Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our “Selected Financial Data” and our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K. In addition to historical consolidated financial information, the following discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results could differ materially from those anticipated by forward-looking statements as a result of many factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Annual Report on Form 10-K, including those set forth under “Part I. Cautionary Statement Regarding Forward-Looking Statements” and “Part I. Item 1A. Risk Factors”.
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 Item 1 above for our description of our reporting segments and a description of their respective business activities. Also see Note 3, Discontinued Operations , and Note 15, Segment Reporting , in our consolidated financial statements for additional information.
2020 Developments
Results of Operations
Revenue
As described in Item 1, Business we earn revenue primarily through our provision of broadband services that include broadband internet, video, voice, and fiber optic Ethernet, wavelength and leasing services in our Broadband segment. Our Broadband segment revenue is driven primarily by the number of our customers that subscribe to our broadband services, and their selection from our respective rate plans. Our Tower segment leases colocation space on our owned cell towers to wireless carriers. Our Tower segment revenue is driven primarily by the number of cell towers that we own, and our ability to secure colocation leases from wireless carriers.
Operating Expenses
Our operating expenses consist primarily of cost of services, selling, general and administrative, and depreciation and amortization expenses.
Other Income (Expense)
Our other income (expense) consists primarily of interest expense and other income. Our other income primarily represents interest and dividends earned from our investments, including patronage income that is connected with our CoBank loan agreements.
Income Tax Expense
Income tax expense consists of federal and state income taxes in the United States.
Income from Discontinued Operations, net of tax
As discussed in the notes to our consolidated financial statements, the results of our Wireless operations are now presented as discontinued operations.
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2020 Compared with 2019
Results of Operations
The Company’s consolidated results from operations are summarized as follows:
Year Ended December 31, Change
($ in thousands) 2020 % of Revenue 2019 % of Revenue $ %
Revenue $ 220,775 100.0 $ 206,862 100.0 13,913 6.7
Operating expenses 221,922 100.5 207,581 100.3 14,341 6.9
Operating loss (1,147) (0.5) (719) (0.3) (428) 59.5
Other income, net 3,187 1.4 3,280 1.6 (93) (2.8)
Income before taxes 2,040 0.9 2,561 1.2 (521) (20.3)
Income tax (benefit) expense (586) (0.3) 173 0.1 (759) (438.7)
Income from continuing operations 2,626 1.2 2,388 1.2 238 10.0
Income from discontinued operations, net of tax 124,097 56.2 53,568 25.9 70,529 131.7
Net income $ 126,723 57.4 $ 55,956 27.0 70,767 126.5
Revenue
Revenue increased approximately $13.9 million, or 6.7%, in 2020 compared with 2019, driven by 31.3% growth in the Tower and 5.4% growth in Broadband segments. Refer to the discussion of the results of operations for the Tower and Broadband segments, included within this annual report, for additional information.
Operating expenses
Operating expenses increased approximately $14.3 million, or 6.9%, in 2020 compared with 2019, driven by incremental Broadband operating expenses incurred to support the launch of our new fiber-to-the-home service, Glo Fiber, and new fixed wireless broadband service, Beam.
Income tax (benefit) expense
Income tax benefit of approximately $0.6 million declined approximately $0.8 million compared with 2019, primarily due to changes in excess tax benefits from stock based compensation and other discrete items.
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax, increased $70.5 million, or 131.7%. The increase was primarily driven by a $48.5 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, $25.3 million increase in wireless service revenue driven by our travel revenue settlement with Sprint, a $12.1 million decline in cost of services due to ceasing amortization on our right of use assets under operating leases during the third quarter of 2020, an $8.8 million decline in interest expense driven by lower interest rates on our term loans, partially offset by $27.5 million of higher income tax.
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 6,800 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:
December 31,
2020 December 31,
2019 December 31,
2018
Broadband homes passed (1) 246,790 208,298 201,633
Incumbent Cable 208,691 206,575 201,633
Glo Fiber 28,652 1,723 —
Beam 9,447 — —
Broadband customer relationships (2) 109,458 100,890 95,328
Residential & SMB RGUs:
Broadband Data 102,812 84,045 75,389
Incumbent Cable 98,555 83,919 75,389
Glo Fiber 4,158 126 —
Beam 99 — —
Video 52,817 53,673 58,672
Voice 32,646 31,380 29,474
Total Residential & SMB RGUs (excludes RLEC)
188,275 169,098 163,535
Residential & SMB Penetration (3)
Broadband Data 41.7 % 40.3 % 37.4 %
Incumbent Cable 47.2 % 40.6 % 37.4 %
Glo Fiber 14.5 % 7.3 % — %
Beam 1.0 % — % — %
Video 21.4 % 25.8 % 29.1 %
Voice 14.8 % 16.2 % 15.9 %
Residential & SMB ARPU (4)
Broadband Data $ 77.93 $ 78.72 $ 81.71
Incumbent Cable $ 77.97 $ 78.72 $ 81.71
Glo Fiber $ 78.90 $ — $ —
Beam $ 73.17 $ — $ —
Video $ 93.17 $ 87.95 $ 81.67
Voice $ 29.44 $ 30.68 $ 29.31
Fiber route miles 6,794 6,139 5,641
Total fiber miles (5) 394,316 320,444 300,200
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(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) Customer relationships represent the number of billed customers who receive at least one of our services.
