Cable One, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Financial statements are unaudited. Cable One became independent of Graham Holdings Company (GHC) on July 1, 2015; the prior-year comparison includes pre-spin results and may not reflect stand-alone costs or performance.
Business context
Cable One operates cable systems in 19 states, providing residential and business data, video and voice services. At quarter-end it served 665,574 customer relationships across approximately 1.648 million homes passed. Management is prioritizing higher-margin residential data and business services while de-emphasizing video and voice.
Financial highlights
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $202.8 million | $202.9 million | Down 0.1% |
| Operating income | $47.4 million | $35.9 million | Up 31.9% |
| Net income | $27.0 million | $22.1 million | Up 22.3% |
| Diluted earnings per share | $4.65 | $3.78 | Up $0.87 |
| Operating cash flow | $77.5 million | $55.8 million | Up $21.8 million |
| Capital expenditures | $27.4 million | $31.7 million | Down $4.3 million |
| Adjusted EBITDA (non-GAAP) | $85.3 million | $74.7 million | Up 14.2% |
| Free cash flow (non-GAAP) | $57.9 million | $43.0 million | Up 34.7% |
Operating margin was approximately 23.4%, versus 17.7% a year earlier. Adjusted EBITDA margin was approximately 42.1%, versus 36.8%. Management defines free cash flow as Adjusted EBITDA less capital expenditures; these non-GAAP measures may not be comparable with similarly named measures at other companies.
Residential data revenue grew 20.8% to $83.4 million, and business services revenue grew 12.6% to $23.8 million. Residential video revenue fell 14.9% to $74.9 million and residential voice revenue fell 22.3% to $11.3 million. Total residential PSUs declined 7.9% year over year; total customer relationships declined 1.8%. Business customer counts were affected by a new billing-system counting method.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $106.2 million, down from $119.2 million at December 31, 2015. Working capital surplus was $29.2 million, versus $39.5 million at year-end.
- Total debt principal was $548.4 million, including $450 million of 5.75% senior unsecured notes due 2022 and $98.1 million under the senior credit facilities. The $200 million revolving facility was available; the filing reports no revolver borrowings in the debt balance. Credit-facility borrowings carried a 2.14% rate at quarter-end.
- Debt carrying value, net of issuance costs and current maturities, was $534.7 million. The company reported covenant compliance at March 31, 2016.
- Operating cash flow benefited from $14.8 million of federal tax and equity-compensation-related cash-flow effects connected with the spin-off, as well as working-capital timing. Financing cash outflows included $34.6 million of share repurchases and $8.7 million of dividends.
Material changes, outlook and risks
- Lower programming costs, reduced billing-system processing costs, lower property taxes and lower salaries, wages and pension-related costs helped lift operating income despite essentially flat revenue. Interest expense was $7.6 million in Q1 2016, compared with none in Q1 2015, reflecting post-spin debt.
- The income-tax provision declined 3.7%; the effective tax rate was 33.0%, compared with 38.4%, including a $2.2 million benefit from certain spin-off and state tax items.
- Management expects residential data and business-services growth to continue, while video and voice revenue declines are expected to persist. It anticipates significant broadband-capacity and infrastructure projects will be completed by the end of 2016, potentially freeing cash otherwise used for investment. No specific earnings or revenue guidance was provided.
- Management said existing cash, operating cash flow and credit facilities should support the operating plan, planned capital expenditures, dividends and repurchases for the next 12 months, but noted this depends on future performance and factors outside its control.
- Key risks include competition from telephone companies, satellite and over-the-top video providers; programming-cost and retransmission-fee increases; technology changes; broadband regulation and the pending challenge to the FCC Open Internet Order; franchise renewal and regulatory requirements; network and information-security risks; and the ability to grow business services.
- Contractual obligations totaled $1.053 billion, including $431.9 million in estimated programming commitments and $548.4 million in debt principal. Litigation is described as ordinary-course; management did not consider existing matters likely to have a material effect. Surety bonds and letters of credit totaled $5.1 million, with payment expected only upon nonperformance.
Important facts for investors to verify
- Whether residential data and business-services growth can offset continuing video and voice subscriber and revenue declines.
- How much of the Q1 operating-cash-flow increase reflects recurring operations versus spin-off tax effects and working-capital timing.
- Whether 2016 infrastructure spending and the expected completion of projects translate into sustained free cash flow and improved returns.
- Debt repayment, interest-rate exposure and covenant headroom, alongside the company’s planned dividends and remaining repurchase authorization.
- Potential effects of regulatory developments, programming costs, competition and the billing-system change on reported customer metrics.