UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended | March 31, 2018 | |
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from | | to | | |
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Commission File Number | | Registrant; State of Incorporation; Address and Telephone Number | | IRS Employer Identification No. |
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001-38126 | | | | 38-3980194 |
| | Altice USA, Inc. | | |
| | Delaware | | |
| | 1 Court Square West | | |
| | Long Island City, New York 11101 | | |
| | (516) 803-2300 | | |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrants were required to submit and post such files). Yes ý No o
Indicate by check mark whether each Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
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Large accelerated filer | o | | Accelerated filer | o |
Non-accelerated filer | ý | | Smaller reporting company | o |
(Do not check if a smaller reporting company) | | | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). | Yes | o | No | ý |
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Number of shares of common stock outstanding as of May 4, 2018: | 737,068,966 |
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ALTICE USA, INC. AND SUBSIDIARIES | |
FORM 10-Q | |
TABLE OF CONTENTS | |
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PART I. FINANCIAL INFORMATION | |
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Item 1. Financial Statements of Altice USA, Inc. and Subsidiaries | |
| Condensed Consolidated Balance Sheets - March 31, 2018 (Unaudited) and December 31, 2017 (Unaudited) | |
| Condensed Consolidated Statements of Operations - Three months ended March 31, 2018 and 2017 (Unaudited) | |
| Condensed Consolidated Statements of Comprehensive Loss - Three months ended March 31, 2018 and 2017 (Unaudited) | |
| Condensed Consolidated Statements of Stockholders’ Equity - Three months ended March 31, 2018 (Unaudited) | |
| Condensed Consolidated Statements of Cash Flows - Three months ended March 31, 2018 and 2017 (Unaudited) | |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
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Item 4. Controls and Procedures | |
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PART II. OTHER INFORMATION | |
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Item 1. Legal Proceedings | |
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Item 6. Exhibits | |
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SIGNATURES | |
PART I. FINANCIAL INFORMATION
This Quarterly Report includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward‑looking statements.” These “forward‑looking statements” appear throughout this Quarterly Report and relate to matters such as anticipated future growth in revenues, operating income, cash provided by operating activities and other financial measures. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “seeks,” “potential,” “continue,” “intends,” “plans” and similar words and terms used in the discussion of future operating results, future financial performance and future events identify forward‑looking statements. All of these forward‑looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are susceptible to uncertainty and changes in circumstances.
We operate in a highly competitive, consumer and technology driven and rapidly changing business that is affected by government regulation and economic, strategic, technological, political and social conditions. Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward‑looking statements. In addition, important factors that could cause our actual results to differ materially from those in our forward‑looking statements include:
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• | competition for broadband, pay television and telephony customers from existing competitors (such as broadband communications companies, direct broadcast satellite ("DBS") providers and Internet‑based providers) and new competitors entering our footprint; |
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• | changes in consumer preferences, laws and regulations or technology that may cause us to change our operational strategies; |
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• | increased difficulty negotiating programming agreements on favorable terms, if at all, resulting in increased costs to us and/or the loss of popular programming; |
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• | increasing programming costs and delivery expenses related to our products and services; |
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• | our ability to achieve anticipated customer and revenue growth, to successfully introduce new products and services and to implement our growth strategy; |
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• | our ability to complete our capital investment plans on time and on budget, including our plan to build a fiber-to-the-home ("FTTH") network, and deploy Altice One, our new home communications hub; |
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• | our ability to develop and deploy mobile voice and data services pursuant to the agreement we entered into with Sprint in the fourth quarter of 2017; |
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• | the effects of economic conditions or other factors which may negatively affect our customers’ demand for our products and services; |
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• | the effects of industry conditions; |
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• | demand for advertising on our cable systems; |
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• | our substantial indebtedness and debt service obligations; |
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• | adverse changes in the credit market; |
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• | changes as a result of any tax reforms that may affect our business; |
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• | financial community and rating agency perceptions of our business, operations, financial condition and the industries in which we operate; |
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• | the restrictions contained in our financing agreements; |
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• | our ability to generate sufficient cash flow to meet our debt service obligations; |
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• | fluctuations in interest rates which may cause our interest expense to vary from quarter to quarter; |
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• | technical failures, equipment defects, physical or electronic break‑ins to our services, computer viruses and similar problems; |
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• | the disruption or failure of our network, information systems or technologies as a result of computer hacking, computer viruses, “cyber‑attacks,” misappropriation of data, outages, natural disasters and other material events; |
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• | our ability to obtain necessary hardware, software, communications equipment and services and other items from our vendors at reasonable costs; |
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• | our ability to effectively integrate acquisitions and to maximize expected operating efficiencies from our acquisitions or as a result of the transactions, if any; |
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• | significant unanticipated increases in the use of bandwidth‑intensive Internet‑based services; |
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• | the outcome of litigation, government investigations and other proceedings; |
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• | our ability to successfully operate our business following the completion of our separation from Altice N.V., and |
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• | other risks and uncertainties inherent in our cable and other broadband communications businesses and our other businesses, including those listed under the caption “Risk Factors” in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 6, 2018 (the "Annual Report") |
These factors are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward‑looking statements. Other unknown or unpredictable factors could cause our actual results to differ materially from those expressed in any of our forward‑looking statements.
Given these uncertainties, you are cautioned not to place undue reliance on such forward‑looking statements. The forward‑looking statements are made only as of the date of this Quarterly Report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update any forward‑looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
You should read this Quarterly Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward‑looking statements by these cautionary statements.
Certain numerical figures included in this quarterly report have been subject to rounding adjustments. Accordingly, such numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Item 1. Financial Statements
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ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) |
(Unaudited) |
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ASSETS | March 31, 2018 | | December 31, 2017 |
Current Assets: | | | |
Cash and cash equivalents | $ | 1,427,651 |
| | $ | 329,848 |
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Restricted cash | 253 |
| | 252 |
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Accounts receivable, trade (less allowance for doubtful accounts of $10,481 and $13,420) | 330,761 |
| | 370,765 |
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Prepaid expenses and other current assets | 142,366 |
| | 130,425 |
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Amounts due from affiliates | 21,146 |
| | 19,764 |
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Derivative contracts | 9,211 |
| | 52,545 |
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Total current assets | 1,931,388 |
| | 903,599 |
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Property, plant and equipment, net of accumulated depreciation of $2,983,696 and $2,599,579 | 5,819,544 |
| | 6,023,826 |
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Investment securities pledged as collateral | 1,467,781 |
| | 1,720,357 |
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Derivative contracts | 63,343 |
| | — |
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Other assets | 122,786 |
| | 57,904 |
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Amortizable customer relationships, net of accumulated amortization of $1,603,142 and $1,409,021 | 4,367,742 |
| | 4,561,863 |
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Amortizable trade names, net of accumulated amortization of $624,276 and $588,574 | 442,807 |
| | 478,509 |
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Other amortizable intangibles, net of accumulated amortization of $12,972 and $10,978 | 24,088 |
| | 26,082 |
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Indefinite-lived cable television franchises | 13,020,081 |
| | 13,020,081 |
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Goodwill | 8,019,849 |
| | 8,019,861 |
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Total assets | $ | 35,279,409 |
| | $ | 34,812,082 |
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See accompanying notes to condensed consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (In thousands, except share and per share amounts) |
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(Unaudited) |
LIABILITIES AND STOCKHOLDERS' EQUITY | March 31, 2018 | | December 31, 2017 |
Current Liabilities: | | | |
Accounts payable | $ | 725,625 |
| | $ | 795,128 |
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Accrued liabilities: | | | |
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Interest | 296,400 |
| | 397,422 |
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Employee related costs | 104,824 |
| | 147,727 |
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Other accrued expenses | 318,098 |
| | 411,988 |
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Amounts due to affiliates | 11,078 |
| | 10,998 |
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Deferred revenue | 122,395 |
| | 111,197 |
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Liabilities under derivative contracts | 9,211 |
| | 52,545 |
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Credit facility debt | 53,900 |
| | 42,650 |
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Senior notes and debentures | 1,042,143 |
| | 507,744 |
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Capital lease obligations | 7,699 |
| | 9,539 |
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Notes payable | 69,084 |
| | 33,424 |
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Total current liabilities | 2,760,457 |
| | 2,520,362 |
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Defined benefit plan obligations | 97,908 |
| | 103,163 |
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Other liabilities | 131,565 |
| | 144,289 |
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Deferred tax liability | 4,729,578 |
| | 4,769,286 |
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Liabilities under derivative contracts | 114,319 |
| | 187,406 |
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Collateralized indebtedness | 1,351,271 |
| | 1,349,474 |
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Credit facility debt | 5,636,102 |
| | 4,600,873 |
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Senior notes and debentures | 14,767,823 |
| | 15,352,688 |
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Capital lease obligations | 11,869 |
| | 12,441 |
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Notes payable | 34,003 |
| | 32,478 |
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Deficit investment in affiliates | 12,891 |
| | 3,579 |
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Total liabilities | 29,647,786 |
| | 29,076,039 |
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Commitments and contingencies |
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Redeemable equity | 234,637 |
| | 231,290 |
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Stockholders' Equity: | | | |
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Preferred Stock, $.01 par value, 100,000,000 shares authorized, no shares issued and outstanding | — |
| | — |
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Class A common stock: $0.01 par value, 4,000,000,000 shares authorized, 246,982,292 issued and outstanding | 2,470 |
| | 2,470 |
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Class B common stock: $0.01 par value, 1,000,000,000 shares authorized, 490,086,674 issued and outstanding | 4,901 |
| | 4,901 |
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Class C common stock: $0.01 par value, 4,000,000,000 shares authorized, no shares issued and outstanding | — |
| | — |
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Paid-in capital | 4,682,646 |
| | 4,665,229 |
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Retained earnings | 713,848 |
| | 840,636 |
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| 5,403,865 |
| | 5,513,236 |
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Accumulated other comprehensive loss | (8,420 | ) | | (10,022 | ) |
Total stockholders' equity | 5,395,445 |
| | 5,503,214 |
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Noncontrolling interest | 1,541 |
| | 1,539 |
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Total stockholders' equity | 5,396,986 |
| | 5,504,753 |
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| $ | 35,279,409 |
| | $ | 34,812,082 |
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See accompanying notes to condensed consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
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| Three Months Ended March 31, |
| 2018 | | 2017 |
Revenue (including revenue from affiliates of $125 and $141, respectively) (See Note 14) | $ | 2,329,714 |
| | $ | 2,302,259 |
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Operating expenses: | | | |
Programming and other direct costs (including charges from affiliates of $1,154 and $735, respectively) (See Note 14) | 787,361 |
| | 758,352 |
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Other operating expenses (including charges from affiliates of $7,994 and $7,298, respectively) (See Note 14) | 583,023 |
| | 608,144 |
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Restructuring and other expense | 3,587 |
| | 76,929 |
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Depreciation and amortization (including impairments) | 642,705 |
| | 608,724 |
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| 2,016,676 |
| | 2,052,149 |
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Operating income | 313,038 |
| | 250,110 |
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Other income (expense): | | | |
Interest expense (including interest expense to affiliates and related parties of$47,588 in 2017) (See Note 14) | (377,258 | ) | | (433,294 | ) |
Interest income | 3,103 |
| | 232 |
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Gain (loss) on investments and sale of affiliate interests, net | (248,602 | ) | | 131,658 |
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Gain (loss) on derivative contracts, net | 168,352 |
| | (71,044 | ) |
Gain (loss) on interest rate swap contracts | (31,922 | ) | | 2,342 |
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Loss on extinguishment of debt and write-off of deferred financing costs | (4,705 | ) | | — |
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Other expense, net | (11,658 | ) | | (2,100 | ) |
| (502,690 | ) | | (372,206 | ) |
Loss before income taxes | (189,652 | ) | | (122,096 | ) |
Income tax benefit | 60,703 |
| | 45,908 |
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Net loss | (128,949 | ) | | (76,188 | ) |
Net income attributable to noncontrolling interests | (2 | ) | | (237 | ) |
Net loss attributable to Altice USA, Inc. stockholders | $ | (128,951 | ) | | $ | (76,425 | ) |
Basic and diluted net loss per share | $ | (0.17 | ) | | $ | (0.12 | ) |
Basic and diluted weighted average common shares (in thousands) | 737,069 |
| | 649,525 |
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See accompanying notes to condensed consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (Unaudited)
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| Three Months Ended March 31, |
| 2018 | | 2017 |
| | | |
Net loss | $ | (128,949 | ) | | $ | (76,188 | ) |
Other comprehensive income (loss): | | | |
Defined benefit pension plans: | | | |
Unrecognized actuarial gain | 4,551 |
| | — |
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Applicable income taxes | (1,228 | ) | | — |
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Unrecognized gain arising during period, net of income taxes | 3,323 |
| | — |
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Settlement losses included in other expense, net | 606 |
| | — |
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Applicable income taxes | (164 | ) | | — |
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Settlement losses included in other expense, net, net of income taxes | 442 |
| | — |
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Other comprehensive gain | 3,765 |
| | — |
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Comprehensive loss | (125,184 | ) | | (76,188 | ) |
Comprehensive income attributable to noncontrolling interests | (2 | ) | | (237 | ) |
Comprehensive loss attributable to Altice USA, Inc. stockholders | $ | (125,186 | ) | | $ | (76,425 | ) |
See accompanying notes to condensed consolidated financial statements.