(3) Penetration is calculated by dividing the number of users by the number of homes passed or available homes, as appropriate.
(4) Average Revenue Per Data RGU calculation = (Residential & SMB Revenue * 1,000) / average data RGUs / 3 months
(5) 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:
Year Ended December 31, Change
($ in thousands) 2020 % of Revenue 2019 % of Revenue $ %
Broadband operating revenue
Residential & SMB $ 155,017 75.9 $ 142,290 73.4 12,727 8.9
Commercial Fiber 32,759 16.0 30,410 15.7 2,349 7.7
RLEC & Other 16,571 8.1 21,243 11.0 (4,672) (22.0)
Total broadband revenue 204,347 100.0 193,943 100.0 % 10,404 5.4
Broadband operating expenses
Cost of services 83,439 40.8 79,235 40.9 4,204 5.3
Selling, general, and administrative 39,472 19.3 33,545 17.3 5,927 17.7
Depreciation and amortization 41,076 20.1 38,566 19.9 2,510 6.5
Total broadband operating expenses 163,987 80.2 151,346 78.0 12,641 8.4
Broadband operating income $ 40,360 19.8 $ 42,597 22.0 (2,237) (5.3)
Residential & SMB revenue
Residential & SMB revenue increased approximately $12.7 million, or 8.9%, during 2020 primarily driven by 22.3% growth in broadband RGUs and penetration improvement.
Commercial Fiber revenue
Commercial Fiber revenue increased approximately $2.3 million, or 7.7%, during 2020 due primarily to an increase in new enterprise and backhaul recurring revenue of $3.9 million partially offset by a decline in amortized upfront fee revenue of $1.6 million.
RLEC & Other revenue
RLEC & Other revenue decreased approximately $4.7 million, or 22.0%, compared with 2019 due primarily to a decline in residential DSL subscribers, lower governmental support, and lower intercompany phone service. We expect RLEC revenue to decline at a slower rate in future periods as subscribers migrate to broadband data services.
Cost of services
Cost of services increased approximately $4.2 million, or 5.3%, compared with 2019, primarily driven by higher compensation expense due to the combination of Glo Fiber and Beam start-up expenses, higher incentive accrual from strong operating results, COVID supplemental pay for customer interfacing employees and enhanced benefit plans.
Selling, general and administrative
Selling, general and administrative expense increased $5.9 million or 17.7% compared with 2019 primarily due to increases in compensation expense of $3.4 million, primarily as a result of Glo Fiber and Beam fixed wireless start-up costs, higher benefit plan and incentive accruals from strong operating results and $2.8 million of higher software and professional fees.
Depreciation and amortization
Depreciation and amortization increased $2.5 million or 6.5%, compared with 2019, primarily as a result of our network expansion and the deployment of infrastructure necessary to support new fiber-to-the-home service, Glo Fiber, and fixed wireless solution, Beam.
Tower
Our Tower segment owns cell towers and leases colocation space on the towers to wireless communications providers, including our Wireless segment that is currently classified as a discontinued operation. Substantially all of our owned towers are built on ground that we lease from the respective landlords. The colocation space that is leased to our discontinued Wireless operations is priced at our estimate of fair market value.
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The following table indicates selected operating statistics of the Tower segment:
December 31,
2020 December 31,
2019 December 31,
2018
Macro tower sites 223 225 208
Tenants (1) 427 404 367
Average tenants per tower 1.8 1.8 1.8
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(1) Includes 221, 201 and 174 intercompany tenants for our Wireless operations, (reported as a discontinued operation), and Broadband operations, as of December 31, 2020, 2019 and 2018, respectively.
