Cable One, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Cable One operates cable systems providing data, video and voice services in 21 states. It served 801,179 customer relationships at quarter-end. Comparative 2017 results were revised for an accounting correction and recast for adoption of ASC 606.
Financial performance
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $268.3 | $253.8 | $802.4 | $702.3 |
| Operating income | $63.3 | $60.9 | $198.6 | $177.0 |
| Net income | $38.3 | $30.9 | $122.8 | $90.9 |
| Diluted EPS | $6.70 | $5.37 | $21.44 | $15.82 |
| Adjusted EBITDA (non-GAAP) | $122.7 | $115.6 | $373.2 | $326.3 |
- Q3 revenue increased 5.7%; management attributed growth mainly to residential data and business services. Q3 operating margin was approximately 23.6%, versus 24.0% a year earlier; Adjusted EBITDA margin was approximately 45.7%, versus 45.5%.
- Nine-month revenue increased 14.3%, and Adjusted EBITDA increased 14.4%. The 2018 period includes a full nine months of NewWave operations, versus five months in 2017; excluding legacy NewWave systems, revenue grew 5.5%.
- Q3 residential data revenue rose 13.0% and business services revenue rose 12.6%; residential video fell 4.5% and residential voice fell 9.7%. For the nine months, residential data and business services grew 20.6% and 22.3%, respectively, while residential voice declined 3.7%.
- Customer trends: year over year, residential data PSUs grew 2.8% and business services PSUs grew 8.7%; residential video PSUs declined 11.7% and residential voice PSUs declined 8.9%. Total PSUs declined 2.3%, although customer relationships increased 0.6%.
- Q3 operating expense excluding depreciation and amortization was nearly flat year over year; as a share of revenue it improved to 34.3% from 36.2%. SG&A rose 14.7%, mainly from marketing, system-conversion, compensation and insurance costs. Q3 depreciation and amortization rose 7.9%.
- Q3 interest expense increased 10.3% to $15.5 million. The effective tax rate declined to 22.4% from 34.5%, primarily reflecting the lower federal corporate tax rate and state tax benefits. Nine-month rates were 21.6% and 36.8%.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $307.6 million, up 40.0% year over year. Capital expenditures were $159.2 million, versus $128.8 million; investing cash outflow was $155.6 million. Cash increased $75.1 million to $236.9 million.
- At September 30, 2018, total debt principal was $1,184.6 million; cash was $236.9 million. The balance sheet reported $1,166.1 million of debt including current portion, net of unamortized debt issuance costs. Working capital was $151.0 million.
- Term Loan A and Term Loan B balances were $240.6 million and $493.8 million, each at 4.14%; $450 million of 5.75% notes mature in 2022. The company had $195.9 million available on its revolving facility and was in compliance with debt covenants.
- Dividends paid during the first nine months were $31.5 million; declared dividends were $5.50 per share. The board approved a further $2.00 per share dividend for payment in December 2018. The company repurchased 34,028 shares for $22.6 million during the first half; none were repurchased under the program in Q3.
Outlook, risks and unusual items
- Management expects residential data and business services to remain growth priorities, while anticipating continued declines in residential video and voice. It plans ongoing broadband investment and stated that cash, credit facilities and operating cash flow should adequately support expected needs for the next 12 months.
- The company expected to spend up to $50 million in 2018 and 2019, in addition to $10 million spent in 2017, to upgrade NewWave systems, including capacity, all-digital video, 1 Gbps capability and billing and back-office integration. Management expected $38–$42 million of cash tax savings in 2018.
- An April 2018 Term Loan B repricing reduced its applicable margin; excluding transaction costs, management estimated annual interest savings of approximately $2.5 million. Variable-rate debt exposes the company to increases in interest costs.
- Q3 included a $3.1 million net loss on asset disposals and $1.7 million of system-conversion costs. Nine-month results included a $12.5 million net loss on disposals, compared with a $3.2 million gain in 2017.
- Management identified competition, programming and retransmission costs, technology changes, NewWave integration and synergy execution, regulation, franchise renewals, cybersecurity, debt and interest rates, and the ability to sustain dividends among key risks. Legal matters were described as ordinary-course proceedings; management did not expect existing matters to have a material effect.
- Control weakness: Disclosure controls were deemed ineffective as of September 30, 2018 because of a material weakness in access and change-management controls for the inherited NewWave billing system. The company reported no resulting financial-statement misstatement and targeted system conversion by year-end 2018 to remediate the weakness.
- The company revised prior-period statements for internal labor capitalization accounting and adopted ASC 606 retrospectively. Management said the accounting changes did not materially affect results; investors should distinguish these presentation and revision effects from operating trends.
Key facts for investors to verify
- Progress and completion of the NewWave billing-system conversion and remediation of the material weakness.
- Organic growth, pricing and subscriber trends in residential data and business services, alongside continued video and voice subscriber losses.
- Delivery of planned NewWave upgrades within the stated spending range and realization of anticipated integration benefits.
- Debt service exposure to variable rates, covenant headroom, and the sustainability of capital spending, dividends and repurchases.
- Cash-tax savings and the impact of tax-law changes, as well as the nature and recurrence of disposal losses and other adjusted-EBITDA exclusions.