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, 2019 | |
OR
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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 | ý | | Accelerated filer | o |
Non-accelerated filer | o | | 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 |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol | Name of each exchange on which registered |
Class A Common Stock, par value $0.01 per share | ATUS | New York Stock Exchange |
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Number of shares of common stock outstanding as of April 26, 2019: | 675,031,483 |
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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 | |
| Consolidated Balance Sheets - March 31, 2019 (Unaudited) and December 31, 2018 | |
| Consolidated Statements of Operations - Three months ended March 31, 2019 and 2018 (Unaudited) | |
| Consolidated Statements of Comprehensive Loss - Three months ended March 31, 2019 and 2018 (Unaudited) | |
| Consolidated Statements of Stockholders’ Equity - Three months ended March 31, 2019 and 2018 (Unaudited) | |
| Consolidated Statements of Cash Flows - Three months ended March 31, 2019 and 2018 (Unaudited) | |
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| Notes to 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 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 6. Exhibits | |
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SIGNATURES | |
PART I. FINANCIAL INFORMATION
This Form 10-Q contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Act of 1934, as amended. In this Form 10-Q there are statements concerning our future operating results and future financial performance. Words such as "expects", "anticipates", "believes", "estimates", "may", "will", "should", "could", "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. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors.
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, video and telephony customers from existing competitors (such as broadband communications companies, wireless data and telephony providers, 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 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, and our ability to attract customers to these services; |
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• | the effects of economic conditions or other factors which may negatively affect our customers’ demand for our current and future products and services; |
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• | the effects of industry conditions; |
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• | demand for digital and linear advertising products and services; |
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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 Europe; 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" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") filed on March 1, 2019 (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 Annual 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 CONSOLIDATED BALANCE SHEETS (In thousands) |
ASSETS | March 31, 2019 (Unaudited) | | December 31, 2018 |
Current Assets: | | | |
Cash and cash equivalents | $ | 123,007 |
| | $ | 298,781 |
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Restricted cash | 258 |
| | 257 |
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Accounts receivable, trade (less allowance for doubtful accounts of $12,007 and $13,520) | 405,030 |
| | 448,399 |
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Prepaid expenses and other current assets | 181,726 |
| | 136,285 |
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Amounts due from affiliates | 1,021 |
| | 17,557 |
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Derivative contracts | — |
| | 1,975 |
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Total current assets | 711,042 |
| | 903,254 |
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Property, plant and equipment, net of accumulated depreciation of $4,384,560 and $4,044,671 | 5,772,026 |
| | 5,828,881 |
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Right-of-use operating lease assets | 259,223 |
| | — |
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Investment securities pledged as collateral | 1,717,350 |
| | 1,462,626 |
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Derivative contracts | — |
| | 109,344 |
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Other assets | 75,030 |
| | 84,382 |
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Amortizable intangibles, net of accumulated amortization of $3,083,406 and $2,882,787 | 3,992,205 |
| | 4,192,824 |
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Indefinite-lived cable television franchises | 13,020,081 |
| | 13,020,081 |
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Goodwill | 8,012,416 |
| | 8,012,416 |
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Total assets | $ | 33,559,373 |
| | $ | 33,613,808 |
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See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (In thousands, except share and per share amounts)
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LIABILITIES AND STOCKHOLDERS' EQUITY | March 31, 2019 (Unaudited) | | December 31, 2018 |
Current Liabilities: | | | |
Accounts payable | $ | 835,481 |
| | $ | 857,502 |
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Interest payable | 272,018 |
| | 386,475 |
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Accrued employee related costs | 100,925 |
| | 139,806 |
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Amounts due to affiliates | 5,538 |
| | 26,096 |
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Deferred revenue | 145,019 |
| | 140,053 |
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Current portion of long-term debt | 123,966 |
| | 158,625 |
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Other current liabilities | 318,873 |
| | 312,634 |
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Total current liabilities | 1,801,820 |
| | 2,021,191 |
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Other liabilities | 231,721 |
| | 271,554 |
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Deferred tax liability | 4,717,667 |
| | 4,723,937 |
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Liabilities under derivative contracts | 223,054 |
| | 132,908 |
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Right-of-use operating lease liability | 245,871 |
| | — |
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Long-term debt, net of current maturities | 23,137,835 |
| | 22,653,975 |
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Total liabilities | 30,357,968 |
| | 29,803,565 |
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Commitments and contingencies (Note 16) |
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Redeemable equity | 190,339 |
| | 130,007 |
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Stockholders' Equity: | | | |
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, 490,946,066 issued and outstanding as of March 31, 2019 and 496,064,027 issued and outstanding as of December 31, 2018 | 4,909 |
| | 4,961 |
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Class B common stock: $0.01 par value, 1,000,000,000 shares authorized, 490,086,674 issued and 188,838,546 outstanding as of March 31, 2019 and 212,976,259 outstanding as of December 31, 2018 | 1,888 |
| | 2,130 |
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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 | 2,777,554 |
| | 3,423,803 |
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Retained earnings | 226,831 |
| | 251,830 |
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| 3,011,182 |
| | 3,682,724 |
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Accumulated other comprehensive loss | (8,212 | ) | | (11,783 | ) |
Total stockholders' equity | 3,002,970 |
| | 3,670,941 |
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Noncontrolling interest | 8,096 |
| | 9,295 |
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Total stockholders' equity | 3,011,066 |
| | 3,680,236 |
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| $ | 33,559,373 |
| | $ | 33,613,808 |
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See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share amounts) (Unaudited) |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Revenue (including revenue from affiliates of $592 and $125, respectively) (See Note 15) | $ | 2,396,567 |
| | $ | 2,329,714 |
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Operating expenses: | | | |
Programming and other direct costs (including charges from affiliates of $1,687 and $1,154, respectively) (See Note 15) | 812,985 |
| | 787,361 |
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Other operating expenses (including charges from affiliates of $2,246 and $7,994, respectively) (See Note 15) | 564,432 |
| | 583,023 |
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Restructuring and other expense | 15,244 |
| | 3,587 |
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Depreciation and amortization (including impairments) | 561,428 |
| | 642,705 |
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| 1,954,089 |
| | 2,016,676 |
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Operating income | 442,478 |
| | 313,038 |
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Other income (expense): | | | |
Interest expense | (388,283 | ) | | (377,258 | ) |
Interest income | 1,819 |
| | 3,103 |
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Gain (loss) on investments and sale of affiliate interests, net | 254,725 |
| | (248,602 | ) |
Gain (loss) on derivative contracts, net | (177,029 | ) | | 168,352 |
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Loss on interest rate swap contracts | (23,672 | ) | | (31,922 | ) |
Loss on extinguishment of debt and write-off of deferred financing costs | (157,902 | ) | | (4,705 | ) |
Other income (expense), net | 80 |
| | (11,658 | ) |
| (490,262 | ) | | (502,690 | ) |
Loss before income taxes | (47,784 | ) | | (189,652 | ) |
Income tax benefit | 22,586 |
| | 60,703 |
|
Net loss | (25,198 | ) | | (128,949 | ) |
Net loss (income) attributable to noncontrolling interests | 199 |
| | (2 | ) |
Net loss attributable to Altice USA, Inc. stockholders | $ | (24,999 | ) | | $ | (128,951 | ) |
Loss per share: | | | |
Basic and diluted loss per share: | $ | (0.04 | ) | | $ | (0.17 | ) |
Basic and diluted weighted average common shares (in thousands) | 695,528 |
| | 737,069 |
|
Cash dividends declared per common share | $ | — |
| | $ | — |
|
See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (In thousands) (Unaudited) |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Net loss | $ | (25,198 | ) | | $ | (128,949 | ) |
Other comprehensive income (loss): | | | |
Defined benefit pension plans: | | | |
Unrecognized actuarial gain | 4,918 |
| | 4,551 |
|
Applicable income taxes | (1,292 | ) | | (1,228 | ) |
Unrecognized gain arising during period, net of income taxes | 3,626 |
| | 3,323 |
|
Settlement loss included in other expense, net | 171 |
| | 606 |
|
Applicable income taxes | (45 | ) | | (164 | ) |
Settlement loss included in other expense, net, net of income taxes | 126 |
| | 442 |
|
Foreign currency translation adjustment | (245 | ) | | — |
|
Applicable income taxes | 64 |
| | — |
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Foreign currency translation adjustment, net | (181 | ) | | — |
|
Other comprehensive income | 3,571 |
| | 3,765 |
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Comprehensive loss | (21,627 | ) | | (125,184 | ) |
Comprehensive loss (income) attributable to noncontrolling interests | 199 |
| | (2 | ) |
Comprehensive loss attributable to Altice USA, Inc. stockholders | $ | (21,428 | ) | | $ | (125,186 | ) |
See accompanying notes to consolidated financial statements.
