ATN International, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Financial statements are unaudited. Unless otherwise noted, dollar amounts below are in millions. Results exclude the Alltel U.S. retail wireless business, sold in September 2013 and presented as discontinued operations.
Business context
ATN provides wireless and wireline telecommunications services in the United States, Guyana, Bermuda and the Caribbean. Its four reportable segments are U.S. Wireless, International Integrated Telephony, Island Wireless and U.S. Wireline.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $83.3 | $71.6 | $158.4 | $136.5 |
| Operating income | $21.6 | $15.9 | $37.9 | $28.0 |
| Operating margin | 26.0% | 22.2% | 23.9% | 20.5% |
| Income from continuing operations | $14.3 | $8.3 | $24.7 | $14.2 |
| Net income attributable to ATN stockholders | $11.5 | $8.9 | $19.4 | $17.6 |
| Diluted EPS attributable to ATN stockholders | $0.72 | $0.56 | $1.21 | $1.12 |
| Operating cash flow | Not stated separately | Not stated separately | $12.1 | $35.4 |
| Capital expenditures | Not stated separately | Not stated separately | $25.1 | $39.7 |
Q2 revenue rose 16.3%; U.S. Wireless revenue increased 40.9% to $37.5 million, mainly from network upgrades, greater data demand and growth in wholesale base stations (654 versus 572 a year earlier). International Wireless grew 2.7%, while Wireline grew 1.9%. For the first half, revenue increased 16.1% and operating income increased 35.3%.
Six-month continuing-operations operating cash flow was $15.3 million, compared with $12.5 million a year earlier; total operating cash flow fell to $12.1 million from $35.4 million, principally reflecting the absence of Alltel operating cash flow. Cash and cash equivalents were $348.8 million at June 30, down $7.8 million from year-end; restricted cash was $58.8 million, mainly Alltel-sale escrow. Total assets were $830.8 million and total liabilities $119.2 million. ATN had no long-term debt or revolver borrowings and reported compliance with credit-facility covenants. Its facility provides a $100 million revolver, subject to terms and covenants.
The effective tax rate declined to 33.9% for Q2 and 34.3% for the first half, from 36.9% and 38.3%, respectively, as a greater share of income came from lower-tax jurisdictions. Dividends declared were $0.27 per share for Q2 and $0.54 per share for the first half.
Material changes and unusual items
- The prior-year periods included Alltel discontinued operations: $3.1 million of after-tax income in Q2 2013 and $7.1 million in the first half of 2013. There was no discontinued-operations income in 2014.
- Interest expense was substantially lower after repayment of term loans in September 2013 and termination of interest-rate swaps in October 2013: $0.02 million in Q2 2014 versus $2.7 million in Q2 2013; $0.2 million for the first half versus $5.0 million.
- First-half 2013 included a $1.1 million gain on the disposition of long-lived assets; there was no comparable gain in 2014.
- During the first half of 2014, ATN recorded approximately $0.7 million of general and administrative expense to correct understated 2013 transactional tax liabilities. Management said the correction was not material to current or prior periods.
Outlook, risks and contingencies
- Management expected 2014 continuing-operations capital expenditures of $60–65 million, primarily funded from cash and operating cash flow. The Vermont stimulus project was expected to require a further $3.0 million of investment, with $2.1 million expected to be grant-funded.
- Management expected modest year-over-year U.S. Wireless revenue growth in the second half of 2014, as continued data-traffic growth may be offset by lower contracted wholesale data prices. It also expected network-related operating costs and depreciation to rise with expansion and investment.
- ATN had received $7.3 million of Mobility Fund support and posted approximately $11.0 million of letters of credit. Failure to meet grant conditions could result in draws, penalties or loss of eligibility for future support.
- ATN was contesting Aruba demands for approximately $4.0 million in license fees and $2.0 million in overdue spectrum invoices; the license had expired in January 2014. The filing does not state a resolved amount or outcome.
- A 2009 Guyana lawsuit challenges GT&T’s exclusive license rights and remained pending. ATN said it considered the challenge without merit and was defending it. Regulatory changes in Bermuda and possible loss of Guyana exclusivity could affect costs or revenue.
- Management said disclosure controls and procedures were not effective as of June 30, 2014 because previously identified material weaknesses persisted, related to implementation of a Guyana billing system and insufficient accounting experience and training at GT&T. Remediation was ongoing through 2014; management nevertheless stated the interim financial statements were fairly stated in all material respects.
- Other stated risks include competition, roaming arrangements, foreign-market political and economic conditions, technology and network execution, supplier concentration, weather and access to capital. Management believed existing cash and credit availability would meet working-capital and capital needs for the next 12 months.
Important facts for investors to verify
- Whether U.S. Wireless traffic and network growth can offset wholesale pricing declines, and how segment costs affect margins.
- The release of the $58.5 million remaining Alltel indemnity escrow, scheduled subject to claims in September 2014 and March 2015.
- Developments in the Aruba license and spectrum-fee dispute and the Guyana exclusive-license litigation and regulatory environment.
- Progress in remediating the Guyana billing and accounting-control material weaknesses.
- Actual capital spending versus the $60–65 million 2014 estimate, and compliance with Mobility Fund construction and other grant requirements.