SHENANDOAH TELECOMMUNICATIONS CO/VA/ - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES OF AMERICA
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended March 31, 2021 | |||||
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| For the transition period from__________ to __________ | |||||
Commission File No.: 000-09881
SHENANDOAH TELECOMMUNICATIONS COMPANY
(Exact name of registrant as specified in its charter)
| Virginia | 54-1162807 | |||||||
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
500 Shentel Way, Edinburg, Virginia 22824
(Address of principal executive offices) (Zip Code)
(540) 984-4141
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
| Common Stock (No Par Value) | SHEN | NASDAQ Global Select Market | 49,943,149 | ||||||||
| (Title of Class) | (Trading Symbol) | (Name of Exchange on which Registered) | (The number of shares of the registrant's common stock outstanding on April 26, 2021) | ||||||||
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
SHENANDOAH TELECOMMUNICATIONS COMPANY
INDEX
| Page Numbers | ||||||||||||||
| PART I. | FINANCIAL INFORMATION | |||||||||||||
| Item 1. | Financial Statements | |||||||||||||
| Unaudited Condensed Consolidated Balance Sheets | ||||||||||||||
| Unaudited Condensed Consolidated Statements of Comprehensive Income | ||||||||||||||
| Unaudited Condensed Consolidated Statements of Shareholders’ Equity | ||||||||||||||
| Unaudited Condensed Consolidated Statements of Cash Flows | ||||||||||||||
| Notes to Unaudited Condensed Consolidated Financial Statements | ||||||||||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||||||||||
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||||||||||||
| Item 4. | Controls and Procedures | |||||||||||||
| PART II. | OTHER INFORMATION | |||||||||||||
| Item 1A. | Risk Factors | |||||||||||||
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||||||||||
| Item 6. | Exhibits | |||||||||||||
| Signatures | ||||||||||||||
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 229,182 | $ | 195,397 | |||||||
Accounts receivable, net of allowance for doubtful accounts of $490 and $614, respectively | 66,618 | 70,393 | |||||||||
| Prepaid expenses and other | 12,943 | 9,631 | |||||||||
| Current assets held for sale | 1,117,528 | 1,133,294 | |||||||||
| Total current assets | 1,426,271 | 1,408,715 | |||||||||
| Investments | 13,376 | 13,769 | |||||||||
| Property, plant and equipment, net | 468,383 | 440,427 | |||||||||
| Goodwill and Intangible assets, net | 106,543 | 106,759 | |||||||||
| Operating lease right-of-use assets | 52,738 | 50,387 | |||||||||
| Deferred charges and other assets | 14,998 | 11,650 | |||||||||
| Total assets | $ | 2,082,309 | $ | 2,031,707 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current maturities of long-term debt, net of unamortized loan fees | $ | 680,531 | $ | 688,463 | |||||||
| Accounts payable | 19,866 | 19,599 | |||||||||
| Advanced billings and customer deposits | 9,407 | 8,594 | |||||||||
| Accrued compensation | 11,235 | 16,413 | |||||||||
| Income taxes payable | 21,622 | 6,951 | |||||||||
| Current operating lease liabilities | 2,062 | 1,970 | |||||||||
| Accrued liabilities and other | 14,505 | 13,869 | |||||||||
| Current liabilities held for sale | 443,089 | 452,202 | |||||||||
| Total current liabilities | 1,202,317 | 1,208,061 | |||||||||
| Other long-term liabilities: | |||||||||||
| Deferred income taxes | 155,623 | 150,652 | |||||||||
| Asset retirement obligations | 5,130 | 4,955 | |||||||||
| Benefit plan obligations | 12,785 | 14,645 | |||||||||
| Non-current operating lease liabilities | 48,047 | 46,095 | |||||||||
| Other liabilities | 24,453 | 24,905 | |||||||||
| Total other long-term liabilities | 246,038 | 241,252 | |||||||||
Commitments and contingencies (Note 13) | |||||||||||
| Shareholders’ equity: | |||||||||||
Common stock, no par value, authorized 96,000; 49,943 and 49,868 issued and outstanding at March 31, 2021 and December 31, 2020, respectively | — | — | |||||||||
| Additional paid in capital | 46,583 | 47,317 | |||||||||
| Retained earnings | 591,304 | 539,783 | |||||||||
| Accumulated other comprehensive loss, net of taxes | (3,933) | (4,706) | |||||||||
| Total shareholders’ equity | 633,954 | 582,394 | |||||||||
| Total liabilities and shareholders’ equity | $ | 2,082,309 | $ | 2,031,707 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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| SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | |||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||||||||
| (in thousands, except per share amounts) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Service revenue and other | $ | 59,691 | $ | 53,134 | |||||||
| Operating expenses: | |||||||||||
| Cost of services | 23,283 | 20,317 | |||||||||
| Selling, general and administrative | 20,153 | 22,096 | |||||||||
| Restructuring expense | 618 | — | |||||||||
| Depreciation and amortization | 13,266 | 12,085 | |||||||||
| Total operating expenses | 57,320 | 54,498 | |||||||||
| Operating income (loss) | 2,371 | (1,364) | |||||||||
| Other income: | |||||||||||
| Other income, net | 1,600 | 749 | |||||||||
| Income (loss) before income taxes | 3,971 | (615) | |||||||||
| Income tax expense (benefit) | 922 | (765) | |||||||||
| Income from continuing operations | 3,049 | 150 | |||||||||
| Income from discontinued operations, net of tax | 48,472 | 13,130 | |||||||||
| Net income | 51,521 | 13,280 | |||||||||
| Other comprehensive income: | |||||||||||
| Unrealized income (loss) on interest rate hedge, net of tax | 773 | (6,106) | |||||||||
| Comprehensive income | $ | 52,294 | $ | 7,174 | |||||||
| Net income per share, basic and diluted: | |||||||||||
| Basic - Income from continuing operations | $ | 0.06 | $ | — | |||||||
| Basic - Income from discontinued operations, net of tax | $ | 0.97 | $ | 0.27 | |||||||
| Basic net income per share | $ | 1.03 | $ | 0.27 | |||||||
| Diluted - Income from continuing operations | $ | 0.06 | $ | — | |||||||
| Diluted - Income from discontinued operations, net of tax | $ | 0.97 | $ | 0.27 | |||||||
| Diluted net income per share | $ | 1.03 | $ | 0.27 | |||||||
| Weighted average shares outstanding, basic | 49,947 | 49,888 | |||||||||
| Weighted average shares outstanding, diluted | 50,081 | 50,036 | |||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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| SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | ||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Shares of Common Stock (no par value) | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 49,868 | $ | 47,317 | $ | 539,783 | $ | (4,706) | $ | 582,394 | |||||||||||||||||||||||
| Net income | — | — | 51,521 | — | 51,521 | |||||||||||||||||||||||||||
| Other comprehensive gain (loss), net of tax | — | — | — | 773 | 773 | |||||||||||||||||||||||||||
| Stock based compensation | 109 | 746 | — | — | 746 | |||||||||||||||||||||||||||
| Stock options exercised | — | — | — | — | — | |||||||||||||||||||||||||||
| Common stock issued | — | 8 | — | — | 8 | |||||||||||||||||||||||||||
| Shares retired for settlement of employee taxes upon issuance of vested equity awards | (33) | (1,486) | — | — | (1,486) | |||||||||||||||||||||||||||
| Common stock issued to acquire non-controlling interest in nTelos | — | — | — | — | — | |||||||||||||||||||||||||||
| Balance, March 31, 2021 | 49,943 | $ | 46,583 | $ | 591,304 | $ | (3,933) | $ | 633,954 | |||||||||||||||||||||||
| Shares of Common Stock (no par value) | Additional Paid in Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | ||||||||||||||||||||||||||||
| Balance, December 31, 2019 | 49,671 | $ | 42,110 | $ | 430,010 | $ | 308 | $ | 472,428 | |||||||||||||||||||||||
| Net income | — | — | 13,280 | — | 13,280 | |||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | (6,106) | (6,106) | |||||||||||||||||||||||||||
| Stock-based compensation | 137 | 2,985 | — | — | 2,985 | |||||||||||||||||||||||||||
| Common stock issued | — | 8 | — | — | 8 | |||||||||||||||||||||||||||
| Shares retired for settlement of employee taxes upon issuance of vested equity awards | (42) | (1,945) | — | — | (1,945) | |||||||||||||||||||||||||||
| Common stock issued to acquire non-controlling interest in nTelos | 76 | — | — | — | — | |||||||||||||||||||||||||||
| Balance, March 31, 2020 | 49,842 | $ | 43,158 | $ | 443,290 | $ | (5,798) | $ | 480,650 | |||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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| SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES | |||||||||||
| UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| (in thousands) | Three Months Ended March 31, | ||||||||||
| 2021 | 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 51,521 | $ | 13,280 | |||||||
| Income from discontinued operations, net of tax | 48,472 | 13,130 | |||||||||
| Income from continuing operations | 3,049 | 150 | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation | 13,043 | 11,931 | |||||||||
| Amortization | 223 | 154 | |||||||||
| Accretion of asset retirement obligations | 93 | 81 | |||||||||
