ATN International, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed November 9, 2017. Unaudited results. Amounts below are in millions of U.S. dollars unless otherwise indicated.
Business context
ATN provides wireless and wireline telecommunications services in the U.S., Bermuda and the Caribbean, and develops and operates solar energy projects in the U.S. and India. Its reportable segments are U.S. Telecom, International Telecom and Renewable Energy. The 2017 comparisons reflect acquired One Communications and Viya for more months than the 2016 comparisons, as well as the March 2017 sale of the Sovernet business and other dispositions.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $122.1 | $138.8 | $373.5 | $328.5 |
| Operating income (loss) | $(19.5) | $22.1 | $14.1 | $39.9 |
| Net income (loss) attributable to ATN shareholders | $(24.8) | $7.2 | $(12.0) | $10.2 |
| Diluted EPS | $(1.53) | $0.44 | $(0.74) | $0.63 |
- Q3 operating margin was approximately -16.0%, versus 15.9% a year earlier; nine-month operating margin was 3.8%, versus 12.1%.
- Q3 revenue fell 12.0%, largely reflecting lower U.S. and international telecom revenue, hurricane-related service credits and the Sovernet sale. Nine-month revenue rose 13.7%, primarily because the 2017 period included more contribution from the 2016 One Communications and Viya acquisitions.
- Q3 wireless revenue declined 6.4% and wireline revenue declined 14.8%. Nine-month wireless revenue declined 5.3%, while wireline revenue increased 48.6%, chiefly due to acquired businesses.
- Renewable energy revenue declined 14.0% in Q3 and 12.8% for nine months, mainly due to expiring California incentive credits; nine-month segment operating income improved to $3.3 million from a $0.7 million loss.
- Nine-month cash provided by operations was $122.0 million, compared with $92.1 million in 2016. Investing activities used $138.8 million and financing activities used $28.5 million. Cash and cash equivalents decreased $45.1 million to $224.6 million.
- Cash, cash equivalents, restricted cash and short-term investments totaled approximately $249.5 million. Total debt, net of unamortized financing costs, was approximately $159.7 million; no borrowings were outstanding under the $225 million revolving credit facility. ATN reported compliance with its debt covenants.
- Nine-month capital expenditures were $108.3 million, including $36.8 million for spectrum licenses. Accounts payable included $15.7 million of noncash PP&E purchases. Current assets were $334.7 million and current liabilities $173.7 million.
Material changes and unusual items
- Hurricanes Irma and Maria severely damaged ATN’s U.S. Virgin Islands wireless and wireline operations. The company recorded $35.2 million of estimated damaged-asset losses and $1.4 million of hurricane-related operating costs in Q3. The damage estimate was preliminary and could increase.
- ATN issued approximately $4.4 million in subscriber service credits. It said disruption to wireline revenue could continue for several quarters and be most pronounced in Q4 2017, due to damage and unreliable commercial power.
- Insurance coverage could provide up to approximately $34 million across property replacement, extra expense and business interruption claims. Management expected no insurance recovery to be recorded until 2018, after completing its assessment, and believed total losses would exceed potential proceeds.
- International Telecom recorded a Q3 operating loss of $28.5 million, compared with $11.4 million of operating income a year earlier, with hurricane charges the principal driver. U.S. Telecom Q3 operating income fell to $16.0 million from $18.1 million.
- The nine-month effective tax rate was 76.1%, versus 45.5% in 2016, reflecting jurisdictional losses for which tax benefits were not recognized and discrete tax items, including a $3.4 million amended-return refund claim.
- In September, management reduced the fair value of contingent consideration from the Sovernet sale to zero, concluding the operational milestones were unlikely to be achieved by the deadline.
Outlook, risks and contingencies
- Management expected 2017 telecom capital expenditures of $95–110 million, excluding U.S. Virgin Islands hurricane restoration, whose cost and timing were not yet determined. Renewable energy capital expenditures were expected to be $30–40 million, primarily for India projects.
- Management said available liquidity and the revolving credit facility should meet working-capital and capital-expenditure needs for at least the next 12 months. The company also cited potential external financing needs for future acquisitions or investments.
- ATN expected U.S. wholesale wireless revenue and margins to face continued pressure from lower roaming rates and revenue caps, and anticipated the possible sale of approximately 100 cell sites beginning in early 2018. It also noted subscriber and roaming pressures in international markets.
- Guyana’s telecom legislation could introduce competition and affect GTT’s exclusive rights, although implementation timing and effects were uncertain. A separate Guyana tax dispute involves assessments totaling $44.1 million; ATN had accrued $5.0 million and said an adverse outcome was considered probable.
- Foreign exchange exposure includes the Guyana dollar and Indian rupee. ATN reported a $1.0 million Guyana-dollar transaction loss for the nine-month period and warned further currency declines could adversely affect results.
- ATN declared a $0.17-per-share quarterly dividend. It repurchased approximately $11.1 million of stock during the first nine months, including $10.6 million in Q3, with $39.3 million remaining under its repurchase authorization at September 30.
Important facts for investors to verify
- Updated U.S. Virgin Islands damage, service-restoration and revenue-loss estimates, including the timing and amount of any insurance recovery.
- Whether 2017 telecom and renewable energy capital-expenditure expectations remain achievable, and the additional cost of hurricane restoration.
- Performance trends in International Telecom after the acquisitions, hurricane disruption and business dispositions; and continued U.S. wholesale roaming rate and cap pressure.
- Developments in Guyana’s licensing and exclusivity framework and the $44.1 million tax dispute relative to the $5.0 million accrual.
- Liquidity available for operations and investment, foreign-subsidiary cash restrictions, debt covenant headroom and the sustainability of dividends and share repurchases.