Cable One, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results include Fidelity from its October 2019 acquisition and Valu-Net from July 1, 2020. Cable One reported one operating and reportable segment.
Business context
Cable One provides residential and business data, video and voice services in 21 states. At quarter-end it served approximately 984,000 customer relationships and passed approximately 2.4 million homes. Management’s strategy prioritizes higher-margin residential data and business services, while de-emphasizing residential video and voice.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue | $339.0 million | $285.0 million | +18.9% |
| Operating income | $96.1 million | $80.1 million | +20.0% |
| Net income | $66.3 million | $49.8 million | +33.0% |
| Diluted EPS | $10.96 | $8.68 | +26.3% |
| Adjusted EBITDA (non-GAAP) | $174.4 million | $140.0 million | +24.6% |
Q3 operating margin was approximately 28.4% versus 28.1%; net margin was approximately 19.6% versus 17.5%. Adjusted EBITDA margin was approximately 51.4% versus 49.1%. Adjusted EBITDA is a non-GAAP measure and excludes items described in the filing.
- Nine months: Revenue was $988.5 million (+16.4%); operating income $279.6 million; net income $198.2 million (+58.6%); diluted EPS $33.60; and Adjusted EBITDA $495.2 million (+20.6%).
- Revenue mix, Q3: Residential data $174.5 million (+29.9%); video $83.6 million (+3.2%); voice $11.5 million (+12.1%); business services $59.4 million (+17.3%). Acquired operations contributed $37.1 million of the quarterly revenue increase; growth also reflected organic gains in data and business services.
- Subscriber trends: Total data PSUs rose 25.6% year over year to 866,000; total video PSUs declined 7.1% to 277,000. Total customer relationships increased 19.8% to 984,000. Acquisitions and unusually strong pandemic-period residential data additions contributed to growth.
- Cash flow and capital spending, nine months: Operating cash flow was $399.0 million, capital expenditures were $218.0 million, investing cash outflow was $299.8 million and financing cash inflow was $400.9 million. Operating cash flow less capital expenditures was approximately $181.0 million, a simple calculation, not a company-defined free-cash-flow measure.
- Liquidity at September 30: Cash and equivalents were $625.3 million; current assets $739.8 million and current liabilities $226.5 million. The current ratio was approximately 3.3.
- Debt: Total debt carrying amount, including finance leases, was $1.738 billion; long-term debt was $1.689 billion. Cash less total debt implies net debt of approximately $1.112 billion. The company had $320.4 million available under its $350 million revolver and reported compliance with debt covenants.
Changes versus prior period and notable items
- Q3 costs rose with acquisitions and operating needs, but operating expenses and SG&A each declined as a share of revenue. Depreciation and amortization increased 46.5% to $71.4 million, reflecting acquired and recently placed-in-service assets.
- For the nine months, the effective tax rate fell to 15.1% from 23.3%, principally due to CARES Act NOL carryback benefits and equity-award tax benefits. The Q3 rate was 19.0% versus 24.1%.
- Q3 interest expense increased 9.2% to $17.6 million, driven mainly by higher debt and swap settlement expense, partly offset by lower rates. Interest-rate swaps covered $1.2 billion of variable-rate debt; their reported liability totaled $206.9 million at quarter-end.
- In May, the company issued 287,500 shares for net proceeds of $469.8 million, used in part to repay $100 million drawn on the revolver and fund transactions. No shares were repurchased during the first nine months of 2020.
- The nine-month results included a $3.1 million net gain on asset sales and disposals, including a $6.6 million noncash gain on tower property sales.
Outlook, management commentary and risks
- Management expects residential data and business services growth over the long term, continued decline in residential video and voice, and ongoing investment in broadband infrastructure. Gigabit service was available to approximately 97% of homes passed. The filing provides no specific full-year financial guidance.
- Management said COVID-19 actions reduced Adjusted EBITDA by $3.3 million in Q3 and $19.8 million for the first nine months, mainly from waived fees and slower business-services growth, alongside higher labor and operating costs. These effects were more than offset by stronger residential data additions and revenue and lower travel costs. Management expected most negative effects to dissipate in Q4 as fees resumed, while noting uncertainty around customer growth, bad debt and expense normalization.
- The ERP system implementation remained scheduled for summer 2021; pandemic-related resource challenges had caused inefficiencies. Delays or implementation problems could disrupt operations and controls.
- On September 28, the company agreed to invest approximately $574 million for an approximately 45% interest in MBI, expected to close in Q4 2020. It also acquired minority interests in Nextlink and Wisper, and on October 1 contributed its Anniston system to Hargray for a minority interest.
- After quarter-end, Cable One priced $650 million of 4.0% senior notes due 2030, expected to close November 9. On October 30 it amended its credit facilities, including increasing the revolver to $500 million, extending certain maturities and upsizing Term Loan B-3 by $300 million; proceeds plus cash were used to repay the $483.8 million Term Loan B-1. These subsequent transactions were not reflected in September 30 balances.
- Key risks include COVID-19 uncertainty, competitive pressure, rising programming costs, acquisition integration and minority-investment risks, leverage and variable-rate exposure, regulatory changes, cybersecurity, and possible disruption from the ERP implementation. A $22 million letter of credit supports Wisper’s FCC program obligations; management assessed nonperformance risk as remote and recorded no liability. The company reported no legal proceedings expected to have a material adverse effect.
Important facts for investors to verify
- How much of revenue, earnings and subscriber growth reflects acquired operations versus organic growth, and whether pandemic-era data additions persist.
- Whether Q4 fee normalization and management’s expectations for COVID-related effects, bad debt and costs are borne out.
- Funding, closing conditions and capital structure impact of the approximately $574 million MBI investment, including the post-quarter debt transactions and notes offering.
- Whether continued broadband capital spending supports growth while maintaining cash generation, dividend capacity and covenant compliance.
- The financial exposure and governance protections attached to minority investments, particularly MBI, and the $22 million Wisper letter of credit.