Cable One, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unaudited results; amounts below are in millions except per-share data and where stated.
Business context
Cable One provides residential and business data, video and voice services in 21 states. On May 1, 2017, it acquired NewWave for approximately $740.2 million in cash. Reported 2017 results include five months of NewWave operations. At September 30, the company reported 796,110 customer relationships and 1,143,881 primary service units (PSUs).
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $253.8 | $205.5 | $702.3 | $612.9 |
| Operating income | $61.9 | $43.8 | $180.9 | $141.8 |
| Net income | $31.5 | $20.9 | $93.3 | $74.6 |
| Diluted EPS | $5.48 | $3.63 | $16.24 | $12.91 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $219.8 | $193.6 |
| Capital expenditures | Not provided for the quarter | Not provided for the quarter | $128.8 | $91.3 |
Revenue increased 23.5% in Q3 and 14.6% year to date. Excluding NewWave, revenue growth was 0.4% in Q3 and 1.6% year to date. Operating margins, calculated as operating income divided by revenue, were 24.4% versus 21.3% in Q3 and 25.8% versus 23.1% year to date.
Management-reported non-GAAP Adjusted EBITDA was $115.5 million in Q3, up 32.5%, and $326.7 million for nine months, up 24.7%. The respective Adjusted EBITDA margins, calculated from reported figures, were 45.5% versus 42.4% and 46.5% versus 42.7%. Excluding both NewWave and the labor-capitalization estimate change, Adjusted EBITDA growth was 5.3% for Q3 and 7.1% year to date. Adjusted EBITDA is not a GAAP measure and does not reflect capital spending or cash debt service.
At September 30, cash and cash equivalents were $118.7 million, working capital was $51.7 million, and total assets were $2.17 billion. Gross debt, including current maturities and capital leases, was $1.20 billion, compared with $545.3 million at December 31, 2016. The company had $196.9 million available on its revolving facility and reported compliance with all debt covenants. Nine-month financing included $750 million of new loans; the company paid $27.2 million in dividends.
Material changes and unusual items
- NewWave added $47.5 million of revenue and $2.8 million of net income in Q3; for the post-acquisition period through September, it contributed $79.7 million of revenue and $4.9 million of net income.
- Debt increased substantially to fund the acquisition, raising Q3 interest expense 86.2% year over year to $14.0 million.
- A change in the estimate for capitalizing labor costs reduced reported expense by $6.2 million in Q3 and $17.2 million year to date compared with the prior estimate. Management said Adjusted EBITDA and net income growth were materially affected by this change.
- Hurricane Harvey reduced Q3 revenue by approximately $1.6 million through waived service charges; asset disposals included $1.3 million of storm-related damage.
- Q3 net income benefited from a lower effective tax rate: 34.6% versus 48.6% in the prior-year quarter. Management attributed the difference mainly to prior-year tax adjustments and current-year equity-award tax benefits.
- Legacy Cable One residential video and voice PSUs declined 13.1% and 11.2%, respectively, year over year; legacy residential data PSUs rose 1.0%. Acquisition-driven growth lifts consolidated customer totals.
Outlook, commentary and risks
Management expects residential data and business services growth to continue, supported by broadband upgrades, higher-speed offerings and expansion in business customers. It expects residential video and landline voice revenues to decline over time, citing competition from OTT and satellite video and wireless substitution for landlines. The company plans continued infrastructure investment and said cash, credit facilities and operating cash flow should support its expected needs over the next 12 months; it gave no specific earnings or revenue guidance.
Key risks include integrating NewWave and realizing synergies, intense competition, programming and retransmission costs, technology changes, franchise renewals, pole-attachment costs, regulatory changes affecting broadband, and network and information-system security. The filing discusses ongoing ordinary-course legal matters but says management does not believe existing proceedings are likely to have a material effect. NewWave used separate accounting systems; management was evaluating related internal-control design and effectiveness. Disclosure controls were reported effective.
Important facts for investors to verify
- How much reported growth and margin improvement is attributable to NewWave versus organic performance, and whether acquisition synergies are being realized.
- The ongoing earnings and cash-flow effect of the revised labor-capitalization estimate; reported expense reductions were $17.2 million year to date.
- Debt-service capacity, floating-rate exposure, covenant headroom and refinancing needs following the acquisition financing.
- Trends in legacy residential video and voice losses, and whether data and business growth can offset them.
- Capital spending requirements, dividend sustainability and the effect of regulatory or competitive developments.
- Completion of NewWave purchase-price allocation and evaluation of its internal controls.