ATN International, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Unaudited results. ATN operates International Telecom, US Telecom, and Renewable Energy businesses.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $109.1 million | $107.7 million | $220.0 million | $211.0 million |
| Operating income | $7.0 million | $2.8 million | $14.3 million | $4.9 million |
| Net income | $8.4 million | $2.0 million | $10.7 million | $2.8 million |
| Net income (loss) attributable to ATN shareholders | $4.7 million | $(0.9) million | $3.7 million | $(2.4) million |
| Diluted EPS | $0.30 | $(0.05) | $0.23 | $(0.15) |
Q2 operating margin was approximately 6.4%, compared with 2.6% a year earlier; first-half operating margin was 6.5%, versus 2.3%. The filing does not provide a clear EBITDA value. Q2 included an income tax benefit of $2.3 million; the six-month period included a tax benefit of $1.1 million. Tax results were affected by CARES Act provisions, jurisdictional income mix, and discrete tax items.
- Revenue mix: Q2 communications services revenue was $106.2 million and other revenue was $2.9 million. Fixed revenue rose, while mobility revenue declined.
- Cash flow: First-half operating cash flow was $40.4 million, versus $18.5 million in 2019. Investing activities used $54.7 million, including $32.0 million of capital expenditures and $20.0 million for intangible assets and deposits. Financing activities used $22.0 million.
- Cash and liquidity: Cash, cash equivalents, and restricted cash totaled $125.9 million at June 30, down $36.5 million from year-end 2019. Current assets were $244.2 million and current liabilities $118.4 million. The company reported $184.0 million available under its $200 million revolving facility, net of outstanding letters of credit.
- Debt: Total debt was $84.6 million, down from $86.4 million at December 31, 2019. ATN had no borrowings under its revolving credit facility and reported compliance with its financial covenants at quarter-end. The $60.0 million Viya loan and $25.3 million One Communications loan are the principal outstanding borrowings.
- Margins and segments: International Telecom Q2 operating income rose to $14.6 million from $11.1 million; US Telecom rose to $1.8 million from $1.5 million; Renewable Energy reported a $0.6 million operating loss versus $0.2 million of income. First-half US Telecom operating income improved to $4.0 million from a $2.0 million loss.
Material changes versus prior period
- Q2 revenue increased 1.3%; operating income increased $4.3 million, and ATN-attributable earnings turned positive. Lower operating expenses, especially in International Telecom, contributed to the improvement.
- First-half revenue increased 4.3%, while total operating expenses were approximately flat. Operating income increased $9.5 million, reflecting stronger International Telecom and US Telecom results.
- Fixed communications revenue increased 4.9% in Q2, supported by broadband demand and federal support revenue. Mobility revenue fell 10.1%, and International Telecom carrier-services revenue declined as travel restrictions reduced roaming.
- First-half operating cash flow improved substantially year over year, partly because 2019 included tax payments related to the sale of US solar operations. Cash declined during the first half as investing and financing outflows exceeded operating cash generation.
- Effective January 1, 2020, ATN changed its revenue presentation: mobility, fixed, and carrier services are reported within communications services; managed services and renewable energy are included in other revenue.
Outlook, risks, and unusual items
- COVID-19: Broadband demand strengthened in several markets, but travel restrictions and customer concessions reduced roaming, mobility, handset, and some renewable-energy revenue. Cost savings and deferred capital spending offset much of the effect in Q2; management cautioned that future periods could be materially affected, particularly in tourism-dependent Caribbean markets and through customer nonpayment.
- Capital spending: Management expected 2020 capital expenditures to be below the prior forecast. Guidance was approximately $35–$40 million for International Telecom and $25–$30 million for US Telecom, including $10 million for FirstNet-related towers and backhaul.
- FirstNet: ATN expects $80–$85 million of construction revenue over roughly two years, largely offset by construction costs and with minimal operating-income impact. COVID-related delays pushed expected construction revenue to late 2020 through 2021. ATN amended the build schedule with AT&T on August 6, 2020.
- Other notable items: First-half other expense included $1.4 million of losses on non-controlling investments and $1.3 million of foreign-currency transaction losses. ATN also invested $2.8 million in an equity-method investment and purchased $20.0 million of intangible assets, including deposits; the filing does not provide a clear description of the acquired intangible asset in the supplied text.
- Contingencies and regulatory exposure: ATN’s Guyana subsidiary faces uncertainty over its exclusive license and ongoing disputes, including tax assessments totaling $44.1 million; ATN accrued $5.0 million and stated that some adverse outcome was probable. A 2019 Viya debt covenant breach had been waived in February 2020. The company also disclosed potential clawback provisions on a $7.4 million tribal bidding credit if deployment requirements are not met.
- Other risks include competition, dependence on roaming and carrier relationships, regulatory changes, foreign-currency movements, network investment requirements, and access to capital. Management stated that its disclosure controls were effective as of June 30, 2020.
Important facts for investors to verify
- Whether COVID-19-related revenue pressure, customer concessions, bad-debt expense, and cost savings persist or change in the second half of 2020.
- Progress, timing, costs, and financing of the FirstNet build, including the revised schedule and the expected shift from roaming revenue to maintenance, leasing, and transport revenue.
- Execution of the 2020 capital-spending plan and the cash impact of the $20.0 million intangible-asset purchase and other investments.
- Developments in Guyana regarding GTT’s exclusivity, regulatory changes, litigation, spectrum fees, and the $44.1 million disputed tax assessments against the $5.0 million accrual.
- Liquidity and covenant headroom, including the use of the available revolver and the status of the Viya covenant waiver and One Communications debt covenants.
- Whether the CARES Act tax benefits and other discrete tax items recur; reported earnings were affected by unusual tax items and non-controlling interests.