| Bad debt expense | 137 | 205 | |||||||||
| Stock based compensation expense, net of amount capitalized | 642 | 2,739 | |||||||||
| Deferred income taxes | 5,256 | (385) | |||||||||
| Gain from patronage and investments | (432) | (338) | |||||||||
| Changes in assets and liabilities: | |||||||||||
| Accounts receivable | 1,861 | 2,998 | |||||||||
| Current income taxes | (4,334) | (388) | |||||||||
| Operating lease right-of-use assets | 669 | 666 | |||||||||
| Other assets | (5,824) | (1,732) | |||||||||
| Accounts payable | (281) | 1,262 | |||||||||
| Lease liabilities | (929) | (416) | |||||||||
| Other deferrals and accruals | (4,037) | (3,673) | |||||||||
| Net cash provided by operating activities - continuing operations | 9,136 | 13,254 | |||||||||
| Net cash provided by operating activities - discontinued operations | 75,530 | 47,854 | |||||||||
| Net cash provided by operating activities | 84,666 | 61,108 | |||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (39,482) | (23,362) | |||||||||
| Proceeds from sale of assets and other | 14 | 263 | |||||||||
| Net cash used in investing activities - continuing operations | (39,468) | (23,099) | |||||||||
| Net cash used in investing activities - discontinued operations | (882) | (8,926) | |||||||||
| Net cash used in investing activities | (40,350) | (32,025) | |||||||||
| Cash flows from financing activities: | |||||||||||
| Taxes paid for equity award issuances | (1,486) | (1,945) | |||||||||
| Payments for financing arrangements and other | (496) | (27) | |||||||||
| Net cash used in financing activities - continuing operations | (1,982) | (1,972) | |||||||||
| Net cash used in financing activities - discontinued operations | (8,549) | (8,530) | |||||||||
| Net cash used in financing activities | (10,531) | (10,502) | |||||||||
| Net increase in cash and cash equivalents | 33,785 | 18,581 | |||||||||
| Cash and cash equivalents, beginning of period | 195,397 | 101,651 | |||||||||
| Cash and cash equivalents, end of period | $ | 229,182 | $ | 120,232 | |||||||
See accompanying notes to unaudited condensed consolidated financial statements.
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SHENANDOAH TELECOMMUNICATIONS COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation and Other Information
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. All normal recurring adjustments considered necessary for a fair presentation have been included. Certain disclosures normally included in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) have been omitted. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes contained in our Annual Report on Form 10-K for the year ended December 31, 2020.
The preparation of the unaudited interim consolidated financial statements requires management of the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingencies at the date of the unaudited interim condensed consolidated financial statements. These estimates are inherently subject to judgment and actual results could differ.
Adoption of New Accounting Principles
There have been no material developments related to recently issued accounting standards, including the expected dates of adoption and estimated effects on the Company's unaudited condensed consolidated financial statements and note disclosures, from those disclosed in the Company's 2020 Annual Report on Form 10-K, that would be expected to impact the Company.
Note 2. Discontinued Operations
On August 26, 2020, Sprint Corporation ("Sprint"), an indirect subsidiary of T-Mobile US, Inc., ("T-Mobile"), on behalf of and as the direct or indirect owner of Sprint PCS, delivered notice to the Company exercising its option to purchase the assets and operations of our Wireless operations for 90% of the “Entire Business Value” (as defined under our affiliate agreement and determined pursuant to the appraisal process set forth therein). Shortly thereafter, the Company committed to a plan to sell the discontinued Wireless operations.
The final and binding appraisal process that determined the transaction price was completed on February 1, 2021. Expected sale proceeds are $1.95 billion based upon the appraisal process and other agreements between the parties.
The closing of the sale is now expected to occur in the third quarter of 2021, subject to execution of the definitive asset purchase agreement, securing required regulatory approvals and customary closing conditions. The Company and T-Mobile submitted required regulatory filings to the Department of Justice (DOJ), the Federal Communications Commission (FCC), and the Public Service Commission of West Virginia (PSCWV), in March 2021. The premerger notification waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, expired on April 26, 2021, without the DOJ’s Antitrust Division or the Federal Trade Commission taking any action in connection with the proposed transaction thus allowing the parties to consummate the transaction upon receipt of pending regulatory approvals from the FCC and the PSCWV.
The assets and liabilities that are expected to transfer in the sale are presented as held for sale within our unaudited condensed consolidated balance sheets, and discontinued operations within our unaudited condensed consolidated statements of comprehensive income. This disposal group excludes the accounts receivable and certain current liabilities generated by our Wireless operations because they are expected to be settled separately from the sale. Such accounts receivable totaled $49.4 million and $51.7 million at March 31, 2021 and December 31, 2020, respectively, and such current liabilities totaled $4.9 million and $6.1 million at March 31, 2021 and December 31, 2020, respectively. Our identification of assets and liabilities held for sale could change based on the terms of the final asset purchase agreement.
The transaction is structured as an asset sale for income tax purposes. As a result, no current or deferred tax assets or liabilities are included within the disposal group. While our long-term debt does not transfer in the sale, its provisions require us to repay all of the debt upon consummation of the sale. Our debt is therefore presented outside of the disposal group as a current liability at December 31, 2020. Our related interest rate swap liabilities are also presented outside of the disposal group as a current liability at December 31, 2020, because management intends to settle them at consummation. Because repayment of the debt is
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contractually triggered by the sale, the related interest expense is presented within discontinued operations under the relevant authoritative guidance.
The carrying amounts of the major classes of assets and liabilities, which are classified as held for sale in the consolidated balance sheets, are as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| ASSETS | |||||||||||
| Inventory | $ | 3,651 | $ | 5,746 | |||||||
| Prepaid expenses and other | 42,942 | 47,003 | |||||||||
| Property, plant and equipment, net | 299,246 | 299,647 | |||||||||
| Intangible assets, net | 166,103 | 176,459 | |||||||||
| Goodwill | 146,383 | 146,383 | |||||||||
| Operating lease right-of-use assets | 420,410 | 421,586 | |||||||||
| Deferred charges and other assets | 38,793 | 36,470 | |||||||||
| Current assets held for sale | $ | 1,117,528 | $ | 1,133,294 | |||||||
| LIABILITIES | |||||||||||
| Current operating lease liabilities | $ | 398,340 | $ | 409,887 | |||||||
| Accrued liabilities and other | 10,775 | 8,770 | |||||||||
| Asset retirement obligations | 33,974 | 33,545 | |||||||||
| Current liabilities held for sale | $ | 443,089 | $ | 452,202 | |||||||
Income from discontinued operations, net of tax in the consolidated statements of comprehensive income consist of the following:
| (in thousands) | Three Months Ended March 31, | ||||||||||
| Revenue: | 2021 | 2020 | |||||||||
| Service revenue and other | $ | 100,674 | $ | 91,388 | |||||||
| Equipment revenue | 6,399 | 12,750 | |||||||||
| Total revenue | 107,073 | 104,138 | |||||||||
| Operating expenses: | |||||||||||
| Cost of services | 19,427 | 33,439 | |||||||||
| Cost of goods sold | 6,221 | 12,528 | |||||||||
| Selling, general and administrative | 10,702 | 8,930 | |||||||||
| Restructuring expense | 211 | — | |||||||||
| Depreciation and amortization | — | 24,826 | |||||||||
| Total operating expenses | 36,561 | 79,723 | |||||||||
| Operating income | 70,512 | 24,415 | |||||||||
| Other (expense) income: | |||||||||||
| Interest expense | (4,384) | (6,228) | |||||||||
| Income before income taxes | 66,128 | 18,187 | |||||||||
| Income tax expense | 17,656 | 5,057 | |||||||||
| Income from discontinued operations, net of tax | $ | 48,472 | $ | 13,130 | |||||||
Under the relevant authoritative guidance, consummation of the sale will trigger or accelerate the recognition of certain expense related to contingent deal advisory fees, severance costs, recognition of our interest rate swap losses in net income, and loss on debt extinguishment. Our estimate of the related range of reasonably possible expense extends from $0 if the sale is not consummated to $36 million.