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ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) (Unaudited) |
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Class A Common Stock | |
Class B Common Stock | | Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (loss) | | Total Stockholders' Equity | | Non-controlling Interest | | Total Equity |
Balance at January 1, 2018, as reported | $ | 2,470 |
| | $ | 4,901 |
| | $ | 4,642,128 |
| | $ | 854,824 |
| | $ | (10,022 | ) | | $ | 5,494,301 |
| | $ | 1,539 |
| | $ | 5,495,840 |
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Impact of change in accounting policies (See Note 3) | — |
| | — |
| | — |
| | 12,666 |
| | — |
| | 12,666 |
| | — |
| | 12,666 |
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Impact of ATS Acquisition (See Note 3) | — |
| | — |
| | 23,101 |
| | (26,854 | ) | | — |
| | (3,753 | ) | | — |
| | (3,753 | ) |
Balance at January 1, 2018, as adjusted | 2,470 |
| | 4,901 |
| | 4,665,229 |
| | 840,636 |
| | (10,022 | ) | | 5,503,214 |
| | 1,539 |
| | 5,504,753 |
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Net loss attributable to stockholders | — |
| | — |
| | — |
| | (128,951 | ) | | — |
| | (128,951 | ) | | — |
| | (128,951 | ) |
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
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Pension liability adjustments, net of income taxes | — |
| | — |
| | — |
| | — |
| | 3,765 |
| | 3,765 |
| | — |
| | 3,765 |
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Share-based compensation expense | — |
| | — |
| | 21,623 |
| | — |
| | — |
| | 21,623 |
| | — |
| | 21,623 |
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Change in fair value of redeemable equity | — |
| | — |
| | (3,347 | ) | | — |
| | — |
| | (3,347 | ) | | — |
| | (3,347 | ) |
Other changes to equity | — |
| | — |
| | (859 | ) | | — |
| | — |
| | (859 | ) | | — |
| | (859 | ) |
Adoption of ASU No. 2018-02 | — |
| | — |
| | — |
| | 2,163 |
| | (2,163 | ) | | — |
| | — |
| | — |
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Balance at March 31, 2018 | $ | 2,470 |
| | $ | 4,901 |
| | $ | 4,682,646 |
| | $ | 713,848 |
| | $ | (8,420 | ) | | $ | 5,395,445 |
| | $ | 1,541 |
| | $ | 5,396,986 |
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See accompanying notes to condensed consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) |
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| Three Months Ended March 31, |
| 2018 | | 2017 |
Cash flows from operating activities: | | | |
Net loss | $ | (128,949 | ) | | $ | (76,188 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization (including impairments) | 642,705 |
| | 608,724 |
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Equity in net loss of affiliates | 10,442 |
| | 2,757 |
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Loss (gain) on investments and sale of affiliate interests, net | 248,602 |
| | (131,658 | ) |
Loss (gain) on derivative contracts, net | (168,352 | ) | | 71,044 |
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Loss on extinguishment of debt and write-off of deferred financing costs | 4,705 |
| | — |
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Amortization of deferred financing costs and discounts (premiums) on indebtedness | 16,950 |
| | 1,812 |
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Settlement loss related to pension plan | 606 |
| | — |
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Share-based compensation expense | 21,623 |
| | 7,848 |
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Deferred income taxes | (65,833 | ) | | (52,184 | ) |
Provision for doubtful accounts | 13,500 |
| | 15,694 |
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Change in assets and liabilities, net of effects of acquisitions and dispositions: | | | |
Accounts receivable, trade | 25,207 |
| | 34,707 |
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Other receivables | (28,759 | ) | | — |
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Prepaid expenses and other assets | 9,609 |
| | (10,113 | ) |
Amounts due from and due to affiliates | (1,465 | ) | | (131,564 | ) |
Accounts payable | 11,297 |
| | 147,999 |
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Accrued liabilities | (224,787 | ) | | (253,707 | ) |
Deferred revenue | 11,929 |
| | 11,257 |
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Liabilities related to interest rate swap contracts | 31,922 |
| | (2,342 | ) |
Net cash provided by operating activities | 430,952 |
| | 244,086 |
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Cash flows from investing activities: | | | |
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Payment for acquisition, net of cash acquired | (28,940 | ) | | (43,608 | ) |
Sale of affiliate interests | (3,537 | ) | | — |
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Capital expenditures | (257,615 | ) | | (257,427 | ) |
Proceeds related to sale of equipment, including costs of disposal | 965 |
| | 596 |
|
Increase in other investments | (2,500 | ) | | (550 | ) |
Additions to other intangible assets | — |
| | (183 | ) |
Net cash used in investing activities | (291,627 | ) | | (301,172 | ) |
| | | |
See accompanying notes to condensed consolidated financial statements. |
ALTICE USA, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) |
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Cash flows from financing activities: | | | |
Proceeds from credit facility debt, net of discounts | $ | 1,642,500 |
| | $ | 225,000 |
|
Repayment of credit facility debt | (610,663 | ) | | (183,288 | ) |
Issuance of senior notes and debentures | 1,000,000 |
| | — |
|
Proceeds from collateralized indebtedness | — |
| | 156,136 |
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Repayment of collateralized indebtedness and related derivative contracts | — |
| | (150,084 | ) |
Redemption of senior notes, including premiums and fees | (1,057,019 | ) | | — |
|
Proceeds from notes payable | 6,812 |
| | — |
|
Principal payments on capital lease obligations | (3,067 | ) | | (4,207 | ) |
Additions to deferred financing costs | (19,225 | ) | | (1,290 | ) |
Other | (859 | ) | | — |
|
Net cash provided by financing activities | 958,479 |
| | 42,267 |
|
Net increase (decrease) in cash and cash equivalents | 1,097,804 |
| | (14,819 | ) |
Cash, cash equivalents and restricted cash at beginning of year | 330,100 |
| | 503,093 |
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Cash, cash equivalents and restricted cash at end of period | $ | 1,427,904 |
| | $ | 488,274 |
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See accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND RELATED MATTERS
The Company and Related Matters
Altice USA, Inc. ("Altice USA" or the "Company") was incorporated in Delaware on September 14, 2015. As of March 31, 2018, Altice USA is majority‑owned by Altice N.V., a public company with limited liability (naamloze vennootshcap) under Dutch law. Upon the completion of the Altice N.V. distribution discussed below, the Company will no longer be majority-owned by Altice N.V.
The Company provides broadband communications and video services in the United States. It delivers broadband, pay television, telephony services, proprietary content and advertising services to residential and business customers.
Altice N.V., through a subsidiary, acquired Cequel Corporation ("Cequel" or "Suddenlink") on December 21, 2015 and Cequel was contributed to Altice USA on June 9, 2016. Altice USA acquired Cablevision Systems Corporation ("Cablevision" or "Optimum") on June 21, 2016.
The Company classifies its operations into two reportable segments: Cablevision, which operates in the New York metropolitan area, and Cequel, which principally operates in markets in the south‑central United States.
The accompanying condensed combined consolidated financial statements ("condensed consolidated financial statements") include the accounts of the Company and all subsidiaries in which the Company has a controlling interest and gives effect to the ATS Acquisition discussed below on a combined basis. All significant inter-company accounts and transactions have been eliminated in consolidation.
The accompanying condensed consolidated operating results for the three months ended March 31, 2017 reflect the retrospective adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers and ASU No. 2017‑07 Compensation-Retirement Benefits (Topic 715). See Note 3 for further details of the impact on the Company's historical financial statements.
