ATN International, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial amounts below are in millions of U.S. dollars unless noted. The filing is unaudited.
Business context
ATN provides fixed, mobile, carrier and managed communications services in rural U.S. markets and the Caribbean. Its reportable segments are International Telecom, US Telecom and Renewable Energy. Alaska Communications, acquired in July 2021, is included in 2022 results but not in the prior-year comparable periods; this significantly affects year-over-year comparisons. ATN sold a majority interest in its India solar business in January 2021.
Key financial results
| Metric | Q2 2022 | Q2 2021 | H1 2022 | H1 2021 |
|---|---|---|---|---|
| Revenue | $179.5 | $123.9 | $351.5 | $248.4 |
| Operating income | $1.7 | $2.9 | $1.8 | $6.3 |
| Operating margin | 1.0% | 2.3% | 0.5% | 2.5% |
| Net income (loss) attributable to ATN shareholders | $(0.5) | $2.0 | $(1.5) | $4.7 |
| Diluted EPS | $(0.11) | $0.13 | $(0.24) | $0.30 |
Q2 revenue rose 44.9% and first-half revenue rose 41.5%. Communication services drove the increase, while construction revenue declined as fewer FirstNet sites were completed. Operating costs, depreciation and amortization, and interest expense increased; operating income and shareholder earnings consequently fell. The 2022 shareholder loss also includes accrued preferred dividends related to Alaska Communications’ redeemable preferred interests.
- Cash flow: H1 operating cash flow was $50.7, versus $27.5 a year earlier. Capital expenditures were $75.1, versus $41.9. Operating cash flow less capital expenditures was approximately $(24.4) in H1 2022, compared with $(14.5) in H1 2021; this simple comparison does not include other investing cash flows.
- Cash and liquidity: At June 30, cash and cash equivalents were $71.1; restricted cash was $1.1 and short-term investments were $0.3. Management said existing cash, operating cash generation and credit availability should cover working capital and capital expenditure needs for at least 12 months.
- Debt: Book debt was $396.6, up from $366.5 at December 31, 2021; this excludes lease liabilities. ATN reported $78.0 outstanding under the CoBank revolver, with $96.0 available after letters of credit, and $29.7 available under the FirstNet receivables facility. The company was in compliance with CoBank financial covenants. Variable-rate debt totaled $301.8; management estimated a 100-basis-point rate increase would raise annual interest expense by $3.1.
- Dividends: Common dividends were $0.17 per share in Q2, unchanged from Q2 2021.
Material changes and segment performance
- US Telecom: Q2 revenue increased to $91.1 from $37.6, chiefly reflecting Alaska Communications. The segment recorded an operating loss of $0.3, compared with a loss of $0.6. H1 revenue was $176.3 versus $77.9, while the operating loss widened to $4.9 from $1.1.
- International Telecom: Q2 revenue rose 2.6% to $88.4, but operating income fell 20.5% to $11.6 as expenses rose and federal support declined. H1 revenue increased 3.1% to $175.2, while operating income decreased to $23.5 from $27.8.
- FirstNet construction: Q2 construction revenue was $3.3 versus $9.3; H1 was $5.3 versus $21.6. ATN reported 65% of related sites completed by June 30. Construction revenue and related costs are expected to have minimal operating-income impact.
- H1 capital expenditures increased substantially, with $40.8 allocated to US Telecom and $33.9 to International Telecom. Cash used in investing activities was $74.7, compared with $25.3 in H1 2021.
Outlook, risks and unusual items
- Management expects 2022 capital expenditures of approximately $150–$160, net of reimbursable amounts. The FirstNet build schedule was amended in August 2022; management expected the remaining work to continue into early 2023.
- Viya’s annual U.S. Virgin Islands High Cost Program support fell to $10.9 from $16.4 and was scheduled to decline to $5.5 in July 2022 through June 2023, with no support expected thereafter.
- After quarter-end, ATN was allocated up to approximately $207 to reimburse eligible costs to remove and replace ZTE equipment in its U.S. networks. Reimbursement is subject to approved costs and program deadlines; ATN noted the allocation was below its initial requested funding and that full project costs and financial-statement effects were still being assessed.
- After quarter-end, ATN agreed to acquire Sacred Wind Enterprises, a New Mexico rural telecommunications provider, in a transaction involving $24 cash, $13 of Alloy equity, assumed existing debt of approximately $32, and potential earn-outs. Closing, expected in Q4 2022 or Q1 2023, remained subject to regulatory and other approvals.
- Key risks include inflation, supply-chain constraints, interest-rate increases, competition, government subsidy changes, network replacement execution and uncertainty in the company’s transition toward broadband and carrier services. Management said COVID-19 had no material adverse effect on the reported period but could affect future results.
- ATN accrued $13.3 for legal, regulatory and other claims. Material unresolved matters include Guyana tax assessments totaling $44.1 and Alaska Communications’ Rural Health Care Program audit and FCC inquiry; the filing says outcomes and potential impacts cannot currently be predicted.
- Other notable items include $3.4 of H1 losses on dispositions of long-lived assets, increased interest expense, and tax effects from discrete items, including a valuation allowance on certain deferred tax assets.
Important facts for investors to verify
- How much of reported revenue growth reflects Alaska Communications versus underlying subscriber, pricing and usage trends, and whether the acquired business improves profitability.
- Progress, total costs and reimbursement timing for the ZTE replacement program, including whether the approximately $207 allocation will cover eligible costs and deadlines.
- FirstNet completion timing and the cash-collection profile of associated receivables and receivables-facility borrowings.
- The impact of declining U.S. Virgin Islands support, Guyana competition and unresolved regulatory or tax matters on future revenue, margins and liquidity.
- Debt-service capacity and covenant headroom as interest rates, capital spending and acquisition-related obligations evolve.