Tower results from operations are summarized as follows:
Year Ended December 31, Change
($ in thousands) 2020 % of Revenue 2019 % of Revenue $ %
Tower revenue $ 17,055 100.0 $ 12,985 100.0 % 4,070 31.3
Tower operating expenses 8,232 48.3 6,690 51.5 1,542 23.0
Tower operating income $ 8,823 51.7 $ 6,295 48.5 2,528 40.2
Revenue
Revenue increased approximately $4.1 million, or 31.3%, in 2020 compared with 2019. This increase was due to a 5.7% increase in tenants and a 23.4% increase in average revenue per tenant driven by amendments to intercompany leases.
Revenue derived from our wireless operations was approximately $9.7 million and $6.0 million in 2020 and 2019, respectively.
Operating expenses
Operating expenses increased approximately $1.5 million compared to the prior year period, due primarily to increases in ground lease rent expense and professional services.
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2019 Compared with 2018
Results of Operations
The Company’s consolidated results from operations are summarized as follows:
Year Ended December 31, Change
($ in thousands) 2019 % of Revenue 2018 % of Revenue $ %
Revenue $ 206,862 100.0 $ 192,683 100.0 14,179 7.4
Operating expenses 207,581 100.3 195,652 101.5 11,929 6.1
Operating loss (719) (0.3) (2,969) (1.5) 2,250 (75.8)
Other income, net 3,280 1.6 3,703 1.9 (423) (11.4)
Income before taxes 2,561 1.2 734 0.4 1,827 248.9
Income tax expense (benefit) 173 0.1 (1,343) (0.7) 1,516 112.9
Income from continuing operations $ 2,388 1.2 $ 2,077 1.1 311 15.0
Income from discontinued operations, net of tax 53,568 25.9 44,518 23.1 9,050 20.3
Net income $ 55,956 27.0 $ 46,595 24.2 9,361 20.1
Revenue
Revenue increased approximately $14.2 million, or 7.4%, in 2019 compared with 2018, driven primarily by Broadband data penetration and subscriber growth. Refer to the discussion of the results of operations for the Broadband segment, included within this annual report, for additional information.
Operating expenses
Operating expenses increased approximately $11.9 million, or 6.1%, in 2019 compared with 2018. The increase was primarily due to incremental operating expenses incurred to support the growth of our Broadband segment including the launch of new fiber-to-the-home service, Glo Fiber, as well as maintenance costs to support our larger network.
Other income
Other income decreased approximately $0.4 million, or 11.4%, in 2019 compared with 2018. The decrease was primarily due to changes in the value of our investments and pension obligation.
Income tax expense (benefit)
Income tax expense increased approximately $1.5 million, compared with 2018, primarily driven by the increase in our income before taxes and changes in excess tax benefits from stock based compensation and other discrete items
Income from discontinued operations, net of tax
Income from discontinued operations, net of tax, increased $9.1 million, or 20.3% in 2019 as compared to 2018. The increase was driven by a $10.5 million decline in depreciation expense as certain assets acquired in 2016 became fully depreciated, a decline of $5.6 million in interest expense from lower borrowing rates, service revenue growth of $4.9 million, lower income tax expense of $1.3 million due to changes in taxable income; partially offset by a $12.0 million decline in travel revenue and an increase of $2.2 million in operating expense to facilitate subscriber and network growth.
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Broadband
Broadband results from operations are summarized as follows:
Year Ended December 31, Change
($ in thousands) 2019 % of Revenue 2018 % of Revenue $ %
Broadband operating revenue
Residential & SMB $ 142,290 73.4 $ 130,731 71.4 11,559 8.8
Commercial Fiber 30,410 15.7 29,661 16.2 749 2.5
RLEC & Other 21,243 11.0 22,728 12.4 (1,485) (6.5)
Total broadband revenue 193,943 100.0 183,120 100.0 % 10,823 5.9
Broadband operating expenses
Cost of services 79,235 40.9 76,731 41.9 2,504 3.3
Selling, general, and administrative 33,545 17.3 28,103 15.3 5,442 19.4
Depreciation and amortization 38,566 19.9 35,992 19.7 2,574 7.2
Total broadband operating expenses 151,346 78.0 140,826 76.9 10,520 7.5
Broadband operating income $ 42,597 22.0 $ 42,294 23.1 303 0.7
Residential & SMB revenue
Residential & SMB revenue increased approximately $11.6 million, or 8.8%, during 2019 primarily driven by data revenue growth of $7.6 million from an increase in broadband data penetration, video revenue growth of $1.0 million from an increase in ARPU due to a pass through of higher programming costs, voice revenue growth of $0.9 million from growth in SMB voice RGUs, and lower promotional discounts of $1.3 million, partially offset by a decrease in video RGUs.
