Shenandoah Telecommunications Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Unaudited results; amounts below are in U.S. dollars. The company provides wireless, cable, and wireline telecommunications services.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $77.5 million | $72.9 million | $231.0 million | $213.1 million |
| Operating income | $13.3 million | $5.4 million | $43.0 million | $25.4 million |
| Operating margin | 17.1% | 7.4% | 18.6% | 11.9% |
| Net income | $6.7 million | $1.4 million | $22.9 million | $11.4 million |
| Diluted EPS | $0.28 | $0.06 | $0.95 | $0.47 |
| Adjusted OIBDA (non-GAAP) | $28.7 million | $25.6 million | $89.6 million | $80.8 million |
For the first nine months, operating cash flow was $73.5 million, versus $77.5 million in 2012. Capital expenditures were $80.8 million, versus $53.6 million; operating cash flow less capital expenditures was therefore negative $7.3 million, compared with positive $23.8 million. Cash and equivalents were $62.0 million at September 30, down from $71.1 million at year-end 2012.
Long-term debt was $230.2 million, essentially unchanged from year-end; the company reported a weighted-average annual interest rate of approximately 3.39% after the swap. Current liabilities were $48.5 million and current assets $112.0 million. The company reported $50 million available under its revolving facility and potential incremental term borrowing capacity of up to $100 million, subject to restrictions. It was in compliance with debt covenants.
Changes and operating drivers
- Q3 revenue grew 6.4%; nine-month revenue grew 8.4%. Wireless and cable growth drove the increase. Wireless service revenue benefited from subscriber growth and smartphone fees; cable growth reflected more revenue-generating units, price increases, and customers selecting higher-priced services.
- Wireless segment operating income rose to $15.5 million in Q3 from $8.2 million and to $46.4 million for nine months from $31.3 million. Lower accelerated depreciation and operating costs supported improvement.
- Cable remained loss-making at the operating level: Q3 operating loss was $4.7 million, improving from $5.6 million; nine-month operating loss was $11.7 million, improving from $14.2 million. Video customers declined, while internet and voice customers increased.
- Wireline operating income was $3.3 million in Q3, versus $3.4 million; nine-month income was $10.5 million, versus $10.6 million. Traditional access-line counts continued to decline.
Outlook, risks, and unusual items
- Management expected 2013 capital spending of approximately $102.4 million, below the original $125.2 million budget, mainly because certain wireless and wireline projects were delayed into 2014. Management said cash, operating cash flow, and expected credit-facility availability should cover planned spending and obligations for at least the next 12 months; future capital spending was expected to be lower than in 2013.
- The Network Vision wireless upgrade was substantially advanced: 500 of 525 sites had been upgraded by quarter-end. The company reported $3.1 million of accelerated depreciation for the project in the first nine months of 2013 and received $14.2 million in equipment trade-in credits. Remaining site work depended on resolving lease and zoning issues.
- Interest-rate exposure remains relevant. Approximately $55.4 million of variable-rate debt was unhedged; a 1 percentage-point rate increase would add about $2.3 million to annual interest expense before considering the swap. The company estimated the swap would add $1.6 million to interest expense over the next 12 months.
- Wireless operations rely on Sprint for billing, collections, customer care, and other services; Sprint remits approximately 59% of company revenue. Effective August 1, Sprint’s retention of postpaid revenue increased from 20% to 22%, reducing postpaid revenue. The filing also notes reliance on Sprint’s financial data and related controls.
- A carrier disputed approximately $3.0 million of intrastate tariff charges. The company believed its billings were appropriate and was discussing a settlement; the filing does not state a resolution or clear estimate of any potential loss.
- Effective tax rates fell year over year, partly reflecting changes to the company’s subsidiary structure. Return-to-provision tax adjustments affected both comparative periods.
- On October 22, 2013, the board declared a $0.36-per-share dividend, 9% above the 2012 dividend, payable December 2, 2013. The expected total payout was approximately $8.7 million.
Important facts for investors to verify
- Whether wireless subscriber and revenue growth can continue, particularly given higher Sprint revenue-retention fees and Sprint’s central role in operations.
- Actual Network Vision and other capital spending, project delays, and the resulting effect on cash balances and future borrowing needs.
- Progress in improving cable profitability as video subscribers decline and internet and voice customers grow.
- Resolution and financial impact, if any, of the approximately $3.0 million carrier billing dispute and the state tax audits noted in the filing.
- Interest-rate exposure, swap costs, covenant compliance, and availability of borrowing capacity as financing needs evolve.