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ALTICE USA, INC. AND SUBSIDIARIES 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 Loss | | Total Stockholders' Equity | | Non-controlling Interest | | Total Equity |
Balance at January 1, 2019 | $ | 4,961 |
| | $ | 2,130 |
| | $ | 3,423,803 |
| | $ | 251,830 |
| | $ | (11,783 | ) | | $ | 3,670,941 |
| | $ | 9,295 |
| | $ | 3,680,236 |
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Net loss attributable to stockholders | — |
| | — |
| | — |
| | (24,999 | ) | | — |
| | (24,999 | ) | | — |
| | (24,999 | ) |
Net loss attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (199 | ) | | (199 | ) |
Distributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,000 | ) | | (1,000 | ) |
Pension liability adjustments, net of income taxes | — |
| | — |
| | — |
| | — |
| | 3,752 |
| | 3,752 |
| | — |
| | 3,752 |
|
Foreign currency translation adjustment, net of income taxes | — |
| | — |
| | — |
| | — |
| | (181 | ) | | (181 | ) | | — |
| | (181 | ) |
Share-based compensation expense | — |
| | — |
| | 13,790 |
| | — |
| | — |
| | 13,790 |
| | — |
| | 13,790 |
|
Redeemable equity vested | — |
| | — |
| | 1,364 |
| | — |
| | — |
| | 1,364 |
| | — |
| | 1,364 |
|
Change in redeemable equity | — |
| | — |
| | (61,696 | ) | | — |
| | — |
| | (61,696 | ) | | — |
| | (61,696 | ) |
Class A shares acquired through share repurchase program and retired | (294 | ) | | — |
| | (599,707 | ) | | — |
| | — |
| | (600,001 | ) | | — |
| | (600,001 | ) |
Conversion of Class B to Class A shares | 242 |
| | (242 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
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Balance at March 31, 2019 | $ | 4,909 |
| | $ | 1,888 |
| | $ | 2,777,554 |
| | $ | 226,831 |
| | $ | (8,212 | ) | | $ | 3,002,970 |
| | $ | 8,096 |
| | $ | 3,011,066 |
|
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 |
|
Net loss attributable to stockholders | — |
| | — |
| | — |
| | (128,951 | ) | | — |
| | (128,951 | ) | | — |
| | (128,951 | ) |
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 2 |
| | 2 |
|
Pension liability adjustments, net of income taxes | — |
| | — |
| | — |
| | — |
| | 3,765 |
| | 3,765 |
| | — |
| | 3,765 |
|
Share-based compensation expense | — |
| | — |
| | 21,623 |
| | — |
| | — |
| | 21,623 |
| | — |
| | 21,623 |
|
Change in 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 | ) | | — |
| | — |
| | — |
|
Balance at March 31, 2018 | $ | 2,470 |
| | $ | 4,901 |
| | $ | 4,682,646 |
| | $ | 713,848 |
| | $ | (8,420 | ) | | $ | 5,395,445 |
| | $ | 1,541 |
| | $ | 5,396,986 |
|
See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Cash flows from operating activities: | | | |
Net loss | $ | (25,198 | ) | | $ | (128,949 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization (including impairments) | 561,428 |
| | 642,705 |
|
Equity in net loss of affiliates | — |
| | 10,442 |
|
Loss (gain) on investments and sale of affiliate interests, net | (254,725 | ) | | 248,602 |
|
Loss (gain) on derivative contracts, net | 177,029 |
| | (168,352 | ) |
Loss on extinguishment of debt and write-off of deferred financing costs | 157,902 |
| | 4,705 |
|
Amortization of deferred financing costs and discounts (premiums) on indebtedness | 26,066 |
| | 16,950 |
|
Settlement loss related to pension plan | 171 |
| | 606 |
|
Share-based compensation expense | 13,790 |
| | 21,623 |
|
Deferred income taxes | (19,918 | ) | | (65,833 | ) |
Provision for doubtful accounts | 15,091 |
| | 13,500 |
|
Change in assets and liabilities, net of effects of acquisitions and dispositions: | | | |
Accounts receivable, trade | 28,278 |
| | 25,207 |
|
Other receivables | (708 | ) | | (28,759 | ) |
Prepaid expenses and other assets | (3,744 | ) | | 9,609 |
|
Amounts due from and due to affiliates | (4,023 | ) | | (1,465 | ) |
Accounts payable | 33,889 |
| | 11,297 |
|
Interest payable, accrued employee related costs and other liabilities | (235,369 | ) | | (224,787 | ) |
Deferred revenue | 8,915 |
| | 11,929 |
|
Liabilities related to interest rate swap and derivative contracts | 25,120 |
| | 31,922 |
|
Net cash provided by operating activities | 503,994 |
| | 430,952 |
|
Cash flows from investing activities: | | | |
Capital expenditures | (340,386 | ) | | (257,615 | ) |
Sale of affiliate interest | — |
| | (3,537 | ) |
Proceeds related to sale of equipment, including costs of disposal | 479 |
| | 965 |
|
Increase in other investments | — |
| | (2,500 | ) |
Net cash used in investing activities | (339,907 | ) | | (262,687 | ) |
| | | |
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) (Unaudited) |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Cash flows from financing activities: | | | |
Proceeds from credit facility debt, net of discounts | $ | 1,390,000 |
| | $ | 1,642,500 |
|
Repayment of credit facility debt | (361,250 | ) | | (610,663 | ) |
Issuance of senior notes and debentures, including premiums | 1,754,375 |
| | 1,000,000 |
|
Redemption of senior notes, including premiums and fees | (2,462,692 | ) | | (1,057,019 | ) |
Proceeds from notes payable | — |
| | 6,812 |
|
Repayment of notes payable | (58,500 | ) | | — |
|
Principal payments on finance lease obligations | (1,611 | ) | | (3,067 | ) |
Purchase of shares of Altice USA, Inc. Class A common stock, pursuant to a share repurchase program | (586,759 | ) | | — |
|
Additions to deferred financing costs | (11,678 | ) | | (19,225 | ) |
Contingent payment for acquisition | (500 | ) | | (28,940 | ) |
Distributions to noncontrolling interests, net | (1,000 | ) | | — |
|
Other | — |
| | (859 | ) |
Net cash provided by (used in) financing activities | (339,615 | ) | | 929,539 |
|
Net increase (decrease) in cash and cash equivalents | (175,528 | ) | | 1,097,804 |
|
Effect of exchange rate changes on cash and cash equivalents | (245 | ) | | — |
|
Net increase (decrease) in cash and cash equivalents | (175,773 | ) | | 1,097,804 |
|
Cash, cash equivalents and restricted cash at beginning of year | 299,038 |
| | 330,100 |
|
Cash, cash equivalents and restricted cash at end of year | $ | 123,265 |
| | $ | 1,427,904 |
|
See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO 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. Through June 8, 2018, the Company was majority-owned by Altice Europe N.V. ("Altice Europe"), a public company with limited liability (naamloze vennootshcap) under Dutch law. On June 8, 2018, Altice Europe distributed substantially all of its equity interest in the Company through a distribution in kind to holders of Altice Europe's common shares A and common shares B (the “Distribution”). The Company is now majority-owned by Patrick Drahi through Next Alt. S.a.r.l. ("Next Alt").
