ATN International, Inc. — Q3 2019 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2019, compared with the same 2018 periods. ATN operates U.S. and international telecommunications businesses and an India renewable-energy business. In November 2018, it sold its U.S. solar operations; those results remain in continuing operations.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $115.6 million | $121.1 million | $326.6 million | $343.4 million |
| Operating income | $10.2 million | $30.8 million | $15.1 million | $50.8 million |
| Net income | $4.8 million | $20.9 million | $7.6 million | $29.4 million |
| Net income (loss) attributable to ATN shareholders | $1.4 million | $17.0 million | $(1.1) million | $18.7 million |
| Diluted earnings (loss) per share | $0.09 | $1.06 | $(0.07) | $1.16 |
| Cash provided by operating activities | Not separately reported for quarter | Not separately reported for quarter | $56.8 million | $98.0 million |
- Q3 revenue fell 4.6%; operating margin was approximately 8.9%, compared with 25.4% in Q3 2018. Nine-month operating margin was approximately 4.6%, versus 14.8%.
- Q3 wireless revenue rose 4.9% to $54.6 million, while wireline revenue declined 6.4% to $59.6 million and renewable-energy revenue fell 73.5% to $1.4 million. Nine-month revenue declined 4.9% overall.
- Cash and cash equivalents were $165.3 million at September 30, 2019; cash, cash equivalents and restricted cash totaled $166.4 million. The company reported $189.4 million available under its revolving credit facility after letters of credit.
- Long-term debt, including current maturities and net of financing costs, was approximately $88.3 million. The company had no borrowings under its $200 million revolving facility and reported compliance with its covenants. Operating lease liabilities totaled approximately $69.6 million.
- Capital expenditures were $49.5 million for the first nine months, versus $154.3 million in 2018, which included substantial U.S. Virgin Islands hurricane-rebuild spending. Operating cash flow less reported capital expenditures was approximately $7.4 million in 2019; this is a simple calculation, not a company-reported non-GAAP measure.
Material changes and drivers
- Q3 operating income and ATN-attributable earnings fell sharply, in part because Q3 2018 included a $13.5 million gain on the sale of about 100 cell sites. Nine-month 2018 operating results also benefited from that gain and additional U.S. Virgin Islands support funding.
- U.S. Telecom Q3 revenue increased, aided by FirstNet-related roaming revenue and $1.9 million of Connect America Fund II revenue, but segment operating income declined versus 2018. For the first nine months, U.S. Telecom revenue and operating income were lower, reflecting sold cell sites and reduced wholesale traffic.
- International Telecom revenue increased 2.5% for the first nine months, primarily due to broadband growth, but segment operating income declined 4.3% amid higher operating costs. U.S. Virgin Islands revenue recovery remains uncertain.
- The U.S. solar sale reduced renewable-energy revenue substantially year over year. The company reported a $2.1 million write-down of a previously held non-controlling investment in 2019.
- Operating cash flow decreased by $41.2 million year over year, including approximately $28.5 million in tax payments primarily related to the U.S. solar sale, as well as lower cash generation in U.S. Telecom and Renewable Energy.
Outlook, risks and unusual items
- FirstNet: ATN expects approximately $80–85 million of construction revenue over the next two years, largely offset by construction costs and with minimal operating-income impact. The company expects construction activity through approximately mid-2021 and relatively steady operating-income contributions from 2020 onward. Delays, cost overruns, missed milestones or service-level failures could expose the agreement to termination by AT&T.
- Capital spending outlook: Management expected 2019 capital expenditures of approximately $50 million for International Telecom, $10–15 million for U.S. Telecom, and $6–7 million for Renewable Energy. Management expected to fund current spending primarily with cash and operating cash flow, with possible additional financing for India renewable-energy investment.
- U.S. Virgin Islands funding: The FCC’s Connect USVI Fund is expected to replace legacy fixed-network support, with recipients potentially determined in the second half of 2020. ATN expects to participate but is not assured of receiving funding or historical support levels. Lower awards could affect revenue, investment and competition.
- Hurricanes: Management said restoration work was substantially complete, but recovery to pre-hurricane revenue levels is uncertain due to population movements, local economic effects and customer demand.
- Guyana: Regulatory changes could threaten GTT’s exclusive telecommunications rights. A related constitutional challenge and other litigation remain pending. GTT disputes tax assessments totaling $44.1 million; ATN accrued $5.0 million and said some adverse outcome is probable.
- Other exposures: Government grants and support carry compliance requirements and potential clawbacks. The filing also identifies foreign-currency, regulatory, competition, technology/cybersecurity, supplier and market risks. Management stated disclosure controls were effective as of September 30, 2019.
- The company declared a quarterly dividend of $0.17 per share. Its 2019 credit facility matures in April 2024; separate Viya and One Communications debt remained outstanding.
Important facts for investors to verify
- Whether FirstNet construction meets AT&T’s schedule, budget and service requirements, and how construction and ongoing services affect margins and cash flow.
- The outcome and timing of the Connect USVI funding process, including the amount and duration of support ATN ultimately receives.
- Whether U.S. Virgin Islands subscriber levels and revenue recover, and whether Guyana’s regulatory or tax matters result in additional costs or loss of exclusivity.
- The sustainability of operating cash generation after the U.S. solar sale-related tax payments and the planned telecommunications and renewable-energy investment.
- The full debt and lease obligations, covenant headroom, and the potential impact of currency movements and investment valuations.