ATN International, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. Financial amounts below are in U.S. dollars. Comparisons are affected by the April 2010 Alltel acquisition, which means 2010 included only part of the acquired business’s operations.
Business context
ATN provides wireless and wireline telecommunications services in the United States, Guyana, Bermuda and other Caribbean markets. U.S. Wireless generated about 79% of consolidated revenue in Q2. During Q2 2011, ATN completed its Bermuda merger with M3 Wireless and established a Navajo Nation wireless joint venture.
Key financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $193.8m | $164.7m | $381.9m | $219.5m |
| Operating income | $6.3m | $7.8m | $16.7m | $15.2m |
| Net income attributable to ATN shareholders | $1.8m | $24.8m | $6.3m | $28.8m |
| Diluted earnings per share | $0.12 | $1.60 | $0.41 | $1.86 |
| Operating margin | 3.2% | 4.7% | 4.4% | 6.9% |
Revenue rose 17.6% in Q2 and 74.0% for the first half, principally reflecting a full quarter/six months of Alltel operations in 2011 versus partial-period contribution in 2010, along with growth in international wireless. Operating income grew 9.7% for the first half but fell 19.3% in Q2. The 2010 comparisons include a one-time $27.0m after-tax bargain-purchase gain from Alltel; excluding that unusual item, reported net income comparisons are substantially less favorable in 2011. Higher depreciation, operating costs and interest expense also weighed on earnings.
- Revenue mix and trends: Q2 U.S. Wireless retail revenue was $95.4m and wholesale revenue $51.9m. International wireless revenue was $18.7m; wireline revenue declined 10.1% to $20.9m. Wholesale roaming is exposed to rate reductions and carrier network build-outs.
- Cash flow: First-half operating cash flow was $43.0m, versus $60.7m in 2010. Capital expenditures were $45.4m versus $52.0m. Cash and cash equivalents increased by $9.4m to $46.8m; investing used $40.9m and financing provided $7.3m.
- Debt and liquidity: June 30 gross debt was $311.9m, including $258.2m of term loans, $47.1m drawn on the revolver and $6.6m due to an affiliate. Balance-sheet debt carrying amount, net of discount, was $307.5m, of which $289.7m was long-term. The company reported $46.8m cash and said available cash and credit were expected to meet working-capital and capital needs for at least 12 months. It was in compliance with amended financial covenants at quarter-end.
- Other balance-sheet items: Total assets were $863.8m and total equity $346.1m at June 30, 2011. ATN declared dividends of $0.22 per share for Q2; first-half dividends were $0.44 per share.
Outlook, commentary and risks
- Management expected 2011 capital expenditures of $105m–$120m, including $70m–$80m for U.S. Wireless. First-half spending was $45.4m.
- ATN completed the Alltel customer-system transition in late July 2011. Management expected U.S. retail subscriber attrition to end late in Q3, with modest subscriber growth and further churn improvement through year-end. U.S. retail subscribers were 639,000 at June 30, down from 807,000 a year earlier; Q2 churn improved to 3.73% from 4.29% in Q1.
- Management anticipated continued pressure on wholesale roaming rates and possible further revenue losses as Verizon and AT&T build or acquire overlapping networks. Wireline revenue in Guyana also faced illegal bypass activity, lower usage and potential competition from proposed licensing changes.
- Guyana license contingency: On August 4, 2011, the Guyanese government introduced legislation that could terminate ATN’s exclusive fixed-line and international services license. The government expected adoption during Q3, but timing and outcome were uncertain. ATN said it believed it could be entitled to compensation but could not assure recovery or prevent unilateral action.
- ATN had accrued $5.0m for certain regulatory, litigation and related matters identified in its 2010 Form 10-K. It also disclosed ongoing labor-contract negotiations in Guyana, which management did not expect to materially affect the financial statements.
- Interest-rate swaps covered $143.0m of debt; the remaining $168.9m was exposed to variable rates. The swaps had an $8.7m liability fair value, and ATN estimated another $4.0m would be reclassified to interest expense through June 30, 2012.
Important facts for investors to verify
- Whether Guyana’s proposed legislation is enacted and how it affects ATN’s exclusive license, revenue, and potential compensation claims.
- Whether U.S. wireless subscriber losses stabilize after the Alltel transition, and whether churn and subscriber growth meet management’s expectations.
- The extent and pace of wholesale roaming rate reductions and network overlap losses, and whether growth elsewhere offsets them.
- Whether operating cash flow supports the $105m–$120m capital-spending plan, dividends and debt service without greater borrowing.
- Progress on debt repayment, covenant headroom and interest costs following the June 2011 covenant amendments.