Business context and reporting period
Shenandoah Telecommunications Company (Shentel) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2014. Its businesses include Wireless (as a Sprint PCS affiliate), Cable, and Wireline. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $81.4 | $77.5 | $161.9 | $153.5 |
| Operating income | $15.8 | $14.5 | $31.5 | $29.7 |
| Net income | $8.6 | $7.8 | $17.2 | $16.2 |
| Diluted EPS | $0.35 | $0.33 | $0.71 | $0.67 |
| Operating margin | 19.4% | 18.7% | 19.4% | 19.4% |
Q2 revenue grew 5.1% and net income 9.9%; first-half revenue grew 5.5% and net income 6.4%. Operating expenses rose 4.2% in Q2 and 5.4% in the first half. Management attributed earnings growth principally to subscriber gains and higher revenue per subscriber in Wireless and Cable, partly offset by higher operating costs. First-half adjusted OIBDA, a company-defined non-GAAP measure, was $64.8 million, up from $60.9 million; it should not be viewed as a substitute for GAAP results.
Segments and operating trends
- Wireless: First-half segment revenue was $102.9 million, up 5.0%, and operating income was $34.4 million, up 4.9%. Growth in postpaid data and subscriber counts, and prepaid revenue, was partly offset by higher handset and network costs and Sprint’s increased postpaid service fee. Postpaid subscribers reached 277,673; prepaid subscribers were 138,176.
- Cable: First-half revenue was $41.3 million, up 10.9%; operating loss narrowed to $4.0 million from $4.8 million. Broadband and voice customers grew, while video customers declined. Growth reflected higher revenue-generating units, rate/package changes, and charges for customers’ first set-top box; programming and other operating costs also increased.
- Wireline: First-half revenue was $31.4 million, up 3.5%, and operating income was $8.1 million, up 3.4%. Facility-lease revenue, including affiliate billings associated with Wireless network upgrades, supported growth; legacy access-line and access revenue trends remained weak.
Cash flow, liquidity and debt
First-half operating cash flow was $66.6 million, versus $52.2 million in 2013; capital expenditures were $32.8 million versus $48.5 million. Cash at June 30 was $72.1 million, up from $38.3 million at year-end. The cash-flow increase was attributed largely to use of excess tax payments carried over from 2013; collection of a $16.6 million income-tax receivable materially benefited working capital. Cash flow should therefore be assessed with this timing effect in mind.
Debt totaled $230.0 million at June 30, compared with $230.0 million at year-end, and the reported annualized weighted-average rate was approximately 3.40% after the swap (approximately 2.71% after lender patronage credits). The company had $50 million available under its revolving facility and could seek up to $100 million in incremental term loans, subject to restrictions. It reported compliance with debt covenants: leverage ratio 1.84 against a maximum of 2.50, debt-service coverage 13.87 against a minimum of 2.50, and equity-to-assets ratio 41.7% against a minimum of 32.5%.
Management said cash, operating cash flows and available borrowing capacity were expected to fund planned capital expenditures, debt service and other requirements for at least the next 12 months. The 2014 capital-expenditure budget was $74 million; $32.8 million had been spent in the first half.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. The $74 million capital budget is the principal quantified forward plan.
- Interest-rate exposure is material: all $230 million of debt was variable-rate, with a swap covering approximately 76% through 2019. Management estimated a 1 percentage-point rate increase would add about $2.3 million in annual interest expense before the swap; $55.4 million of debt had no interest-rate protection. The swap was estimated to add $1.6 million to annual interest expense at then-current rates.
- Wireless operations depend substantially on Sprint for billing, collections, customer care and other functions. Sprint remitted approximately 59% of company revenue, and Shentel relies on Sprint data for a substantial portion of revenue and receivables reporting. Sprint’s postpaid net-service fee increased from 12% to 14% in August 2013, reducing reported service revenue.
- Other risks identified include competition, regulation, technology and customer-demand changes, execution in acquired Cable markets, and dependence on Sprint. The company reported no material changes to the risk factors in its 2013 Form 10-K.
- A Maryland state tax audit covered tax years 2009–2011. The company said disclosure controls were effective as of June 30, 2014 and reported no material second-quarter changes in internal control over financial reporting.
- The company was evaluating the effect and transition method for the new revenue-recognition standard, effective for it January 1, 2017.
Important facts for investors to verify
- Whether first-half cash generation remains strong after the tax-receivable collection and other working-capital timing effects.
- Wireless subscriber growth, churn, Sprint fee terms, and the company’s reliance on Sprint-supplied operating and financial data.
- Whether Cable broadband and voice growth can offset continued video-customer declines and programming-cost pressure.
- Execution and returns from the $74 million capital budget, including post-Network Vision spending and network expansion.
- Variable-rate debt exposure, swap costs and terms, covenant headroom, and the outcome of the Maryland tax audit.