In June 2017, the Company completed its initial public offering ("IPO") of 71,724,139 shares of its Class A common stock. The Company’s Class A common stock began trading on June 22, 2017, on the New York Stock Exchange under the symbol "ATUS".
Acquisition of Altice Technical Services US Corp
ATS was formed in 2017 to provide network construction and maintenance services and commercial and residential installations, disconnections, and maintenance. The Company believes the services it receives from ATS are of higher quality and at a lower cost than the Company could achieve without ATS, including for the construction of its new fiber-to-the home ("FTTH") network.
During the second quarter of 2017, a substantial portion of the Company's technical workforce at the Cablevision segment either accepted employment with ATS or became employees of ATS and ATS commenced operations and began to perform services for the Company. A substantial portion of the Cequel segment technical workforce became employees of ATS in December 2017.
In January 2018, the Company acquired 70% of the equity interests in Altice Technical Services US Corp. ("ATS") for $1.00 (the "ATS Acquisition") and the Company became the owner of 100% of the equity interests in ATS in March 2018. ATS was previously owned by Altice N.V. and a member of ATS's management through a holding company. As the acquisition is a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of ATS for all periods since its formation. See Note 3 for the impact of the ATS Acquisition on the Company's condensed consolidated balance sheet as of December 31, 2017.
Altice N.V. Distribution
On January 8, 2018, Altice N.V. announced plans for the separation of the Company from Altice N.V. Altice N.V. will distribute substantially all of its equity interest in the Company through a distribution in kind to holders of Altice N.V.'s common shares A and common shares B (the “Distribution”). Following the Distribution, Altice N.V. will no longer own a controlling equity interest in the Company, and the Company will operate independently from Altice N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The implementation of the Distribution is expected to be subject to certain conditions precedent being satisfied or waived. Although Altice N.V. and the Company have not yet negotiated the final terms of the Distribution and related transactions, the Company expects that the following will be conditions to the Distribution:
| |
• | Approval of Altice N.V. shareholders of (i) the distribution in kind and (ii) the board resolution approving the change in identity and character of the business of Altice N.V. resulting from the Distribution; |
| |
• | Receipt of certain U.S. regulatory approvals, which could take up to 180 days; |
| |
• | The Registration Statement filed on January 8, 2018 being declared effective by the U.S. Securities and Exchange Commission (the ‘‘Commission’’); |
| |
• | The entry into the Master Separation Agreement and the entry into, amendments to or termination of various arrangements between Altice N.V. and the Company, such as a license to use the Altice brand, the stockholders’ agreement among Altice USA, Altice N.V. and certain other parties and the management agreement pursuant to which the Company pays a quarterly management fee to Altice N.V.; and |
| |
• | The declaration and payment of a one-time $1.5 billion dividend to Altice USA stockholders as of a record date prior to the Distribution (the ‘‘Pre-Distribution Dividend’’). |
Prior to Altice N.V.'s announcement of the Distribution, the Board of Directors of Altice USA, acting through its independent directors, approved in principle the payment of the Pre-Distribution Dividend to all shareholders immediately prior to completion of the separation. Formal approval of the Pre-Distribution Dividend and setting of a record date are expected to occur in the second quarter of 2018. The payment of the Pre-Distribution Dividend will be funded with available Cablevision revolving facility capacity and available cash from new financings, completed in January 2018, at CSC Holdings LLC, a wholly-owned subsidiary of Cablevision. In addition, the Board of Directors of Altice USA has authorized a share repurchase program of $2.0 billion, effective following completion of the separation.
In connection with the Distribution, it is expected that the Management Advisory and Consulting Services Agreement with Altice N.V. which provides certain consulting, advisory and other services will be terminated. Compensation under the terms of the agreement is an annual fee of $30,000 paid by the Company.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all the information and notes required for complete annual financial statements.
The interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
The financial statements presented in this report are unaudited; however, in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented.
The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2018.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncements
In February 2018, the FASB issued ASU No. 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The primary provision of ASU No. 2018-02 allows for the reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. ASU No. 2018-02 also requires certain disclosures
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
about stranded tax effects. ASU No. 2018‑02 is effective for the Company on January 1, 2019, with early adoption permitted and will be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company elected to adopt ASU No. 2018-02 during the first quarter of 2018. The adoption resulted in the reclassification of stranded tax amounts of $2,163 associated with net unrecognized losses from the Company's pension plans from accumulated other comprehensive loss to retained earnings.
In May 2017, the FASB issued ASU No. 2017‑09, Compensation- Stock Compensation (Topic 718). ASU No. 2017‑09 provides clarity and guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2017‑09 was adopted by the Company on January 1, 2018 and had no impact to the Company's condensed consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017‑07 Compensation-Retirement Benefits (Topic 715). ASU No. 2017‑07 requires that an employer disaggregate the service cost component from the other components of net benefit cost. It also provides guidance on how to present the service cost component and the other components of net benefit cost in the income statement and what component of net benefit cost is eligible for capitalization. ASU No. 2017‑07 was adopted by the Company on January 1, 2018 and was applied retrospectively. As a result of the adoption, the Company reclassified the non-service cost components of the Company's pension expense for the three months ended March 31, 2017 from other operating expenses to other income (expense), net. The Company elected to apply the practical expedient which allowed it to reclassify amounts disclosed previously in the benefits plan note as the basis for applying retrospective presentation for comparative periods, as the Company determined it was impracticable to disaggregate the cost components for amounts capitalized and amortized in those periods. See Note 3 for information on the impact of the adoption of ASU No. 2017-07.
In January 2017, the FASB issued ASU No. 2017‑01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which amends Topic 805 to interpret the definition of a business by adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The Company adopted the new guidance on January 1, 2018 and had no impact to the Company's condensed consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 modifies how entities measure certain equity investments and also modifies the recognition of changes in the fair value of financial liabilities measured under the fair value option. Entities will be required to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. For financial liabilities measured using the fair value option, entities will be required to record changes in fair value caused by a change in instrument-specific credit risk (own credit risk) separately in other comprehensive income. ASU No. 2016-01 was adopted by the Company on January 1, 2018 and had no impact to the Company's condensed consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers ("ASC 606"), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASC 606 replaced most existing revenue recognition guidance in GAAP and allowed the use of either the retrospective or cumulative effect transition method.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, in order to clarify the Codification and to correct any unintended application of the guidance. The amendments in this update affected the guidance in ASC 606. ASC 606 was adopted by the Company on January 1, 2018 on a full retrospective basis, which required the Company to reflect the impact of the updated guidance for all periods presented. The adoption of ASC 606 did not have a material impact on the Company’s financial position or results of operations. See Note 3 for information on the impact of the adoption of ASC 606.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The Company adopted the new guidance on January 1, 2018 and had no impact to the Company's condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Recently Issued But Not Yet Adopted Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017‑04, Intangibles-Goodwill and Other (Topic 350). ASU No. 2017‑04 simplifies the subsequent measurement of goodwill by removing the second step of the two‑step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017‑04 becomes effective for the Company on January 1, 2020 with early adoption permitted and will be applied prospectively.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new guidance becomes effective for the Company on January 1, 2019. The Company has not yet completed the evaluation of the effect that ASU No. 2016-02 will have on its consolidated financial statements.
Reclassifications
Certain reclassifications have been made to the 2017 financial statements to conform to the 2018 presentation.
NOTE 3. CHANGE IN ACCOUNTING POLICIES AND ATS ACQUISITION
Adoption of ASC 606 - Revenue from Contracts with Customers
On January 1, 2018, the Company adopted the guidance pursuant to ASC 606. The Company elected to apply the guidance on a full retrospective basis, which required the Company to reflect the impact of the updated guidance for all periods presented. The adoption of the guidance resulted in the deferral of certain installation revenue, the deferral of certain commission expenses, and a reduction of revenue due to the reclassification of certain third party giveaways and incentives from operating expense. Additionally, the Company made changes in the composition of revenue resulting from the allocation of value related to bundled services sold to residential customers at a discount.
Installation Services Revenue
Pursuant to ASC 606, the Company's installation services revenue is deferred and recognized over the benefit period. For residential customers, the benefit period is less than one year. For business and wholesale customers, the benefit period is the contract term. Prior to the adoption of ASC 606, the Company recognized installation services revenue for residential and small and medium-sized business ("SMB") customers when installations were completed. As a result of the deferral of installation services revenue for residential and SMB customers, the Company recognized contract liabilities of $6,978 and recorded a cumulative effect adjustment of $5,093 (net of tax of $1,885) to retained earnings. The accounting for installation services revenue related to business and wholesale customers has not changed.
Commission Expenses
Pursuant to ASC 606, the Company defers commission expenses related to obtaining a contract with a customer when the expected period of benefit is greater than one year and amortizes these costs over the average contract term. For commission expenses related to customer contracts with a term of one year or less, the Company is utilizing the practical expedient and is recognizing the costs when incurred. Prior to the adoption of ASC 606, the Company recognized commission expenses related to the sale of its services when incurred. As a result of the change in the timing of recognition of these commission expenses, the Company recognized contract assets of $24,329 and recorded a cumulative effect adjustment of $17,759 (net of tax of $6,570) to retained earnings.
Third Party Product Giveaways and Incentives
When the Company acts as the agent in providing certain product giveaways or incentives, revenue is recorded net of the costs of the giveaways and incentives. For the three months ended March 31, 2017, costs of $3,417 for the giveaways and incentives recorded in other operating expense have been reclassified to revenue.
Bundled Services
The Company provides bundled services at a discounted rate to its customers. Under ASC 606, revenue should be allocated to separate performance obligations within a bundled offering based on the relative stand-alone selling price of each service within the bundle. In connection with the adoption of ASC 606, the Company revised the amounts
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
allocated to each performance obligation within its bundled offerings which reduced previously reported revenue for telephony services and increased previously reported revenue allocated to pay television and broadband services.
Adoption of ASU No. 2017-07 - Compensation-Retirement Benefits (Topic 715)
On January 1, 2018, the Company adopted the guidance pursuant to ASU No. 2017‑07. ASU No. 2017‑07 requires that an employer disaggregate the service cost component from the other components of net benefit cost. In connection with the adoption of ASU No. 2017‑07, the Company retroactively reclassified certain pension costs from other operating expenses to other income (expense), net. The adoption of ASU No. 2017-07 had no impact on the Company's condensed consolidated balance sheet.
