ATN International, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Financial statements are unaudited; amounts below are in U.S. dollars. Unless noted otherwise, financial figures are in millions.
Business context
ATN provides wireless and wireline telecommunications services in the United States, Bermuda and the Caribbean, and develops and operates distributed solar power projects in the United States and India. Its 2016 reportable segments are U.S. Telecom, International Telecom and Renewable Energy. Results include KeyTech from May 3 and Vibrant Energy from April 7; the July 1 Innovative acquisition is subsequent to the reporting period.
Key financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $100.0 | $90.3 | $189.7 | $175.7 |
| Operating income | $1.9 | $28.7 | $17.8 | $47.9 |
| Operating margin | 1.9% | 31.8% | 9.4% | 27.3% |
| Net income (loss) attributable to ATN shareholders | $(3.1) | $9.5 | $3.0 | $6.2 |
| Diluted earnings (loss) per share | $(0.19) | $0.59 | $0.19 | $0.38 |
| Cash from operating activities | Not separately presented for quarter | $50.7 | $81.1 |
Q2 revenue increased 10.7%, while operating income fell 93.3%. For the six-month period, revenue rose 8.0%, but operating income declined 62.8%. Wireless revenue decreased 5.4% in Q2, while wireline revenue rose 53.8%, largely due to KeyTech. Renewable energy revenue increased 5.1% in Q2. The filing does not provide a comparable quarterly cash-flow figure in the supplied text.
Q2 operating results included $10.4 million of transaction charges, $1.8 million of restructuring charges, an $11.1 million impairment and a $7.3 million KeyTech bargain-purchase gain. The impairment included $7.5 million of goodwill and $3.6 million of other long-lived assets. The reported Q2 effective tax rate was approximately 278%, reflecting charges with no tax benefit and other factors.
Cash, debt and liquidity
- Cash and cash equivalents were $352.3 million at June 30, down from $392.0 million at December 31, 2015. Cash, cash equivalents and restricted cash totaled approximately $358.8 million; $93.1 million was held by foreign subsidiaries and described as permanently invested abroad.
- Total debt was approximately $63.5 million, compared with $32.9 million at year-end. ATN had no borrowings under its $225 million revolving credit facility and approximately $10.6 million of outstanding letters of credit; it reported compliance with credit covenants.
- Operating cash flow was $50.7 million. Investing activities used $91.2 million, including $42.7 million of capital expenditures, $29.7 million for acquisitions net of acquired cash, $10.9 million for spectrum licenses and intangible assets, and $7.0 million to acquire a non-controlling interest. Financing activities provided $0.7 million. Cash declined $39.8 million during the half-year.
- Management said cash on hand and credit availability should meet working-capital and capital-expenditure needs for at least the next 12 months.
Material changes, outlook and notable events
- KeyTech: ATN acquired a 51% interest for approximately $41.6 million cash, contributed its BDC interest and consolidated KeyTech from May 3. The transaction added $14.0 million of six-month revenue and included assumed debt. A $7.3 million bargain-purchase gain was recorded.
- Vibrant Energy: ATN acquired an India solar development portfolio for $6.2 million consideration. The business contributed $0.1 million of revenue through June 30. Management targeted at least 250 MWp of projects through 2018 and expected revenue generation to begin in early 2017.
- Innovative: On July 1, ATN completed the approximately $145 million acquisition, funded with $85 million cash and a $60 million loan from an affiliate of the seller. Results will be included in International Telecom after the quarter.
- Capital spending outlook for 2016 was $80–$95 million for combined U.S. and International Telecom and $40–$50 million for Renewable Energy. No full-year earnings or revenue guidance is stated in the supplied filing text.
- Management expected U.S. wholesale wireless revenue and margins to face pressure from lower roaming rates, partly offset by higher data traffic. It expected wireline revenue to increase later in 2016, particularly with acquisitions, and solar revenue from the existing portfolio to remain fairly consistent.
- On August 8, ATN announced an agreement to sell most of its Northeast U.S. Wireline business, subject to regulatory approvals and expected to close in early 2017. ATN expected those wireline revenues to decline significantly after closing; the impairment recorded in Q2 reflected the business review and sale-related developments.
Risks and contingencies
- Guyana enacted telecommunications legislation on July 18 intended to increase competition. It did not itself terminate GTT’s exclusive license, but implementation and any changes to exclusivity remained uncertain and could pressure revenue.
- Guyana tax disputes involve $32.4 million of assessments; ATN stated an adverse outcome was probable and had accrued $5.0 million. Other Guyana legal and spectrum-fee disputes remain, with outcomes uncertain. A major CTL claim was dismissed in April 2016; other claims and counterclaims remain pending.
- ATN continued to contest an approximately $4 million fee demanded for renewal of its Aruba telecommunications license, which expired in 2014.
- Approximately $10.6 million of letters of credit secured Mobility Fund obligations. Noncompliance could permit USAC to draw affected amounts plus penalties.
- Innovative received $16.3 million of high-cost Universal Service Fund support in 2015; changes to funding could adversely affect its operations and revenues.
- Key broader risks include competition, regulation, roaming arrangements, technology upgrades, political and economic conditions in foreign markets, natural catastrophes, supplier reliance, acquisition integration, and access to capital. ATN identified Guyana-dollar exposure and $33.8 million of variable-rate debt.
Important facts for investors to verify
- How much of revenue growth and future earnings depends on acquired businesses, and the post-acquisition operating performance and integration costs of KeyTech and Innovative.
- The cash-flow and leverage effects of the Innovative purchase, the $60 million loan, and planned capital spending.
- Whether lower wholesale roaming rates continue to reduce wireless revenue and margins, and whether traffic growth offsets the pressure.
- Regulatory implementation in Guyana, including effects on GTT’s exclusivity, and the outcome of the disclosed tax, spectrum-fee and license matters.
- Regulatory approval, closing terms and final proceeds for the Northeast Wireline sale, and the valuation assumptions behind the $11.1 million impairment.
- Execution and funding of the India solar development target, including the timing of project construction and expected revenue commencement.