Shenandoah Telecommunications Company — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed February 25, 2021. The filing presents Wireless as discontinued operations following the planned sale to T-Mobile. Unless stated otherwise, financial amounts below are in millions of dollars.
Business context
Shentel provides broadband, video, voice, fiber and tower-colocation services in the Mid-Atlantic. Continuing operations comprise Broadband and Tower. At year-end, Broadband served 188,275 residential and small-business revenue-generating units, up 11.3%; the Tower segment owned 223 towers. Wireless, historically a substantial part of the company, is reported as discontinued operations.
Key financial metrics
| Metric | FY2020 | FY2019 |
|---|---|---|
| Continuing-operations revenue | $220.8 | $206.9 |
| Continuing-operations operating income (loss) | $(1.1) | $(0.7) |
| Income from continuing operations | $2.6 | $2.4 |
| Income from discontinued operations, net of tax | $124.1 | $53.6 |
| Net income | $126.7 | $56.0 |
| Diluted EPS | $2.53 | $1.12 |
| Cash and cash equivalents at year-end | $195.4 | $101.7 |
| Capital expenditures | $120.5 | $67.0 |
| Operating cash flow—continuing operations | $53.4 | $42.3 |
| Operating cash flow—discontinued operations | $249.5 | $216.8 |
Continuing-operations revenue rose 6.7%, while operating expenses grew 6.9%, leaving a 0.5% operating loss margin. Broadband revenue grew 5.4% to $204.3 million, but segment operating income fell 5.3% to $40.4 million and margin declined to 19.8% from 22.0%, reflecting expansion-related costs. Tower revenue increased 31.3% to $17.1 million; operating margin was 51.7%, up from 48.5%.
Wireless discontinued-operations revenue was $442.4 million versus $443.4 million. Its net income rose to $124.1 million from $53.6 million, principally reflecting lower depreciation and amortization after held-for-sale classification, a $25.3 million increase in service revenue related to a travel-revenue settlement with Sprint, and lower interest expense. Thus, consolidated net income largely reflects discontinued operations rather than continuing operations.
Year-end gross variable-rate debt was $697.9 million (carrying debt, net of unamortized fees, was $688.5 million); the weighted-average interest rate was 2.3%. Shentel reported $270.4 million of available liquidity, including cash and the undrawn $75 million revolver, and was in compliance with credit covenants. A 1 percentage-point rate increase would add about $6.9 million of annual interest expense before swaps; swaps covered approximately 41.5% of debt principal.
Material changes and unusual items
- Broadband data RGUs increased to 102,812 from 84,045, while video RGUs declined to 52,817 from 53,673. Residential and small-business revenue grew 8.9%; RLEC and other revenue fell 22.0%.
- Capital expenditures increased by $53.4 million, mainly for Glo Fiber expansion. Management expects capital expenditures to exceed continuing-operations cash flow through 2023.
- 2020 quarterly results included fourth-quarter revenue of $58.1 million, operating income of $1.6 million, net income of $49.3 million and diluted EPS of $0.98. The quarter’s net income included $47.7 million from discontinued operations.
- The company disclosed immaterial prior-period errors and revised 2019 comparative figures; the filing says 2019 discontinued-operations EPS increased by $0.02 as a result.
Outlook, risks and contingencies
- The final and binding appraisal for the planned T-Mobile asset sale was completed February 1, 2021, with expected gross proceeds of $1.95 billion. The company expected to sign a definitive agreement in Q1 2021 and close in Q2, subject to customary conditions and regulatory approvals; closing was not assured.
- Management estimated after-tax sale proceeds of approximately $1.5 billion and expected to repay approximately $702 million of term loans and swap liabilities. It planned a special dividend of $18.75 per share after closing, subject to Board approval. Management also expected to secure a new credit facility after the sale.
- Management expected more than $400 million in federal and state income taxes in 2021 related to the sale. Tax-rate increases could reduce the anticipated dividend or liquidity.
- Risks include intense broadband and video competition, subscriber losses and rising programming costs; execution and returns from Glo Fiber and Beam expansion; COVID-19, supply and construction constraints; cybersecurity and regulatory changes; and uncertainty around post-sale growth, overhead reductions and reinvestment of proceeds. The company reported an underfunded pension plan of approximately $8.0 million.
- Management and the auditor identified material weaknesses in internal controls over financial reporting, involving the control environment and controls for property, plant and equipment/depreciation and purchasing. Management concluded controls were ineffective; KPMG issued an adverse opinion on internal-control effectiveness, while giving an unqualified opinion on the financial statements. Remediation is ongoing, with completion no longer expected by the previously targeted end of 2021.
- Sale completion could trigger up to $35.9 million of specified expenses, including deal-advisory fees, severance, swap-loss recognition and debt-extinguishment loss. Item 3 reports no legal proceedings; the notes say ordinary-course claims are not believed to present a probable or reasonably possible material loss.
Investor verification priorities
- Confirm execution, regulatory approval and closing of the T-Mobile sale, and reconcile final proceeds, taxes and transaction expenses against the estimates.
- Verify whether the Board approved and paid the $18.75-per-share special dividend, and how proceeds were allocated among debt repayment, liquidity, growth and other uses.
- Assess post-sale continuing-operations performance, particularly broadband customer additions, ARPU, segment margins, capital spending and cash generation.
- Track remediation of the material weaknesses and the ERP replacement, including whether financial reporting controls become effective and whether further errors are identified.
- Review debt and liquidity after the required repayment and refinancing, as well as interest-rate exposure and the LIBOR transition.