The Company provides broadband communications and video services in the United States and markets its services under two brands: Optimum, in the New York metropolitan area, and Suddenlink, principally in markets in the south-central United States. It delivers broadband, video, telephony services, proprietary content and advertising services to residential and business customers. As these brands are managed on a consolidated basis, the Company classifies its operations in one segment.
The accompanying combined consolidated financial statements ("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 and the i24 Acquisition discussed below. All significant inter-company accounts and transactions have been eliminated in consolidation.
Acquisition of Altice Technical Services US Corp
Altice Technical Services US Corp. ("ATS") was formed to provide network construction and maintenance services and commercial and residential installations, disconnections, and maintenance. During the second quarter of 2017, a substantial portion of the Company's technical workforce at Cablevision 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 technical workforce became employees of ATS in December 2017. Additionally, in the second quarter of 2017, the Company entered into an Independent Contractor Agreement with ATS that governed the terms of the services provided to the Company and entered into a Transition Services Agreement for the use of the Company's resources to provide various overhead functions to ATS, including accounting, legal and human resources and for the use of certain facilities, vehicles and technician tools during a transitional period. The Transition Services Agreement required ATS to reimburse the Company for its cost to provide such services.
In January 2018, the Company acquired 70% of the equity interests in 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 Europe 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. In connection with the ATS Acquisition, the Company recorded goodwill of $23,101, representing the amount previously transferred to ATS.
Acquisition of i24NEWS
In April 2018, Altice Europe transferred its ownership of i24 US and i24 Europe ("i24NEWS"), Altice Europe's 24/7 international news and current affairs channels to the Company for minimal consideration (the "i24 Acquisition"). As the acquisition was a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of i24NEWS as of April 1, 2018. Operating results for periods prior to April 1, 2018 have not been revised to reflect the i24 Acquisition as the impact was deemed immaterial.
Altice Europe Distribution
On June 8, 2018, Altice Europe distributed substantially all of its equity interest in the Company through a distribution in kind to holders of Altice Europe's common shares A and common shares B (the “Distribution”). The Distribution took place by way of a special distribution in kind by Altice Europe of its 67.2% interest in the Company to Altice Europe shareholders. Each shareholder of Altice Europe on May 23, 2018, the Distribution record date, received 0.4163 shares of the Company's common stock for every share held by such shareholder in Altice Europe.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Prior to Altice Europe's announcement of the Distribution, the Board of Directors of Altice USA, acting through its independent directors, approved the payment of a $2.035 dividend to all shareholders of record on May 22, 2018. The payment of the dividend, aggregating $1,499,935, was made on June 6, 2018, and was funded with cash at CSC Holdings LLC, a wholly-owned subsidiary of Cablevision, from financings completed in January 2018, and cash generated from operations at Cequel. In connection with the payment of the dividend, the Company recorded a decrease in retained earnings of $536,224, representing the cumulative earnings through the payment date, and a decrease in paid in capital of $963,711.
In connection with the Distribution, the Management Advisory and Consulting Services Agreement with Altice Europe which provided certain consulting, advisory and other services was terminated. See Note 15 for further details.
Stock Repurchase Plan
In June 2018, the Board of Directors of Altice USA also authorized a share repurchase program of $2.0 billion. Under the repurchase program, shares of Altice USA Class A common stock may be purchased from time to time in the open market and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Size and timing of these purchases will be determined based on market conditions and other factors.
From inception through March 31, 2019, the Company repurchased an aggregate of 57,284,354 shares for a total purchase price of approximately $1,100,000. These acquired shares were retired and the cost for these shares was recorded in paid in capital in the Company's consolidated balance sheet. As of March 31, 2019, the Company had approximately $900,000 of availability remaining under its stock repurchase program and had 679,784,612 combined Class A and Class B shares outstanding.
NOTE 2. BASIS OF PRESENTATION
The accompanying unaudited 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 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, 2018.
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, 2019.
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.
Reclassifications
Certain reclassifications have been made to the 2018 financial statements to conform to the 2019 presentation.
NOTE 3. ACCOUNTING PRONOUNCEMENTS
Recently Issued But Not Yet Adopted Accounting Pronouncements
ASU No. 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans ("ASU 2018-14")
In August 2018, the FASB issued ASU 2018-14, Changes to the Disclosure Requirements for Defined Benefit Plans, which amends ASC 715 to clarify certain disclosure requirements related to defined benefit pension and other postretirement plans. ASU 2018-14 becomes effective for the Company on January 1, 2022, although early adoption is
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
permitted. The Company does not expect the adoption of ASU 2018-14 to have a material impact on its consolidated financial statements.
ASU No. 2018-15, Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")
Also in August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement That Is a Service Contract, which requires upfront implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. ASU 2018-14 becomes effective for the Company on January 1, 2020, although early adoption is permitted. The Company is currently in the process of evaluating the impact that the adoption of ASU 2018-15 will have on its consolidated financial statements.
ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350) ("ASU 2017-04")
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350). ASU. 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 2017-04 becomes effective for the Company on January 1, 2020 with early adoption permitted and will be applied prospectively.
NOTE 4. NET LOSS PER SHARE ATTRIBUTABLE TO STOCKHOLDERS
Net Loss Per Share
Basic net loss per common share attributable to Altice USA stockholders is computed by dividing net loss attributable to Altice USA stockholders by the weighted average number of common shares outstanding during the period. Diluted net loss per common share attributable to Altice USA stockholders excludes the effects of common stock equivalents of 11,480,467 shares and 5,165,746 shares for the three months ended March 31, 2019 and 2018, respectively, as they are anti-dilutive.
NOTE 5. REVENUE AND CONTRACT ASSETS
The following table presents the composition of revenue:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Residential: | | | |
Video | $ | 1,017,330 |
| | $ | 1,033,708 |
|
Broadband | 775,573 |
| | 701,621 |
|
Telephony | 154,464 |
| | 166,038 |
|
Business services and wholesale | 350,689 |
| | 333,090 |
|
Advertising | 93,545 |
| | 87,582 |
|
Other | 4,966 |
| | 7,675 |
|
Total revenue | $ | 2,396,567 |
| | $ | 2,329,714 |
|
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, 2019 and 2018, the amount of franchise fees and certain other taxes and fees included as a component of revenue aggregated $64,236 and $63,830, respectively.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Contract Assets
The following table provides information about contracts assets and contract liabilities related to contracts with customers:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Contract assets (a) | $ | 27,242 |
| | $ | 26,405 |
|
Deferred revenue (b) | 198,971 |
| | 190,056 |
|
| |
(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's non-cash investing and financing activities and other supplemental data were as follows: |
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Non-Cash Investing and Financing Activities: | | | |
| | | |
Property and equipment accrued but unpaid | $ | 158,025 |
| | $ | 91,036 |
|
Notes payable issued to vendor for the purchase of equipment | 16,266 |
| | 30,237 |
|
Unsettled purchases of shares of Altice USA, Inc. Class A common stock, pursuant to a share repurchase program | 13,242 |
| | — |
|
Right-of-use assets acquired in exchange for finance lease obligations | 4,970 |
| | 656 |
|
Deferred financing costs accrued but unpaid | 1,663 |
| | — |
|
Supplemental Data: | | | |
Cash interest paid | 475,109 |
| | 464,763 |
|
Income taxes paid (refunded), net | 110 |
| | (1,027 | ) |
NOTE 7. RESTRUCTURING AND OTHER EXPENSE
Restructuring
Beginning in the first quarter of 2016, the Company commenced restructuring initiatives that were intended to simplify the Company's organizational structure.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | |
The following table summarizes the activity for these initiatives: | | |
| Severance and Other Employee Related Costs | | Facility Realignment and Other Costs | | Total |
Accrual balance at December 31, 2018 | $ | 21,454 |
| | $ | 13,615 |
| | $ | 35,069 |
|
Restructuring charges | 2,522 |
| | 4,569 |
| | 7,091 |
|
Payments and other | (13,866 | ) | | (536 | ) | | (14,402 | ) |
Impact of the adoption of ASC 842 (a) | — |
| | (13,849 | ) | | (13,849 | ) |
Accrual balance at March 31, 2019 | $ | 10,110 |
| | $ | 3,799 |
| | $ | 13,909 |
|
| |
(a) | Certain accrued restructuring liabilities were netted against right-of-use operating assets on the Company's consolidated balance sheet as of January 1, 2019 in connection with the Company's adoption of ASC 842 (see Note 8). |
In addition, for the three months ended March 31, 2019, the Company recorded restructuring charges of $8,549 related to the impairment of right-of-use operating lease assets, included in the Company's restructuring initiatives, as their carrying amount was not recoverable and exceeded their fair value.
