ATN International, Inc. (formerly Atlantic Tele-Network, Inc.) — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Financial statements are unaudited. Unless noted, amounts are in U.S. dollars and millions. The Alltel U.S. retail wireless business is reported as discontinued operations.
Business context and key financial metrics
ATN provides wireless and wireline services in the United States, Guyana, Bermuda and the Caribbean. Following the Alltel sale, continuing operations comprise U.S. wholesale wireless, international wireless and integrated telephony, and U.S. wireline.
| Metric | Q3 2012 | Q3 2013 | Nine months 2012 | Nine months 2013 |
|---|---|---|---|---|
| Revenue from continuing operations | $73.3 | $79.4 | $207.9 | $215.8 |
| Operating income | $16.2 | $20.0 | $35.5 | $48.0 |
| Operating margin | 22.1% | 25.3% | 17.1% | 22.3% |
| Income from continuing operations | $9.1 | $4.5 | $15.3 | $18.7 |
| Net income attributable to ATN shareholders | $16.0 | $276.2 | $35.8 | $293.9 |
| Diluted earnings per share | $1.02 | $17.43 | $2.29 | $18.61 |
Q3 2013 revenue rose 8.2% year over year; operating income increased 23.9%. Revenue growth reflected U.S. wholesale wireless data traffic and international wireless subscriber, retail and roaming growth. Nine-month wireline revenue declined 1.8%, mainly from lower local landline and international calling revenue in Guyana. The operating margin figures above are calculated from reported revenue and operating income.
Reported net income includes the Alltel sale gain: $305.2 million after tax, or approximately $276.5 million attributable to ATN shareholders after non-controlling interests. Excluding that gain, continuing-operations income was $4.5 million in Q3 and $18.7 million for the nine-month period. Q3 continuing income fell 50.3% year over year, in part because of debt-extinguishment costs and a derivative loss.
Cash flow, debt and liquidity
- At September 30, cash and cash equivalents were $594.3 million; restricted cash was $78.0 million, split between current and long-term assets. Total cash, cash equivalents and restricted cash were approximately $672.3 million.
- Long-term debt was fully repaid on September 20; the balance sheet reported no debt at quarter-end. The $100 million revolving facility remained available subject to its terms; approximately $29.9 million of capacity was used for Mobility Fund letters of credit, with no revolver draw reported.
- Nine-month operating cash flow was $84.5 million, including $58.8 million from continuing operations and $25.8 million from discontinued operations. Capital expenditures for continuing operations were $55.2 million, compared with $28.6 million in the prior-year period.
- Investing activities provided $657.9 million, principally reflecting the Alltel sale. Financing activities used $284.7 million, including $272.1 million of debt repayments. Management said cash, internally generated funds and credit availability were expected to meet working-capital and capital needs for at least 12 months.
Material changes, outlook and risks
- Alltel divestiture: ATN completed the sale to AT&T Mobility on September 20 for adjusted proceeds of approximately $797.4 million. This included $78.0 million in indemnity escrow, expected to be released in stages over 18 months. The sale generated a $305.2 million after-tax gain; transaction-related charges were $2.6 million in Q3. Alltel’s operations generated $88.0 million of revenue and a $2.0 million net loss in Q3 before the sale.
- Debt and derivatives: Repayment of term loans accelerated amortization of financing costs, including $4.7 million of debt discounts, contributing to Q3 interest expense. Repayment also made interest-rate hedges ineffective, resulting in a $5.7 million loss. ATN terminated the derivatives on October 2 and paid $5.4 million.
- Investment plans: Management forecast 2013 continuing-operations capital expenditures of $70–$80 million. It expected stimulus-funded network projects to be completed by year-end 2013; remaining project capital expenditures were estimated at $9.5 million, with $5.6 million expected from grants.
- Wireless and market outlook: Management expected data volume to grow with network expansion and smartphone usage, while cautioning that lower roaming rates, declining voice traffic or carrier decisions to build their own networks could offset revenue gains. International prepaid customers and seasonal wholesale roaming revenue can shift or fluctuate; competition remains strong.
- Regulatory, legal and funding exposure: Proposed Guyana telecommunications legislation could end GT&T’s exclusive international long-distance rights and pressure wireline revenue. A Guyana claim by Caribbean Telecommunications Limited seeks more than $200 million; ATN considers it without merit. The company had accrued $5.0 million for identified regulatory, litigation and related matters. Failure to meet Mobility Fund requirements could expose letters of credit to draw, penalties or loss of eligibility. ATN paid $4.6 million in penalties after the Alltel sale and expected reimbursement from AT&T.
- Management cited competition, roaming arrangements, foreign-market political and economic risks, regulatory and license changes, technology shifts, network capacity, severe weather, suppliers and continued access to capital as risks. It gave no specific revenue or earnings guidance in this filing.
Important facts for investors to verify
- Final Alltel working-capital settlement, escrow release timetable and AT&T reimbursement of the $4.6 million Mobility Fund penalty.
- Continuing-business cash generation and profitability after removing the sale gain and Alltel’s discontinued results.
- Use and availability of the revolving credit facility, including letters of credit and compliance with covenants.
- Delivery, funding and completion of the 2013 capital and stimulus projects, and whether management’s $70–$80 million capex forecast was achieved.
- Developments in Guyana’s proposed telecommunications legislation and the CTL litigation, including any change to the recorded contingency accrual.