Acquisition of ATS
As discussed in Note 1, the Company completed the ATS Acquisition in the first quarter of 2018. ATS was previously owned by Altice N.V. and a member of ATS's management through a holding company. As the acquisition is a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of ATS for all periods since the formation of ATS, including goodwill of $23,101, representing the amount previously transferred to ATS.
The following table summarizes the impact of adopting ASC 606 and the impact of the ATS Acquisition on the Company's condensed consolidated balance sheet:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
| As Reported | | Impact of ASC 606 | | Impact of ATS Acquisition | | As Adjusted |
Cash and cash equivalents | $ | 273,329 |
| | $ | — |
| | $ | 56,519 |
| | $ | 329,848 |
|
Other current assets | 580,231 |
| | 14,068 |
| | (20,548 | ) | | 573,751 |
|
Property, plant and equipment, net | 6,063,829 |
| | — |
| | (40,003 | ) | | 6,023,826 |
|
Goodwill | 7,996,760 |
| | — |
| | 23,101 |
| | 8,019,861 |
|
Other assets, long-term | 19,861,076 |
| | 10,261 |
| | (6,541 | ) | | 19,864,796 |
|
Total assets | $ | 34,775,225 |
| | $ | 24,329 |
| | $ | 12,528 |
| | $ | 34,812,082 |
|
Current liabilities | $ | 2,492,983 |
| | $ | 6,978 |
| | $ | 20,401 |
| | $ | 2,520,362 |
|
Deferred tax liability, long-term | 4,775,115 |
| | 4,685 |
| | (10,514 | ) | | 4,769,286 |
|
Liabilities, long-term | 21,779,997 |
| | — |
| | 6,394 |
| | 21,786,391 |
|
Total liabilities | 29,048,095 |
| | 11,663 |
| | 16,281 |
| | 29,076,039 |
|
Redeemable equity | 231,290 |
| | — |
| | — |
| | 231,290 |
|
Paid-in capital | 4,642,128 |
| | — |
| | 23,101 |
| | 4,665,229 |
|
Retained earnings | 854,824 |
| | 12,666 |
| | (26,854 | ) | | 840,636 |
|
Total stockholders' equity | 5,495,840 |
| | 12,666 |
| | (3,753 | ) | | 5,504,753 |
|
Total liabilities and stockholders' equity | $ | 34,775,225 |
| | $ | 24,329 |
| | $ | 12,528 |
| | $ | 34,812,082 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The ATS Acquisition did not have an impact on the Company's condensed consolidated statement of operations for the three months ended March 31, 2017. The following table summarizes the impact of adopting ASC 606 and ASU No. 2017-07 on the Company's condensed consolidated statement of operations:
|
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2017 |
| As Reported | | Impact of ASC 606 | | Impact of ASU No. 2017-07 | | As Adjusted |
Residential: | | | | | | | |
Pay TV | $ | 1,071,361 |
| | $ | 12,517 |
| | $ | — |
| | $ | 1,083,878 |
|
Broadband | 611,769 |
| | 14,149 |
| | — |
| | 625,918 |
|
Telephony | 210,873 |
| | (29,912 | ) | | — |
| | 180,961 |
|
Business services and wholesale | 319,591 |
| | (171 | ) | | — |
| | 319,420 |
|
Advertising | 83,361 |
| | — |
| | — |
| | 83,361 |
|
Other | 8,721 |
| | — |
| | — |
| | 8,721 |
|
Total revenue | 2,305,676 |
| | (3,417 | ) | | — |
| | 2,302,259 |
|
| | | | |
| |
|
Programming and other direct costs | 758,352 |
| | — |
| | — |
| | 758,352 |
|
Other operating expenses | 613,437 |
| | (3,417 | ) | | (1,876 | ) | | 608,144 |
|
Restructuring and other expense | 76,929 |
| | — |
| | — |
| | 76,929 |
|
Depreciation and amortization | 608,724 |
| | — |
| | — |
| | 608,724 |
|
Operating income | 248,234 |
| | — |
| | 1,876 |
| | 250,110 |
|
Other expense, net | (370,330 | ) | | — |
| | (1,876 | ) | | (372,206 | ) |
Loss before income taxes | (122,096 | ) | | — |
| | — |
| | (122,096 | ) |
Income tax benefit | 45,908 |
| | — |
| | — |
| | 45,908 |
|
Net loss | $ | (76,188 | ) | | $ | — |
| | $ | — |
| | $ | (76,188 | ) |
NOTE 4. NET LOSS PER SHARE ATTRIBUTABLE TO STOCKHOLDERS
Basic net income (loss) per common share attributable to Altice USA stockholders is computed by dividing net income (loss) attributable to Altice USA stockholders by the weighted average number of common shares outstanding during the period. Diluted income per common share attributable to Altice USA stockholders reflects the dilutive effects of stock options. Diluted net loss per common share attributable to Altice USA stockholders excludes the effects of common stock equivalents as they are anti-dilutive.
The weighted average number of shares used to compute basic and diluted net loss per share for the three months ended March 31, 2017 reflect the retroactive impact of certain organizational transactions that occurred prior to the Company's IPO.
NOTE 5. REVENUE AND CONTRACT ASSETS
Revenue Recognition
Residential Services
The Company derives revenue through monthly charges to residential customers of its pay television, broadband, and telephony services, including installation services. In addition, the Company derives revenue from digital video recorder ("DVR"), video-on-demand ("VOD"), pay‑per‑view, and home shopping commissions which are reflected in "Residential pay TV" revenues. The Company recognizes pay television, broadband, and telephony revenues as the services are provided to a customer on a monthly basis. Revenue from the sale of bundled services at a discounted rate is allocated to each product based on the standalone selling price of each performance obligation within the bundled offer. The standalone selling price requires judgment and is typically determined based on the current prices at which the separate services are sold by the Company. Installation revenue for the Company's residential services is deferred and recognized over the benefit period, which is estimated to be less than one year. The estimated benefit period takes
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
into account both quantitative and qualitative factors including the significance of average installation fees to total recurring revenue per customer.
The Company is assessed non-income related taxes by governmental authorities, including franchising authorities (generally under multi-year agreements), and collects such taxes from its customers. In instances where the tax is being assessed directly on the Company, amounts paid to the governmental authorities are recorded as programming and other direct costs and amounts received from the customers are recorded as revenue. For the three months ended March 31, 2018 and 2017 the amount of franchise fees and certain other taxes and fees included as a component of revenue aggregated $63,830 and $64,986, respectively.
Business and Wholesale Services
The Company derives revenue from the sale of products and services to both large enterprise and SMB customers, including broadband, telephony, networking, and pay television services reflected in "Business services and wholesale" revenues. The Company's business services also include Ethernet, data transport, and IP-based virtual private networks. The Company also provides managed services to businesses, including hosted telephony services (cloud based SIP-based private branch exchange), managed Wi-Fi, managed desktop and server backup and managed collaboration services including audio and web conferencing. The Company also offers fiber-to-the-tower services to wireless carriers for cell tower backhaul and enable wireline communications service providers to connect to customers that their own networks do not reach. The Company recognizes revenues for these services as the services are provided to a customer on a monthly basis.
Substantially all of our SMB customers are billed monthly and large enterprise customers are billed in accordance with the terms of their contracts which is typically also on a monthly basis. Contracts with large enterprise customers typically range from three to five years. Installation revenue related to our large enterprise customers is deferred and recognized over the average contract term. Installation revenue related to SMB customers is deferred and recognized over the benefit period, which is less than a year. The estimated benefit period for SMB customers takes into account both quantitative and qualitative factors including the significance of average installation fees to total recurring revenue per customer.
Advertising
As part of the agreements under which the Company acquires pay television programming, the Company typically receives an allocation of scheduled advertising time during such programming into which the Company's cable systems can insert commercials. In several of the markets in which the Company operates, it has entered into agreements commonly referred to as interconnects with other cable operators to jointly sell local advertising. In some of these markets, the Company represents the advertising sales efforts of other cable operators; in other markets, other cable operators represent the Company. Advertising revenues are recognized when commercials are aired. Arrangements in which the Company controls the sale of advertising and acts as the principal to the transaction, the Company recognizes revenue earned from the advertising customer on a gross basis and the amount remitted to the distributor as an operating expense. Arrangements in which the Company does not control the sale of advertising and acts as an agent to the transaction, the Company recognizes revenue net of any fee remitted to the distributor.
The Company's advanced advertising businesses provide data-driven, audience-based advertising solutions using advanced analytics tools that provide granular measurement of consumer groups, accurate hyper-local ratings and other insights into target audience behavior not available through traditional sample-based measurement services. Revenue earned from the Company's advanced advertising businesses are recognized when services are provided.
Other
Revenues derived from other sources are recognized when services are provided or events occur.
Contract Assets
Incremental costs incurred in obtaining a contract with a customer are deferred and recorded as a contract asset if the period of benefit is expected to be greater than one year. Sales commissions for enterprise and certain SMB customers are deferred and amortized over the average contract term. For sales commission expenses related to residential and SMB customers with a term of one year or less, the Company is utilizing the practical expedient and is recognizing the costs when incurred. Cost of fulfilling a contract with a customer are deferred and recorded as a contract asset if they
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
generate or enhance resources of the Company that will be used in satisfying future performance obligations and are expected to be recovered. Installation costs related to residential and SMB customers that are not capitalized as part of the initial deployment of new customer premise equipment are expensed as incurred pursuant to industry-specific guidance.
The following table provides information about contracts assets and contract liabilities related to contracts with customers:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017, as adjusted |
Contract assets (a) | $ | 23,682 |
| | $ | 24,329 |
|
Deferred revenue (b) | 129,560 |
| | 117,679 |
|
| |
(a) | Contract assets include primarily sales commissions for enterprise customers that are deferred and amortized over the average contract term. |
| |
(b) | Deferred revenue represents payments received from customers for services that have yet to be provided and installation revenue which is deferred and recognized over the benefit period. The majority of the Company's deferred revenue represents payments for services for up to one month in advance from residential and SMB customers which is realized within the following month as services are performed. |
A significant portion of our revenue is derived from residential and SMB customer contracts which are month-to month. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from our existing customer base. Contracts with enterprise customers generally range from three to five years, and services may only be terminated in accordance with the contractual terms.
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers the balance of its investment in funds that substantially hold securities that mature within three months or less from the date the fund purchases these securities to be cash equivalents. The carrying amount of cash and cash equivalents either approximates fair value due to the short-term maturity of these instruments or are at fair value.
