USA Mobility, Inc. — Q3 2011 Form 10-Q
Entity context: The filing is for USA Mobility, Inc., the company that later became associated with Spok Holdings. It covers the quarter and nine months ended September 30, 2011. Amounts below are in millions of dollars unless otherwise stated; interim financial statements are unaudited.
Business context and reporting period
USA Mobility provided wireless messaging and mobile services and, following its March 3, 2011 acquisition of Amcom Software, mission-critical unified communications software. Amcom’s results are included from the acquisition date, so reported 2011 results are not directly comparable with 2010 without considering the acquisition. The company reported Wireless and Software as separate segments.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $61.5 | $56.7 | $184.0 | $178.6 |
| Operating income | $16.2 | $16.1 | $45.7 | $44.5 |
| Net income | $10.4 | $15.4 | $69.7 | $37.4 |
| Operating margin | 26.3% | 28.4% | 24.9% | 24.9% |
| Diluted EPS | $0.46 | $0.69 | $3.10 | $1.65 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $60.8 | $61.7 |
For the nine months, company-defined operating cash flow (EBITDA less capital expenditures) was $55.5 million, down from $60.4 million. Capital expenditures were $5.1 million, compared with $4.0 million. Net cash used in investing was $131.8 million, primarily reflecting $134.2 million of acquisition spending, partly offset by $7.5 million from a license sale. Financing activities used $17.7 million, including $16.6 million of dividends and $23.7 million of debt repayments, offset partly by new borrowings.
At September 30, cash was $40.6 million, current assets $83.8 million, and current liabilities $59.0 million. Total debt was $28.3 million, comprising $11.3 million current and $17.0 million long-term. Debt carried a variable rate of 5.25%; the company reported compliance with its financial covenants. Cash declined from $129.2 million at year-end, principally to fund the Amcom acquisition. The company declared dividends of $0.25 per share for Q3 and declared another $0.25 quarterly dividend after quarter-end.
Material changes versus comparable periods
- Q3 revenue rose 8.4%, but wireless revenue fell 14.4% to $48.5 million. Amcom contributed $12.9 million of Q3 revenue; it had no comparable 2010 contribution.
- Wireless subscriber units declined to 1.721 million from 1.950 million a year earlier. Consolidated wireless ARPU was $8.59, down from $8.85; management attributed revenue pressure to subscriber losses and customer mix.
- Q3 operating income was nearly flat, while net income declined 32% as 2010 included $2.3 million of other income and Q3 2011 had higher interest expense and income tax expense.
- Nine-month net income increased to $69.7 million, principally reflecting a $39.5 million reduction in the deferred-tax valuation allowance and a $7.5 million gain on sale of narrowband PCS licenses. These items materially affect the comparison with 2010.
- Software generated $30.8 million of revenue from March 3 through September 30, but reported an operating loss of $0.5 million for that period. Its Q3 renewal rate for maintenance contracts was 99.6%; reported maintenance revenue was reduced by acquisition accounting adjustments.
- Wireless cost reductions included lower site rent and telecommunications costs as networks were consolidated. Active transmitters fell 15.1% year over year to 5,061. The company reduced wireless headcount and anticipated further staffing reductions.
Outlook, risks, and unusual items
- Management expected messaging demand and wireless revenue to continue declining. It said price increases could mitigate, but not fully offset, declines in ARPU and revenue.
- Management believed operating cash flow and cash on hand would meet foreseeable cash needs, while noting it could cut capital spending or dividends, sell assets, or seek financing if funding proved insufficient.
- Network consolidation could disrupt service and reduce revenue; management also cited risks from faster-than-expected messaging declines and failure to integrate Amcom or realize acquisition benefits.
- The Amcom acquisition consideration was approximately $141.6 million, funded mainly with cash and debt. Purchase accounting remained preliminary, including approximately $131 million of goodwill and $43.5 million of acquired intangible assets. The company recorded $2.7 million in transaction costs during the nine months.
- Variable-rate borrowings expose the company to interest-rate risk; it had no interest-rate derivatives. Debt was secured by substantially all company assets. The company temporarily suspended share repurchases while prioritizing debt repayment.
- The company reported no material outstanding lawsuits and no material changes to previously reported risk factors. Management concluded disclosure controls were effective; acquisition-related controls had been added.
Most important facts for investors to verify
- Whether wireless subscriber, ARPU, and revenue declines continue, and how much software growth offsets them.
- Whether Amcom integration improves segment profitability and produces expected benefits; verify final purchase-price allocation and goodwill assumptions.
- How much of reported nine-month earnings came from the $39.5 million tax valuation-allowance release and $7.5 million license-sale gain, versus recurring operations.
- Debt repayment progress, variable-rate exposure, covenant headroom, and the sustainability of quarterly dividends given the reduced cash balance.
- Whether network consolidation and further staffing reductions achieve cost savings without materially disrupting service or revenue.