Filing identity and reporting period
The supplied filing is Primus Telecommunications Group, Incorporated’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011—not a filing identified as INNOVATE Corp. Investors should verify the issuer and filing before relying on this summary.
Primus provided voice, wireless, Internet, VoIP, data and data-center services, primarily in Australia, Canada, the United States and Brazil. Results include Arbinet from its February 28, 2011 acquisition; 2010 European retail operations are presented as discontinued operations.
Financial performance
Amounts are in millions of U.S. dollars unless noted.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $282.5 | $194.6 | $506.2 | $387.6 |
| Gross profit / margin | $77.0 / 27.2% | $70.6 / 36.3% | $148.4 / 29.3% | $141.7 / 36.5% |
| Operating income (loss) | $0.5 | $4.8 | $(11.8) | $7.8 |
| Net income (loss) attributable to Primus | $(6.3) | $(13.0) | $(25.6) | $(14.0) |
| Operating cash flow | Not separately reported | Not separately reported | $15.0 | $16.5 |
| Capital expenditures | Not separately reported | Not separately reported | $13.9 | $10.7 |
Q2 basic and diluted loss per share was $0.48, versus $1.34 in Q2 2010; six-month loss per share was $2.09 versus $1.45. Interest expense was $7.9 million for Q2 and $16.6 million for the first half, compared with $8.7 million and $18.1 million, respectively.
Liquidity, debt and balance sheet
At June 30, 2011, cash and cash equivalents were $31.5 million, restricted cash $12.5 million, current assets $149.2 million and current liabilities $163.7 million, a $14.5 million working-capital deficit. Total assets were $549.5 million and total liabilities $440.3 million. Debt obligations were $221.2 million, including $130.0 million of 13% senior secured notes and $90.0 million of 14.25% senior subordinated secured notes. Cash declined $10.1 million in the first half.
Management said existing cash was expected to fund debt service, fixed obligations and operations for at least the next twelve months. At June 30, contractual obligations included $30.3 million of purchase commitments and $80.4 million of operating lease payments. The filing’s debt-payment schedule included principal and interest and should not be confused with debt carrying value.
Material changes and unusual items
- Revenue rose 45% in Q2 and 31% in the first half, but growth was substantially acquisition- and currency-driven. On a constant-currency basis, revenue increased 33% in Q2 and 21% in the first half.
- Arbinet contributed $73.1 million of Q2 revenue and $99.9 million from acquisition through June 30. International Carrier Services revenue expanded sharply, while Australia and U.S. retail revenue faced underlying declines.
- Lower-margin Arbinet carrier traffic contributed to cost of revenue increasing to 72.8% of Q2 revenue from 63.7% a year earlier; first-half cost of revenue was 70.7% versus 63.5%.
- Primus recorded a $14.7 million goodwill impairment in Q1 related to Arbinet. Its purchase-price allocation was preliminary and subject to adjustment.
- Foreign-currency transaction gains were $2.4 million in Q2 and $6.4 million in the first half, versus losses of $9.6 million and $3.8 million in the comparable 2010 periods.
- Share-based compensation expense increased to $3.4 million in the first half from $0.2 million. Shares issued for the Arbinet acquisition contributed to the increase in weighted-average shares.
Outlook, risks and contingencies
Management emphasized growing broadband, IP voice, local, wireless, data and data-center services, while using traditional voice services to generate cash. The filing provides no specific numerical earnings or revenue guidance. Management cited declining long-distance usage, product substitution, competition, economic conditions, pricing and customer migration costs as challenges.
Approximately 80% of first-half revenue was generated outside the United States. Primus said currency movements could materially affect reported results and disclosed that it historically had not hedged this exposure. Other risks include integration and expected synergies from Arbinet, debt service and refinancing, and uncertainty in estimates of acquired asset values.
Subsequent to quarter-end, Primus issued $240.2 million principal amount of 10% senior secured notes due 2017 in an exchange and consent transaction. The transaction extended maturities and reduced the stated coupon, but the new notes are secured by substantially all assets of the issuers and guarantors. After the transaction, $2.4 million of 13% notes remained, with most restrictive covenants removed and collateral released; the remaining 14.25% notes were redeemed. On August 9, the board authorized up to $15 million in share repurchases. On August 10, Globility agreed to sell Canadian wireless spectrum assets for approximately $15 million, subject to regulatory approval.
Primus disclosed $88.4 million of gross unrecognized tax benefits and said use of net operating losses would be subject to an annual limitation of approximately $1.6 million following an ownership change. Management did not believe ordinary-course legal proceedings would have a material adverse effect, while acknowledging uncertain outcomes. Disclosure controls were reported ineffective because of a material weakness in income-tax accounting; no material change in internal control was reported during the quarter.
Important facts for investors to verify
- Confirm the filing belongs to Primus Telecommunications Group, not INNOVATE Corp., and verify the applicable issuer and reporting period.
- Review the completed debt exchange’s final terms, collateral, covenant package, remaining debt and subsequent interest and liquidity requirements.
- Assess whether Arbinet integration can improve performance despite the acquired business’s lower margins and the recorded goodwill impairment.
- Track cash generation, working-capital needs, customer receivables and the company’s ability to meet debt and contractual obligations.
- Monitor remediation of the income-tax control weakness, tax examinations, unrecognized tax benefits and restrictions on tax-loss utilization.
- Consider foreign-exchange exposure and whether operating trends in Australia, U.S. retail and carrier services support reported revenue growth.