The Company's non-cash investing and financing activities and other supplemental data were as follows: |
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Non-Cash Investing and Financing Activities: | | | |
Continuing Operations: | | | |
Property and equipment accrued but unpaid | $ | 91,036 |
| | $ | 61,170 |
|
Notes payable to vendor | 30,237 |
| | — |
|
Capital lease obligations | 656 |
| | — |
|
Supplemental Data: | | | |
Cash interest paid | 464,763 |
| | 524,864 |
|
Income taxes paid (refunded), net | (1,027 | ) | | 1,553 |
|
NOTE 7. RESTRUCTURING COSTS AND OTHER EXPENSE
Restructuring
Beginning in the first quarter of 2016, the Company commenced its restructuring initiatives (the "2016 Restructuring Plan") that are intended to simplify the Company's organizational structure.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | |
The following table summarizes the activity for the 2016 Restructuring Plan during 2018: | | |
| Severance and Other Employee Related Costs | | Facility Realignment and Other Costs | | Total |
Accrual balance at December 31, 2017 | $ | 113,474 |
| | $ | 9,626 |
| | $ | 123,100 |
|
Restructuring charges | 1,818 |
| | (497 | ) | | 1,321 |
|
Payments and other | (38,469 | ) | | (4,475 | ) | | (42,944 | ) |
Accrual balance at March 31, 2018 | $ | 76,823 |
| | $ | 4,654 |
| | $ | 81,477 |
|
The Company recorded restructuring charges of $76,751 for the three months ended March 31, 2017 relating to the 2016 Restructuring Plan.
Cumulative costs to date relating to the 2016 Restructuring Plan amounted to $310,294 and $67,526 for our Cablevision segment and Cequel segments, respectively.
Transaction Costs
The Company incurred transaction costs of $2,266 for the three months ended March 31, 2018 relating to the Distribution discussed in Note 1 and $178 for the three months ended March 31, 2017 related to the acquisition of a business.
NOTE 8. INTANGIBLE ASSETS
The following table summarizes information relating to the Company's acquired amortizable intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Estimated Useful Lives |
| | | | | | | | | | | | | |
Customer relationships | $ | 5,970,884 |
| | $ | (1,603,142 | ) | | $ | 4,367,742 |
| | $ | 5,970,884 |
| | $ | (1,409,021 | ) | | $ | 4,561,863 |
| | 8 to 18 years |
Trade names | 1,067,083 |
| | (624,276 | ) | | 442,807 |
| | 1,067,083 |
| | (588,574 | ) | | 478,509 |
| | 2 to 5 years |
Other amortizable intangibles | 37,060 |
| | (12,972 | ) | | 24,088 |
| | 37,060 |
| | (10,978 | ) | | 26,082 |
| | 1 to 15 years |
| $ | 7,075,027 |
| | $ | (2,240,390 | ) | | $ | 4,834,637 |
| | $ | 7,075,027 |
| | $ | (2,008,573 | ) | | $ | 5,066,454 |
| | |
Amortization expense for the three months ended March 31, 2018 and 2017 aggregated $231,817, and $238,019, respectively.
The following table summarizes information relating to the Company's acquired indefinite-lived intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Cablevision | | Cequel | | Total | | Cablevision | | Cequel | | Total |
Cable television franchises | $ | 8,113,575 |
| | $ | 4,906,506 |
| | $ | 13,020,081 |
| | $ | 8,113,575 |
| | $ | 4,906,506 |
| | $ | 13,020,081 |
|
Goodwill | 5,866,108 |
| | 2,153,741 |
| | 8,019,849 |
| | 5,866,120 |
| | 2,153,741 |
| | 8,019,861 |
|
Total | $ | 13,979,683 |
| | $ | 7,060,247 |
| | $ | 21,039,930 |
| | $ | 13,979,695 |
| | $ | 7,060,247 |
| | $ | 21,039,942 |
|
The carrying amount of goodwill is presented below:
|
| | | |
Gross goodwill as of December 31, 2017, as reported | $ | 7,996,760 |
|
ATS goodwill included in Cablevision segment (See Note 3 for further details) | 23,101 |
|
Gross goodwill as of December 31, 2017, as adjusted | 8,019,861 |
|
Adjustment to purchase accounting relating to business acquired in fourth quarter of 2017 | (12 | ) |
Net goodwill as of March 31, 2018 | $ | 8,019,849 |
|
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
NOTE 9. DEBT
The following table provides details of the Company's outstanding credit facility debt:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | March 31, 2018 | | December 31, 2017 |
| Maturity Date | | Interest Rate | | Principal Amount | | Carrying Amount (a) | | Principal Amount | | Carrying Amount (a) |
CSC Holdings Restricted Group: | | | | | | | | | | |
Revolving Credit Facility (b) | $20,000 on October 9, 2020, remaining balance on November 30, 2021 | | —% | | $ | — |
| | $ | — |
| | $ | 450,000 |
| | $ | 425,488 |
|
Term Loan Facility | July 17, 2025 | | 4.04% | | 2,977,500 |
| | 2,960,859 |
| | 2,985,000 |
| | 2,967,818 |
|
Incremental Term Loan Facility | January 25, 2026 | | 4.28% | | 1,500,000 |
| | 1,481,825 |
| | — |
| | — |
|
Cequel: | | | | | | | | | | | |
Revolving Credit Facility (c) | $65,000 on November 30, 2021, and remaining balance on April 5, 2023 | | — | | — |
| | — |
| | — |
| | — |
|
Term Loan Facility | July 28, 2025 | | 4.13% | | 1,255,513 |
| | 1,247,318 |
| | 1,258,675 |
| | 1,250,217 |
|
| | | | | $ | 5,733,013 |
| | 5,690,002 |
| | $ | 4,693,675 |
| | 4,643,523 |
|
Less: Current portion | | | | 53,900 |
| | | | 42,650 |
|
Long-term debt | | | | $ | 5,636,102 |
| | | | $ | 4,600,873 |
|
| |
(a) | The carrying amount is net of the unamortized deferred financing costs and/or discounts/premiums. |
| |
(b) | At March 31, 2018, $115,973 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $2,184,027 of the facility was undrawn and available, subject to covenant limitations. |
| |
(c) | At March 31, 2018, $13,500 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $336,500 of the facility was undrawn and available, subject to covenant limitations. |
In January 2018, CSC Holdings borrowed $150,000 under its revolving credit facility and entered into a new $1,500,000 incremental term loan facility (the "Incremental Term Loan") under its existing CVC Credit Facilities Agreement. The Incremental Term Loan was priced at 99.5% and will mature on January 25, 2026. The Incremental Term Loan is comprised of eurodollar borrowings or alternate base rate borrowings, and bears interest at a rate per annum equal to the adjusted LIBO rate or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 1.50% per annum and (ii) with respect to any eurodollar loan, 2.50% per annum.
The Company made a voluntary repayment of $600,000 under the CSC Holdings revolving credit facility in January 2018.
On March 22, 2018, Altice US Finance I Corporation, an indirect wholly-owned subsidiary of the Company, entered into a Fourth Amendment to Cequel Credit Agreement (Extension Amendment), by and among the borrower, the Revolving Consent Lenders (as defined in the Fourth Amendment) and JPMorgan Chase Bank, N.A., as administrative agent for the lenders (the “Fourth Amendment”). The Fourth Amendment amends and supplements the Borrower’s credit agreement, dated as of June 12, 2015, as amended by the first amendment (refinancing amendment), dated as of October 25, 2016, the second amendment (extension amendment), dated as of December 9, 2016, and the third amendment (incremental loan assumption agreement and refinancing amendment), dated as of March 15, 2017, (as so amended and as may be further amended, restated, modified or supplemented from time to time and as further amended by the Fourth Amendment among, inter alios, the borrower, the lenders party thereto and the administrative agent.
The Fourth Amendment extends the maturity date of the revolving loans and/or commitments of the Revolving Consent Lenders to April 5, 2023. The Fourth Amendment and the extended maturity date will not apply to the revolving loans and/or commitments of revolving lenders under the Cequel Credit Agreement that are not Revolving Consent Lenders.
