ATN International, Inc. (formerly Atlantic Tele-Network, Inc.) — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also provides unaudited fourth-quarter results. Unless stated otherwise, financial amounts below are in U.S. dollars.
Business context
ATN provided wireless and wireline telecommunications services in the United States, Guyana, Bermuda and other Caribbean markets. Its businesses included U.S. retail wireless under the Alltel brand, U.S. wholesale roaming, island wireless, Guyana integrated telephone services and U.S. wireline services. The company signed an agreement in January 2013 to sell certain Alltel assets to AT&T; the transaction had not closed at the filing date.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $741.4 million | $759.2 million |
| Operating income | $99.5 million | $55.3 million |
| Operating margin | 13.4% | 7.3% |
| Net income attributable to ATN stockholders | $48.9 million | $21.8 million |
| Diluted EPS | $3.13 | $1.41 |
| Cash from operating activities | $187.5 million | $132.6 million |
| Capital expenditures | $77.4 million | $101.4 million |
| Cash and cash equivalents at year-end | $136.6 million | $48.7 million |
| Total debt at year-end | $272.1 million | $286.0 million |
Operating cash flow less capital expenditures was approximately $110.1 million, compared with $31.2 million in 2011. The company reported working capital of $103.5 million, up from $38.1 million. Year-end revolver availability was $99.9 million, net of a $0.1 million letter of credit; the company reported compliance with its credit-facility covenants. Net debt, calculated as total debt less cash, was approximately $135.4 million.
Interest expense declined to $14.1 million from $17.4 million. The effective tax rate was 42%, versus 48%. The annual dividend was $0.96 per share, up from $0.90.
Fourth quarter: Revenue was $184.4 million, operating income $28.6 million, net income attributable to ATN stockholders $13.1 million and diluted EPS $0.84. In fourth-quarter 2011, the corresponding figures were $182.9 million, $10.9 million, $4.1 million and $0.27.
Material changes versus 2011
- Revenue decreased 2.4%, mainly as U.S. retail wireless revenue fell 8.8% to $337.8 million. The decline reflected post-acquisition subscriber challenges and a mix shift from higher-revenue postpaid customers.
- U.S. wholesale revenue was essentially flat at $201.9 million. International wireless revenue rose 13.0% to $81.6 million, largely due to the Bermuda merger and subscriber growth in the U.S. Virgin Islands; wireline revenue was nearly unchanged at $84.8 million.
- Operating income increased 80.0% as total operating expenses fell 8.8%. Termination and access fees, sales and marketing, and general and administrative costs decreased, including from the completion of the Alltel systems transition. Equipment expense rose 24.9% with higher smartphone sales and subscriber additions.
- Results included an $11.6 million gain on the sale of U.S. wholesale network assets and spectrum, sold for $15.6 million, and a $3.4 million non-cash impairment of an Island Wireless telecommunications license. The filing says no goodwill impairment was recorded in 2012; a $2.4 million goodwill impairment was recorded in 2011.
- Cash from operations increased by $54.9 million, reflecting higher earnings, an $11.5 million income-tax refund and working-capital changes. Capital spending decreased, in part because some projects were delayed to 2013.
Outlook, risks and contingencies
- Alltel sale: The proposed all-cash sale was valued at approximately $780 million. Alltel generated $464.4 million, or 63% of 2012 consolidated revenue, and $41.4 million, or 42% of operating income. Closing remained subject to customary conditions, including FCC approval; ATN expected completion in the second half of 2013. If completed, the sale would materially reduce revenue and wholesale business tied to the retail network and increase the relative importance of Guyana and Caribbean operations.
- Capital spending: ATN forecast 2013 capital expenditures of $95 million to $105 million, assuming the Alltel sale proceeded as anticipated. It expected to fund spending primarily from operating cash flow and credit-facility borrowings.
- Wireless operations: U.S. retail subscribers totaled approximately 588,000 at year-end, including 425,000 postpaid and 163,000 prepaid. Total subscribers rose modestly, but postpaid subscribers declined; management cited handset availability, customer churn and competition. U.S. retail churn improved to 3.42% from 3.89%, though management warned contract expirations could increase churn.
- Wholesale exposure: Four national carriers generated a substantial portion of wholesale revenue. Carrier network expansion, lower roaming rates, lower voice traffic or reduced roaming on ATN networks could pressure revenue. A network sale in December 2012 generated approximately $16 million in wholesale revenue in 2012 that ATN said would be difficult to replace in the near term.
- Guyana: Government draft laws could end GT&T’s claimed exclusive rights to domestic fixed and international voice and data services. The validity and scope of those rights were also being contested in court. ATN could not predict the outcome and acknowledged it might not prevail in enforcing its rights.
- Legal and tax matters: GT&T faced disputed Guyana tax assessments totaling $36.8 million; the company believed the government would owe reimbursement under its agreement if GT&T were required to pay. The filing estimated approximately $39.9 million of contingencies, most not accrued because an adverse outcome was not considered probable; $5.0 million was accrued. Outcomes and timing remain uncertain.
- Funding and regulation: High-cost Universal Service Fund support was being phased down. ATN subsidiaries provisionally won approximately $68 million in Mobility Fund support, subject to final approval and conditions, including network construction obligations and letters of credit. Regulatory change, competition, technology investment needs and natural disasters were also cited as risks.
- Controls and audit: The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. Management reported effective controls overall, while also disclosing policy violations and control-environment problems at GT&T and steps to strengthen oversight, including management changes.
Most important facts for investors to verify
- Whether the AT&T transaction closed, its final proceeds and conditions, and the resulting revenue, earnings and debt profile.
- Whether the decline in U.S. postpaid subscribers and the pressure on wholesale roaming revenue continued after 2012.
- The status and financial implications of Guyana’s proposed telecom reforms, license disputes and GT&T tax assessments.
- Final approval, receipt and use of Mobility Fund grants, and compliance with associated build-out requirements.
- The sustainability of 2012 cash generation and earnings, including the effects of asset-sale gains, tax refunds and deferred capital projects.
- Progress on remediation of GT&T’s control environment and the company’s ability to meet 2013 capital-spending plans while maintaining liquidity and dividend capacity.