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Note 3. Revenue from Contracts with Customers
Our Broadband segment provides broadband data, video and voice services to residential and commercial customers in portions of Virginia, West Virginia, Maryland, Pennsylvania and Kentucky, via fiber optic, hybrid fiber coaxial cable, and fixed wireless networks. The Broadband segment also provides voice and DSL telephone services to customers in Virginia’s Shenandoah County and portions of adjacent counties as a Rural Local Exchange Carrier (“RLEC”).
These contracts are generally cancellable at the customer’s discretion without penalty at any time. We allocate the total transaction price in these transactions based upon the standalone selling price of each distinct good or service. We generally recognize these revenues over time as customers simultaneously receive and consume the benefits of the service, with the exception of equipment sales and home wiring, which are recognized as revenue at a point in time when control transfers and when installation is complete, respectively. Installation fees, charged upfront without transfer of commensurate goods or services to the customer, are allocated to services and are recognized ratably over the longer of the contract term or the period in which the unrecognized fee remains material to the contract, which we estimate to be about one year. Additionally, the Company incurs commission and installation costs related to in-house and third-party vendors which are capitalized and amortized over the expected weighted average customer life which is approximately five years.
Our Broadband segment also provides Ethernet and Wavelength fiber optic services to commercial fiber customers under capacity agreements, and the related revenue is recognized over time. In some cases, non-refundable upfront fees are charged for connecting commercial fiber customers to our fiber network. Those amounts are recognized ratably over the longer of the contract term or the period in which the unrecognized fee remains material to the respective contract. A related contract liability of $2.8 million was recognized at March 31, 2021, which we expect to recognize into revenue at the rate of approximately $0.8 million per year.
The Broadband segment also leases dedicated fiber optic strands to customers as part of “dark fiber” agreements, which are accounted for as leases under ASC 842, Leases.
Our Tower segment leases space on owned cell towers to our Wireless and Broadband segments, and to other wireless carriers. Revenue from these leases is accounted for under ASC 842.
Refer to Note 14, Segment Reporting, for a summary of these revenue streams.
Below is a summary of the Broadband segment's capitalized contract acquisition and fulfillment costs:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Beginning Balance | $ | 14,669 | $ | 11,005 | |||||||
| Contract payments | 1,805 | 1,685 | |||||||||
| Contract amortization | (1,259) | (1,027) | |||||||||
| Ending Balance | $ | 15,215 | $ | 11,663 | |||||||
Note 4. Investments
Investments consist of the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| SERP Investments at fair value | $ | 2,039 | $ | 2,687 | |||||||
| Cost method investments | 10,780 | 10,536 | |||||||||
| Equity method investments | 557 | 546 | |||||||||
| Total investments | $ | 13,376 | $ | 13,769 | |||||||
SERP Investments at Fair Value: The Supplemental Executive Retirement Plan (“SERP”) is a benefit plan that provides deferred compensation to certain employees. The Company holds the related investments in a rabbi trust as a source of funding for future payments under the plan. The SERP’s investments were designated as trading securities and will be liquidated and
9
paid out to the participants upon retirement. The benefit obligation to participants is always equal to the value of the SERP assets under ASC 710, Compensation. Changes to the investments' fair value are presented in Other income (expense), while the reciprocal changes in the liability are presented in selling, general and administrative expense. At March 31, 2021, an additional $0.8 million of SERP investments were presented as prepaid expenses and other (current assets) as we intend to liquidate certain investments to pay the current portion of our SERP obligation.
Cost Method Investments: Our investment in CoBank’s Class A common stock represented substantially all of our cost method investments with a balance of $10.0 million and $9.8 million at March 31, 2021 and December 31, 2020, respectively. We recognized approximately $1.0 million of patronage income in Other income (expense) in both the three months ended March 31, 2021 and 2020. Historically, approximately 75% of the patronage distributions were collected in cash and 25% in equity.
Equity Method Investments: At March 31, 2021, the Company had a 20.0% ownership interest in Valley Network Partnership (“ValleyNet”). The Company and ValleyNet purchase capacity on one another’s fiber network. We recognized revenue of $0.2 million from providing service to ValleyNet during both of the three months ended March 31, 2021 and 2020, respectively. We recognized Cost of service of $0.5 million and $0.8 million for the use of ValleyNet’s network during the three months ended March 31, 2021 and 2020, respectively.
Note 5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
| ($ in thousands) | Estimated Useful Lives | March 31, 2021 | December 31, 2020 | ||||||||||||||
| Land | $ | 3,771 | $ | 3,909 | |||||||||||||
| Land improvements | 10 years | 3,141 | 2,910 | ||||||||||||||
| Buildings and structures | 10 - 40 years | 92,974 | 91,335 | ||||||||||||||
| Cable and fiber | 15 - 30 years | 407,341 | 390,209 | ||||||||||||||
| Equipment and software | 4 - 8 years | 329,087 | 331,047 | ||||||||||||||
| Plant in service | 836,314 | 819,410 | |||||||||||||||
| Plant under construction | 70,369 | 49,417 | |||||||||||||||
| Total property, plant and equipment | 906,683 | 868,827 | |||||||||||||||
| Less: accumulated amortization and depreciation | 438,300 | 428,400 | |||||||||||||||
| Property, plant and equipment, net | $ | 468,383 | $ | 440,427 | |||||||||||||
Property, plant and equipment net, increased due primarily to capital expenditures in the Broadband segment driven by our Glo Fiber and Beam market expansions.
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Note 6. Goodwill and Intangible Assets
Other intangible assets consisted of the following:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Gross Carrying Amount | Accumulated Amortization and Other | Net | Gross Carrying Amount | Accumulated Amortization and Other | Net | |||||||||||||||||||||||||||||
| Goodwill - Broadband | $ | 3,244 | $ | — | $ | 3,244 | $ | 3,244 | $ | — | $ | 3,244 | |||||||||||||||||||||||
| Indefinite-lived intangibles: | |||||||||||||||||||||||||||||||||||
| Cable franchise rights | $ | 64,334 | $ | — | $ | 64,334 | $ | 64,334 | $ | — | $ | 64,334 | |||||||||||||||||||||||
| FCC spectrum licenses | 29,958 | — | 29,958 | 29,958 | — | 29,958 | |||||||||||||||||||||||||||||
| Railroad crossing rights | 141 | — | 141 | 141 | — | 141 | |||||||||||||||||||||||||||||
| Total indefinite-lived intangibles | 94,433 | — | 94,433 | 94,433 | — | 94,433 | |||||||||||||||||||||||||||||
| Finite-lived intangibles: | |||||||||||||||||||||||||||||||||||
| FCC spectrum licenses | 6,811 | (437) | 6,374 | 6,811 | (340) | 6,471 | |||||||||||||||||||||||||||||
| Subscriber relationships | 28,425 | (26,113) | 2,312 | 28,425 | (26,000) | 2,425 | |||||||||||||||||||||||||||||
| Other intangibles | 463 | (283) | 180 | 463 | (277) | 186 | |||||||||||||||||||||||||||||
| Total finite-lived intangibles | 35,699 | (26,833) | 8,866 | 35,699 | (26,617) | 9,082 | |||||||||||||||||||||||||||||
| Total goodwill and intangible assets | $ | 133,376 | $ | (26,833) | $ | 106,543 | $ | 133,376 | $ | (26,617) | $ | 106,759 | |||||||||||||||||||||||
We acquired Canaan Cable ("Canaan") on December 31, 2020. The $2.1 million acquisition price was allocated as follows: $1.1 million of property, plant and equipment; $0.4 million to subscriber relationships; and $0.6 million of goodwill. We remitted $1.89 million of the acquisition price at closing.
