Business context and reporting period
Filing identity: The supplied filing is Primus Telecommunications Group, Incorporated’s unaudited Form 10-Q for the quarter ended September 30, 2011; it does not identify INNOVATE Corp. as the registrant. Amounts below are in U.S. dollars unless noted.
Primus provides telecommunications, internet, data, and data-center services, principally in Australia, Canada, the United States, and Brazil. The filing compares the three and nine months ended September 30, 2011 with the corresponding 2010 periods. Results include Arbinet from its February 28, 2011 acquisition; prior-period results classify European retail operations as discontinued.
Financial performance and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $254.7m | $188.2m | $760.9m | $575.8m |
| Operating income (loss) | $5.4m | $2.1m | ($6.4m) | $9.9m |
| Net income (loss) attributable to Primus | ($10.0m) | $5.1m | ($35.6m) | ($9.0m) |
| Operating cash flow | Not separately presented | Not separately presented | $26.0m | $37.3m |
- Q3 revenue rose 35.3%; management attributed most growth to Arbinet and favorable foreign-exchange translation. On a constant-currency basis, revenue rose 26.1%. Nine-month revenue increased 32.1% reported, or 22.8% excluding currency effects.
- Gross margin, calculated as revenue less cost of revenue, was approximately 29.8% in Q3 versus 35.8% a year earlier, and 29.5% for the nine-month period versus 36.3%. Management cited Arbinet’s higher-volume, lower-margin carrier-services mix.
- Q3 operating income improved, but the company reported a net loss. Nine-month operating results included a $14.7m Arbinet goodwill impairment; net results also reflected foreign-currency losses and debt-restructuring costs.
- At September 30, cash and cash equivalents were $27.2m, down from $41.5m at year-end 2010. Current assets were $128.8m and current liabilities $144.5m, a working-capital deficit of about $15.6m. Management said available cash was expected to cover debt service, fixed obligations, and operating needs for at least 12 months.
- Debt and capital leases totaled approximately $255.8m before original-issue discount and current-portion presentation. The new 10% senior secured notes had $240.2m principal outstanding, mature in 2017, and bear 10% annual interest. Nine-month capital expenditures were $22.8m. Operating cash flow less capital expenditures was approximately $3.2m.
- Stockholders’ equity was $97.6m. The company had 13.7m common shares outstanding at November 1, 2011.
Material changes versus the prior comparable period
- Arbinet contributed $55.4m of Q3 revenue and $155.3m from acquisition through September 30. Its acquisition was funded with Primus shares valued at $50.6m; preliminary purchase accounting and valuations remained subject to adjustment.
- International Carrier Services revenue more than doubled year over year, primarily due to Arbinet. Australia revenue declined 10.0% excluding currency effects in Q3 and 9.0% for the nine-month period; legacy voice and related services faced declining usage and substitution.
- Cost of revenue increased faster than revenue, raising its share of revenue to 70.2% in Q3 from 64.2%, and to 70.5% for nine months from 63.7%.
- On July 7, 2011, Primus completed debt exchange offers and issued $240.2m of 10% notes due 2017. The company recorded $6.9m of restructuring-related costs. $2.4m principal of 13% notes remained outstanding; the 14¼% notes were discharged.
- The company repurchased 31,626 shares for $0.4m during the quarter under a board-authorized program of up to $15m. It also completed smaller Canadian and Australian acquisitions.
Outlook, risks, contingencies, and unusual items
- No specific revenue or earnings guidance is provided. Management described a strategy of investing in broadband, IP voice, local, wireless, data, and data-center services, while using traditional services for cash generation and integrating Arbinet.
- Management cited competition, declining long-distance usage, product substitution, economic conditions, pricing pressure, and customer-migration costs as business risks. Approximately 82% of nine-month revenue came from outside the United States; currency movements can materially affect reported results.
- Q3 included a $12.3m foreign-currency transaction loss and an $11.4m gain from revaluing contingent value rights (CVRs). The nine-month period included a $5.9m currency loss, a $7.1m CVR valuation gain, $6.9m debt-restructuring costs, and the $14.7m goodwill impairment. These items materially affect comparisons and reported net income.
- After quarter-end, Globility, in which Primus indirectly owns 45.6%, sold Canadian wireless spectrum assets for approximately CAD$15m (about US$15m), recording an estimated pretax gain of CAD$13.4m. This is a subsequent event, not included in September 30 results.
- Primus reported disclosure controls were not effective at quarter-end because of a material weakness in income-tax accounting controls. Remediation work was underway, with testing planned for Q4 2011. The company reported $88.4m of gross unrecognized tax benefits and said use of net operating losses was subject to an estimated $1.6m annual limitation following an ownership change.
- Ordinary-course legal claims were disclosed; management did not expect them to have a material adverse effect. The filing also identifies significant estimation uncertainty in acquisition valuations, goodwill, intangible assets, CVRs, taxes, and doubtful accounts.
Most important facts for investors to verify
- Confirm the registrant and filing identity: the source is a Primus Telecommunications Group 2011 10-Q, not an INNOVATE Corp. filing.
- Review whether Arbinet integration can sustain revenue while improving the low-margin International Carrier Services mix; assess the final acquisition valuation and goodwill impairment assumptions.
- Reconcile debt principal, carrying value, maturities, interest costs, and covenant restrictions, and test management’s 12-month liquidity assertion against cash needs and obligations.
- Track operating cash flow, capital spending, working capital, and cash balances; cash fell by $14.3m during the first nine months.
- Assess exposure to foreign exchange, tax contingencies and NOL limitations, and the reported ineffective disclosure controls and remediation status.