Cumulative costs to date relating to these initiatives amounted to $423,166.
Transaction Costs
The Company recorded a net credit of $396 during the three months ended March 31, 2019 resulting from an adjustment to the contingent liability initially recorded for a business acquired in fourth quarter of 2017. The Company recorded transaction costs of $2,266 for the three months ended March 31, 2018, related to the Distribution discussed in Note 1.
NOTE 8. LEASES
On January 1, 2019, the Company adopted FASB Accounting Standards Codification, or ASC, Topic 842, Leases ("ASC 842"), 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 requires the recognition of the right-of-use ("ROU") assets and related operating and finance lease liabilities on the balance sheet. The Company adopted the new guidance using the modified retrospective approach with a cumulative-effect adjustment recorded on January 1, 2019. As a result, the consolidated balance sheet as of December 31, 2018 was not restated and is not comparative.
The adoption of ASC 842 resulted in the recognition of ROU assets of $274,292 and lease liabilities for operating leases of $299,900 on the Company's consolidated balance sheet as of January 1, 2019, with no material impact to its consolidated statements of operations. The difference between the ROU assets and the operating lease liability represents the reclassification of (i) deferred rent balances, resulting from the historical operating leases, and (ii) certain accrued restructuring liabilities (See Note 7). The Company's accounting for finance leases remained substantially unchanged from its accounting for capital leases in prior periods.
The Company elected the package of practical expedients permitted within the standard, which allow an entity to forgo reassessing (i) whether a contract contains a lease, (ii) classification of leases, and (iii) whether capitalized costs associated with a lease meet the definition of initial direct costs. Also, the Company elected the expedient allowing an entity to use hindsight to determine the lease term and impairment of ROU assets and the expedient related to land easements which allows the Company not to retrospectively treat land easements as leases; however, the Company must apply lease accounting prospectively to land easements if they meet the definition of a lease.
For contracts entered into on or after the effective date, at the inception of a contract the Company will assess whether the contract is, or contains, a lease. The Company's assessment is based on: (i) whether the contract involves the use of a distinct identified asset, (ii) whether the Company obtained the right to substantially all the economic benefit from the use of the asset throughout the period, and (iii) whether the Company has the right to direct the use of the asset. Leases entered into prior to January 1, 2019, are accounted for under ASC 840 and were not reassessed for classification.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
For operating leases, the lease liability is initially and subsequently measured at the present value of the unpaid lease payments. For finance leases, the lease liability is initially measured in the same manner and date as for operating leases, and is subsequently measured at amortized cost using the effective interest method. The Company generally uses its incremental borrowing rate as the discount rate for leases, unless an interest rate is implicitly stated in the lease. The lease term for all of the Company’s leases includes the noncancellable period of the lease plus any additional periods covered by either a Company option to extend the lease that the Company is reasonably certain to exercise, or an option to extend the lease controlled by the lessor. All ROU assets are reviewed for impairment.
Lease expense for operating leases consists of the lease payments plus any initial direct costs and is recognized on a straight-line basis over the lease term. Lease expense for finance leases consists of the amortization of the asset on a straight-line basis over the earlier of the lease term or its useful life and interest expense determined on an amortized cost basis. The lease payments are allocated between a reduction of the lease liability and interest expense.
The Company's operating leases are comprised primarily of facility leases and finance leases are comprised primarily of vehicle leases.
Balance sheet information related to our leases is presented below:
|
| | | | | | | | | | | | | |
| | | March 31, | | January 1, | | December 31, |
| Balance Sheet location | | 2019 | | 2019 | | 2018 |
Operating leases: | | | | | | | |
Right-of-use lease assets | Right-of-use operating lease assets | | $ | 259,223 |
| | $ | 274,292 |
| | $ | — |
|
Right-of-use lease liability, current | Other current liabilities | | 41,188 |
| | 48,033 |
| | — |
|
Right-of-use lease liability, long-term | Right-of-use operating lease liability | | 245,871 |
| | 251,867 |
| | — |
|
Finance leases: | | | | | | | |
Right-of-use lease assets | Property, plant and equipment | | 28,562 |
| | 30,891 |
| | 30,891 |
|
Right-of-use lease liability, current | Current portion of long-term debt | | 6,293 |
| | 5,928 |
| | 5,928 |
|
Right-of-use lease liability, long-term | Long-term debt | | 21,011 |
| | 19,262 |
| | 19,262 |
|
The following provides details of the Company's lease expense:
|
| | | |
| Three Months Ended March 31, |
| 2019 |
Operating lease expense, net | $ | 15,278 |
|
Finance lease expense: | |
Amortization of assets | 1,562 |
|
Interest on lease liabilities | 358 |
|
Total finance lease expense | 1,920 |
|
| $ | 17,198 |
|
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Other information related to leases is presented below:
|
| | | |
| As of March 31, |
| 2019 |
Right-of-use assets acquired in exchange for operating lease obligations | $ | 4,193 |
|
| |
Cash Paid For Amounts Included In Measurement of Liabilities: | |
Operating cash flows from finance leases | 358 |
|
Operating cash flows from operating leases | 16,482 |
|
| |
Weighted Average Remaining Lease Term: | |
Operating leases | 8.9 years |
|
Finance leases | 4.8 years |
|
Weighted Average Discount Rate: | |
Operating leases | 6.25 | % |
Finance leases | 5.82 | % |
The minimum future annual payments under non-cancellable leases during the next five years and thereafter, at rates now in force, are as follows:
|
| | | | | | | |
| Financing leases | | Operating leases |
2019 (excluding the three months ended March 31, 2019) | $ | 5,775 |
| | $ | 43,386 |
|
2020 | 6,859 |
| | 58,231 |
|
2021 | 5,538 |
| | 49,829 |
|
2022 | 5,510 |
| | 39,308 |
|
2023 | 4,967 |
| | 29,260 |
|
Thereafter | 2,580 |
| | 157,402 |
|
Total future minimum lease payments, undiscounted | 31,229 |
| | 377,416 |
|
Less: Imputed interest | (3,925 | ) | | (90,357 | ) |
Present value of future minimum lease payments | $ | 27,304 |
| | $ | 287,059 |
|
NOTE 9. INTANGIBLE ASSETS
The following table summarizes information relating to the Company's acquired amortizable intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2019 | | As of December 31, 2018 | | |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Estimated Useful Lives |
Customer relationships | $ | 5,970,884 |
