ATN International, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011. The filing is unaudited. ATN provides wireless and wireline telecommunications services in the United States, Guyana, Bermuda and other Caribbean markets. The Alltel transition was completed in July 2011; ATN completed its merger with Bermuda wireless provider M3 in May 2011.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $194.3 million | $205.0 million | $576.3 million | $424.5 million |
| Operating income | $27.6 million | $13.8 million | $44.3 million | $29.0 million |
| Operating margin | 14.2% | 6.7% | 7.7% | 6.8% |
| Net income attributable to ATN stockholders | $11.3 million | $6.4 million | $17.6 million | $35.2 million |
| Diluted EPS attributable to ATN stockholders | $0.73 | $0.41 | $1.14 | $2.27 |
| Operating cash flow | Not separately reported for the quarter | $84.7 million | $100.3 million | |
| Capital expenditures | Not separately reported for the quarter | $65.9 million | $91.6 million |
Q3 revenue declined 5.2%, while operating income doubled; the operating margin figures above are calculated from reported revenue and operating income. Q3 ATN-attributable net income rose 78.1%. For the nine-month comparison, revenue increased 35.8%, primarily reflecting a full nine months of Alltel operations in 2011 and the M3 merger. ATN-attributable income fell 49.8%, largely because 2010 included a $27.0 million after-tax Alltel bargain-purchase gain; 2010 also included $15.9 million of acquisition-related charges.
At September 30, 2011, cash and cash equivalents were $52.1 million, up from $37.3 million at December 31, 2010. Current assets were $185.2 million and current liabilities $147.9 million. Total debt was $298.9 million, including $20.6 million current and $278.3 million long-term net of debt discount, compared with $288.3 million outstanding at year-end 2010. The weighted-average interest rate, after swaps, was 5.43%. The company reported compliance with its amended credit-facility financial covenants. Management said cash, cash equivalents and credit-facility availability should cover working capital and capital expenditures for at least 12 months.
Operating cash flow declined by $15.6 million year over year for the nine-month period. Investing activities used $60.1 million, mainly for capital expenditures. Financing activities used $9.9 million, including dividends and net debt repayments. Dividends were $0.23 per share in Q3 and $0.67 per share for the nine-month period.
Material changes and operating trends
- Q3 U.S. wireless retail revenue fell 18.1% to $89.1 million. ATN attributed the decline mainly to subscriber losses and about $2.3 million of temporarily unbilled usage and ancillary fees following the Alltel system conversion. U.S. retail subscribers were approximately 593,000, down 174,000 year over year; quarterly churn improved to 4.05% from 4.41%.
- Q3 U.S. wireless wholesale revenue grew 14.2% to $57.0 million, driven by higher data volume and expanded coverage, partly offset by network overbuilds by national carriers and lower rates.
- Q3 international wireless revenue increased 46.7% to $20.5 million, including the contribution from the M3 merger. Wireline revenue rose 4.4% to $21.7 million. Equipment and other revenue declined 47.9% to $5.9 million.
- Alltel migration completion reduced duplicate transition costs, supporting lower Q3 engineering and operations, sales and marketing, equipment, and general and administrative expenses versus Q3 2010. A $2.4 million gain on sale of fully depreciated network assets also contributed to Q3 operating income.
- Nine-month interest expense rose to $12.4 million from $6.9 million, reflecting higher borrowings, interest-rate hedging costs and credit-facility margins.
Outlook, risks and contingencies
- Management expected U.S. retail wireless revenue to stabilize over the following two quarters, citing planned new service plans and handset offerings, improved customer systems, anticipated subscriber additions and moderately lower churn. It also reported higher U.S. subscriber attrition in Q3 than Q2, which it believed was mainly related to challenges during the Alltel transition.
- ATN expected 2011 capital expenditures of $95 million to $105 million, including $65 million to $70 million in U.S. Wireless. Network expansion and system development remain significant investment needs.
- Management anticipated wholesale data growth from greater smartphone usage, but identified national-carrier network overbuilds and rate reductions as offsets. It also cited competition, subscriber retention, economic conditions, technology change, vendor reliance, severe weather, and continued access to capital as risks.
- In Guyana, proposed telecommunications legislation could end ATN’s exclusive fixed-line and international services rights. The government introduced related legislation in August 2011 but withdrew it in late September; ATN could not predict whether it would be reintroduced. The company said compensation might be available if exclusivity were terminated involuntarily, but could not assure recovery.
- ATN had accrued $5.0 million for certain regulatory, litigation or related matters where it considered an adverse outcome probable. The filing also describes potential losses from illegal bypass of Guyana international calls and possible licensing changes. A $11.7 million interest-rate-swap liability could become payable upon specified debt-default events; no collateral had been posted.
Key facts for investors to verify
- Whether U.S. wireless subscriber losses and retail revenue stabilize after the Alltel transition, and whether new plans improve additions and churn.
- How much wholesale growth is sustained by data usage versus offset by carrier network overbuilds and pricing pressure.
- Progress against the $95 million to $105 million 2011 capital expenditure outlook and the impact on cash and debt.
- Developments in Guyana’s proposed telecom reforms, ATN’s exclusivity rights, and the matters underlying the $5.0 million accrual.
- Debt levels, covenant headroom, interest expense and swap exposure; the filing does not state a clear numerical amount of undrawn revolver availability.