ATN International, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Comparisons are with Q1 2016 unless stated otherwise. ATN provides telecommunications services in the U.S., Bermuda and the Caribbean, and operates distributed solar power businesses in the U.S. and India.
Financial results and liquidity
- Revenue: $128.1 million, up 42.8% from $89.7 million. Wireline revenue rose to $63.8 million, largely reflecting the inclusion of One Communications and Viya, acquired in 2016. Wireless revenue declined 4.5% to $56.2 million; renewable energy revenue declined to $4.9 million from $5.6 million.
- Profitability: Operating income was $17.8 million, up 12.0%; operating margin was 13.9%, versus 17.7%. Net income was $11.6 million, up 7.3%, while net income attributable to ATN shareholders was $6.9 million, up 12.1%. Diluted EPS was $0.42, compared with $0.38.
- Cash flow: Operating cash flow was $32.1 million, versus $28.3 million. Capital expenditures were $45.7 million, versus $16.4 million. Investing cash outflow was $20.9 million, including $22.6 million of net proceeds from business divestitures; financing cash outflow was $15.6 million. Cash and cash equivalents fell $4.2 million to $265.5 million.
- Liquidity: Cash, cash equivalents, restricted cash and short-term investments totaled approximately $291.1 million at March 31, 2017. This includes $108.5 million held by foreign subsidiaries and permanently invested outside the U.S. Current assets were $376.6 million and current liabilities $161.8 million.
- Debt: Total debt, net of deferred financing costs, was $152.4 million, down from $156.8 million at December 31, 2016. ATN had no borrowings under its $225 million revolving credit facility and was in compliance with stated financial covenants.
- Shareholder returns: Quarterly dividends declared were $0.34 per share, compared with $0.32 in Q1 2016. The $50 million repurchase plan had approximately $49.9 million remaining; reported Q1 share purchases were for employee tax withholding and option-related obligations, not under that plan.
Material changes versus Q1 2016
- International Telecom revenue increased to $79.3 million from $37.9 million, primarily due to One Communications and Viya, which contributed $44.8 million of Q1 2017 revenue with no comparable 2016 contribution. Segment operating income rose to $10.0 million from $7.7 million.
- U.S. Telecom revenue declined 5.2% to $43.8 million. Wholesale wireless revenue fell as lower roaming rates more than offset increased traffic and network sites; U.S. Telecom operating income was broadly flat at $16.6 million.
- Renewable Energy revenue declined 10.7% to $5.0 million, but segment operating income increased to $1.4 million from $0.1 million, partly because Q1 2016 included acquisition-related costs. India operations began generating revenue in Q1 2017.
- Operating expenses increased 49.5% to $110.3 million, including higher depreciation and amortization and costs associated with acquired businesses. Interest expense rose to $2.3 million from $0.8 million, largely reflecting acquisition-related debt.
- On March 8, 2017, ATN sold its Sovernet New England and New York operations for stated consideration of $25.9 million. The transaction resulted in a $2.4 million loss, including transaction costs, a $0.5 million loss on deconsolidation, and a separately reported $1.1 million loss on disposition of long-lived assets.
Outlook, risks and unusual items
- Management expects 2017 telecom capital expenditures of $95–115 million and renewable energy capital expenditures of $40–60 million, subject to available financing and its terms. Q1 capital expenditures were $45.7 million.
- ATN was notified after quarter-end that it was the high bidder for certain 600 MHz licenses and expected to pay the remaining $36.8 million during Q2 2017. The $10.9 million auction deposit was already recorded as an asset at March 31.
- Management’s stated liquidity assessment was that cash, short-term investments and credit-facility availability would meet working-capital and capital-expenditure needs for at least 12 months. It also identified potential external financing needs for acquisitions and India solar development. The company’s India project target was at least 250 MWp through the end of 2018, conditional on obtaining necessary financing, among other factors.
- Key risks include the possible introduction of competition in Guyana, where regulatory implementation and negotiations over GTT’s exclusivity rights remained uncertain; currency fluctuations, including a $0.6 million Guyana-dollar transaction loss in Q1; and integration and execution risks related to acquired businesses and network upgrades.
- GTT disputed tax assessments totaling $44.1 million; ATN stated that an adverse outcome was probable and had accrued $5.0 million. The filing says the potential liability would be partly offset by amounts needed to preserve a stated minimum return on investment. ATN also had approximately $5.9 million of letters of credit supporting Mobility Fund obligations; USAC could draw on them if requirements were not met.
- Other notable items included a 21.3% effective tax rate, versus 30.0% in Q1 2016, partly reflecting a tax benefit related to capital losses on business sales; and a $0.5 million loss on deconsolidation. The filing provides no earnings guidance.
Important facts for investors to verify
- How much of reported revenue and operating income growth reflects the full-quarter contribution and integration costs of One Communications and Viya, rather than organic growth.
- Whether lower wholesale roaming rates and potential Guyana regulatory changes further pressure telecom revenue, margins or cash generation.
- Funding, timing and expected returns for planned 2017 capital expenditures, the 600 MHz license payment and the India solar development target.
- Progress and possible financial exposure concerning GTT’s $44.1 million disputed tax assessments, Guyana exclusivity and Mobility Fund compliance.
- Availability and practical accessibility of reported liquidity, considering restricted cash, permanently invested foreign cash, debt covenants and acquisition or investment needs.