ATN International, Inc. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014; unaudited. ATN provides wireless and wireline telecommunications services in the United States, Guyana, Bermuda and the Caribbean. Unless noted otherwise, figures below are in U.S. dollars.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $89.4m | $79.4m | $247.8m | $215.8m |
| Operating income | $28.2m | $20.0m | $66.0m | $48.0m |
| Operating margin | 31.5% | 25.3% | 26.6% | 22.3% |
| Income from continuing operations | $18.9m | $4.5m | $43.6m | $18.7m |
| Net income attributable to ATN shareholders | $16.2m | $276.2m | $35.5m | $293.9m |
| Diluted EPS | $1.01 | $17.43 | $2.22 | $18.61 |
The sharp year-over-year decline in reported net income and EPS reflects the $305.2m after-tax gain on the 2013 sale of the Alltel retail wireless business; 2014 had no discontinued-operations income. The 2013 sale proceeds were approximately $796.8m, including escrowed funds.
- Revenue mix: Q3 U.S. wireless revenue rose 35.1% to $44.3m, driven by higher data traffic, network upgrades and an increase in wholesale-only base stations from 579 to 716. International wireless fell 5.8% to $21.6m; wireline was essentially flat at $21.5m. For the nine months, revenue increased 14.8%, led by U.S. wireless growth of 36.7%.
- Cash flow and investment: Nine-month operating cash flow was $51.0m, including $55.7m from continuing operations. Capital expenditures were $41.7m, down from $55.2m. Cash provided by continuing operations less reported capital expenditures was approximately $14.0m.
- Liquidity and debt: September 30 cash and cash equivalents were $384.4m, with an additional $39.3m of restricted cash. ATN reported no long-term debt and had a $100m revolving credit facility available; it was in compliance with financial covenants. Approximately $90.4m of cash was held outside the United States. Management said available cash and facility capacity should cover working capital and capital expenditures for the next 12 months.
- Balance sheet: Total assets were $843.4m and total liabilities $118.5m at September 30, 2014. Restricted cash includes the remaining Alltel indemnity escrow, expected to be released in March 2015 subject to claims.
Changes, outlook and key risks
- Operating income improved as revenue growth outpaced operating expense growth. Q3 termination and access fees rose 13.5%, mainly with higher data traffic; sales and marketing increased 25.6%. Interest expense fell substantially after the 2013 repayment of term debt.
- Management expected continued U.S. data traffic growth into 2015, but forecast more modest U.S. wireless revenue growth for the remainder of 2014 because of expected significant declines in contracted wholesale data prices. ATN expected 2014 capital expenditures of $60m–$65m.
- International wireless subscribers declined from 327,000 to 320,000 year over year amid strong competition; 88% were prepaid. Management noted that prepaid subscribers and revenue can shift quickly and roaming revenue is seasonal.
- Regulatory and legal exposures include a Bermuda regulator draft decision that could reassign spectrum needed for next-generation services; contested Aruba license and spectrum fees of approximately $4m and $2m, respectively; and pending litigation challenging GT&T’s exclusive Guyana license rights. Outcomes and financial effects are uncertain.
- ATN disclosed ineffective disclosure controls as of September 30, 2014 because of previously identified material weaknesses related to Guyana’s new billing system and GT&T accounting staff experience and training. Remediation was underway and expected to continue through 2014. Management nevertheless concluded the interim financial statements were fairly stated in all material respects.
- Other risks include technology and network investment needs, competition and roaming arrangements, foreign-market and currency exposure, supplier reliance, severe weather and cyberattacks, and the timing and returns of potential acquisitions or investments. A $0.7m G&A charge corrected an understatement of 2013 transactional tax liabilities; management said it was not material to current or prior periods.
Important facts for investors to verify
- Progress and effectiveness of remediation of the Guyana billing and accounting control weaknesses.
- Actual U.S. wholesale data-price trends and whether traffic growth offsets lower rates.
- Disposition of the Bermuda spectrum proposal, Aruba fee disputes and Guyana license litigation.
- Release of the remaining $39m Alltel escrow, subject to indemnity claims, and the location and availability of cash held abroad.
- Capital spending against the $60m–$65m 2014 outlook and any deployment of cash toward acquisitions or investments.