ATN International, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. The unaudited filing covers a communications and digital-infrastructure provider operating in the United States and Caribbean markets, through International Telecom and US Telecom segments.
Financial results and liquidity
Amounts below are in millions of U.S. dollars unless stated otherwise.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $186.4 | $179.5 | $372.2 | $351.5 |
| Operating income | $2.4 | $1.7 | $3.1 | $1.8 |
| Net income (loss) | $(0.7) | $(1.3) | $(7.7) | $(3.3) |
| Net income (loss) attributable to ATN stockholders | $0.8 | $(0.5) | $(5.1) | $(1.5) |
| EPS attributable to ATN stockholders | $(0.03) | $(0.11) | $(0.48) | $(0.24) |
| Cash from operating activities | Not reported separately | Not reported separately | $60.3 | $50.7 |
| Capital expenditures (cash-flow statement) | Not reported separately | Not reported separately | $89.5 | $71.2 |
- Q2 revenue rose 3.9%; communication-services revenue increased 5.7%. Operating margin was approximately 1.3%, versus 1.0% a year earlier. Six-month operating margin was approximately 0.8%, versus 0.5%.
- For the six months, operating cash flow less capital expenditures was approximately negative $29.1 million, compared with negative $20.5 million in 2022. This is a simple cash-flow measure, not company-reported free cash flow.
- At June 30, cash and cash equivalents were $64.0 million, with an additional $3.2 million of restricted cash. Management reported total cash, cash equivalents and restricted cash of $67.2 million; $27.7 million was held by foreign subsidiaries and indefinitely invested outside the U.S.
- Book debt, including the customer-receivable credit facility, was approximately $528.6 million, up from $467.2 million at year-end 2022. Current assets were $248.1 million and current liabilities $240.8 million. Long-term lease liabilities were $80.9 million, in addition to current lease liabilities.
- Interest expense rose to $10.4 million in Q2 from $4.3 million and to $19.3 million for the first half from $7.6 million. The filing attributes the increase to higher borrowings, added Sacred Wind and GTT debt, and higher rates on floating-rate debt. EBITDA is not presented as a clear consolidated figure in the supplied filing text.
Material changes and operating trends
- International Telecom Q2 revenue increased 4.1% to $92.0 million, and segment operating income rose 25.9% to $14.6 million. Growth in mobility, fixed broadband and carrier services was partly offset by lower U.S. Virgin Islands high-cost support.
- US Telecom Q2 revenue increased 3.7% to $94.5 million, but its operating loss widened to $2.4 million from $0.3 million. Higher business and fixed-service revenue and Sacred Wind contributions were offset by increased operating costs, lower FirstNet construction revenue and reduced roaming revenue.
- For the first half, fixed-service revenue grew 10.2% to $235.6 million, while construction revenue fell 69.5% to $1.6 million as fewer FirstNet sites were completed. SG&A increased 10.6% to $123.3 million; depreciation and amortization increased 8.2% to $72.6 million.
- Revenue attributable to government support programs was $52.4 million for the first half, versus $33.4 million. CAF II support is scheduled at $27.7 million annually through December 2025, then $8.0 million annually from January 2026 through July 2028. U.S. Virgin Islands high-cost support of $5.5 million annually was extended through December 2025, subject to maintaining the current service footprint.
Outlook, financing, risks and unusual items
- Management expects 2023 capital investment of approximately $160 million to $170 million, net of reimbursable amounts, primarily for network expansion and upgrades. Six-month segment capital expenditures were $96.4 million, including reimbursable amounts.
- The FirstNet build is expected to be substantially complete by the end of 2023, with the remainder completed in early 2024. Management expects total FirstNet construction revenue of approximately $80 million to $85 million and relatively steady operating-income contributions from the broader transaction.
- In May 2023, Commnet entered a Verizon carrier managed-services agreement with an initial seven-year term and approximately $200 million of aggregate service payments over the term. Revenue depends on network upgrades, milestones and service-level performance; Verizon has specified termination rights.
- After quarter-end, on July 13, 2023, ATN entered a new CoBank facility comprising a $170 million revolving loan and a $130 million term loan. It drew the term loan and approximately $13.6 million on the revolver and used proceeds to repay $139.5 million under the prior facility. The new agreement has a quarterly maximum total net leverage covenant of 3.25 to 1.0. The company reported compliance with its prior facility covenants at June 30.
- Variable-rate debt was $390.8 million at June 30; management estimated that a 100-basis-point rate change would alter annual interest expense by approximately $3.9 million. The Alaska subsidiary also has material debt and its own leverage and fixed-charge-coverage covenants.
- Q2 included $0.4 million of restructuring expense; first-half restructuring charges were $3.3 million, primarily for decommissioning legacy wholesale-roaming cell sites. First-half results also included a $4.0 million tax benefit from reversal of an unrecognized tax position. ATN reported a first-half net loss despite positive Q2 income attributable to ATN stockholders; preferred dividends contributed to the negative per-share result.
- ATN was allocated up to approximately $207 million under the federal Replace and Remove Program and recorded a $21.0 million reimbursement receivable at June 30. The program requires completion by July 2024; management said it anticipates meeting the deadlines and requirements. Construction grants and tribal broadband sub-recipient awards are also significant; reimbursement and execution timing remain relevant.
- The company accrued $16.0 million for legal, regulatory and other potential liabilities. Matters include long-running Guyana spectrum, licensing and tax disputes, and U.S. Rural Health Care program audit and FCC inquiries involving Alaska Communications. The company said it could not predict the outcome or impact of those proceedings; additional reasonably possible contingencies could not be estimated.
- Other stated risks include subsidy and regulatory changes, competition, inflation and supply-chain costs, foreign-currency exposure, network and construction execution, access to capital, and severe weather or natural catastrophes. Management said current liquidity should cover working-capital needs and capital expenditures for at least the next 12 months.
Most important facts for investors to verify
- Progress and remaining costs for the FirstNet and Verizon network builds, including milestone compliance, completion timing, and the expected economics after construction.
- Cash conversion and funding needs against planned 2023 capital expenditures, government reimbursements, and the company’s dividend and share-repurchase activity.
- Debt, interest-rate exposure, upcoming maturities, covenant headroom and the terms and utilization of the post-quarter CoBank refinancing.
- Resolution, potential exposure and any changes in accruals for the Guyana disputes and Alaska Communications’ Rural Health Care audit and FCC inquiries.
- Receipt and compliance conditions for federal support, construction grants and Replace and Remove reimbursements, including the $21.0 million receivable and July 2024 program deadline.