During the third quarter of 2020, the Company completed the purchase of certain indefinite-lived CBRS spectrum licenses for an aggregate cost of $16.1 million, within our Broadband segment. Spectrum licenses in the CBRS band are issued by the Federal Communications Commission (“FCC”) and provide us priority access rights over general access users other than incumbents, in that specific band, in accordance with the FCC’s three-tier CBRS band spectrum sharing framework to utilize designated radio frequency spectrum within specific geographic service areas to provide wireless communication services.
For the three months ended March 31, 2021 and 2020, amortization expense was approximately $0.2 million and $0.2 million, respectively.
Note 7. Other Assets and Accrued Liabilities
Prepaid expenses and other, classified as current assets, included the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Prepaid maintenance expenses | $ | 6,089 | $ | 4,018 | |||||||
| Broadband contract acquisition and fulfillment costs | 4,721 | 4,417 | |||||||||
| SERP investments | 840 | — | |||||||||
| Other | 1,293 | 1,196 | |||||||||
| Prepaid expenses and other | $ | 12,943 | $ | 9,631 | |||||||
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Deferred charges and other assets, classified as long-term assets, included the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Broadband contract acquisition and fulfillment costs | $ | 10,494 | $ | 10,252 | |||||||
| Prepaid expenses and other | 4,504 | 1,398 | |||||||||
| Deferred charges and other assets | $ | 14,998 | $ | 11,650 | |||||||
Accrued liabilities and other, classified as current liabilities, included the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Interest rate swaps | $ | 3,018 | $ | 4,048 | |||||||
| Accrued programming costs | 3,113 | 2,868 | |||||||||
| Sales and property taxes payable | 1,967 | 1,072 | |||||||||
| Restructuring accrual | 806 | — | |||||||||
| Other current liabilities | 5,601 | 5,881 | |||||||||
| Accrued liabilities and other | $ | 14,505 | $ | 13,869 | |||||||
Other liabilities, classified as long-term liabilities, included the following:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Noncurrent portion of deferred lease revenue | $ | 18,610 | $ | 18,687 | |||||||
| FCC spectrum license obligations | 3,836 | 3,845 | |||||||||
| Noncurrent portion of financing leases | 1,581 | 1,492 | |||||||||
| Other | 426 | 881 | |||||||||
| Other liabilities | $ | 24,453 | $ | 24,905 | |||||||
During the three months ended March 31, 2021, we implemented a restructuring plan whereby certain employees will leave the Company during the second quarter of 2021. We recognized a restructuring accrual for severance benefits payable to those employees totaling $0.8 million. Of that amount, $0.6 million was presented within income from continuing operations, and $0.2 million was presented within income from discontinued operations.
Note 8. Leases
We lease various telecommunications sites, warehouses, retail stores, and office facilities for use in our business. These agreements include fixed rental payments as well as variable rental payments, such as those based on relevant inflation indices. The accounting lease term includes optional renewal periods that we are reasonably certain to exercise based on our assessment of relevant contractual and economic factors. The related lease payments are discounted at lease commencement using the Company's incremental borrowing rate in order to measure the lease liability and ROU asset.
The incremental borrowing rate is determined using a portfolio approach based on the rate of interest that the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the observable unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate. At March 31, 2021, our operating leases had a weighted average remaining lease term of 22 years and a weighted average discount rate of 4.5%. Our finance leases had a weighted average remaining lease term of 14 years and a weighted average discount rate of 5.2%.
During each of the three months ended March 31, 2021 and 2020, we recognized $1.4 million of operating lease expense. We recognized $0.2 million and $0.1 million of interest and depreciation expense on finance leases during the three months ended March 31, 2021 and 2020, respectively. Operating lease expense is presented in cost of service or selling, general and administrative expense based on the use of the relevant facility. Variable lease payments and short-term lease expense were both immaterial. We remitted $1.5 million and $1.0 million of operating lease payments during the three months ended March 31, 2021 and 2020, respectively. We also obtained $2.7 million and $0.3 million of leased assets in exchange for new operating lease liabilities recognized during the three months ended March 31, 2021 and 2020, respectively.
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The following table summarizes the expected maturity of lease liabilities at March 31, 2021:
| (in thousands) | Operating Leases | Finance Leases | Total | |||||||||||||||||
| 2021 | $ | 3,639 | $ | 107 | $ | 3,746 | ||||||||||||||
| 2022 | 4,695 | 175 | 4,870 | |||||||||||||||||
| 2023 | 4,251 | 177 | 4,428 | |||||||||||||||||
| 2024 | 3,894 | 179 | 4,073 | |||||||||||||||||
| 2025 | 3,672 | 181 | 3,853 | |||||||||||||||||
| 2026 and thereafter | 65,240 | 1,551 | 66,791 | |||||||||||||||||
| Total lease payments | 85,391 | 2,370 | 87,761 | |||||||||||||||||
| Less: Interest | 35,282 | 695 | 35,977 | |||||||||||||||||
| Present value of lease liabilities | $ | 50,109 | $ | 1,675 | $ | 51,784 | ||||||||||||||
We recognized $2.4 million and $2.1 million of operating lease revenue during the three months ended March 31, 2021 and 2020, respectively, related to the cell site colocation space and dedicated fiber optic strands that we lease to our customers, which is included in Service and other revenue in the consolidated statements of comprehensive income. Substantially all of our lease revenue relates to fixed lease payments.
Below is a summary of our minimum rental receipts under the lease agreements in place at March 31, 2021:
| (in thousands) | Operating Leases | |||||||
| 2021 | $ | 6,137 | ||||||
| 2022 | 7,198 | |||||||
| 2023 | 5,668 | |||||||
| 2024 | 4,526 | |||||||
| 2025 | 3,465 | |||||||
| 2026 and thereafter | 7,109 | |||||||
| Total | $ | 34,103 | ||||||
Note 9. Debt
Our syndicated Credit Agreement includes a $75 million, five-year undrawn revolving credit facility, as well as the following term loans:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Term loan A-1 | $ | 222,154 | $ | 229,437 | |||||||
| Term loan A-2 | 467,234 | 468,481 | |||||||||
| 689,388 | 697,918 | ||||||||||
| Less: unamortized loan fees | 8,857 | 9,455 | |||||||||
| Total debt, net of unamortized loan fees | $ | 680,531 | $ | 688,463 | |||||||
Term Loan A-1 bears interest at one-month LIBOR plus a margin of 1.50%, while Term Loan A-2 bears interest at one-month LIBOR plus a margin of 1.75%. LIBOR resets monthly. Our cash payments for interest were $3.9 million and $5.8 million during the three months ended March 31, 2021 and 2020, respectively.
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As shown below, as of March 31, 2021, the Company was in compliance with the financial covenants in its credit agreements.
| Actual | Covenant Requirement | ||||||||||
| Total leverage ratio | 1.8 | 3.25 or Lower | |||||||||
| Debt service coverage ratio | 7.4 | 2.0 or Higher | |||||||||
| Minimum liquidity balance (in millions) | $ | 304.2 | $25.0 or Higher | ||||||||
Rate quotations provided by a group of banks that sustain LIBOR will no longer be required after 2021. As a result, it is uncertain whether LIBOR will continue to be quoted after 2021. Our term loans and interest rate swaps identify LIBOR as a reference rate and mature after 2021. Alternative reference rates that replace LIBOR may not yield the same or similar economic results over the terms of the financial instruments. The transition from LIBOR could result in us paying higher or lower interest rates on our current LIBOR-indexed term loans, affect the fair value of the derivative instruments we hold, or affect our ability to effectively use interest rate swaps to manage interest rate risk. Our Credit Agreement includes provisions that provide for the identification of a LIBOR replacement rate. Due to the uncertainty regarding the transition from LIBOR-indexed financial instruments, including when it will happen, and the manner in which an alternative reference rate will apply, we cannot yet reasonably estimate the expected financial impact of the LIBOR transition.