As of March 31, 2018, the Company was in compliance with all of its financial covenants under the CSC Holdings Credit Facilities Agreement and the Cequel Credit Facilities Agreement.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Senior Guaranteed Notes, Senior Secured Notes and Senior Notes and Debentures
The following table summarizes the Company's senior guaranteed notes, senior secured notes and senior notes and debentures:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | March 31, 2018 | | December 31, 2017 |
Date Issued | | Maturity Date | | Interest Rate | | | | Principal Amount | | Carrying Amount (a) | | Principal Amount | | Carrying Amount (a) |
CSC Holdings Senior Notes: | | | | | | | | | |
February 6, 1998 | | February 15, 2018 | | 7.875 | % | (b) | (f) | (o) | $ | — |
| | $ | — |
| | $ | 300,000 |
| | $ | 301,184 |
|
July 21, 1998 | | July 15, 2018 | | 7.625 | % | (b) | (f) | | 500,000 |
| | 504,213 |
| | 500,000 |
| | 507,744 |
|
February 12, 2009 | | February 15, 2019 | | 8.625 | % | (c) | (f) | | 526,000 |
| | 537,930 |
| | 526,000 |
| | 541,165 |
|
November 15, 2011 | | November 15, 2021 | | 6.750 | % | (c) | (f) | | 1,000,000 |
| | 962,332 |
| | 1,000,000 |
| | 960,146 |
|
May 23, 2014 | | June 1, 2024 | | 5.250 | % | (c) | (f) | | 750,000 |
| | 663,291 |
| | 750,000 |
| | 660,601 |
|
October 9, 2015 | | January 15, 2023 | | 10.125 | % | (e) | | | 1,800,000 |
| | 1,778,745 |
| | 1,800,000 |
| | 1,777,914 |
|
October 9, 2015 | | October 15, 2025 | | 10.875 | % | (e) | (l) | | 1,684,221 |
| | 1,661,516 |
| | 1,684,221 |
| | 1,661,135 |
|
CSC Holdings Senior Guaranteed Notes: | | | | | | | | | |
October 9, 2015 | | October 15, 2025 | | 6.625 | % | (e) | | | 1,000,000 |
| | 987,037 |
| | 1,000,000 |
| | 986,717 |
|
September 23, 2016 | | April 15, 2027 | | 5.500 | % | (g) | | | 1,310,000 |
| | 1,304,581 |
| | 1,310,000 |
| | 1,304,468 |
|
January 29, 2018 | | February 1, 2028 | | 5.375 | % | (n) | | | 1,000,000 |
| | 991,665 |
| | — |
| | — |
|
Cablevision Senior Notes (k): | | | | | | | | | |
April 15, 2010 | | April 15, 2018 | | 7.750 | % | (c) | (f) | (o) | — |
| | — |
| | 750,000 |
| | 754,035 |
|
April 15, 2010 | | April 15, 2020 | | 8.000 | % | (c) | (f) | | 500,000 |
| | 492,795 |
| | 500,000 |
| | 492,009 |
|
September 27, 2012 | | September 15, 2022 | | 5.875 | % | (c) | (f) | | 649,024 |
| | 575,348 |
| | 649,024 |
| | 572,071 |
|
Cequel and Cequel Capital Senior Notes (l): | | | | | | | | | |
Oct. 25, 2012 Dec. 28, 2012 | | September 15, 2020 | | 6.375 | % | (d) | (m) | | 1,050,000 |
| | 1,029,364 |
| | 1,050,000 |
| | 1,027,493 |
|
May 16, 2013 Sept. 9, 2014 | | December 15, 2021 | | 5.125 | % | (d) | | | 1,250,000 |
| | 1,144,929 |
| | 1,250,000 |
| | 1,138,870 |
|
June 12, 2015 | | July 15, 2025 | | 7.750 | % | (i) | | | 620,000 |
| | 604,755 |
| | 620,000 |
| | 604,374 |
|
Altice US Finance I Corporation Senior Secured Notes (l): | | | | | | | |
June 12, 2015 | | July 15, 2023 | | 5.375 | % | (h) | | | 1,100,000 |
| | 1,083,159 |
| | 1,100,000 |
| | 1,082,482 |
|
April 26, 2016 | | May 15, 2026 | | 5.500 | % | (j) | | | 1,500,000 |
| | 1,488,306 |
| | 1,500,000 |
| | 1,488,024 |
|
| | | | | | | | $ | 16,239,245 |
| | 15,809,966 |
| | $ | 16,289,245 |
| | 15,860,432 |
|
Less: current portion | | | 1,042,143 |
| | | | 507,744 |
|
Long-term debt | | | $ | 14,767,823 |
| | | | $ | 15,352,688 |
|
| |
(a) | The carrying amount is net of the unamortized deferred financing costs and/or discounts/premiums. |
| |
(b) | The debentures are not redeemable by CSC Holdings prior to maturity. |
| |
(c) | Notes are redeemable at any time at a specified "make-whole" price plus accrued and unpaid interest to the redemption date. |
| |
(d) | The Company may redeem some or more of all the notes at the redemption price set forth in the relevant indenture, plus accrued and unpaid interest. |
| |
(e) | The Company may redeem some or all of the 2023 Notes at any time on or after January 15, 2019, and some or all of the 2025 Notes and 2025 Guaranteed Notes at any time on or after October 15, 2020, at the redemption prices set forth in the relevant indenture, plus accrued and unpaid interest, if any. The Company may also redeem up to 40% of each series of |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
the Cablevision Acquisition Notes using the proceeds of certain equity offerings before October 15, 2018, at a redemption price equal to 110.125% for the 2023 Notes, 110.875% for the 2025 Notes and 106.625% for the 2025 Guaranteed Notes, in each case plus accrued and unpaid interest. In addition, at any time prior to January 15, 2019, CSC Holdings may redeem some or all of the 2023 Notes, and at any time prior to October 15, 2020, the Company may redeem some or all of the 2025 Notes and the 2025 Guaranteed Notes, at a price equal to 100% of the principal amount thereof, plus a “make whole” premium specified in the relevant indenture plus accrued and unpaid interest.
| |
(f) | The carrying value of the notes was adjusted to reflect their fair value on the Cablevision Acquisition Date (aggregate reduction of $52,788). |
| |
(g) | The 2027 Guaranteed Notes are redeemable at any time on or after April 15, 2022 at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any. In addition, up to 40% may be redeemed for each series of the 2027 Guaranteed Notes using the proceeds of certain equity offerings before October 15, 2019, at a redemption price equal to 105.500%, plus accrued and unpaid interest. |
| |
(h) | Some or all of these notes may be redeemed at any time on or after July 15, 2018, plus accrued and unpaid interest, if any. Up to 40% of the notes may be redeemed using the proceeds of certain equity offerings before July 15, 2018, at a redemption price equal to 105.375%. |
| |
(i) | Some or all of these notes may be redeemed at any time on or after July 15, 2020, plus accrued and unpaid interest, if any. Up to 40% of the notes may be redeemed using the proceeds of certain equity offerings before July 15, 2018, at a redemption price equal to 107.750%. |
| |
(j) | Some or all of these notes may be redeemed at any time on or after May 15, 2021, plus accrued and unpaid interest, if any. Up to 40% of the notes may be redeemed using the proceeds of certain equity offerings before May 15, 2019, at a redemption price equal to 105.500%. |
| |
(k) | The issuers of these notes have no ability to service interest or principal on the notes, other than through any dividends or distributions received from CSC Holdings. CSC Holdings is restricted, in certain circumstances, from paying dividends or distributions to the issuers by the terms of the CVC Credit Facilities Agreement. |
| |
(l) | The issuers of these notes have no ability to service interest or principal on the notes, other than through any contributions/distributions from Cequel Communications, LLC (an indirect subsidiary of Cequel and the parent of Altice US Finance I). Cequel Communications, LLC is restricted in certain circumstances, from paying dividends or distributions to the issuers by the terms of the Cequel Credit Facilities Agreement. |
| |
(m) | These notes were repaid in April 2018 with the proceeds from the issuance of new senior notes (see Note 17). |
| |
(n) | The 2028 Guaranteed Notes are redeemable at any time on or after February 1, 2023 at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any. In addition, up to 40% of the original aggregate principal amount of the notes may be redeemed using the proceeds of certain equity offerings before February 1, 2021, at a redemption price equal to 105.375%, plus accrued and unpaid interest. |
| |
(o) | These notes were repaid in February 2018 with the proceeds from the 2028 Guaranteed Notes (defined below) and with the proceeds from the Incremental Term Loan. |
In January 2018, CSC Holdings issued $1,000,000 aggregate principal amount of 5.375% senior guaranteed notes due February 1, 2028 (the "2028 Guaranteed Notes"). The 2028 Guaranteed Notes are senior unsecured obligations and rank pari passu in right of payment with all of the existing and future senior indebtedness, including the existing senior notes and the CVC Credit Facilities and rank senior in right of payment to all of existing and future subordinated indebtedness.
The proceeds from the 2028 Guaranteed Notes, together with proceeds from the Incremental Term Loan (discussed above), borrowings under the CVC revolving credit facility and cash on hand, were used in February 2018 to repay $300,000 principal amount of CSC Holdings' senior notes due in February 2018 and $750,000 principal amount of Cablevision senior notes due in April 2018 and will be used to fund a dividend of $1,500,000 to the Company's stockholders immediately prior to and in connection with the Distribution discussed in Note 1.
The indentures under which the senior notes and debentures were issued contain various covenants. The Company was in compliance with all of its financial covenants under these indentures as of March 31, 2018.
Notes Payable to Affiliates and Related Parties
On June 21, 2016, in connection with the Cablevision Acquisition, the Company issued notes payable to affiliates and related parties aggregating $1,750,000, of which $875,000 bore interest at 10.75% and matured on December 20, 2023 and $875,000 bore interest at 11% and matured on December 20, 2024.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
In connection with the Company's IPO in June 2017, the Company converted the notes payable to affiliates and related parties (together with accrued and unpaid interest of $529 and applicable premium of $513,723) into shares of the Company’s common stock at the IPO price. The premium was recorded as a loss on extinguishment of debt on the Company's statement of operations in the second quarter of 2017. In connection with the conversion of the notes, the Company recorded a credit to paid in capital of $2,264,252 in the second quarter of 2017.
For the three months ended March 31, 2017, the Company recognized $47,588 of interest expense related to these notes prior to their conversion.
Summary of Debt Maturities
The future maturities of debt payable by the Company under its various debt obligations outstanding as of March 31, 2018, including notes payable, collateralized indebtedness (see Note 10), and capital leases, are as follows:
|
| | | | | | | | | | | |
Years Ending December 31, | Cablevision | | Cequel | | Total |
2018 | $ | 581,298 |
| | $ | 14,193 |
| | $ | 595,491 |
|
2019 | 579,587 |
| | 32,563 |
| | 612,150 |
|
2020 | 547,517 |
| | 1,062,715 |
| | 1,610,232 |
|
2021 | 2,506,407 |
| | 1,262,725 |
| | 3,769,132 |
|
2022 | 695,806 |
| | 12,730 |
| | 708,536 |
|
Thereafter | 11,812,663 |
| | 4,416,240 |
| | 16,228,903 |
|
NOTE 10. DERIVATIVE CONTRACTS AND COLLATERALIZED INDEBTEDNESS
Prepaid Forward Contracts
The Company has entered into various transactions to limit the exposure against equity price risk on its shares of Comcast Corporation ("Comcast") common stock. The Company has monetized all of its stock holdings in Comcast through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. At maturity, the contracts provide for the option to deliver cash or shares of Comcast stock with a value determined by reference to the applicable stock price at maturity. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share while allowing the Company to retain upside appreciation from the hedge price per share to the relevant cap price.
The Company received cash proceeds upon execution of the prepaid forward contracts discussed above which has been reflected as collateralized indebtedness in the accompanying condensed consolidated balance sheets. In addition, the Company separately accounts for the equity derivative component of the prepaid forward contracts. These equity derivatives have not been designated as hedges for accounting purposes. Therefore, the net fair values of the equity derivatives have been reflected in the accompanying condensed consolidated balance sheets as an asset or liability and the net increases or decreases in the fair value of the equity derivative component of the prepaid forward contracts are included in gain (loss) on derivative contracts in the accompanying condensed consolidated statements of operations.
All of the Company's monetization transactions are obligations of its wholly-owned subsidiaries that are not part of the Restricted Group; however, CSC Holdings has provided guarantees of the subsidiaries' ongoing contract payment expense obligations and potential payments that could be due as a result of an early termination event (as defined in the agreements). If any one of these contracts were terminated prior to its scheduled maturity date, the Company would be obligated to repay the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and equity collar, calculated at the termination date. As of March 31, 2018, the Company did not have an early termination shortfall relating to any of these contracts.
