ATN International, Inc. — Q3 2022 Form 10-Q
Business context and period: Unaudited results for the three and nine months ended September 30, 2022. ATN provides wireless, wireline, carrier and managed communications services, primarily in rural U.S. markets and the Caribbean. Results include Alaska Communications, acquired July 22, 2021; the year-ago periods therefore include a shorter contribution from that business.
Financial performance and position
- Revenue: Q3 revenue was $182.2 million, up 9.3% year over year; communication-services revenue rose 12.0% while construction revenue declined 48.1%. Nine-month revenue was $533.7 million, up 28.6%, principally reflecting Alaska Communications and higher communication-services revenue; construction revenue fell 69.3%.
- Profitability: Q3 operating income was $1.4 million versus an operating loss of $1.0 million; operating margin was approximately 0.8%. Net loss attributable to ATN stockholders was $2.8 million, or $0.25 per diluted share, versus a $2.6 million loss, or $0.22 per share. For nine months, operating income was $3.3 million (approximately 0.6% margin), compared with $5.3 million; attributable net loss was $4.3 million, or $0.49 per share, versus income of $2.1 million, or $0.08 per share.
- Cash flow and investment: Nine-month operating cash flow was $79.0 million, up from $47.7 million. Capital expenditures were $109.9 million, with $4.0 million of reimbursable capital expenditures reported separately; operating cash flow less total reported capital expenditures was approximately negative $35.0 million. Net cash used in investing activities was $94.6 million.
- Liquidity and debt: At September 30, cash and cash equivalents were $76.7 million, plus $1.1 million of restricted cash. Total debt, including the customer-receivable credit facility, was $399.2 million, up from $366.5 million at year-end 2021. ATN reported $103.0 million available under its CoBank facility after outstanding letters of credit and was in compliance with its covenants. Management said available cash and credit capacity should meet working-capital and capital-expenditure needs for at least 12 months.
- Other metrics: Interest expense rose to $13.1 million for the first nine months from $5.7 million. Approximately $300.2 million of debt was variable-rate; management estimated a 100-basis-point rate change would alter annual interest expense by about $3.0 million. The quarterly common dividend was $0.17 per share.
Material changes and management commentary
- U.S. Telecom revenue increased with a full nine months of Alaska Communications in 2022; higher fixed and carrier-services revenue was partly offset by lower FirstNet construction revenue and restructured carrier roaming contracts. International Telecom revenue grew, but nine-month segment operating income declined to $36.9 million from $41.0 million as expenses grew faster than revenue.
- Capital expenditures were expected to total approximately $150 million to $160 million for full-year 2022, net of reimbursable amounts. No consolidated revenue or EBITDA forecast is stated in the filing text.
- The FirstNet build was approximately 70% complete at September 30. ATN expected a further 5% of sites to be completed in Q4 2022 and the remainder in 2023; expected total construction revenue was approximately $80 million to $85 million, with limited operating-income impact.
- ATN was allocated up to approximately $207 million under the federal Replace and Remove Program to reimburse eligible costs to remove and replace ZTE equipment. The company expected to meet program requirements, but the project involves deadlines and approved-cost reimbursement conditions.
- Government support remains significant: CAF II provides stated annual support of $27.7 million through December 2025, then $8.0 million annually through July 2028. Viya’s annual High Cost support declined to $5.5 million for the period through June 2023 and is expected to end thereafter. ATN also reported $77.5 million in Tribal Broadband Connectivity Program sub-awards, plus an additional $52.3 million announced in October 2022.
- After quarter-end, ATN acquired Sacred Wind Enterprises on November 7, 2022, paying approximately $27 million cash, assuming about $32 million of debt and issuing approximately 6% of Alloy’s fully diluted shares to the sellers; potential earn-outs remain under assessment.
Risks, contingencies and unusual items
- Management cited inflation, wage and energy costs, equipment supply constraints, and geopolitical uncertainty as potential pressures on operating costs and build budgets, particularly for fixed-budget and grant-funded projects.
- ATN accrued $11.7 million for legal, regulatory and other potential liabilities. Matters include Guyana licensing, spectrum fees and tax disputes, a Trinidad and Tobago judgment enforcement appeal, and U.S. funding-program audits and an FCC inquiry involving Alaska Communications. The outcomes and potential additional exposure are uncertain.
- Viya’s government support is scheduled to decline, while Guyana’s liberalized telecom regime may affect competition and legacy exclusive rights. The filing notes that the full effects of competitors’ licenses were not yet clear.
- Reported results include acquisition-related costs, increased depreciation and amortization, higher interest expense, and gains from noncontrolling investments. Nine-month earnings also reflect a $2.1 million discrete valuation allowance expense on certain deferred tax assets.
Key facts for investors to verify
- How much of revenue growth and operating performance is organic versus attributable to Alaska Communications, and whether US Telecom can sustain improved profitability.
- FirstNet completion timing, remaining construction costs, reimbursement and receivable collection, and whether the $150 million to $160 million capital-spending expectation is achieved.
- Debt maturities, variable-rate exposure, covenant headroom and the effect of the Sacred Wind transaction and ZTE replacement financing.
- Actual timing and conditions for federal and tribal grants, and the financial impact of Viya’s declining support and Guyana regulatory changes.
- Developments in the $11.7 million accrued contingencies and the unresolved funding-program audits and litigation.