As discussed in Note 2, Discontinued Operations, the terms of our long term debt agreements require us to repay all of our debt upon consummation of the sale of our Wireless operations, which is expected to occur during the third quarter of 2021. Management also intends to settle the related interest rate swaps upon consummation. Both are therefore presented outside of the disposal group as a current liability at March 31, 2021.
Note 10. Derivatives and Hedging
The Company's interest rate swaps are pay-fixed (1.16%), receive-variable (one month LIBOR) that hedged approximately 40% of outstanding debt with outstanding notional amounts totaling $275.3 million and $328.7 million as of March 31, 2021 and 2020, respectively.
The fair value of these instruments was estimated using an income approach and observable market inputs. The hedge was determined to be highly effective and therefore all of the change in its fair value was recognized through other comprehensive income.
The table below summarizes changes in accumulated other comprehensive income (loss) by component:
| (in thousands) | Gains (Losses) on Cash Flow Hedges | Income Tax (Expense) Benefit | Accumulated Other Comprehensive Income (Loss), net of taxes | ||||||||||||||
| Balance as of December 31, 2020 | $ | (4,048) | $ | (658) | $ | (4,706) | |||||||||||
| Net change in unrealized (loss) gain | (731) | (257) | (988) | ||||||||||||||
| Amounts reclassified from accumulated other comprehensive income (loss) to interest expense | 1,761 | — | 1,761 | ||||||||||||||
| Net current period other comprehensive (loss) income | 1,030 | (257) | 773 | ||||||||||||||
| Balance as of March 31, 2021 | $ | (3,018) | $ | (915) | $ | (3,933) | |||||||||||
Note 11. Income Taxes
The Company files U.S. federal income tax returns and various state income tax returns. The Company is not subject to any state or federal income tax audits as of March 31, 2021. The Company's returns are generally open to examination from 2017 forward and the net operating losses acquired in the acquisition of nTelos are open to examination from 2002 forward.
The effective tax rates for the three months ended March 31, 2021 and 2020, differ from the statutory U.S. federal income tax rate of 21% primarily due to the state income taxes, excess tax benefits and other discrete items.
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| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Expected tax expense at federal statutory | $ | 834 | $ | (129) | |||||||
| State income taxes, net of federal tax effect | 315 | (28) | |||||||||
| Excess tax benefit from share based compensation and other, net | (227) | (608) | |||||||||
| Income tax (benefit) expense | $ | 922 | $ | (765) | |||||||
The Company's cash refunds for income taxes were $0.8 million in the three months ended March 31, 2021. The Company had no significant cash payments or refunds for income taxes during the three months ended March 31, 2020.
Note 12. Earnings per Share
We utilize the treasury stock method to calculate the impact on diluted earnings per share that potentially dilutive stock-based compensation awards have. The following table indicates the computation of basic and diluted earnings per share:
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per share amounts) | 2021 | 2020 | |||||||||
| Calculation of net income per share: | |||||||||||
| Income from continuing operations | $ | 3,049 | $ | 150 | |||||||
| Income from discontinued operations, net of tax | $ | 48,472 | $ | 13,130 | |||||||
| Net income | $ | 51,521 | $ | 13,280 | |||||||
| Basic weighted average shares outstanding | 49,947 | 49,888 | |||||||||
| Basic net income per share - continuing operations | $ | 0.06 | $ | — | |||||||
| Basic net income per share - discontinued operations | $ | 0.97 | $ | 0.27 | |||||||
| Basic net income per share | $ | 1.03 | $ | 0.27 | |||||||
| Effect of stock-based compensation awards outstanding: | |||||||||||
| Basic weighted average shares outstanding | 49,947 | 49,888 | |||||||||
| Effect from dilutive shares and options outstanding | 134 | 148 | |||||||||
| Diluted weighted average shares outstanding | 50,081 | 50,036 | |||||||||
| Diluted net income per share - continuing operations | $ | 0.06 | $ | — | |||||||
| Diluted net income per share - discontinued operations | $ | 0.97 | $ | 0.27 | |||||||
| Diluted net income per share | $ | 1.03 | $ | 0.27 | |||||||
There were fewer than 100 thousand anti-dilutive awards outstanding during three months ended March 31, 2021 and 2020.
Note 13. Commitments and Contingencies
We are committed to make payments to satisfy our lease liabilities and long-term debt. The scheduled payments under those obligations are summarized in the respective notes. We are also committed to make annual payments of approximately $108.0 thousand on our FCC spectrum license obligation through 2039.
The Company is subject to claims and legal actions that may arise in the ordinary course of business. The Company does not believe that any of these pending claims or legal actions are either probable or reasonably possible of a material loss.
Note 14. Segment Reporting
The expected divestiture of our Wireless operations represents a strategic shift in the Company’s business and qualifies as a discontinued operation. As a result, the operating results and cash flows related to the Wireless segment have been reflected as discontinued operations in our Unaudited Condensed Consolidated Statements of Comprehensive Income and the Unaudited Condensed Consolidated Statements of Cash Flows. The tables below reflect the results of operations of the Company's reportable segments in continuing operations, consistent with internal reporting used by the Company.
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Three Months Ended March 31, 2021:
| (in thousands) | Broadband | Tower | Corporate & Eliminations | Consolidated | ||||||||||||||||||||||
| External revenue | ||||||||||||||||||||||||||
| Residential & SMB | $ | 42,930 | $ | — | $ | — | $ | 42,930 | ||||||||||||||||||
| Commercial Fiber | 6,385 | — | — | 6,385 | ||||||||||||||||||||||
| RLEC & Other | 3,631 | — | — | 3,631 | ||||||||||||||||||||||
| Tower lease | — | 2,150 | — | 2,150 | ||||||||||||||||||||||
| Service revenue and other | 52,946 | 2,150 | — | 55,096 | ||||||||||||||||||||||
| Revenue for service provided to the discontinued Wireless operations | 2,208 | 2,515 | (128) | 4,595 | ||||||||||||||||||||||
| Total revenue | 55,154 | 4,665 | (128) | 59,691 | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Cost of services | 22,136 | 1,248 | (101) | 23,283 | ||||||||||||||||||||||
| Selling, general and administrative | 10,725 | 234 | 9,194 | 20,153 | ||||||||||||||||||||||
| Restructuring expense | 105 | — | 513 | 618 | ||||||||||||||||||||||
| Depreciation and amortization | 11,761 | 481 | 1,024 | 13,266 | ||||||||||||||||||||||
| Total operating expenses | 44,727 | 1,963 | 10,630 | 57,320 | ||||||||||||||||||||||
| Operating income (loss) | $ | 10,427 | $ | 2,702 | $ | (10,758) | $ | 2,371 | ||||||||||||||||||
Three Months Ended March 31, 2020:
| (in thousands) | Broadband | Tower | Corporate & Eliminations | Consolidated | ||||||||||||||||||||||
| External revenue | ||||||||||||||||||||||||||
| Residential & SMB | $ | 37,009 | $ | — | $ | — | $ | 37,009 | ||||||||||||||||||
| Commercial Fiber | 6,200 | — | — | 6,200 | ||||||||||||||||||||||
| RLEC & Other | 4,044 | — | — | 4,044 | ||||||||||||||||||||||
| Tower lease | — | 1,797 | — | 1,797 | ||||||||||||||||||||||
| Service revenue and other | 47,253 | 1,797 | — | 49,050 | ||||||||||||||||||||||
| Revenue for service provided to the discontinued Wireless operations | 2,533 | 1,933 | (382) | 4,084 | ||||||||||||||||||||||
| Total revenue | 49,786 | 3,730 | (382) | 53,134 | ||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||
| Cost of services | 19,386 | 939 | (8) | 20,317 | ||||||||||||||||||||||
| Selling, general and administrative | 9,704 | 526 | 11,866 | 22,096 | ||||||||||||||||||||||
| Depreciation and amortization | 10,034 | 470 | 1,581 | 12,085 | ||||||||||||||||||||||
| Total operating expenses | 39,124 | 1,935 | 13,439 | 54,498 | ||||||||||||||||||||||
| Operating income (loss) | $ | 10,662 | $ | 1,795 | $ | (13,821) | $ | (1,364) | ||||||||||||||||||
A reconciliation of the total of the reportable segments’ operating income to consolidated income before taxes is as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Total consolidated operating income loss | $ | 2,371 | $ | (1,364) | |||||||
| Other income, net | 1,600 | 749 | |||||||||
| Income (loss) from continuing operations before income taxes | $ | 3,971 | $ | (615) | |||||||
The Company’s chief operating decision maker (CODM) does not currently review total assets by segment since the assets are centrally managed and some of the assets are shared by the segments, accordingly total assets by segment are not provided.