The Company monitors the financial institutions that are counterparties to its equity derivative contracts. All of the counterparties to such transactions carry investment grade credit ratings as of March 31, 2018.
Interest Rate Swap Contracts
In June 2016, the Company entered into two fixed to floating interest rate swap contracts. One fixed to floating interest rate swap is converting $750,000 from a fixed rate of 1.6655% to six-month LIBO rate and a second tranche of $750,000
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
from a fixed rate of 1.68% to six-month LIBO rate. The objective of these swaps is to cover the exposure of the 2026 Senior Secured Notes issued by Cequel to changes in the market interest rate. These swap contracts were not designated as hedges for accounting purposes. Accordingly, the changes in the fair value of these interest rate swap contracts are recorded through the statements of operations.
The Company does not hold or issue derivative instruments for trading or speculative purposes.
The following represents the location of the assets and liabilities associated with the Company's derivative instruments within the condensed consolidated balance sheets:
|
| | | | | | | | | | | | | | | | | | |
| | | | Asset Derivatives | | Liability Derivatives |
Derivatives Not Designated as Hedging Instruments | | Balance Sheet Location | | Fair Value at March 31, 2018 | | Fair Value at December 31, 2017 | | Fair Value at March 31, 2018 | | Fair Value at December 31, 2017 |
| | | | | | | | | | |
Prepaid forward contracts | | Derivative contracts, current | | $ | 9,211 |
| | $ | 52,545 |
| | $ | (9,211 | ) | | $ | (52,545 | ) |
Prepaid forward contracts | | Derivative contracts, long-term | | 63,343 |
| | — |
| | (4,495 | ) | | (109,504 | ) |
Interest rate swap contracts | | Liabilities under derivative contracts, long-term | | — |
| | — |
| | (109,824 | ) | | (77,902 | ) |
| | | | $ | 72,554 |
| | $ | 52,545 |
| | $ | (123,530 | ) | | $ | (239,951 | ) |
Gain (loss) related to the Company's derivative contracts related to the Comcast common stock for the three months ended March 31, 2018 and 2017 of $168,352 and $(71,044), respectively, are reflected in gain (loss) on derivative contracts, net in the Company's condensed consolidated statement of operations.
For the three months ended March 31, 2018 and 2017, the Company recorded a gain (loss) on investments of $(252,576) and $131,658, respectively, primarily representing the net increase (decrease) in the fair values of the investment securities pledged as collateral.
For the three months ended March 31, 2018 and 2017, the Company recorded a gain (loss) on interest rate swap contracts of $(31,922) and $2,342, respectively.
NOTE 11. FAIR VALUE MEASUREMENT
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| |
• | Level I - Quoted prices for identical instruments in active markets. |
| |
• | Level II - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| |
• | Level III - Instruments whose significant value drivers are unobservable. |
The following table presents for each of these hierarchy levels, the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | |
| Fair Value Hierarchy | | March 31, 2018 | | December 31, 2017 |
Assets: | | | | | |
Money market funds | Level I | | $ | 1,121,432 |
| | $ | 5,949 |
|
Investment securities pledged as collateral | Level I | | 1,467,781 |
| | 1,720,357 |
|
Prepaid forward contracts | Level II | | 72,554 |
| | 52,545 |
|
Liabilities: | | | | | |
Prepaid forward contracts | Level II | | 13,706 |
| | 162,049 |
|
Interest rate swap contracts | Level II | | 109,824 |
| | 77,902 |
|
Contingent consideration related to 2017 acquisitions | Level III | | 3,233 |
| | 32,233 |
|
The Company's cash equivalents, investment securities and investment securities pledged as collateral are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
The Company's derivative contracts and liabilities under derivative contracts on the Company's balance sheets are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit risk considerations. Such adjustments are generally based on available market evidence. Since model inputs can generally be verified and do not involve significant management judgment, the Company has concluded that these instruments should be classified within Level II of the fair value hierarchy.
The fair value of the contingent consideration as of March 31, 2018 related to acquisitions in the first quarter and fourth quarters of 2017 of approximately $1,000 and $2,233, respectively. The estimated amount recorded as of March 31, 2018 is the remaining unpaid contractual amount for the first quarter 2017 acquisition and approximately 51% of the contractual amount for the fourth quarter 2017 acquisition. The fair value of the consideration was estimated based on a probability assessment of attaining the targets as of March 31, 2018.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate:
Credit Facility Debt, Collateralized Indebtedness, Senior Notes and Debentures, Senior Secured Notes, Senior Guaranteed Notes, and Notes Payable
The fair values of each of the Company's debt instruments are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments of the same remaining maturities. The fair value of notes payable is based primarily on the present value of the remaining payments discounted at the borrowing cost.
The carrying values, estimated fair values, and classification under the fair value hierarchy of the Company's financial instruments, excluding those that are carried at fair value in the accompanying condensed consolidated balance sheets, are summarized as follows:
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | |
| | | March 31, 2018 | | December 31, 2017 |
| Fair Value Hierarchy | | Carrying Amount (a) | | Estimated Fair Value | | Carrying Amount (a) | | Estimated Fair Value |
CSC Holdings debt instruments: | | | |
| | |
| | |
| | |
|
Credit facility debt | Level II | | $ | 4,442,684 |
| | $ | 4,477,500 |
| | $ | 3,393,306 |
| | $ | 3,435,000 |
|
Collateralized indebtedness | Level II | | 1,351,271 |
| | 1,298,060 |
| | 1,349,474 |
| | 1,305,932 |
|
Senior guaranteed notes | Level II | | 3,283,283 |
| | 3,231,825 |
| | 2,291,185 |
| | 2,420,000 |
|
Senior notes and debentures | Level II | | 6,108,028 |
| | 6,797,434 |
| | 6,409,889 |
| | 7,221,846 |
|
Notes payable | Level II | | 78,938 |
| | 76,340 |
| | 56,956 |
| | 55,289 |
|
Cablevision senior notes: | | | | | | | | | |
Senior notes and debentures | Level II | | 1,068,142 |
| | 1,172,906 |
| | 1,818,115 |
| | 1,931,239 |
|
Cequel debt instruments: | | |
|
| |
|
| |
|
| |
|
|
Cequel credit facility | Level II | | 1,247,318 |
| | 1,255,513 |
| | 1,250,217 |
| | 1,258,675 |
|
Senior secured notes | Level II | | 2,571,465 |
| | 2,580,000 |
| | 2,570,506 |
| | 2,658,930 |
|
Senior notes | Level II | | 2,779,048 |
| | 2,987,700 |
| | 2,770,737 |
| | 2,983,615 |
|
Notes payable | Level II | | 24,149 |
| | 24,149 |
| | 8,946 |
| | 8,946 |
|
| | | $ | 22,954,326 |
| | $ | 23,901,427 |
| | $ | 21,919,331 |
| | $ | 23,279,472 |
|
| |
(a) | Amounts are net of unamortized deferred financing costs and discounts. |
The fair value estimates related to the Company's debt instruments presented above are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NOTE 12. INCOME TAXES
In general, the Company is required to use an estimated annual effective tax rate to measure the income tax expense or benefit recognized in an interim period. The estimated annual effective tax rate is revised on a quarterly basis and therefore may be different from the rate used in a prior interim period. In addition, certain items included in income tax expense as well as the tax impact of certain items included in pretax income from continuing operations must be treated as discrete items. The income tax expense or benefit associated with these discrete items is fully recognized in the interim period in which the items occur.
The Company recorded income tax benefit of $60,703 for the three months ended March 31, 2018, reflecting an effective tax rate of 32%, which has declined compared to previous years primarily as a result of the enactment of the Tax Cuts & Jobs Act in December 2017 which lowered the corporate federal income tax rate from 35% to 21%.
The Company recorded income tax benefit of $45,908 for the three months ended March 31, 2017, reflecting an effective tax rate of 38%. Nondeductible share-based compensation expense resulted in tax expense of $3,140. Absent this item, the effective tax rate for the three months ended March 31, 2017 would have been 40%.
As of March 31, 2018, the Company's federal net operating losses (“NOLs”) were approximately $2,486,000. The utilization of certain pre-merger NOLs of Cablevision and Cequel are limited pursuant to Internal Revenue Code Section 382. The Company does not expect such limitations to impact the ability to utilize the NOLs prior to their expiration.
NOTE 13. SHARE BASED COMPENSATION
Certain employees of the Company and its affiliates received awards of units in a carry unit plan of Neptune Management LP, an entity which has an ownership interest in the Company. The awards generally vest as follows: 50% on the second anniversary of June 21, 2016 for Cablevision employees or December 21, 2015 for Cequel employees ("Base Date"), 25% on the third anniversary of the Base Date, and 25% on the fourth anniversary of the Base Date. Neptune Holding US GP LLC, the general partner of Neptune Management LP, has the right to repurchase (or to assign to an affiliate, including the Company, the right to repurchase) vested awards held by employees for sixty days following their termination. For performance-based awards under the plan, vesting occurs upon achievement or satisfaction of a specified
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
performance condition. The Company considered the probability of achieving the established performance targets in determining the share-based compensation with respect to these awards at the end of each reporting period.
Beginning on the fourth anniversary of the Base Date, the holders of carry units have an annual opportunity (a sixty day period determined by the administrator of the plan) to sell their units back to Neptune Holding US GP LLC (or affiliate, including the Company, designated by Neptune Holding US GP LLC). Accordingly, the carry units are presented as temporary equity on the consolidated balance sheets at fair value. Adjustments to fair value at each reporting period are recorded in paid-in capital.
The right of Neptune Holding US GP LLC to assign to an affiliate, including the Company, the right to repurchase an employee’s vested units during the sixty-day period following termination, or to satisfy its obligation to repurchase an employee’s vested units during annual 60 day periods following the fourth anniversary of the Base Date, may be exercised by Neptune Holding US GP LLC in its discretion at the time a repurchase right or obligation arises. The carry unit plan requires the purchase price payable to the employee or former employee, as the case may be, to be paid in cash, a promissory note (with a term of not more than 3 years and bearing interest at the long-term applicable federal rate under Section 1274(d) of the Internal Revenue Code) or combination thereof, in each case as determined by Neptune Holding US GP LLC in its discretion at the time of the repurchase. Neptune Holding US GP LLC expects that vested units will be redeemed for shares of the Company's Class A common stock upon vesting.
