Shenandoah Telecommunications Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Unless stated otherwise, amounts are in U.S. dollars. The May 2016 nTelos acquisition significantly affects year-over-year comparisons.
Financial performance
- Revenue: $153.9 million, up 66.2% from $92.6 million. Wireless revenue grew $58.9 million, almost entirely from nTelos; Cable revenue rose 9.7% and Wireline revenue 4.2%.
- Profitability: Operating income fell 49.9% to $10.7 million from $21.3 million. Operating margin was approximately 6.9%, versus 23.0%. Net income declined 83.1% to $2.3 million from $13.9 million; diluted EPS was $0.05 versus $0.28. Net margin was approximately 1.5%, versus 15.0%.
- Drivers: Higher depreciation and amortization, acquisition-related costs, Sprint fee accounting adjustments, and increased interest expense weighed on results. Operating expenses rose 101.0% to $143.2 million. Interest expense increased to $9.1 million from $1.6 million.
- Cash flow and investment: Operating cash flow was $24.5 million, down from $43.2 million; management attributed the change primarily to timing of payments for inventory acquired in late 2016. Capital expenditures were $38.6 million, versus $20.5 million. Investing cash use was $38.5 million, and financing provided $17.7 million. Cash increased to $39.9 million from $36.2 million.
- Non-GAAP measures: Adjusted OIBDA was $73.5 million and Continuing OIBDA was $64.6 million, compared with $40.4 million for each measure in Q1 2016. These company-defined measures exclude specified items and are not substitutes for GAAP results.
Balance sheet, debt and liquidity
- Total assets were $1.453 billion at March 31, 2017, down from $1.484 billion at year-end 2016. Shareholders’ equity was $299.4 million.
- Gross term-loan debt was $866.8 million; debt net of unamortized fees was $849.0 million. Debt increased from $847.9 million gross at year-end. The weighted effective interest rate, including swaps and loan costs, was approximately 3.91%.
- The company reported covenant compliance: leverage ratio 2.88 against a maximum of 3.75; debt-service coverage ratio 4.56 against a minimum of 2.00; and minimum liquidity of $113 million against a $25 million requirement.
- Approximately 50% of expected outstanding debt was hedged with interest-rate swaps. The filing estimates a 1 percentage-point rate increase would add about $8.7 million to annual interest expense before swap effects.
Material changes and operating developments
- Wireless subscribers at March 31 included 717,150 postpaid and 243,557 prepaid retail customers. Compared with Q1 2016, postpaid monthly churn increased to 2.05% from 1.56%; prepaid churn was 4.86% versus 5.05%. The comparison reflects the nTelos acquisition.
- Cable customer relationships increased to 77,925 from 77,090 a year earlier, while video customers declined to 47,160 from 50,195. High-speed internet customers rose to 61,815 from 58,273.
- On April 6, 2017, the company and Sprint closed an agreement expanding the service area into parts of Kentucky, Maryland, Ohio and West Virginia. The area includes about 500,000 market POPs and 21,000 Sprint customers and entails network build-out requirements over three years.
Outlook, risks and unusual items
- Management expected approximately $23 million of nTelos integration and acquisition expenses in 2017, in addition to $54.7 million incurred in 2016; $7.1 million of 2017 costs had been incurred by March 31. The company also cited approximately $23 million of debt issuance costs, for a stated total expected transaction-related cost of about $101 million including those costs.
- 2017 capital expenditure budget was $152.3 million, including $86.4 million for Wireless upgrades and expansion. Management said cash, operating cash flow and expected credit-facility availability should fund planned spending and obligations for at least the next 12 months.
- Key exposures include variable-rate debt, substantial reliance on Sprint for wireless billing, collections and customer-care functions, and the need to complete nTelos integration and network upgrades. Management cautioned that actual capital needs and operating cash flows may vary with demand, regulation, technology, labor and other conditions.
- Disclosure controls and procedures remained ineffective at March 31 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Management nevertheless stated that the interim financial statements fairly presented the company’s financial position, results and cash flows.
- The company adopted the updated inventory measurement standard with no significant financial-statement impact. It expected the new lease standard, effective for it in 2019, to have a material impact; the impact of the 2018 revenue-recognition standard remained under assessment.
Important facts for investors to verify
- How much of revenue growth and future Wireless performance reflects acquired nTelos operations versus underlying growth, and how subscriber migration and churn progress.
- Whether integration costs, Sprint fee waivers and related accounting adjustments develop as expected, and how they affect GAAP results and cash generation.
- Execution and funding of the $152.3 million capital plan, including the Sprint territory expansion and network build-out obligations.
- Debt repayment, covenant headroom and sensitivity to interest rates, including the extent of swap coverage over time.
- Progress in remediating internal-control material weaknesses and maintaining reliable financial reporting, including reliance on data supplied by Sprint.