Primus Telecommunications Group, Incorporated — Q1 2013 Form 10-Q
Entity note: The supplied filing is for Primus Telecommunications Group, Incorporated (PTGi), not INNOVATE Corp. It reports the three months ended March 31, 2013, compared with the same period in 2012. Financial statement amounts below are in millions of U.S. dollars unless stated otherwise.
Business context
PTGi provided telecommunications and data-center services, primarily in Canada and the United States. Its continuing operations included North America Telecom and BLACKIRON Data; International Carrier Services (ICS) was classified as discontinued and held for sale. The Australian business had been sold in 2012, and comparative periods were recast for discontinued operations.
Key financial results
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue from continuing operations | $60.9 | $68.0 |
| Cost of revenue | $29.5 | $33.5 |
| Gross profit / gross margin | $31.4 / 51.6% | $34.5 / 50.7% |
| Operating income (loss) / margin | $2.2 / 3.7% | $(0.3) / (0.4)% |
| Interest expense | $4.2 | $6.9 |
| Continuing-operations loss | $(1.9) | $(11.4) |
| Net loss attributable to PTGi | $(3.2) | $(6.9) |
| Basic and diluted loss per share | $(0.23) | $(0.50) |
| Operating cash flow | $(1.4) | $18.0 |
| Capital expenditures | $6.5 | $8.1 |
- Revenue fell 10.0% excluding currency effects, primarily because North America Telecom revenue declined 13.9%; BLACKIRON revenue increased 18.2% excluding currency effects.
- SG&A declined to $22.6 million from $27.2 million, and depreciation and amortization declined to $6.6 million from $7.6 million. Lower costs and interest expense helped lift operating results and reduce the net loss.
- Discontinued operations generated a $1.3 million loss in Q1 2013, versus $4.6 million of income in Q1 2012. Their revenue was $58.8 million and $166.7 million, respectively; these amounts are excluded from continuing-operations revenue.
- Cash and cash equivalents were $13.8 million at March 31, down from $23.2 million at December 31, 2012. Current assets were $77.1 million and current liabilities $70.7 million.
- Long-term obligations were $127.1 million net of discount and current portion; principal notes were largely 10% secured notes due 2017, with a smaller 13% note due 2016. Contractual principal and interest payments totalled $184.5 million, including $131.5 million due in 2017.
Material changes, outlook and risks
- Management said existing cash was expected to fund debt service, fixed obligations and operating needs for at least the next 12 months. This is management’s assessment, not a guarantee; Q1 operating cash flow was negative.
- BLACKIRON was sold to Rogers on April 17, 2013 for approximately CAD$200 million, subject to closing adjustments; CAD$20 million was placed in escrow. The sale removes a business that generated $9.7 million, or 15.8%, of Q1 2013 revenue excluding currency effects.
- On May 10, 2013, PTGi agreed to sell its North America Telecom operations to York Capital affiliates for approximately $129 million, subject to adjustments, approvals and other closing conditions. About $126 million was expected at initial closing; the PTI sale was expected later. The transaction was not complete as of the filing, and management expected most closings by Q3 2013, subject to conditions.
- PTGi continued to seek a sale or other disposition of ICS and was evaluating strategic alternatives. The filing provides no ongoing-operations revenue or earnings guidance.
- Key risks include declining traditional voice demand, competition and pricing pressure, ability to generate liquidity and service substantial debt, foreign-exchange exposure, and execution and approval risks for the announced divestitures. Approximately 87% of Q1 revenue was derived outside the U.S.; the company historically did not hedge currency exposures.
- Q1 results included a $0.1 million gain from remeasurement of contingent value rights (CVRs), compared with a $7.2 million loss in Q1 2012. CVRs were a $14.8 million balance-sheet liability at quarter-end. The company also reported $66.2 million of gross unrecognized tax benefits; tax examinations were described as not individually or collectively material.
- After quarter-end, Executive Chairman Peter D. Aquino resigned effective April 30. His disclosed separation benefits included $2.8 million severance, a $0.75 million bonus, $2.87 million of unpaid incentive awards, accelerated vesting and other benefits.
Most important facts for investors to verify
- Confirm the identity of the issuer: this filing is PTGi’s, not INNOVATE Corp.’s.
- Track actual proceeds, adjustments, escrow releases and final closing status for the BLACKIRON and North America Telecom sales, including required approvals and the later PTI closing.
- Assess post-divestiture cash, remaining operating businesses and obligations, and whether liquidity remains adequate given negative operating cash flow and scheduled debt payments.
- Review the status and valuation of the ICS disposal, held-for-sale assets and liabilities, and any related impairment or sale proceeds.
- Monitor debt covenant compliance, refinancing or repayment plans for the 2017 maturities, foreign-exchange effects, and the material tax and indemnification exposures.