| | $ | (2,337,085 | ) | | $ | 3,633,799 |
| | $ | 5,970,884 |
| | $ | (2,162,110 | ) | | $ | 3,808,774 |
| | 8 to 18 years |
Trade names | 1,067,083 |
| | (725,748 | ) | | 341,335 |
| | 1,067,083 |
| | (701,998 | ) | | 365,085 |
| | 2 to 5 years |
Other amortizable intangibles | 37,644 |
| | (20,573 | ) | | 17,071 |
| | 37,644 |
| | (18,679 | ) | | 18,965 |
| | 1 to 15 years |
| $ | 7,075,611 |
| | $ | (3,083,406 | ) | | $ | 3,992,205 |
| | $ | 7,075,611 |
| | $ | (2,882,787 | ) | | $ | 4,192,824 |
| | |
Amortization expense for the three months ended March 31, 2019 and 2018 aggregated $200,619 and $231,817, respectively.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
NOTE 10. DEBT
The following table provides details of the Company's outstanding debt:
|
| | | | | | | | | | | | | | | | | | | | |
| | | Interest Rate | | March 31, 2019 | | December 31, 2018 |
Date Issued | | Maturity Date | | Principal Amount | | Carrying Amount (a) | | Principal Amount | | Carrying Amount (a) |
CSC Holdings Senior Notes: | | | | | | | | | |
February 12, 2009 | | February 15, 2019 | 8.625 | % | | $ | — |
| | $ | — |
| | $ | 526,000 |
| | $ | 527,749 |
|
November 15, 2011 | | November 15, 2021 | 6.750 | % | | 1,000,000 |
| | 971,652 |
| | 1,000,000 |
| | 969,285 |
|
May 23, 2014 | | June 1, 2024 | 5.250 | % | | 750,000 |
| | 674,731 |
| | 750,000 |
| | 671,829 |
|
October 9, 2015 | | January 15, 2023 | 10.125 | % | | — |
| | — |
| | 1,800,000 |
| | 1,781,424 |
|
October 9, 2015 | | October 15, 2025 | 10.875 | % | | 1,684,221 |
| | 1,663,549 |
| | 1,684,221 |
| | 1,663,027 |
|
November 27, 2018 | | December 15, 2021 | 5.125 | % | | 1,240,762 |
| | 1,161,667 |
| | 1,240,762 |
| | 1,155,264 |
|
November 27, 2018 | | July 15, 2025 | 7.750 | % | | 617,881 |
| | 604,295 |
| | 617,881 |
| | 603,889 |
|
November 27, 2018 | | April 1, 2028 | 7.500 | % | | 1,045,882 |
| | 1,044,175 |
| | 1,045,882 |
| | 1,044,143 |
|
CSC Holdings Senior Guaranteed Notes: | | | | | | | | |
October 9, 2015 | | October 15, 2025 | 6.625 | % | | 1,000,000 |
| | 988,396 |
| | 1,000,000 |
| | 988,052 |
|
September 23, 2016 | | April 15, 2027 | 5.500 | % | | 1,310,000 |
| | 1,305,056 |
| | 1,310,000 |
| | 1,304,936 |
|
January 29, 2018 | | February 1, 2028 | 5.375 | % | | 1,000,000 |
| | 992,232 |
| | 1,000,000 |
| | 992,064 |
|
November 27, 2018 | | July 15, 2023 | 5.375 | % | | 1,095,825 |
| | 1,079,260 |
| | 1,095,825 |
| | 1,078,428 |
|
November 27, 2018 | | May 15, 2026 | 5.500 | % | | 1,498,806 |
| | 1,484,671 |
| | 1,498,806 |
| | 1,484,278 |
|
January 24, 2019 | | February 1, 2029 | 6.500 | % | | 1,750,000 |
| | 1,746,831 |
| | — |
| | — |
|
Cablevision Senior Notes (b): | | | | | | | | | |
April 15, 2010 | | April 15, 2020 | 8.000 | % | | 500,000 |
| | 496,159 |
| | 500,000 |
| | 495,302 |
|
September 27, 2012 | | September 15, 2022 | 5.875 | % | | 649,024 |
| | 589,400 |
| | 649,024 |
| | 585,817 |
|
October 19, 2018 | | December 15, 2021 | 5.125 | % | | 8,886 |
| | 8,320 |
| | 8,886 |
| | 8,274 |
|
October 19, 2018 | | July 15, 2025 | 7.750 | % | | 1,740 |
| | 1,691 |
| | 1,740 |
| | 1,690 |
|
October 19, 2018 | | April 1, 2028 | 7.500 | % | | 4,118 |
| | 4,111 |
| | 4,118 |
| | 4,110 |
|
| | 15,157,145 |
| | 14,816,196 |
| | 15,733,145 |
| | 15,359,561 |
|
CSC Holdings Credit Facility Debt (Restricted Group): | | | | | | | | |
Revolving Credit Facility (c) (e) | 4.879 | % | (d) | 300,000 |
| | 284,969 |
| | 250,000 |
| | 231,425 |
|
Term Loan B | | July 17, 2025 | 4.734 | % | (d) | 2,947,500 |
| | 2,932,491 |
| | 2,955,000 |
| | 2,939,425 |
|
Incremental Term Loan B-2 | | January 25, 2026 | 4.984 | % | (d) | 1,488,750 |
| | 1,472,554 |
| | 1,492,500 |
| | 1,475,778 |
|
Incremental Term Loan B-3 | | January 15, 2026 | 4.734 | % | (d) | 1,275,000 |
| | 1,269,135 |
| | 1,275,000 |
| | 1,268,931 |
|
Incremental Term Loan B-4 | | April 15, 2027 | 5.591 | % | (d) | 1,000,000 |
| | 986,152 |
| | — |
| | — |
|
| 7,011,250 |
| | 6,945,301 |
| | 5,972,500 |
| | 5,915,559 |
|
Collateralized indebtedness (see Note 11) | 1,459,638 |
| | 1,411,869 |
| | 1,459,638 |
| | 1,406,182 |
|
Finance lease obligations (see Note 8) | 27,304 |
| | 27,304 |
| | 25,190 |
| | 25,190 |
|
Notes Payable | 61,131 |
| | 61,131 |
| | 106,108 |
| | 106,108 |
|
| 23,716,468 |
| | 23,261,801 |
| | 23,296,581 |
| | 22,812,600 |
|
Less: current portion of credit facility debt | (65,250 | ) | | (65,250 | ) | | (54,563 | ) | | (54,563 | ) |
Less: current portion of notes payable | (52,423 | ) | | (52,423 | ) | | (98,134 | ) | | (98,134 | ) |
Less: current portion of finance lease obligations | (6,293 | ) | | (6,293 | ) | | (5,928 | ) | | (5,928 | ) |
| | (123,966 | ) | | (123,966 | ) | | (158,625 | ) | | (158,625 | ) |
Long-term debt | $ | 23,592,502 |
| | $ | 23,137,835 |
| | $ | 23,137,956 |
| | $ | 22,653,975 |
|
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
| |
(a) | The carrying amount is net of the unamortized deferred financing costs and/or discounts/premiums and with respect to certain notes, a fair value adjustment resulting from the Cequel and Cablevision acquisitions. |
| |
(b) | 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 CSC Holdings credit facilities agreement. |
| |
(c) | At March 31, 2019, $163,014 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $2,099,486 of the facility was undrawn and available, subject to covenant limitations. |
| |
(d) | Represents interest rate at March 31, 2019. |
| |
(e) | The revolving credit facility matures on January 31, 2024, however $350,000 is due on November 30, 2021. |
In January 2019, CSC Holdings issued $1,500,000 in aggregate principal amount of senior guaranteed notes due 2029 ("CSC Holdings 2029 Guaranteed Notes"). The notes bear interest at a rate of 6.5% and will mature on February 1, 2029. The net proceeds from the sale of the notes were used to repay certain indebtedness, including to repay at maturity $526,000 aggregate principal amount of CSC Holdings' 8.625% senior notes due February 2019 plus accrued interest, redeem approximately $905,300 of the aggregate outstanding amount of CSC Holdings' 10.125% senior notes due 2023 at a redemption price of 107.594% plus accrued interest, and paid fees and expenses associated with the transactions. In connection with this refinancing, $526,000 of short-term senior notes were reclassified to long-term debt as of December 31, 2018.
In February 2019, CSC Holdings issued an additional $250,000 CSC Holdings 2029 Guaranteed Notes at a price of 101.75% of the principal value. The proceeds of these notes were used to repay amounts outstanding under the CSC Holdings Revolving Credit Facility.
During the three months ended March 31, 2019, CSC Holdings borrowed $400,000 under its revolving credit facility and repaid $350,000 of amounts outstanding under the revolving credit facility, a portion of which was funded from the proceeds of the issuance of an additional $250,000 principal amount of CSC Holdings 2029 Guaranteed Notes (see discussion above).
In January 2019, CSC Holdings refinanced its existing revolving credit facility. After the refinancing, the total size of the new revolving credit facility is $2,562,500, including $2,212,500 extended to January 2024 and priced at LIBOR plus 2.25%. The remaining $350,000 matures in November 2021.
