Shenandoah Telecommunications Company — Q3 2018 Form 10-Q
Business context and period. The unaudited filing covers the three and nine months ended September 30, 2018. Shentel provides wireless service as a Sprint affiliate, as well as cable and wireline services. Sprint accounted for approximately 61% of consolidated revenue in the first nine months, making the relationship a significant customer and operating dependency.
Key financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $158.7 million | $151.8 million | $469.4 million | $458.9 million |
| Operating income | $28.3 million | $9.5 million | $66.3 million | $28.4 million |
| Net income | $15.5 million | $3.5 million | $31.7 million | $5.8 million |
| Diluted EPS | $0.31 | $0.07 | $0.63 | $0.12 |
| Operating cash flow | Not separately presented | Not separately presented | $188.8 million | $158.7 million |
- Reported operating margin was 17.8% in Q3 versus 6.2% a year earlier, and 14.1% for the first nine months versus 6.2%. Net margin was 9.8% and 6.8%, respectively, in 2018.
- Cash and equivalents were $75.2 million at September 30, 2018, compared with $78.6 million at December 31, 2017. Total assets were $1.470 billion.
- Gross debt was $790.1 million; debt net of unamortized loan fees was $778.8 million. The weighted-average annualized interest rate was approximately 4.11%. The company repaid $46.4 million of debt principal in the first nine months.
- Cash used in investing activities was $143.8 million, including $92.3 million of property and equipment spending and $52.0 million for the Sprint territory expansion. Financing activities used $48.4 million.
Changes and drivers
- Revenue increased 4.6% in Q3 and 2.3% year to date as reported. Management said growth excluding the presentation effects of Topic 606 was approximately 7.6% and 4.0%, respectively. Q3 wireless and cable contributed to growth; wireline revenue was slightly lower.
- Net income rose substantially year over year. Management attributed lower operating costs partly to the completion of nTelos integration and migration work in 2017. Reported cost and revenue comparisons also reflect Topic 606 accounting changes, so reported growth rates are not fully comparable.
- Topic 606, adopted January 1, 2018, changed Sprint handset transactions to gross equipment revenue and cost presentation, and reclassified certain Sprint reimbursements as reductions of revenue, amortized over benefit periods. It also changed the timing of recognition for certain contract costs and fees. The company recorded a $56.1 million cumulative increase to opening retained earnings on adoption.
- Wireless operating revenue was $116.1 million in Q3 and $343.7 million year to date. At September 30, postpaid subscribers were 785,537 and prepaid subscribers were 255,462. The February 2018 expansion added approximately 1.1 million market POPs and required a $52.0 million payment.
Outlook, risks and unusual items
- Management expected full-year 2018 capital expenditures of $145 million to $155 million, with timing of equipment deliveries potentially shifting spending into 2019. It stated that cash, operating cash flow and expected credit-facility availability should fund planned spending and obligations for at least the next 12 months, while noting that future cash generation and borrowing availability are not assured.
- At September 30, the company reported covenant compliance: leverage ratio 2.61 against a maximum of 3.75; debt-service coverage 3.25 against a minimum of 2.00; and covenant liquidity of $149.1 million against a $25 million minimum.
- Debt is primarily variable-rate. Approximately $395.1 million of variable-rate debt had no interest-rate protection; management estimated a 1 percentage-point rate increase would add about $7.6 million to annual interest expense before swap effects. Interest-rate swaps cover approximately half of outstanding variable-rate debt.
- Sprint waived management fees, contributing $28.2 million to operating cash flow adjustments in the first nine months. The waiver is capped at approximately $255.6 million and was expected to reach that amount in 2022. This benefit is distinct from ongoing operating performance.
- The company disclosed an immaterial correction to its 2018 interim statements involving deferred contract-cost amortization and Topic 606 adoption amounts; prior interim periods were revised. It also reported that disclosure controls remained ineffective because previously identified material weaknesses in internal control had not yet been remediated. Management nevertheless stated the interim financial statements fairly presented the company’s results in all material respects.
- The board approved a $0.27-per-share dividend, payable November 30, 2018; the expected total payout was approximately $13.4 million. The company reported no material updates to its previously disclosed risk factors.
Important facts for investors to verify
- Assess underlying revenue and earnings trends using Topic 606-adjusted comparisons, including the effects of gross equipment reporting and deferred Sprint reimbursements.
- Monitor Sprint’s continuing role as the principal wireless customer and provider of certain billing, customer-care and collection functions, as well as the affiliate agreement’s terms and remaining fee waivers.
- Track expansion-area network buildout, planned capital spending, subscriber growth and churn, and whether spending remains within management’s stated range.
- Review variable-rate debt exposure, scheduled repayments, covenant headroom and the company’s ability to maintain liquidity and generate operating cash.
- Follow remediation and testing of the disclosed internal-control material weaknesses, and review the corrected interim-period figures and adoption accounting.