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ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When used in this report, the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan” and similar expressions as they relate to Shenandoah Telecommunications Company or its management are intended to identify these forward-looking statements. All statements regarding Shenandoah Telecommunications Company’s expected future financial position and operating results, business strategy, financing plans, forecasted trends relating to the markets in which Shenandoah Telecommunications Company operates and similar matters, including information concerning our response to COVID-19, are forward-looking statements. We cannot assure you that the Company’s expectations expressed or implied in these forward-looking statements will turn out to be correct. The Company’s actual results could be materially different from its expectations because of various factors, that may include natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, changes in general economic conditions, increases in costs, changes in regulation and other competitive factors. Updates to the Risk Factors described in “Item 1A-Risk Factors” as provided in our Annual Report on Form 10-K for the year ended December 31, 2020, may be found below in Part II, under the heading “Item 1A-Risk Factors.
The following management’s discussion and analysis should be read in conjunction with the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2020, including the consolidated financial statements and related notes included therein.
Overview
Shenandoah Telecommunications Company (“Shentel”, “we”, “our”, “us”, or the “Company”), is a provider of a comprehensive range of broadband communication services and cell tower colocation space in the Mid-Atlantic portion of the United States.
Management’s Discussion and Analysis is organized around our reporting segments. Refer to Note 2, Discontinued Operations, and Note 14, Segment Reporting, in our unaudited condensed consolidated financial statements for additional information.
Results of Operations
Three Months Ended March 31, 2021 Compared with the Three Months Ended March 31, 2020
The Company’s consolidated results from operations are summarized as follows:
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||
| ($ in thousands) | 2021 | % of Revenue | 2020 | % of Revenue | $ | % | ||||||||||||||||||||||||||
| Revenue | $ | 59,691 | 100.0 | $ | 53,134 | 100.0 | 6,557 | 12.3 | ||||||||||||||||||||||||
| Operating expenses | 57,320 | 96.0 | 54,498 | 102.6 | 2,822 | 5.2 | ||||||||||||||||||||||||||
| Operating income (loss) | 2,371 | 4.0 | (1,364) | (2.6) | 3,735 | (273.8) | ||||||||||||||||||||||||||
| Other income, net | 1,600 | 2.7 | 749 | 1.4 | 851 | 113.6 | ||||||||||||||||||||||||||
| Income (loss) before taxes | 3,971 | 6.7 | (615) | (1.2) | 4,586 | (745.7) | ||||||||||||||||||||||||||
| Income tax expense (benefit) | 922 | 1.5 | (765) | (1.4) | 1,687 | 220.5 | ||||||||||||||||||||||||||
| Income from continuing operations | 3,049 | 5.1 | 150 | 0.3 | 2,899 | 1,932.7 | ||||||||||||||||||||||||||
| Income from discontinued operations, net of tax | 48,472 | 81.2 | 13,130 | 24.7 | 35,342 | 269.2 | ||||||||||||||||||||||||||
| Net income | $ | 51,521 | 86.3 | $ | 13,280 | 25.0 | 38,241 | 288.0 | ||||||||||||||||||||||||
Revenue
Revenue increased approximately $6.6 million, or 12.3%, during the three months ended March 31, 2021 compared with the three months ended March 31, 2020, driven by growth of $5.4 million, or 10.8%, in the Broadband segment and $0.9 million,
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or 25.1%, in the Tower segment. Refer to the discussion of the results of operations for the Tower and Broadband segments, included within this quarterly report, for additional information.
Operating expenses
Operating expenses increased approximately $2.8 million, or 5.2%, during the three months ended March 31, 2021 compared with the three months ended March 31, 2020, primarily driven by incremental Broadband operating expenses incurred to support the launch of our Glo Fiber and Beam fixed wireless services.
During the three months ended March 31, 2021, we implemented a workforce reduction plan whereby certain employees of the continuing operations will leave the Company during the second quarter of 2021. We recognized a restructuring accrual for severance benefits payable to those employees totaling $0.6 million. Under our workforce reduction plan, we expect to incur an additional $1.1 million of severance expense within income from continuing operations when the sale of our Wireless operations is completed, which is expected to be in the third quarter of 2021. The workforce reduction is expected to decrease the Company's annualized run-rate operating expenses for continuing operations by approximately $4 million.
Income tax expense (benefit)
Income tax expense of approximately $0.9 million increased approximately $1.7 million during the three months ended March 31, 2021 compared with the three months ended March 31, 2020, primarily due to changes in taxable income.
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax, increased by $35.3 million during the three months ended March 31, 2021 as compared with the three months ended March 31, 2020, primarily driven by a $4.5 million increase in Travel Revenue following the June 2020 settlement with Sprint, a $24.8 million decline in depreciation and amortization primarily as a result of ceasing depreciation and amortization of assets held for sale during the third quarter of 2020, a $14.0 million decline in cost of services primarily due to ceasing amortization on our right of use assets under operating leases during the third quarter of 2020, an $1.7 decline in interest expense primarily driven by lower interest rates on our term loans, partially offset by $12.6 million of higher income tax driven by changes in taxable income.
During the three months ended March 31, 2021, we implemented a workforce reduction plan whereby certain employees of the continuing operations will leave the Company during the second quarter of 2021. We recognized a restructuring accrual for severance benefits payable to those employees totaling $0.2 million. Under our workforce reduction plan, we expect to incur an additional $3.9 million of severance expense within income from discontinued operations when the sale of our Wireless operations is completed, which is expected to be in the third quarter of 2021.
Broadband
Our Broadband segment provides broadband internet, video and voice services to residential and commercial customers in portions of Virginia, West Virginia, Maryland, Pennsylvania, and Kentucky, via hybrid fiber coaxial cable under the brand name of Shentel, fiber optics under the brand name of Glo Fiber and fixed wireless network under the brand name of Beam. The Broadband segment also leases dark fiber and provides Ethernet and Wavelength fiber optic services to enterprise and wholesale customers throughout the entirety of our service area. The Broadband segment also provides voice and DSL telephone services to customers in Virginia’s Shenandoah County and portions of adjacent counties as a Rural Local Exchange Carrier (“RLEC”). These integrated networks are connected by an approximately 6,900 fiber route mile network. This fiber optic network also supports our Wireless segment operations, which are currently classified as discontinued operations, and these intercompany transactions are reported at their market value.
