ATN International, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. ATN provides wireless and wireline telecommunications services in the U.S., Caribbean and Bermuda, and operates solar energy projects in the U.S. and India. Financial figures below are in U.S. dollars; millions unless stated otherwise.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $117.8 | $123.2 | $222.3 | $251.4 |
| Operating income | $15.8 | $15.8 | $20.0 | $33.6 |
| Net income | $10.8 | $10.9 | $8.5 | $22.5 |
| Net income attributable to ATN shareholders | $7.2 | $5.9 | $1.7 | $12.7 |
| Diluted earnings per share | $0.45 | $0.36 | $0.10 | $0.78 |
| Operating margin | 13.4% | 12.8% | 9.0% | 13.3% |
Q2 revenue declined 4.4% year over year, while operating income was nearly flat. Six-month revenue fell 11.6%, and operating income declined 40.5%. Q2 shareholder earnings rose despite slightly lower consolidated net income, largely because income allocated to non-controlling interests decreased. The six-month effective tax rate was 41.5%, versus 20.3% a year earlier; management cited jurisdictional income mix and discrete tax items.
Q2 revenue by line: wireless $50.5 million, down 10.7%; wireline $61.3 million, down 0.9%; and renewable energy $6.0 million, up 23.0%. U.S. Telecom weakness reflected lower wholesale roaming rates and contractual revenue caps. India solar generation supported renewable-energy growth.
Cash flow, liquidity and debt
- Six-month operating cash flow was $46.0 million, down from $65.5 million. Investing used $58.8 million and financing used $26.8 million.
- Capital expenditures were $107.2 million, including $66.7 million for U.S. Virgin Islands hurricane restoration. The company received $34.6 million of hurricane insurance proceeds and $5.4 million of government grants during the period.
- Cash, cash equivalents and restricted cash totaled $180.1 million at June 30, down from $219.9 million at year-end. Cash and cash equivalents alone were $167.1 million. Short-term investments were $1.6 million.
- Total debt, net of deferred financing costs, was approximately $151.0 million, down from $155.8 million at December 31, 2017. The $225 million revolving credit facility was undrawn; ATN reported compliance with debt covenants.
- ATN said available cash, investments and credit-facility capacity should cover working capital and capital needs for at least 12 months. It reported $23.6 million of variable-rate debt and considered a 10% rate increase immaterial to its financial statements.
Material changes, outlook and risks
- Hurricane recovery: Hurricanes Irma and Maria severely damaged the U.S. Virgin Islands networks. Restoration spending enabled reconnection of about two-thirds of households and three-quarters of businesses by quarter-end. ATN expected substantial completion of restoration by the end of Q3 2018, but cautioned that revenue recovery could take much longer because of population shifts, local economic effects and customer demand.
- Capital spending outlook: Management estimated 2018 telecom capital expenditures of about $80 million excluding hurricane restoration, with restoration and resiliency costs of about $75 million. It expected another $5–$7 million to complete the initial India solar construction phase; further India expansion depends substantially on local financing.
- Operating outlook: ATN expected U.S. wholesale wireless revenue and margins to continue declining under revised roaming contracts and revenue caps; it did not expect higher traffic or more sites to materially offset the reductions. International wireline recovery remained uncertain, and management identified potential continued video and Guyana long-distance declines. The filing gives no consolidated revenue or earnings guidance.
- Funding and contingencies: The FCC authorized approximately $7.3 million of additional hurricane restoration funding after quarter-end. A proposed Connect USVI support program could alter future subsidies, but allocation and outcome were uncertain. Tribal-bidding funds are subject to buildout and coverage requirements and potential clawback.
- Guyana exposure: Government legislation could introduce competition and affect GT&T’s exclusive license rights; implementation and the outcome of negotiations were uncertain. Disputed tax assessments total $44.1 million, of which ATN accrued $5.0 million. The company also disclosed other pending Guyana disputes, including spectrum-fee and litigation matters.
- Unusual and subsequent items: Q2 included a $2.3 million gain on disposal of long-lived assets, principally wireless licenses, and $0.2 million of hurricane-related costs. In July, ATN completed a sale of about 100 cell sites and expected to record an approximately $15 million gain in Q3, with no additional cash proceeds at closing. The FCC’s additional $7.3 million restoration authorization was announced August 7.
- Other risks: Foreign-currency losses, tax-estimate uncertainty, competition, regulation, natural disasters, and access to capital are among the risks discussed. A Guyana subsidiary paid a $52.0 million dividend in Q1, including $10.4 million to its minority shareholder.
Important facts for investors to verify
- Progress toward U.S. Virgin Islands network restoration, customer reconnections and revenue recovery, including the timing and terms of additional FCC support.
- Whether declining U.S. wholesale roaming revenue and margins stabilize, and whether international operations recover without temporary subsidies.
- Actual 2018 capital spending and cash generation relative to the stated telecom, hurricane-rebuild and India-project estimates.
- The final Q3 accounting and cash implications of the cell-site sale, and whether the expected gain is realized as estimated.
- Developments in Guyana’s telecom licensing and the $44.1 million disputed tax assessments, compared with the $5.0 million accrual.
- Potential tax adjustments, including the transition-tax analysis, and the effect of the elevated six-month effective tax rate on future earnings.