Commercial Fiber revenue
Enterprise revenue increased approximately $0.7 million, or 2.5%, during 2019 from a combination of 425 new enterprise connections and backhaul revenue growth driven by the Wireless fiber-to-the-tower initiative.
RLEC & Other revenue
RLEC & Other revenue decreased approximately $1.5 million, or 6.5%, compared with 2018, primarily due to a decline in residential DSL subscribers and lower intercompany phone service.
Cost of services
Cost of services increased approximately $2.5 million, or 3.3%, in 2019 compared with 2018, primarily due to $1.1 million of maintenance costs to support our larger network, a $0.6 million increase in programming and retransmission costs, and $0.4 million of cost goods sold on higher volume, consistent with the increase in equipment revenue, and a $0.5 million in compensation costs.
Selling, general and administrative
Selling, general and administrative expense increased $5.4 million or 19.4% compared with 2018 primarily due to $2.5 million of expenses incurred in the launch of Glo Fiber, $1.5 million in payroll increases and $0.8 million in higher advertising.
Depreciation and amortization
Depreciation and amortization increased $2.6 million or 7.2%, compared with 2018, primarily due to the expansion of our broadband network footprint.
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Tower
Tower results from operations are summarized as follows:
Year Ended December 31, Change
($ in thousands) 2019 % of Revenue 2018 % of Revenue $ %
Tower revenue $ 12,985 100.0 $ 12,196 100.0 789 6.5
Tower operating expenses 6,690 51.5 6,797 55.7 (107) (1.6)
Tower operating income $ 6,295 48.5 $ 5,399 44.3 896 16.6
Revenue
Revenue increased approximately $0.8 million, or 6.5%, in 2019 compared with 2018. This increase was due to 10.1% increase in tenants and 2.5% increase in the lease rate.
Revenue derived from our wireless operations was approximately $6.0 million and $5.0 million in 2019 and 2018, respectively.
Operating expenses
Operating expenses were comparable with the prior year.
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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 December 31, 2020 our cash and cash equivalents totaled $195.4 million and the availability under our revolving line of credit was $75.0 million, for total available liquidity of $270.4 million.
Operating activities from continuing operations generated approximately $53.4 million in 2020, representing an increase of $11.0 million compared with 2019, driven by Broadband subscriber growth.
Operating activities from discontinued operations generated $249.5 million as compared to $216.8 million in 2019 driven by a $24.0 million increase due to the resolution of our travel revenue dispute with Sprint and $7.5 million lower advertising expense.
Net cash used in investing activities for continuing operations increased $44.4 million in 2020, compared with 2019 due to the following:
• $53.4 million increase in capital expenditures due primarily to higher spending in the Broadband segment primarily driven by our Glo Fiber market expansion.
• $8.1 million decline in acquisitions.
• Net cash used in investing activities for discontinued operations decreased $54.2 million to $17.5 million during 2020, due to completion of the nTelos and Parkersburg network expansions in the first half of 2019 and postponement of Richmond Sliver territory expansion projects in contemplation of the pending sale of our Wireless operations.
Net cash used in financing activities for continuing operations during 2020 decreased approximately $4.6 million compared with 2019, driven by a $7.2 million decline in share repurchases, partially offset by a $2.5 million increase in dividends paid as our annual dividend increased from $0.29 per share in 2019 to $0.34 per share in 2020.
Net cash used in financing activities for discontinued operations during 2020 decreased $19.1 million primarily due to lower principal payments on our term loans.
Indebtedness : As of December 31, 2020, the Company’s indebtedness totaled approximately $698 million, with an annualized overall weighted average interest rate of approximately 2.3%. As of December 31, 2020, 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 $702 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;
• Provide adequate liquidity for growth and potential strategic acquisitions; and
• Provide liquidity for general corporate purposes.
The Company expects to pay the Special Dividend in the second 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.
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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.
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
We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles ("GAAP"). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect our reported amounts of assets, liabilities, revenue and expenses, as well as related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss further below.
Our significant accounting policies are described in Note 2, Summary of Significant Accounting Policies in our consolidated financial statements. The following are the accounting policies that we believe involve a greater degree of judgment and complexity and are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Revenue Recognition
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”). Our service 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 enterprise and carrier customers under capacity agreements, and the related revenue is recognized over time. In some cases, non-refundable upfront fees are charged for connecting enterprise or carrier 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.
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.
Recently Issued Accounting Standards
Recently issued accounting standards and their expected impact, if any, are discussed in Note 2, Summary of Significant Accounting Policies in our consolidated financial statements.
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