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The following table indicates selected operating statistics of Broadband:
| March 31, 2021 | March 31, 2020 | |||||||||||||
| Broadband homes and businesses passed (1) | 259,891 | 212,129 | ||||||||||||
| Incumbent Cable (2) | 210,210 | 206,782 | ||||||||||||
| Glo Fiber | 34,441 | 5,347 | ||||||||||||
| Beam | 15,240 | — | ||||||||||||
| Broadband customer relationships (3) | 115,921 | 103,287 | ||||||||||||
| Residential & SMB RGUs: | ||||||||||||||
| Broadband Data | 107,569 | 86,667 | ||||||||||||
| Incumbent Cable (2) | 101,576 | 86,214 | ||||||||||||
| Glo Fiber | 5,524 | 453 | ||||||||||||
| Beam | 469 | — | ||||||||||||
| Video (2) | 51,989 | 53,067 | ||||||||||||
| Voice (2) | 33,322 | 31,836 | ||||||||||||
Total Residential & SMB RGUs (excludes RLEC) | 192,880 | 171,570 | ||||||||||||
| Residential & SMB Penetration (4) | ||||||||||||||
| Broadband Data | 41.4 | % | 40.9 | % | ||||||||||
| Incumbent Cable | 48.3 | % | 41.7 | % | ||||||||||
| Glo Fiber | 16.0 | % | 8.5 | % | ||||||||||
| Beam | 3.1 | % | — | % | ||||||||||
| Video | 20.0 | % | 25.0 | % | ||||||||||
| Voice | 14.6 | % | 16.3 | % | ||||||||||
| Residential & SMB ARPU (5) | ||||||||||||||
| Broadband Data | $ | 77.93 | $ | 77.88 | ||||||||||
| Incumbent Cable | $ | 78.12 | $ | 77.87 | ||||||||||
| Glo Fiber | $ | 74.24 | $ | 80.55 | ||||||||||
| Beam | $ | 73.14 | $ | — | ||||||||||
| Video | $ | 99.50 | $ | 93.22 | ||||||||||
| Voice | $ | 29.34 | $ | 29.83 | ||||||||||
| Fiber route miles | 6,888 | 6,273 | ||||||||||||
| Total fiber miles (6) | 407,710 | 334,802 | ||||||||||||
_______________________________________________________
(1)Homes and businesses are considered passed (“homes passed”) if we can connect them to our network without further extending the distribution system. Homes passed is an estimate based upon the best available information. Homes passed will vary among video, broadband data and voice services.
(2)The Company acquired Canaan Cable on December 31, 2020 adding 1,100 homes passed, 512 data RGUs, 324 video RGUs and 164 voice RGUs.
(3)Customer relationships represent the number of billed customers who receive at least one of our services.
(4)Penetration is calculated by dividing the number of users by the number of homes passed or available homes, as appropriate.
(5)Average Revenue Per RGU calculation = (Residential & SMB Revenue * 1,000) / average RGUs / 3 months
(6)Total fiber miles are measured by taking the number of fiber strands in a cable and multiplying that number by the route distance. For example, a 10 mile route with 144 fiber strands would equal 1,440 fiber miles.
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Broadband results from operations are summarized as follows:
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||
| ($ in thousands) | 2021 | % of Revenue | 2020 | % of Revenue | $ | % | ||||||||||||||||||||||||||
| Broadband operating revenue | ||||||||||||||||||||||||||||||||
| Residential & SMB | $ | 42,930 | 77.8 | $ | 37,009 | 74.3 | 5,921 | 16.0 | ||||||||||||||||||||||||
| Commercial Fiber | 8,479 | 15.4 | 8,359 | 16.8 | 120 | 1.4 | ||||||||||||||||||||||||||
| RLEC & Other | 3,745 | 6.8 | 4,418 | 8.9 | (673) | (15.2) | ||||||||||||||||||||||||||
| Total broadband revenue | 55,154 | 100.0 | 49,786 | 100.0 | % | 5,368 | 10.8 | |||||||||||||||||||||||||
| Broadband operating expenses | ||||||||||||||||||||||||||||||||
| Cost of services | 22,136 | 40.1 | 19,386 | 38.9 | 2,750 | 14.2 | ||||||||||||||||||||||||||
| Selling, general, and administrative | 10,725 | 19.4 | 9,704 | 19.5 | 1,021 | 10.5 | ||||||||||||||||||||||||||
| Restructuring expense | 105 | 0.2 | — | — | 105 | — | ||||||||||||||||||||||||||
| Depreciation and amortization | 11,761 | 21.3 | 10,034 | 20.2 | 1,727 | 17.2 | ||||||||||||||||||||||||||
| Total broadband operating expenses | 44,727 | 81.1 | 39,124 | 78.6 | 5,603 | 14.3 | ||||||||||||||||||||||||||
| Broadband operating income | $ | 10,427 | 18.9 | $ | 10,662 | 21.4 | (235) | (2.2) | ||||||||||||||||||||||||
Residential & SMB (small & medium business) revenue
Residential & SMB revenue increased approximately $5.9 million, or 16.0%, during the three months ended March 31, 2021 primarily driven by 24.1% growth in broadband RGUs and penetration improvement, driven by demand for higher speed data service and the rollout of our Glo fiber service.
Commercial Fiber revenue
Commercial Fiber revenue was comparable with the prior period.
RLEC & Other revenue
RLEC & Other revenue decreased approximately $0.7 million, or 15.2%, compared with the three months ended March 31, 2020 due primarily to a decline in residential DSL subscribers, lower governmental support, and lower intercompany phone service. We expect RLEC revenue to continue to decline in future periods.
Cost of services
Cost of services increased approximately $2.8 million, or 14.2%, compared with the three months ended March 31, 2020, primarily driven by the growth of our Glo Fiber and Beam fixed wireless products. This included a $1.6 million increase in compensation expense from increased staffing, as well as a $0.5 million increase in installation, maintenance, and other expenses. Higher video programming costs drove an additional increase of $0.5 million.
Selling, general and administrative
Selling, general and administrative expense increased $1.0 million or 10.5% compared with the three months ended March 31, 2020, driven by a $0.9 million increase in software and professional fees, a $0.4 million increase in compensation expense from higher staffing to support our Glo Fiber and Beam fixed wireless services, and partially offset by a $0.3 million decrease in advertising expense.
Restructuring expense
During the first quarter of 2021, we implemented a workforce reduction program that impacted certain broadband employees and as a result we incurred $0.1 million of severance expenses.
Depreciation and amortization
Depreciation and amortization increased $1.7 million or 17.2%, compared with the three months ended March 31, 2020, primarily as a result of our network expansion and the deployment of infrastructure necessary to support new fiber-to-the-home service, Glo Fiber, and fixed wireless solution, Beam.
Tower
Our Tower segment owns cell towers and leases colocation space on the towers to wireless communications providers, including our Wireless segment that is currently classified as a discontinued operation. Substantially all of our owned towers
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are built on ground that we lease from the respective landlords. The colocation space that is leased to our discontinued Wireless operations is priced at our estimate of fair market value.
The following table indicates selected operating statistics of the Tower segment:
| March 31, 2021 | March 31, 2020 | |||||||||||||
| Macro tower sites | 223 | 220 | ||||||||||||
| Tenants (1) | 443 | 408 | ||||||||||||
| Average tenants per tower | 2.0 | 1.85 | ||||||||||||
_______________________________________________________
(1)Includes 236 and 203 intercompany tenants for our Wireless operations, (reported as a discontinued operation), and Broadband operations, as of March 31, 2021 and 2020, respectively.
Tower results from operations are summarized as follows:
| Three Months Ended March 31, | Change | |||||||||||||||||||||||||||||||
| ($ in thousands) | 2021 | % of Revenue | 2020 | % of Revenue | $ | % | ||||||||||||||||||||||||||
| Tower revenue | $ | 4,665 | 100.0 | $ | 3,730 | 100.0 | % | 935 | 25.1 | |||||||||||||||||||||||
| Tower operating expenses | 1,963 | 42.1 | 1,935 | 51.9 | 28 | 1.4 | ||||||||||||||||||||||||||
| Tower operating income | $ | 2,702 | 57.9 | $ | 1,795 | 48.1 | 907 | 50.5 | ||||||||||||||||||||||||
Revenue
Revenue increased approximately $0.9 million, or 25.1%, during the three months ended March 31, 2021 compared with the three months ended March 31, 2020. This increase was due to an 8.6% increase in tenants and a 14.7% increase in average revenue per tenant.
Revenue earned from leasing colocation space to our discontinued wireless operations was approximately $2.5 million and $1.9 million during the three months ended March 31, 2021 and 2020, respectively.
Operating expenses
Operating expenses were consistent with the prior year period.
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Financial Condition, Liquidity and Capital Resources
Sources and Uses of Cash: Our principal sources of liquidity are our cash and cash equivalents, cash generated from operations, proceeds available under our revolving line of credit, and proceeds from dispositions.
As of March 31, 2021 our cash and cash equivalents totaled $229.2 million and the availability under our revolving line of credit was $75.0 million, for total available liquidity of $304.2 million.
Operating activities from continuing operations generated approximately $9.1 million during the three months ended March 31, 2021, representing a decrease of $4.1 million compared with 2020, driven by changes in working capital.
