ATN International, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2012, compared with the same 2011 periods. ATN provides wireless and wireline services in the United States, Guyana, Bermuda and other Caribbean markets. U.S. Wireless generated approximately 77% of consolidated revenue.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $188.8 million | $194.3 million | $557.0 million | $576.3 million |
| Operating income | $29.6 million | $27.6 million | $70.9 million | $44.3 million |
| Operating margin | 15.7% | 14.2% | 12.7% | 7.7% |
| Net income attributable to ATN stockholders | $16.0 million | $11.3 million | $35.8 million | $17.6 million |
| Diluted earnings per share | $1.02 | $0.73 | $2.30 | $1.14 |
- Revenue and profitability: Q3 revenue fell 2.9%; lower U.S. retail and wholesale wireless revenue was partly offset by international wireless and equipment sales. Q3 operating income rose 7.2%, supported by lower operating costs. For the nine months, revenue declined 3.3%, while operating income increased 59.9% and net income attributable to ATN more than doubled.
- Cash flow: Operating activities provided $137.5 million in the first nine months, versus $84.7 million in 2011. Investing activities used $50.5 million, principally capital expenditures; financing activities used $24.3 million. Operating cash flow benefited in part from an $11.5 million income-tax refund.
- Cash, debt and liquidity: Cash and equivalents were $111.4 million at September 30, up from $48.7 million at year-end 2011. Gross debt outstanding was approximately $276.0 million; the balance-sheet carrying amount of current and long-term debt combined was approximately $270.2 million, after debt discounts. The $100 million revolving facility had $99.9 million available, net of a $0.1 million letter of credit. Weighted-average borrowing rate, after swaps, was 4.36%. ATN reported compliance with credit-facility financial covenants.
- Investment and shareholder returns: Nine-month capital expenditures were $50.5 million, down from $65.9 million. Dividends paid were $10.7 million; dividends per share declared for the nine-month period were $0.71.
Material changes versus the prior comparable period
- U.S. retail wireless revenue declined 6.6% in Q3 and 10.6% year to date. ATN attributed the trend to subscriber attrition, including postpaid losses and distribution challenges. It had approximately 585,000 U.S. retail wireless subscribers at quarter-end, down 8,000 year over year; quarterly churn improved to 3.70% from 4.05%.
- U.S. wholesale wireless revenue fell 3.7% in Q3, reflecting lower voice traffic, customer network expansion and lower average rates; nine-month wholesale revenue was roughly flat. The company said growth in data traffic partly offset these pressures.
- International wireless revenue rose 3.3% in Q3 and 14.1% year to date, with the year-to-date increase mainly reflecting the 2011 Bermuda merger and subscriber growth in the U.S. Virgin Islands. Wireline revenue was roughly flat year to date.
- Nine-month operating costs fell 8.6%, led by lower termination/access, sales and marketing, and general and administrative expenses, in part from reduced roaming costs and completion of the Alltel systems transition. Equipment expense rose 20.8%, while depreciation and amortization rose 3.6%.
Outlook, risks and unusual items
- Management forecast 2012 capital expenditures of $65–$85 million, including $35–$50 million for U.S. Wireless, below its earlier $90–$100 million estimate because some projects were delayed into 2013. It said cash, operating funds and available credit should meet working-capital and capital-expenditure needs for the next 12 months.
- ATN was provisionally awarded approximately $68.8 million in FCC Mobility Fund grants on October 3, subject to approval and conditions. The company expected funding to begin in 2013 for network expansion. It warned that failure to meet grant terms could lead the FCC to draw on a related letter of credit and affect future eligibility; a later credit amendment permits up to $55 million of revolving-credit capacity for such letters.
- ATN agreed to sell certain Midwestern spectrum and sites for approximately $15.8 million after a roaming partner exercised a call option. Closing was expected in late 2012, with an anticipated gain of approximately $11 million; the transaction had not yet closed at the reporting date.
- Legal and regulatory uncertainty in Guyana is significant. A July 2012 trial-court ruling questioned the validity and scope of GT&T’s exclusive international-service license, including its application to VoIP. GT&T appealed and obtained an interim injunction against competitor Digicel; the timing and outcome of further proceedings were unclear. ATN accrued $5.0 million for the regulatory, litigation and related matters discussed in the filing.
- Existing U.S. Universal Service Fund support was being phased out by 20% annually over five years beginning in June 2012; ATN received approximately $9.9 million of such support in 2011. Other cited risks include competition, subscriber churn, handset availability, roaming-partner decisions, foreign-market conditions, regulation, network investment and access to capital.
- Interest-rate swaps covered $143.0 million of debt. ATN estimated that $4.1 million would be reclassified from accumulated other comprehensive income as an increase to interest expense through September 30, 2013. A $1.3 million research and development tax-credit benefit reduced the reported effective tax rate for the 2012 periods.
Important facts for investors to verify
- Whether U.S. retail subscriber trends, churn and handset availability improve, and whether wholesale roaming revenue stabilizes.
- FCC approval, timing, construction obligations and letter-of-credit exposure associated with the provisional Mobility Fund award.
- Closing and realized proceeds and gain from the Midwestern spectrum and site sale.
- Developments in the Guyana license dispute and any effect on GT&T revenue, operations or the recorded contingency accrual.
- Execution of delayed capital projects, compliance with debt covenants, and the durability of improved margins and operating cash flow.