In February 2019, CSC Holdings entered into a $1,000,000 senior secured Term Loan B ("Incremental Term Loan B-4") maturing on April 15, 2027, the proceeds of which were used to redeem $894,700 in aggregate principal amount of CSC Holdings’ 10.125% Senior Notes due 2023, representing the entire aggregate principal amount outstanding, and paying related fees, costs and expenses. The Incremental Term Loan B-4 bears interest at a rate per annum equal to LIBOR plus 3.0% and was issued with an original issue discount of 1.0%.
The CSC Credit Facilities Agreement also contains certain customary representations and warranties, affirmative covenants and events of default (including, among others, an event of default upon a change of control). If an event of default occurs, the lenders under the CSC Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the CSC Credit Facilities and all actions permitted to be taken by a secured creditor.
As of March 31, 2019, the Company was in compliance with all of its financial covenants under the CSC Holdings Credit Facilities and with all of its financial covenants under the indentures under which the senior and senior guaranteed notes were issued.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The following table provides a summary of the loss on extinguishment of debt and the write-off of deferred financing costs recorded by the Company upon the redemption of senior notes and the refinancing of credit facilities:
|
| | | | |
For the Three Months Ended March 31, 2019: | |
| CSC Holdings 10.125% Senior Notes due 2023 | $ | 154,666 |
|
| CSC Holdings credit facility refinancing | 3,236 |
|
| | $ | 157,902 |
|
For the Three Months Ended March 31, 2018: | |
| Cablevision 7.75% Senior Notes due 2018 | $ | 4,705 |
|
Summary of Debt Maturities
The future maturities of debt payable by the Company under its various debt obligations outstanding as of March 31, 2019, including notes payable and collateralized indebtedness (see Note 11), but excluding finance lease obligations (see Note 8), are as follows:
|
| | | |
2019 (excluding the three months ended March 31, 2019) | $ | 94,162 |
|
2020 | 578,253 |
|
2021 | 3,779,571 |
|
2022 | 718,124 |
|
2023 | 1,164,330 |
|
Thereafter | 17,354,724 |
|
NOTE 11. 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 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 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 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, 2019, 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, 2019.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Interest Rate Swap Contracts
To manage interest rate risk, we have from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or effectively convert fixed rate borrowings to variable rates to permit the Company to realize lower interest expense in a declining interest rate environment. We monitor the financial institutions that are counterparties to our interest rate swap contracts and we only enter into interest rate swap contracts with financial institutions that are rated investment grade. All such contracts are carried at their fair market values on our consolidated balance sheets, with changes in fair value reflected in the consolidated statements of operations. As of March 31, 2019, the Company did not hold and has not issued 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 consolidated balance sheets:
|
| | | | | | | | | | |
Derivatives Not Designated as Hedging Instruments | | Balance Sheet Location | | Fair Value at |
| | March 31, 2019 | | December 31, 2018 |
| | | | | | |
Asset Derivatives: | | | | | | |
Interest rate swap contracts | | Derivative contracts, current | | $ | — |
| | $ | 1,975 |
|
Prepaid forward contracts | | Derivative contracts, long-term | | — |
| | 109,344 |
|
| | | | — |
| | 111,319 |
|
Liability Derivatives: | | | | | | |
Interest rate swap contracts | | Other current liabilities | | (754 | ) | | (70 | ) |
Prepaid forward contracts | | Liabilities under derivative contracts, long-term | | (67,685 | ) | | — |
|
Interest rate swap contracts | | Liabilities under derivative contracts, long-term | | (155,369 | ) | | (132,908 | ) |
| | | | $ | (223,808 | ) | | $ | (132,978 | ) |
The gain (loss) from the Company's derivative contracts related to the Comcast common stock for the three months ended March 31, 2019 and 2018 of $(177,029) and $168,352, respectively, is reflected in gain (loss) on derivative contracts, net in the Company's consolidated statements of operations.
For the three months ended March 31, 2019 and 2018 the Company recorded a gain (loss) on investments of $254,725 and $(252,576), respectively, representing the net increase (decrease) in the fair value of the Comcast common stock pledged as collateral.
For the three months ended March 31, 2019 and 2018 the Company recorded a loss on interest rate swap contracts of $23,672 and $31,922, respectively.
NOTE 12. 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:
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | |
| Fair Value Hierarchy | | March 31, 2019 | | December 31, 2018 |
Assets: | | | | | |
Money market funds | Level I | | $ | 32,004 |
| | $ | 91,852 |
|
Investment securities pledged as collateral | Level I | | 1,717,350 |
| | 1,462,626 |
|
Prepaid forward contracts | Level II | | — |
| | 109,344 |
|
Interest rate swap contracts | Level II | | — |
| | 1,975 |
|
Liabilities: | | | | | |
Prepaid forward contracts | Level II | | 67,685 |
| | — |
|
Interest rate swap contracts | Level II | | 156,123 |
| | 132,978 |
|
Contingent consideration related to 2017 and 2018 acquisitions | Level III | | 5,139 |
| | 6,195 |
|
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 consolidated 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, 2019 is equal to the contractual obligation expected to be paid based on a probability assessment of attaining the targets as of such date. The maximum amount that could be paid if all targets are achieved is approximately $11,000.
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 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 consolidated balance sheets, are summarized as follows:
|
| | | | | | | | | | | | | | | | | |
| | | March 31, 2019 | | December 31, 2018 |
| Fair Value Hierarchy | | Carrying Amount (a) | | Estimated Fair Value | | Carrying Amount (a) | | Estimated Fair Value |
CSC Holdings debt instruments: | | | | | | | | | |
Credit facility debt | Level II | | $ | 6,945,301 |
| | $ | 7,011,250 |
| | $ | 5,915,559 |
| | $ | 5,972,500 |
|
Collateralized indebtedness | Level II | | 1,411,869 |
| | 1,392,790 |
| | 1,406,182 |
| | 1,374,203 |
|
Senior guaranteed notes | Level II | | 7,596,446 |
| | 7,925,722 |
| | 5,847,758 |
| | 5,646,468 |
|
Senior notes and debentures | Level II | | 6,120,069 |
| | 6,811,420 |
| | 8,416,610 |
| | 8,972,722 |
|
Notes payable | Level II | | 61,131 |
| | 61,091 |
| | 106,108 |
| | 105,836 |
|
Cablevision debt instruments: | | | | | | | | | |
Senior notes and debentures | Level II | | 1,099,681 |
| | 1,216,269 |
| | 1,095,193 |
| | 1,163,843 |
|
| | | $ | 23,234,497 |
| | $ | 24,418,542 |
| | $ | 22,787,410 |
| | $ | 23,235,572 |
|
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
| |
(a) | Amounts are net of unamortized deferred financing costs and discounts/premiums. |
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 13. INCOME TAXES
In general, the Company is required to use an estimated annual effective tax rate ("AETR") to measure the income tax expense or benefit recognized on a year to date basis in an interim period. In addition, certain items included in income tax expense as well as the tax impact of certain items included in pretax income 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.
For the three months ended March 31, 2019, the Company recorded a tax benefit of $22,586 on pre-tax loss of $47,784, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was due to revaluation of state deferred taxes primarily due to certain changes to the state tax rates used to measure the Company’s deferred tax liabilities and certain non-deductible expenses.
For the three months ended March 31, 2018, the Company recorded a tax benefit of $60,703 on pre-tax loss of $189,652, resulting in an effective tax rate that was higher than the U.S. statutory tax rate. The higher tax rate was primarily due to state taxes and non-deductible expenses.
