ATN International, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012. Unaudited. Unless stated otherwise, financial amounts below are in U.S. dollars; rounded figures are in millions.
Business context
ATN provides wireless and wireline telecommunications services in the United States, Guyana, Bermuda and other Caribbean markets. U.S. Wireless generated approximately 77% of consolidated revenue. The company reported four segments: U.S. Wireless, International Integrated Telephony, Island Wireless and U.S. Wireline.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $185.3m | $193.8m | $368.2m | $381.9m |
| Operating income | $23.1m | $6.3m | $41.2m | $16.7m |
| Operating margin | 12.5% | 3.2% | 11.2% | 4.4% |
| Net income attributable to ATN shareholders | $10.5m | $1.8m | $19.9m | $6.3m |
| Diluted EPS | $0.67 | $0.12 | $1.27 | $0.41 |
| Operating cash flow | Not separately reported | Not separately reported | $79.6m | $43.0m |
| Capital expenditures | Not separately reported | Not separately reported | $32.3m | $45.4m |
Q2 net income was $11.8m, compared with $1.3m a year earlier. Six-month net income was $20.7m, compared with $5.3m. The reported cash-flow statement covers six-month periods only.
At June 30, cash and cash equivalents were $79.8m, total debt was $279.9m, and net debt was approximately $200.1m. Current assets of $210.8m and current liabilities of $134.3m imply a current ratio of approximately 1.57. The company said available cash and credit capacity were expected to cover working capital and capital expenditures for the next 12 months. Its new facility had a $100m revolving commitment; no revolver borrowing was outstanding at June 30.
Material changes versus comparable periods
- Q2 revenue fell 4.4%; six-month revenue fell 3.6%. U.S. retail wireless revenue declined 11.9% in Q2 and 12.4% year to date, chiefly due to subscriber losses following Alltel-related policy and distribution changes and market separation.
- Profitability improved substantially despite lower revenue. Q2 operating income rose $16.8m and six-month operating income rose $24.6m, supported by lower termination/access, sales and marketing, and general and administrative expenses, including savings after completion of the Alltel Transition.
- Q2 wholesale wireless revenue was nearly flat, while six-month wholesale revenue rose 2.5% with higher data volume. International wireless revenue increased 10.2% in Q2 and 20.8% year to date, mainly reflecting the Bermuda CellOne merger and U.S. Virgin Islands subscriber growth.
- Operating cash flow increased by $36.6m year over year for the six months, including an $11.5m income tax refund. Capital spending declined by $13.2m.
- Cash increased $31.1m from year-end 2011. Gross debt was $6.1m lower than at year-end, while the debt mix changed following the May 2012 refinancing.
Outlook, risks and unusual items
- Capital spending: Management expected 2012 capital expenditures of $80m–$95m, including $45m–$55m in U.S. Wireless, funded primarily through operating cash and credit facilities.
- Wireless trends: U.S. retail subscribers totaled approximately 584,000 at quarter-end, down 55,000 year over year but up 5,000 sequentially. Q2 gross additions increased to about 55,000 from 39,000; churn improved to 2.9% from 3.73%. Management warned that elevated contract expirations and seasonal softness could raise churn and pressure subscriber levels. Wholesale revenue faces risks from carrier network overbuilds, reduced roaming, lower rates and voice-traffic declines.
- Refinancing: A May 18 amended CoBank facility provides $275m of term loans and a revolving facility of up to $100m. Term loans mature in 2017 and 2019; the revolver matures in 2017. Weighted-average borrowing cost, after swaps, was 4.45%. ATN reported compliance with financial covenants at June 30.
- Guyana legal and regulatory matter: A July 20, 2012 trial-court ruling questioned the validity and scope of GT&T’s exclusive international voice and data license, including its application to VoIP. GT&T appealed and obtained an interim injunction against competitor Digicel bypassing its network; a hearing on a permanent injunction was scheduled for September 18, 2012. The outcome could affect Guyana revenue. ATN had accrued $5.0m for identified regulatory, litigation and related matters.
- Asset sale: After a roaming partner exercised a call option in July 2012, ATN agreed to sell Midwestern spectrum and related sites for approximately $15.8m, subject to regulatory approval, with closing expected in late 2012 or early 2013. The network had generated $8.0m of wholesale revenue in the first half of 2012; management said replacement revenue may be difficult.
- Interest-rate exposure: $143m of debt was hedged with swaps; $132m remained exposed to variable rates. ATN estimated that $4.0m of swap-related amounts would be reclassified as higher interest expense through June 30, 2013. The swaps had an $11.0m liability fair value.
- Other matters: ATN expensed $0.7m of deferred financing costs in Q2 in connection with refinancing. On June 29, certain GT&T managers were terminated for policy violations and its CEO resigned; interim executives were appointed, and ATN said it was enhancing subsidiary oversight. Management reported effective disclosure controls and no material effect on the financial statements from these changes.
- The quarterly dividend was $0.23 per share. Forward-looking statements are subject to competition, subscriber retention, roaming arrangements, foreign-market, regulatory, technology, supplier, weather and capital-market risks.
Important facts for investors to verify
- Whether U.S. retail wireless subscriber stabilization continues and whether churn remains improved as contract expirations rise.
- The legal and regulatory outcome affecting GT&T’s Guyana exclusivity, and any effect on revenue, the $5.0m accrued contingency or liquidity.
- Whether the Midwestern spectrum and site sale receives approval and closes on expected terms, and how much roaming revenue is lost.
- Progress against 2012 capital-spending guidance, cash generation and debt repayment, while maintaining credit-covenant compliance.
- Whether cost savings can offset continued retail revenue declines, handset and network costs, and pressure on wholesale roaming revenue.