ATN International, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Unaudited consolidated results; amounts below are in U.S. dollars. ATN provides wireless and wireline telecommunications services and develops distributed solar power projects.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $138.8m | $96.8m | $328.5m | $272.5m |
| Operating income | $22.1m | $22.5m | $39.9m | $70.4m |
| Net income attributable to ATN shareholders | $7.2m | $6.6m | $10.2m | $12.8m |
| Diluted EPS attributable to ATN shareholders | $0.44 | $0.41 | $0.63 | $0.79 |
| Operating margin | 15.9% | 23.3% | 12.1% | 25.8% |
- Revenue mix and change: Q3 revenue increased 43.4%, principally reflecting the KeyTech and Innovative acquisitions, which contributed $43.7m of wireline revenue in the quarter. Wireless revenue fell 9.4%; renewable energy revenue rose 14.5%. For the first nine months, revenue increased 20.6%, while operating income declined 43.4% and ATN-attributable net income declined 20.0%.
- Cash flow: Operating cash flow was $92.1m for the first nine months, down from $113.1m. Capital expenditures were $78.5m, versus $46.0m. Investing activities used $278.1m, including acquisitions and capital investment; financing activities provided $46.6m.
- Liquidity and debt: September 30 cash and cash equivalents were $252.4m. Management reported $294.4m of cash, cash equivalents, restricted cash and short-term investments; $103.3m was held by foreign subsidiaries and permanently invested outside the U.S. Total debt was approximately $118.9m, compared with $32.9m at year-end 2015. ATN had no borrowings on its $225m revolving facility, approximately $10.6m of letters of credit outstanding, and was in compliance with its financial covenants. Management said available liquidity should cover working capital and capital expenditures for at least 12 months.
- Margins and costs: Lower U.S. wholesale roaming rates weighed on wireless revenue and cash generation. Q3 operating expenses rose 57.2%, faster than revenue, and operating margin contracted. Acquired operations, higher depreciation and transaction-related costs contributed to expense growth.
Material changes, outlook and risks
- Acquisitions: ATN consolidated KeyTech from May 3 and Innovative from July 1, expanding its international telecom operations; it also acquired an India solar development portfolio and certain U.S. telecom assets. Acquisitions materially affect year-over-year comparisons.
- Unusual items: Nine-month results included a $7.3m KeyTech bargain-purchase gain, $11.4m of impairment charges (primarily U.S. wireline assets and goodwill), $16.2m of transaction-related charges and $1.8m of restructuring charges. Transaction costs and impairments reduced reported operating performance; the bargain gain increased it.
- Pending dispositions: ATN agreed to sell most of its Northeast U.S. wireline business, which generated approximately $21m of annual revenue; closing was expected in Q1 2017, subject to regulatory approvals. The company also agreed to sell its St. Maarten cable operations, subject to approvals, with closing expected in Q4 2016.
- Capital spending and growth: Management estimated 2016 capital expenditures of $95m–$110m for combined U.S. and International Telecom and $40m–$50m for Renewable Energy. India solar projects were expected to begin generating revenue in Q4 2016 or Q1 2017; ATN targeted development of at least 250 MW by the end of 2018. These are expectations, not guarantees.
- Operating outlook: Management expected U.S. wholesale wireless revenue and margins to decline as roaming rates were reduced in exchange for longer-term carrier contracts, despite expected data-volume growth. It expected current U.S. solar portfolio revenue to remain fairly consistent. No formal earnings guidance was provided in the supplied filing text.
- Regulatory and legal exposures: New Guyana telecommunications legislation creates uncertainty around GTT’s exclusive rights; implementation remained uncertain, and ATN could not assure the outcome of discussions with the government. A Guyana tax dispute involves $44.1m of assessments; ATN accrued $5.0m and believes reimbursement protections may apply. Mobility Fund support is secured by $10.6m of letters of credit, which could be drawn if requirements are not met. ATN also continued to contest an approximately $4m Aruba license fee.
- Other risks: The filing highlights acquisition integration, competition, carrier roaming arrangements, network investment and capacity, regulation, foreign operations, natural disasters, capital access and cable-content costs. ATN reported $28.5m of variable-rate debt, principally associated with KeyTech.
Most important facts for investors to verify
- Whether the Northeast wireline sale and St. Maarten disposition closed on the expected schedules and on acceptable terms.
- How acquired-business integration affects organic revenue, operating margins, cash flow and debt service, separating acquisition effects from underlying trends.
- Whether wholesale roaming-rate reductions, Guyana regulatory changes or tax disputes materially affect future results or liquidity.
- Actual 2016 capital expenditures, the $27.8m planned Innovative pension and postretirement funding, and progress and economics of the India solar projects.
- The nature and sustainability of the bargain-purchase gain, impairment charges and elevated transaction costs in reported earnings.