NOTE 14. SHARE-BASED COMPENSATION
Carry Unit Plan
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 following table summarizes activity relating to these carry units:
|
| | | | | | | | | |
| Number of Time Vesting Awards | | Number of Performance Based Vesting Awards | | Weighted Average Grant Date Fair Value |
Balance, December 31, 2018 | 83,575,000 |
| | 10,000,000 |
| | $ | 1.14 |
|
Vested | (1,750,000 | ) | | — |
| | 2.77 |
|
Forfeited | (2,687,500 | ) | | — |
| | 0.97 |
|
Balance, March 31, 2019 | 79,137,500 |
| | 10,000,000 |
| | $ | 1.11 |
|
The weighted average fair value per unit was $2.74 and $1.95 as of March 31, 2019 and December 31, 2018, respectively. For the three months ended March 31, 2019 and 2018 the Company recognized an expense of $6,473 and $17,501, respectively, related to the push down of share-based compensation related to the carry unit plan.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Stock Option Plan
The following table summarizes activity related to the Company's employee stock options:
|
| | | | | | | | | | | | | | | | |
| 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, 2018 | 11,230,168 |
| | 73,639 |
| | $ | 17.50 |
| | 9.47 |
| | $ | — |
|
Granted | 745,865 |
| | — |
| | 19.49 |
| | | | |
Forfeited | (202,173 | ) | | (16,736 | ) | | 17.69 |
| | | | |
Balance at March 31, 2019 | 11,773,860 |
| | 56,903 |
| | 17.62 |
| | 9.24 |
| | 45,662 |
|
Options exercisable at March 31, 2019 | — |
| | — |
| | — |
| | — |
| | — |
|
| |
(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. |
The Company recognized share-based compensation expense related to employee stock options for the three months ended March 31, 2019 and 2018 of $7,317 and $4,122, respectively.
NOTE 15. AFFILIATE AND RELATED PARTY TRANSACTIONS
Equity Method Investments
In April 2018, Altice Europe transferred its ownership of i24 US and i24 Europe ('i24NEWS"), Altice Europe's 24/7 international news and current affairs channels to the Company for minimal consideration (the "i24NEWS Acquisition"). As the acquisition was a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of i24NEWS as of April 1, 2018. Operating results for periods prior to April 1, 2018 and the balance sheet as of December 31, 2017 have not been revised to reflect the combination of i24NEWS as the impact was deemed immaterial.
The Company's equity in the net losses of i24NEWS for the three months ended March 31, 2018 of $1,130 were recorded using the equity method and reflected in other expense, net in the Company's consolidated statements of operations. In April 2018, Altice Europe transferred its ownership of i24 US and I24 Europe to the Company for minimal consideration.
In April 2018, the Company redeemed a 24% interest in Newsday LLC ("Newsday"). For the three months ended March 31, 2018, the Company recorded equity in the net loss of Newsday of $9,312, reflected in other expense, net in the Company's consolidated statements of operations. From July 7, 2016 through April 2018, the Company held a 25% ownership interest in Newsday and prior to July 7, 2016, Newsday was a wholly-owned subsidiary of Cablevision.
Affiliate and Related Party Transactions
Altice USA is controlled by Patrick Drahi who is also the controlling stockholder of Altice Europe and its subsidiaries.
As the transactions discussed below were conducted between entities under common control by Mr. Drahi 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.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The following table summarizes the revenue and charges related to services provided to or received from subsidiaries of Altice Europe and Newsday:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Revenue | $ | 592 |
| | $ | 125 |
|
Operating expenses: | | | |
Programming and other direct costs | $ | (1,687 | ) | | $ | (1,154 | ) |
Other operating expenses, net | (2,246 | ) | | (7,994 | ) |
Operating expenses, net | (3,933 | ) | | (9,148 | ) |
| | | |
Net charges | $ | (3,341 | ) | | $ | (9,023 | ) |
Capital Expenditures | $ | 3,354 |
| | $ | 1,626 |
|
Revenue
The Company recognized revenue primarily from the sale of advertising to Teads.
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 Europe.
Other operating expenses, net
Altice Europe provided certain executive services, as well as consulting, advisory and other services, including, prior to the Company's initial public offering ("IPO") in June 2017, CEO, CFO and COO services, to the Company. Compensation under the terms of the agreement was an annual fee of $30,000 to be paid by the Company. Fees associated with this agreement recorded by the Company amounted to $7,500 for the three months ended March 31, 2018. This agreement was 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 Europe aggregating $2,246 and $494, for the three months ended March 31, 2019 and 2018, respectively,
Capital Expenditures
Capital expenditures for the three months ended March 31, 2019 and March 31, 2018 include $3,354 and $1,626, respectively, for equipment purchased and software development services provided by subsidiaries of Altice Europe.
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Aggregate amounts that were due from and due to related parties are summarized below:
|
| | | | | | | |
| March 31, 2019 | | December 31, 2018 |
Due from: | | | |
CVC 3 (a) | $ | — |
| | $ | 13,100 |
|
Newsday (b) | 491 |
| | 490 |
|
Altice Europe (b) | 530 |
| | 1,271 |
|
Altice Dominican Republic (b) | — |
| | 2,550 |
|
Other Altice Europe subsidiaries (b) | — |
| | 146 |
|
| $ | 1,021 |
| | $ | 17,557 |
|
Due to: | | | |
Altice Europe (c) | $ | — |
| | $ | 15,235 |
|
Newsday (b) | 22 |
| | 22 |
|
Altice Labs S.A. (d) | 2,329 |
| | 4,864 |
|
Other Altice Europe subsidiaries (d) | 3,187 |
| | 5,975 |
|
| $ | 5,538 |
| | $ | 26,096 |
|
| |
(a) | Represents interest on senior notes paid by the Company on behalf of Altice US Finance S.A., which merged into CVC 3 in 2018. |
| |
(b) | Represents amounts paid by the Company on behalf of or for services provided to the respective related party and for Newsday, the net amounts due from the related party also include charges for certain transition services provided. |
| |
(c) | Includes $13,250 related to the agreement discussed above. |
| |
(d) | Represents amounts due to affiliates for the purchase of equipment and advertising services, as well as reimbursement for payments made on our behalf. |
NOTE 16. COMMITMENTS AND CONTINGENCIES
Legal Matters
In the latter half of 2018, eight named plaintiffs, each on behalf of a putative class of stockholders who purchased Company common stock in the Company's IPO pursuant to the Registration Statement and Prospectus, filed complaints (seven in New York State Supreme Court, one in United States District Court for the Eastern District of New York). The lawsuits name as defendants the Company, Altice Europe, and the Company's directors, among others, and assert that all defendants violated Sections 11 and 12 of the Securities Act of 1933 (the “Securities Act”) and that the individual defendants violated Section 15 of the Securities Act as control persons. Plaintiffs claim that the Registration Statement and Prospectus misrepresented or omitted material facts relating to the negative performance of Altice France and Altice Portugal, the disclosure of which in November 2017 negatively impacted the value of Altice USA’s stock. The New York State Supreme Court lawsuits are presently being consolidated into one action. The Company intends to vigorously defend the lawsuits. Although the outcome of the matter cannot be predicted and the impact of the final resolution of this matter on the Company’s results of operations in any particular subsequent reporting period is not known at this time, management does not believe that the ultimate resolution of the matter will have a material adverse effect on the operations or financial position of the Company or the ability of the Company to meet its financial obligations as they become due.
On November 6, 2018, Sprint Communications Company L.P (“Sprint”) filed a complaint in the U.S. District Court for the District of Delaware alleging that the Company infringes Sprint’s patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. On December 3, 2018, Sprint filed a second complaint alleging that the Company infringes Sprint’s patents purportedly relating to VOD services. The lawsuits are part of a pattern of litigation that was initiated as far back as 2007 by Sprint against numerous broadband and telecommunications providers. The Company is investigating the allegations, and will vigorously defend the lawsuits. Although the outcome of the matter cannot be predicted and the impact of the final resolution of this matter on the Company’s results of operations in any particular subsequent reporting period is not known at this time, management does not believe that the ultimate resolution of the
ALTICE USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
matter will have a material adverse effect on the operations or financial position of the Company or the ability of the Company to meet its financial obligations as they become due, but it could be material to the Company’s consolidated results of operations or cash flows for any one period.
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. In the event that the Company is found to infringe on any patent rights, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as enter into royalty or license agreements with respect to the patents at issue. The Company believes that the claims are without merit, 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, disputes and investigations, some of which may involve claims for substantial damages, fines or penalties. 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 17. SUBSEQUENT EVENTS
In April 2019, the Company reached an agreement to acquire Cheddar, a digital-first news company, for $200,000, subject to certain closing adjustments as set forth in the merger agreement. The transaction is expected to close upon receipt of regulatory approval.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
All dollar amounts, except per customer and per share data, included in the following discussion, are presented in thousands.
