ATN International, Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. The unaudited results cover ATN’s wireless and wireline telecommunications operations in the United States, Guyana, Bermuda and the Caribbean. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and position
- Q2 revenue: $175.1 million, down 5.6% year over year. Operating income was $20.1 million, down 12.7%; operating margin was approximately 11.5%, versus 12.4% in Q2 2012. Net income was $11.4 million, down 2.9%, while net income attributable to ATN stockholders was $8.9 million, down 15.9%. Diluted EPS was $0.56, compared with $0.67.
- First-half revenue: $347.9 million, down 5.6%. Operating income was $37.9 million, down 8.0%; operating margin was approximately 10.9%, versus 11.2%. Consolidated net income rose 3.1% to $21.3 million, but net income attributable to ATN stockholders fell 11.2% to $17.6 million. Diluted EPS was $1.12, versus $1.27.
- Revenue mix: For the first half, U.S. wireless retail revenue declined 5.1% to $162.0 million and wholesale revenue declined 16.8% to $82.3 million. International wireless revenue rose 10.5% to $43.3 million; wireline revenue fell 3.2% to $41.4 million; equipment and other revenue increased 11.2% to $18.9 million.
- Cash flow and investment: First-half operating cash flow was $35.4 million, versus $79.6 million in 2012. Capital expenditures were $52.2 million, up from $32.3 million. Investing cash outflow was $50.7 million; financing cash outflow was $10.0 million. Cash declined $25.2 million from year-end to $111.4 million.
- Debt and liquidity: Outstanding debt was $268.2 million at June 30, including $19.6 million current; the net carrying amount of long-term debt was $243.6 million. Cash plus $70.1 million of revolver availability (after letters of credit) provided substantial reported liquidity. Weighted-average borrowing cost, after swaps, was 4.39%. ATN reported compliance with its credit-facility covenants.
- Balance sheet and dividends: Total assets were $892.5 million and total equity was $410.4 million. Dividends declared were $0.25 per share in Q2 and $0.50 per share for the first half.
Material changes versus comparable periods
- U.S. wireless weakness, especially lower roaming traffic in Alltel markets as roaming partners shifted traffic elsewhere, was the principal revenue headwind. Postpaid subscriber declines also reduced retail revenue.
- Lower termination and access costs, sales and marketing expense, and depreciation partly offset revenue pressure. Higher equipment expense reflected smartphone demand, contract renewals and device costs.
- Interest expense fell as debt declined and credit-facility margins decreased. First-half cash from operations fell sharply, primarily due to higher prepaid expenses and other current assets and lower accrued taxes.
- Non-controlling interests’ share of income increased, contributing to the divergence between consolidated net income and income attributable to ATN stockholders.
Outlook, risks and unusual items
- Pending Alltel sale: ATN agreed to sell substantially all assets used in its Alltel business to AT&T for approximately $780 million in cash. The transaction remained subject to customary closing conditions, including FCC approval; the company anticipated completion in the second half of 2013. Alltel represented 59% of Q2 revenue and 19% of Q2 operating income. Results remained in continuing operations pending approval.
- Capital spending: ATN expected 2013 capital expenditures of $80–$90 million, assuming the Alltel sale closed as anticipated. It expected remaining stimulus-project spending of $13.7 million, with $9.6 million expected to be grant-funded, and anticipated completion of the projects by year-end 2013. Management said current cash and credit availability should cover working capital and capital needs for the next twelve months.
- Operating risks: Management cited postpaid churn and subscriber trends, continued roaming-partner traffic shifts and rate pressure, competition, network investment needs, regulatory changes, and the potential loss of Guyana’s exclusive wireline rights. Q2 postpaid churn was 2.59%, versus 2.18% a year earlier; ATN expected further postpaid subscriber declines could reduce future revenue.
- Contingencies and grants: ATN had issued $29.8 million in letters of credit to secure part of approximately $68.8 million in pending Mobility Fund grants. Grant receipt required final USAC and FCC approval; noncompliance or loss of eligibility could allow draws, including penalties. ATN accrued $5.0 million for regulatory, litigation and related matters. A renewed Guyana claim by Caribbean Telecommunications Limited was described as without merit; an earlier U.S. claim asserting more than $200 million had been dismissed.
- Other notable items: First-half results included a $1.1 million gain on disposition of long-lived assets. Interest-rate swaps had a $5.7 million liability fair value; ATN estimated that $3.8 million would be reclassified as increased interest expense through June 30, 2014. A $3.7 million related-party loan was repaid in July 2013.
- Controls: Management concluded disclosure controls were effective at a reasonable-assurance level. The filing also noted prior control-environment issues at Guyana subsidiary GT&T and leadership changes there in 2013.
Important facts for investors to verify
- Whether and when the Alltel sale received FCC approval and closed, and the final proceeds and conditions.
- Trends in U.S. wireless postpaid subscribers, churn, wholesale roaming traffic and margins after the sale announcement.
- Conversion of reported operating cash flow into cash after elevated capital spending, dividends and debt repayments.
- Approval and performance conditions for Mobility Fund grants, and potential exposure under the related letters of credit.
- Developments in Guyana regulatory rights and litigation, including whether the accrued $5.0 million remains adequate.
- Whether management’s $80–$90 million capital-spending outlook and twelve-month liquidity assessment remain achievable.