USA Mobility, Inc. — 2012 Form 10-K
Period and identity: The filing covers the fiscal year ended December 31, 2012, with quarterly results also reported. The supplied company metadata names Spok Holdings, Inc., but the filing itself identifies the registrant as USA Mobility, Inc. (ticker USMO); confirm the intended issuer.
Business context and financial performance
USA Mobility operated two segments: wireless messaging and software. Wireless provided paging and related services; software subsidiary Amcom supplied unified communications products, especially to healthcare customers. Software results were included from its March 3, 2011 acquisition. Unless stated otherwise, amounts below are in millions of dollars.
| Metric | 2012 | 2011, restated | Change or context |
|---|---|---|---|
| Revenue | $219.7 | $233.7 | Down 6.0% |
| Operating income | $45.7 | $51.8 | Down 11.8%; operating margin 20.8%, versus 22.2% |
| Net income | $27.0 | $83.8 | 2012 diluted EPS $1.20; 2011 diluted EPS $3.72 |
| Operating cash flow (company-defined OCF) | $57.4 | $63.2 | Down 9.3%; defined as EBITDA less capital expenditures |
| Cash and cash equivalents, year-end | $61.0 | $53.7 | Current assets $95.9; current liabilities $60.7 |
| Debt, year-end | $0 | $28.3 | Remaining $3.3 of borrowings repaid April 6, 2012 |
- Wireless revenue fell to $168.4 million from $199.7 million, down 15.7%. Year-end paging units in service fell 9.2%, to 1.515 million from 1.668 million; consolidated ARPU declined to $8.37 from $8.64.
- Software revenue was $51.3 million, versus $34.0 million for the partial 2011 period after acquisition; 2011 included a $6.1 million purchase-accounting reduction to maintenance revenue. Software bookings reached $61.3 million, and year-end backlog was $40.6 million, up 23.4% from the beginning of 2012. Maintenance renewal rates were approximately 99%.
- 2012 operating expenses included a $3.4 million impairment of software contract-based intangible assets. Fourth-quarter operating income was $4.6 million and net income was $2.0 million, including the impairment charge.
- Capital expenditures were $10.0 million. Cash dividends paid were $16.5 million ($0.75 per share); the quarterly rate was reduced from $0.25 to $0.125 per share during 2012. The company repurchased 712,173 shares for approximately $8.0 million during the year.
Material changes, restatement, and controls
- The company restated 2011 financial statements after finding that software revenue from arrangements combining licenses, installation/training, and maintenance had been recognized before all substantive service obligations were completed. The 2011 restatement reduced revenue by $9.2 million, operating expenses by $1.4 million, net income by $4.8 million, and basic and diluted EPS by $0.22. The 2011 annual statements and first three 2011 quarterly reports should no longer be relied upon; 2012 quarterly reports were not materially misstated.
- Management identified a material weakness in software revenue-recognition controls, and concluded disclosure controls and internal control over financial reporting were ineffective at year-end 2012. The auditor issued an adverse opinion on internal control but an unqualified opinion on the restated financial statements. Remediation measures were underway; management had not yet completed testing to confirm remediation.
- Wireless network rationalization reduced active transmitters 4.8% and helped lower site-rent expense. Wireless staffing also declined, while software staffing and investment increased.
Outlook, risks, and contingencies
- Management’s 2013 priorities were to preserve free cash flow, reduce wireless costs, maximize wireless and software revenue and software bookings, and pursue growth through product innovation and diversification. It expected wireless subscriber and revenue declines to continue; no numeric revenue or earnings guidance was provided.
- Management said $61.0 million of cash and approximately $40.0 million of available revolving-credit capacity should meet foreseeable needs. The $40.0 million facility matures in 2015 and is subject to a $25.0 million minimum-liquidity threshold and financial covenants. Contractual obligations totaled $41.0 million, including $24.3 million of operating leases.
- Key risks include continued paging-industry erosion, the ability to cut costs in step with declining wireless revenue, long and unpredictable software sales cycles, possible service disruption from network consolidation, and software execution, regulatory, privacy, cybersecurity, and acquisition-integration risks. The company also cited uncertainty about using deferred tax assets: estimated recoverable deferred tax assets were $45.2 million, against a $118.7 million valuation allowance.
- A Maryland vehicle-accident lawsuit sought $21.0 million. The company said it was fully insured and did not expect a material financial impact; the case was in discovery and settlement discussions continued as of April 15, 2013.
- A related-party director’s company received $4.3 million in 2012 site rent. A company providing wireless customer-service support, whose COO was a relative of the CEO, received $2.6 million in 2012; the company said it had used the provider since 2003.
Most important facts for investors to verify
- Whether USA Mobility is the intended issuer, given the metadata’s Spok Holdings name.
- The restated 2011 results and the accounting treatment and timing of revenue recognition for software arrangements.
- Progress and independent testing of the software revenue-control remediation, and whether any further corrections are needed.
- Whether software bookings and backlog convert into recognized revenue and cash, given the long sales cycle and negative 2012 software operating income of $7.6 million.
- The pace of wireless subscriber and ARPU erosion, cost reductions, network-rationalization effects, and the sustainability of dividends and repurchases.
- The assumptions supporting deferred tax asset recoverability, liquidity and credit-facility availability, and the insurance coverage and eventual outcome of the lawsuit.