The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and contingent liabilities. For a complete discussion of the accounting judgments and estimates that we have identified as critical in the preparation of our consolidated financial statements, please refer to our Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2018.
Overview
Our Business
We deliver broadband, video, telephony services, proprietary content and advertising services to approximately 4.9 million residential and business customers in and around the New York metropolitan area and in the south-central United States, with the majority of our customers located in the ten states of Texas, West Virginia, Louisiana, Arkansas, North Carolina, Oklahoma, Arizona, California, Missouri and Ohio. Our footprint extends across 21 states through a fiber-rich broadband network with approximately 8.8 million homes passed as of March 31, 2019.
Key Factors Impacting Operating Results and Financial Condition
Our future performance is dependent, to a large extent, on the impact of direct competition, general economic conditions (including capital and credit market conditions), our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers. For more information see “Risk Factors” and “Business-Competition” included in our Annual Report on Form 10-K for the year ended December 31, 2018.
We derive revenue principally through monthly charges to residential customers of our video, broadband, and telephony services. We also derive revenue from DVR, VOD, pay-per-view, installation and home shopping commissions. Our residential video, broadband, and telephony services accounted for approximately 42%, 32% and 6%, respectively, of our consolidated revenue for the three months ended March 31, 2019. We also derive revenue from the sale of a wide and growing variety of products and services to both large enterprise and SMB customers, including broadband, telephony, networking and video services. For the three months ended March 31, 2019, 15% of our consolidated revenue was derived from these business services. In addition, we derive revenues from the sale of advertising time available on the programming carried on our cable television systems, digital advertising and data analytics revenue, which accounted for approximately 4% of our consolidated revenue for the three months ended March 31, 2019. Our other revenue for the three months ended March 31, 2019 accounted for less than 1% of our consolidated revenue.
Revenue is impacted by rate increases, changes in the number of customers to our services, including additional services sold to our existing customers, programming package changes by our video customers, speed tier changes by our broadband customers, and acquisitions of cable systems that result in the addition of new customers.
Our ability to increase the number of customers to our services is significantly related to our penetration rates.
We operate in a highly competitive consumer-driven industry and we compete against a variety of broadband, video and telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite-delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. Our competitors include AT&T and its DirecTV subsidiary, CenturyLink, DISH, Frontier and Verizon. Consumers’ selection of an alternate source of service, whether due to economic constraints, technological advances or preference, negatively impacts the demand for our services. For more information on our competitive landscape, see "Risk Factors" and "Business-Competition" included in our Annual Report on Form 10-K for the year ended December 31, 2018.
Our programming costs, which are the most significant component of our operating expenses, have increased and are expected to continue to increase primarily as a result of contractual rate increases and new channel launches. See “-Results of Operations” below for more information regarding our key factors impacting our revenues and operating expenses.
Historically, we have made substantial investments in our network and the development of new and innovative products and other service offerings for our customers as a way of differentiating ourselves from our competitors and may continue to do so in the future. We are constructing a FTTH network, which will enable us to deliver more than 10 Gbps broadband speeds across our entire Optimum footprint and part of our Suddenlink footprint. In addition, in the summer of 2019 we will begin offering full service mobile voice and data services to our customers. We may incur greater than anticipated capital expenditures in connection with these initiatives, fail to realize anticipated benefits, experience delays and business disruptions or encounter other challenges to executing them as planned. See “-Liquidity and Capital Resources-Capital Expenditures” for additional information regarding our capital expenditures.
Non-GAAP Financial Measures
We define Adjusted EBITDA, which is a non-GAAP financial measure, as net income (loss) excluding income taxes, income (loss) from discontinued operations, non-operating 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 and sale of affiliate interests, net, 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. We believe Adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company. Adjusted EBITDA and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in our industry. Internally, we use revenue and Adjusted EBITDA measures as important indicators of our business performance, and evaluate management’s effectiveness with specific reference to these indicators. We believe Adjusted EBITDA provides management and investors a useful measure for period-to-period comparisons of our core business and operating results by excluding items that are not comparable across reporting periods or that do not otherwise relate to the Company’s ongoing operating results. Adjusted EBITDA should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), and other measures of performance presented in accordance with GAAP. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies.
Results of Operations - Altice USA
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Revenue: | | | |
Residential: | | | |
Video | $ | 1,017,330 |
| | $ | 1,033,708 |
|
Broadband | 775,573 |
| | 701,621 |
|
Telephony | 154,464 |
| | 166,038 |
|
Business services and wholesale | 350,689 |
| | 333,090 |
|
Advertising | 93,545 |
| | 87,582 |
|
Other | 4,966 |
| | 7,675 |
|
Total revenue | 2,396,567 |
| | 2,329,714 |
|
Operating expenses: | | | |
Programming and other direct costs | 812,985 |
| | 787,361 |
|
Other operating expenses | 564,432 |
| | 583,023 |
|
Restructuring and other expense | 15,244 |
| | 3,587 |
|
Depreciation and amortization (including impairments) | 561,428 |
| | 642,705 |
|
Operating income | 442,478 |
| | 313,038 |
|
Other income (expense): | | | |
Interest expense, net | (386,464 | ) | | (374,155 | ) |
Gain (loss) on investments and sale of affiliate interests, net | 254,725 |
| | (248,602 | ) |
Gain (loss) on derivative contracts, net | (177,029 | ) | | 168,352 |
|
Loss on interest rate swap contracts | (23,672 | ) | | (31,922 | ) |
Loss on extinguishment of debt and write-off of deferred financing costs | (157,902 | ) | | (4,705 | ) |
Other income (expense), net | 80 |
| | (11,658 | ) |
Loss before income taxes | (47,784 | ) | | (189,652 | ) |
Income tax benefit | 22,586 |
| | 60,703 |
|
Net loss | (25,198 | ) | | (128,949 | ) |
Net loss (income) attributable to noncontrolling interests | 199 |
| | (2 | ) |
Net loss attributable to Altice USA, Inc. stockholders | $ | (24,999 | ) | | $ | (128,951 | ) |
The following is a reconciliation of net loss to Adjusted EBITDA:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2019 | | 2018 |
Net loss | $ | (25,198 | ) | | $ | (128,949 | ) |
Income tax benefit | (22,586 | ) | | (60,703 | ) |
Other expense (income), net (a) | (80 | ) | | 11,658 |
|
Loss on interest rate swap contracts | 23,672 |
| | 31,922 |
|
Loss (gain) on derivative contracts, net | 177,029 |
| | (168,352 | ) |
Loss (gain) on investments and sales of affiliate interests, net | (254,725 | ) | | 248,602 |
|
Loss on extinguishment of debt and write-off of deferred financing costs | 157,902 |
| | 4,705 |
|
Interest expense, net | 386,464 |
| | 374,155 |
|
Depreciation and amortization | 561,428 |
| | 642,705 |
|
Restructuring and other expense | 15,244 |
| | 3,587 |
|
Share-based compensation | 13,790 |
| | 21,623 |
|
Adjusted EBITDA | $ | 1,032,940 |
| | $ | 980,953 |
|
| |
(a) | Includes the non-service cost components of the Company's pension expense, net of dividends received on Comcast common stock owned by the Company. |
The following table sets forth certain customer metrics for the Company (unaudited):
|
| | | | | | | | | | | |
| As of March 31, 2019 | | As of December 31, 2018 | | As of March 31, 2018 |
| |
Homes passed (a) | 8,761.9 |
| | 8,737.3 |
| | 8,642.0 |
|
Total customer relationships (b)(c) | 4,942.1 |
| | 4,919.6 |
| | 4,916.6 |
|
Residential | 4,563.7 |
| | 4,542.1 |
| | 4,543.4 |
|
SMB | 378.4 |
| | 377.5 |
| | 373.2 |
|
Residential customers: | | | | | |
Video | 3,297.3 |
| | 3,307.5 |
| | 3,375.1 |
|
Broadband | 4,155.0 |
| | 4,118.1 |
| | 4,072.6 |
|
Telephony | 2,511.1 |
| | 2,531.2 |
| | 2,549.7 |
|
|