The following table summarizes activity relating to carry units:
|
| | | | | | | | | |
| Number of Time Vesting Awards | | Number of Performance Based Vesting Awards | | Weighted Average Grant Date Fair Value |
Balance, December 31, 2017 | 168,550,001 |
| | 10,000,000 |
| | $ | 0.71 |
|
Forfeited | (3,500,001 | ) | | — |
| | 0.86 |
|
Balance, March 31, 2018 | 165,050,000 |
| | 10,000,000 |
| | 0.71 |
|
The weighted average fair value per unit was $2.50 and $2.10 as of December 31, 2017 and March 31, 2018, respectively. For the three months ended March 31, 2018 and 2017, the Company recognized an expense of $17,501 and $7,848 related to the push down of share-based compensation related to the carry unit plan of which approximately $16,872 and $5,786 related to units granted to employees of the Company and $629 and $2,062 related to employees of Altice N.V. and affiliated companies allocated to the Company.
Stock Option Plan
The following table summarizes activity related to employee stock options for the three months ended March 31, 2018:
|
| | | | | | | | | | | | | | | | |
| Shares Under Option | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Contractual Term (in years) | | |
| Time Vesting | | Performance Based Vesting | | | | Aggregate Intrinsic Value (a) |
Balance at December 31, 2017 | 5,110,747 |
| | — |
| | $ | 19.48 |
| | 9.97 |
| | $ | 8,944 |
|
Granted | 298,394 |
| | 39,050 |
| | 21.22 |
| | | | |
Forfeited | (103,766 | ) | | (22,314 | ) | | 21.81 |
| | | | |
Balance at March 31, 2018 | 5,305,375 |
| | 16,736 |
| | $ | 19.54 |
| | 9.92 |
| | (5,615 | ) |
Options exercisable at March 31, 2018 | — |
| | — |
| | — |
| | — |
| | — |
|
| |
(a) | The aggregate intrinsic value is calculated as the difference between the exercise price and the closing price of the Company's Class A common stock at the respective date. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The Company recognized share based compensation expense related to employee stock options for the three months ended March 31, 2018 of $4,122.
The following aggregate assumptions were used to calculate the fair values of stock option awards granted during the three months ended March 31, 2018:
|
| | |
Risk-free interest rate | | 2.64% |
Expected life (in years) | | 6.49 |
Dividend yield | | —% |
Volatility | | 33.86% |
Grant date fair value | | $7.49 |
NOTE 14. AFFILIATE AND RELATED PARTY TRANSACTIONS
Equity Method Investments
In July 2016, the Company completed the sale of a 75% interest in Newsday LLC ("Newsday") to an employee of the Company. The Company retained the remaining 25% ownership interest. Effective July 7, 2016, the operating results of Newsday are no longer consolidated with those of the Company and the Company's 25% interest in the operating results of Newsday is recorded using the equity method.
At March 31, 2018, the Company's 25% investment in Newsday and its 25% interest in i24NEWS, Altice N.V.'s 24/7 international news and current affairs channel aggregated $12,891 and $800, respectively and is included in investments in affiliates on our condensed consolidated balance sheet. The operating results of i24NEWS is also recorded using the equity method. For the three months ended March 31, 2018 and 2017, the Company recorded equity in net loss of Newsday of $9,312 and $1,510, respectively, and equity in net loss of i24NEWS of $1,130 and $1,247, respectively. In April 2018, Altice NV transferred its ownership of i24 US and i24 Europe to the Company for minimal consideration.
Affiliate and Related Party Transactions
As the transactions discussed below were conducted between subsidiaries of Altice N.V. under common control and equity method investees, amounts charged for certain services may not have represented amounts that might have been received or incurred if the transactions were based upon arm's length negotiations.
The following table summarizes the revenue and charges related to services provided to or received from subsidiaries of Altice N.V. and Newsday:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Revenue | $ | 125 |
| | $ | 141 |
|
Operating expenses: | |
| | |
Programming and other direct costs | (1,154 | ) | | (735 | ) |
Other operating expenses, net | (7,994 | ) | | (7,298 | ) |
Operating expenses, net | (9,148 | ) | | (8,033 | ) |
| | | |
Interest expense (a) | — |
| | (47,588 | ) |
Net charges | $ | (9,023 | ) | | $ | (55,480 | ) |
Capital Expenditures | $ | 1,626 |
| | $ | 892 |
|
| |
(a) | In connection with the Company's IPO in June 2017, the Company converted the notes payable to affiliates and related parties into shares of the Company’s common stock at the IPO price. |
Revenue
The Company recognized revenue primarily in connection with the sale of advertising to Newsday.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Programming and other direct costs
Programming and other direct costs include costs incurred by the Company for the transport and termination of voice and data services provided by a subsidiary of Altice N.V.
Other operating expenses
A subsidiary of Altice N.V. provides certain executive services, as well as consulting, advisory and other services, including, prior to the IPO, CEO, CFO and COO services, to the Company. Compensation under the terms of the agreement is an annual fee of $30,000 to be paid by the Company. Fees associated with this agreement recorded by the Company amounted to approximately $7,500, for the three months ended March 31, 2018 and 2017. As of June 20, 2017, the CEO, CFO and COO became employees of the Company and the agreement was assigned to Altice N.V. by a subsidiary of Altice N.V. This agreement will be terminated upon the completion of the Distribution discussed in Note 1.
Other operating expenses also include charges for services provided by other subsidiaries of Altice N.V. aggregating $494 and $(202), respectively, net of a credit of $482 for transition services provided to Newsday for the three months ended March 31, 2017.
Capital Expenditures
Capital expenditures include $1,626 and $892, respectively, for equipment purchases and software development services provided by subsidiaries of Altice NV.
Aggregate amounts that were due from and due to related parties are summarized below:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Due from: | | | |
Altice US Finance S.A. (a) | $ | 12,951 |
| | $ | 12,951 |
|
Newsday (b) | 2,558 |
| | 2,713 |
|
Altice Management Americas (b) | 1,271 |
| | 33 |
|
i24 News (b) | 4,335 |
| | 4,036 |
|
Other Altice N.V. subsidiaries (b) | 31 |
| | 31 |
|
| $ | 21,146 |
| | $ | 19,764 |
|
Due to: | | | |
Altice Management International (c) | 7,500 |
| | — |
|
Newsday (b) | 33 |
| | 33 |
|
Altice Labs S.A. (c) | 1,051 |
| | 7,354 |
|
Other Altice N.V. subsidiaries (c) | 2,494 |
| | 3,611 |
|
| $ | 11,078 |
| | $ | 10,998 |
|
| |
(a) | Represents interest on senior notes paid by the Company on behalf of the affiliate. |
| |
(b) | Represents amounts paid by the Company on behalf of the respective related party and for Newsday, the net amounts due from the related party also include charges for certain transition services provided. |
| |
(c) | Represents amounts due to affiliates for services provided to the Company. |
NOTE 15. COMMITMENTS AND CONTINGENCIES
Legal Matters
Following expiration of the affiliation agreements for carriage of certain Fox broadcast stations and cable networks on October 16, 2010, News Corporation terminated delivery of the programming feeds to Cablevision, and as a result, those stations and networks were unavailable on Cablevision's cable television systems. On October 30, 2010, Cablevision and Fox reached an agreement on new affiliation agreements for these stations and networks, and carriage was restored.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Several purported class action lawsuits alleging breach of contract, unjust enrichment, and consumer fraud and seeking unspecified compensatory damages, punitive damages and attorneys' fees were subsequently filed on behalf of Cablevision's customers seeking recovery for the lack of Fox programming. Those lawsuits were consolidated in an action before the U. S. District Court for the Eastern District of New York, and a consolidated complaint was filed in that court on February 22, 2011. On March 28, 2012, in ruling on Cablevision's motion to dismiss, the Court dismissed all of plaintiffs’ claims, except for breach of contract. On March 30, 2014, the Court granted plaintiffs’ motion for class certification. The parties have entered into a settlement agreement, which is subject to Court approval. As of December 31, 2017, the Company had an estimated liability associated with a potential settlement totaling $6,000. The amount ultimately paid in connection with the proposed settlement could exceed the amount recorded.
In October 2015, the New York Attorney General began an investigation into whether the major Internet Service Providers in New York State deliver advertised Internet speeds. The Company is cooperating with this investigation and is currently in discussions with the New York Attorney General about resolving the investigation as to the Company, which resolution may involve operational and or financial components. While the Company is unable to predict the outcome of the investigation or these discussions, at this time it does not expect that the outcome will have a material adverse effect on its operations, financial conditions or cash flows.
The Company receives notices from third parties and, in some cases, is named as a defendant in certain lawsuits claiming infringement of various patents relating to various aspects of the Company's businesses. In certain of these cases other industry participants are also defendants. In certain of these cases the Company expects that any potential liability would be the responsibility of the Company's equipment vendors pursuant to applicable contractual indemnification provisions. The Company believes that the claims are without merit and intends to defend the actions vigorously, but is unable to predict the outcome of these matters or reasonably estimate a range of possible loss.
In addition to the matters discussed above, the Company is party to various lawsuits, some involving claims for substantial damages. Although the outcome of these other matters cannot be predicted and the impact of the final resolution of these other matters on the Company's results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these other lawsuits will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.
NOTE 16. SEGMENT INFORMATION
The Company classifies its operations into two reportable segments: Cablevision and Cequel. The Company's reportable segments are strategic business units that are managed separately. The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment Adjusted EBITDA, a non-GAAP measure. The Company defines Adjusted EBITDA as net income (loss) excluding income taxes, income (loss) from discontinued operations, non-operating other income or expenses, loss on extinguishment of debt and write-off of deferred financing costs, gain (loss) on interest rate swap contracts, gain (loss) on derivative contracts, gain (loss) on investments, interest expense (including cash interest expense), interest income, depreciation and amortization (including impairments), share-based compensation expense or benefit, restructuring expense or credits and transaction expenses. The Company has presented the components that reconcile Adjusted EBITDA to operating income, an accepted GAAP measure:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2018 | | Three Months Ended March 31, 2017 |
| Cablevision | | Cequel | | Total | | Cablevision | | Cequel | | Total |
Operating income | $ | 170,693 |
| | $ | 142,345 |
| | $ | 313,038 |
| | $ | 122,044 |
| | $ | 128,066 |
| | $ | 250,110 |
|
Share-based compensation | 16,172 | |