Operating activities from discontinued operations generated $75.5 million during the three months ended March 31, 2021, as compared to $47.9 million during the three months ended March 31, 2020 driven by an increase in operating income.
Net cash used in investing activities for continuing operations increased $16.4 million during the three months ended March 31, 2021, compared with the three months ended March 31, 2020 due to the following:
•$16.1 million increase in capital expenditures due primarily to higher spending in the Broadband segment primarily driven by our Glo Fiber and Beam market expansions.
•Net cash used in investing activities for discontinued operations decreased $8.0 million to $0.9 million during the three months ended March 31, 2021, due to postponement of expansion projects in contemplation of the pending sale of our Wireless operations.
Net cash used in financing activities for continuing operations during the three months ended March 31, 2021 increased approximately $0.0 million compared with three months ended March 31, 2020, driven by a decline in share repurchases.
Net cash used in financing activities for discontinued operations during the three months ended March 31, 2021, was consistent with the prior year.
Indebtedness: As of March 31, 2021, the Company’s indebtedness totaled approximately $689.4 million, with an annualized overall weighted average interest rate of approximately 2.2%. As of March 31, 2021, we were in compliance with the financial covenants in our Credit Facility agreement.
Disposition of Wireless: Shentel currently expects that the after-tax proceeds from the sale of Shentel Wireless will be approximately $1.5 billion. The transaction will be accounted for as an asset sale for income tax purposes. Cash proceeds from the sale are required to be used to immediately repay our outstanding indebtedness. Principal payments on our debt are thus presented as cash used to finance our discontinued operations. The Company currently expects to use the after-tax proceeds from the sale of Shentel Wireless to, among other things:
•Repay and terminate approximately $692 million of outstanding term loans under our credit agreement, and associated interest rate swap liabilities, concurrent with the closing of the disposition;
•Issue a Special Dividend of $18.75 per share to Shentel’s shareholders, approximately $932 million
The Company expects to pay the Special Dividend in the third quarter 2021 after the close of the Shentel Wireless transaction, subject to the approval of Shentel’s Board of Directors.
Following the disposition of Wireless and concurrent repayment of our outstanding term loans, we expect to secure a new credit facility, to assist in funding our strategic initiatives and future growth.
We expect our cash on hand, proceeds received from dispositions, and cash flow from continuing operations will be sufficient to meet our anticipated liquidity needs for business operations for the next twelve months. There can be no assurance that we will continue to generate cash flows at or above current levels or that we will be able to raise additional financing to support the Company's planned capital expenditures.
We expect our capital expenditures to exceed the cash flow provided from continuing operations through 2023, as we expand our Glo Fiber and Beam broadband services into new markets.
The actual amount and timing of our future capital requirements may differ materially from our estimate depending on the demand for our products and services, the outcome of the sale of our discontinued wireless operations to T-Mobile, new market developments and expansion opportunities.
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Our proceeds from dispositions and cash flows from continuing operations could be adversely affected by events outside our control, including, without limitation, changes in overall economic conditions, regulatory requirements, changes in technologies, demand for our products and services, availability of labor resources and capital, natural disasters, pandemics and outbreaks of contagious diseases and other adverse public health developments, such as COVID-19, and other conditions. Our ability to attract and maintain a sufficient customer base, particularly in our Broadband markets, is critical to our ability to maintain a positive cash flow from operations. The foregoing events individually or collectively could affect our results.
Critical Accounting Policies
There have been no material changes to the critical accounting policies as previously disclosed in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of March 31, 2021, the Company had $689.4 million of gross variable rate debt outstanding, (i.e. outstanding principal on term loans A-1 and A-2), bearing interest at a weighted average rate of 2.2%. An increase in market interest rates of 1.00% would add approximately $6.8 million to annual interest expense, excluding the effect of our interest rate swaps. The swaps cover notional principal equal to $275.3 million, or approximately 39.9% as of March 31, 2021. The Company is required to pay a combined fixed rate of approximately 1.16% and receive a variable rate based on one month LIBOR (0.11% at March 31, 2021), to manage a portion of its interest rate risk. Changes in the net interest paid or received under the swaps would offset a corresponding portion of the change in interest expense on the variable rate debt outstanding.
ITEM 4.CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management, with the participation of our President and Chief Executive Officer, who is the Principal Executive Officer, the Senior Vice President - Finance and Chief Financial Officer, who is the Principal Financial Officer, and the Vice President and Chief Accounting Officer, who is the Principal Accounting Officer, conducted an evaluation of our disclosure controls and procedures, (as defined by Rule 13a-15(e) under the Securities Exchange Act of 1934), as of the end of the period covered by this Quarterly report on Form 10-Q.
As disclosed in our Annual Report on Form 10-K for our fiscal year ended December 31, 2020, we identified material weaknesses in internal control over financial reporting. The material weaknesses will not be considered remediated until the applicable enhanced controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. As remediation has not yet been completed, our President and Chief Executive Officer, our Senior Vice President - Finance and Chief Financial Officer, and our Vice President - Chief Accounting Officer, have concluded that our disclosure controls and procedures continued to be ineffective as of March 31, 2021.
In light of the material weaknesses, management performed additional analysis and other procedures to ensure that our unaudited condensed consolidated financial statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP).
Notwithstanding the material weaknesses, management has concluded that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly state, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Changes in Internal Control over Financial Reporting
During the three months ended March 31, 2021, the Company continued execution of Management's Remediation Plan. Aside from continued improvements under this plan, there were no changes in our internal control over financial reporting that materially affected or are reasonably likely to materially affect our internal control over financial reporting.
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PART II
ITEM 1A. RISK FACTORS
We discuss in our Annual Report on Form 10-K various risks that may materially affect our business. We use this section to update this discussion to reflect material developments since our Form 10-K was filed. As of March 31, 2021, the Company has not identified any needed updates to the risk factors included in our most recent Form 10-K.
ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None.
Use of Proceeds from Registered Securities
None.
Purchases of Equity Securities by the Issuer or Affiliated Purchasers
The following table provides information about shares surrendered during the first quarter ended March 31, 2021, to settle employee tax withholding related to the vesting of stock awards and through the share repurchase program.
| ($ in thousands, except per share amounts) | Number of Shares Surrendered | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1) | Approximate Dollar Value that May Yet be Purchased under the Plans or Programs | |||||||||||||||||||
| January 1 to January 31 | — | $ | — | $ | — | $ | — | ||||||||||||||||
| February 1 to February 28 | 33,450 | $ | 44.42 | — | $ | — | |||||||||||||||||
| March 1 to March 31 | 33 | 48.81 | — | $ | — | ||||||||||||||||||
| Total | 33,483 | — | |||||||||||||||||||||
Dividend Reinvestment Plan
The Company maintains a dividend reinvestment plan (the “DRIP”) for the benefit of its shareholders. When shareholders remove shares from the DRIP, the Company issues whole shares in book entry form, pays out cash for any fractional shares, and cancels the fractional shares. In conjunction with the vesting of shares or exercise of stock options, the grantees may surrender awards necessary to cover the statutory tax withholding requirements and any amounts required to cover stock option strike prices associated with the transaction.
Based on the current number of shares enrolled in the dividend reinvestment plan (the “DRIP”), as observed in April 2021, the Company expects that approximately 79 thousand new shares of common stock will be issued to DRIP participants during 2021 in connection with the Special Dividend. Participation in the DRIP is subject to change at the discretion of the shareholders.
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ITEM 6. Exhibits Index
| Exhibit No. | Exhibit Description | ||||||||||
31.1* | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | ||||||||||
31.2* | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | ||||||||||
31.3* | Certification of Principal Accounting Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. | ||||||||||
32** | Certifications pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. § 1350. | ||||||||||
| (101) | Formatted in XBRL (Extensible Business Reporting Language) | ||||||||||
| 101.INS | XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document | ||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | ||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||
* Filed herewith
** This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended (Securities Act), or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SHENANDOAH TELECOMMUNICATIONS COMPANY | |||||
| /s/James J. Volk | |||||
| James J. Volk | |||||
Senior Vice President - Chief Financial Officer (Principal Financial Officer) | |||||
| Date: April 29, 2021 | |||||
F-26