ATN International, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Amounts below are in U.S. dollars; financial figures are in millions unless otherwise noted.
Business context and reporting period
ATN provides wireless and wireline telecommunications services in the United States, Bermuda and the Caribbean, and develops and operates solar power projects in the United States and India. Its segments are U.S. Telecom, International Telecom and Renewable Energy. Results include full-period contributions from One Communications and Viya, acquired in 2016; the 2016 comparison includes only partial-period results from One Communications and no Viya results, limiting year-over-year comparability. ATN sold its Sovernet businesses in March 2017.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $123.2 | $100.0 | $251.4 | $189.7 |
| Operating income | $15.8 | $1.9 | $33.6 | $17.8 |
| Operating margin | 12.9% | 1.9% | 13.4% | 9.4% |
| Net income (loss), consolidated | $10.9 | $(1.9) | $22.5 | $8.9 |
| Net income attributable to ATN | $5.9 | $(3.1) | $12.7 | $3.0 |
| Diluted EPS attributable to ATN | $0.36 | $(0.19) | $0.78 | $0.19 |
Q2 revenue grew 23.3%; six-month revenue rose 32.5%. Wireline revenue increased substantially, primarily due to the acquired international businesses, while wireless revenue declined. ATN’s reported results also benefited from the absence of prior-year acquisition-related charges, restructuring and impairment costs. Q2 2016 included a $7.3 million bargain purchase gain, so the operating-income comparison is affected by unusual items in both periods.
For the first six months, operating cash flow was $65.5 million, versus $50.7 million in 2016. Capital expenditures were $78.5 million, versus $42.7 million; cash flow after capital expenditures was therefore approximately negative $13.1 million, before other investing activity. Investing cash outflow was $89.4 million and financing cash outflow was $14.3 million. Cash and cash equivalents declined $38.1 million to $231.6 million.
At June 30, cash, cash equivalents, restricted cash and short-term investments totaled approximately $256.3 million; $110.0 million was held by foreign subsidiaries and described as permanently invested outside the United States. Debt, net of unamortized financing costs, was approximately $159.7 million, including $9.9 million current. ATN had no borrowings on its $225 million revolving credit facility and was in compliance with its financial covenants. The reported balance-sheet figures imply current assets of $344.3 million and current liabilities of $151.9 million.
Q2 dividends were $0.34 per share; dividends declared for the first half totaled $0.68 per share. The company had $49.9 million remaining under its $50 million share repurchase authorization.
Material changes versus the prior comparable period
- International Telecom revenue for Q2 increased 61.5% to $81.4 million, principally reflecting full-quarter One Communications and Viya contributions. Segment operating income rose to $10.8 million from $9.3 million.
- U.S. Telecom Q2 revenue declined 15.7% to $37.0 million, reflecting reduced wholesale roaming rates and revenue caps and the Sovernet sale. Segment operating income rose to $13.1 million from $4.8 million, aided by lower expenses and Mobility Fund offsets.
- Renewable Energy Q2 revenue declined 14.0% to $4.9 million, partly due to the expiration of California incentives. Segment operating income improved to $0.8 million from a $3.6 million loss, largely because 2016 included acquisition-related expenses.
- Interest expense increased to $2.2 million in Q2 and $4.5 million for the half year, reflecting acquisition debt and refinancing. Depreciation and amortization increased to $22.3 million in Q2 and $44.7 million for the half year.
- Capital spending rose sharply, including $36.8 million paid for 600 MHz spectrum licenses. The company also spent $25.5 million on Renewable Energy capital expenditures in the first half, versus $0.2 million a year earlier.
Outlook, risks, contingencies and unusual items
- Management forecast 2017 telecom capital expenditures of $95–$115 million and Renewable Energy capital expenditures of $30–$45 million, primarily for solar operations in India. It expected to fund spending mainly from cash and operating cash flow and said available liquidity was sufficient for at least the next 12 months.
- Management expected U.S. wholesale wireless revenue and margins to continue declining as lower roaming rates and revenue caps outweigh traffic growth. It anticipated international wireline growth from acquisitions, with potential offsets from video subscriber losses and competition or regulatory changes in Guyana.
- ATN reported a pipeline of potential India solar projects exceeding 250 MW, but timing and build-out depend on market conditions, including financing. Power generated and banked in India was not yet being recognized as revenue pending regulatory approval and valuation.
- Guyana’s telecommunications legislation could introduce competition and affect GTT’s exclusive rights; implementation timing and outcomes were uncertain. GTT also faced disputed tax assessments totaling $44.1 million; ATN accrued $5.0 million and said some adverse outcome was probable. The filing describes several other pending Guyana disputes.
- Foreign currency exposure is material: ATN reported a $0.9 million loss on Guyana-dollar transactions during the first half and warned further currency weakness could adversely affect results. Weather, competition, regulation, network investment, integration of acquired businesses and access to capital were also identified as risks.
- The company completed refinancing of One Communications debt, with $36.6 million outstanding at June 30, and was required to hedge at least 30% of the debt’s notional amount and term within 90 days. The sale of British Virgin Islands cable operations was expected to close in Q3 2017. Sovernet sale consideration included $2.0 million of contingent consideration, potentially up to $4.0 million depending on milestones.
- Management reported effective disclosure controls and procedures as of June 30, 2017. The filing provides no earnings guidance.
Important facts for investors to verify
- How much of reported revenue and profit growth reflects acquisitions rather than organic performance, particularly in International Telecom.
- Whether U.S. wholesale roaming rate reductions and revenue caps, and any carrier purchase of approximately 100 cell sites beginning in early 2018, affect future revenue, margins and cash flows as expected.
- Progress on Guyana’s regulatory changes and the $44.1 million disputed tax assessments, including the adequacy of the $5.0 million accrual.
- Execution of the telecom and India solar capital expenditure plans, funding needs, project approvals and conversion of India’s banked power into recognized revenue.
- Debt covenant compliance, completion of the required One Communications hedge, and liquidity available after capital spending and dividends.