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 | June 30, 2017 | |
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 | | |
| | 1111 Stewart Avenue | | |
| | Bethpage, New York 11714 | | |
| | (516) 803-2300 | | |
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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 o No ý
Indicate by check mark whether each Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
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Large accelerated filer | o | | Accelerated filer | o |
Non-accelerated filer | ý | | Smaller reporting company | o |
(Do not check if a smaller reporting company) | | | | |
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. |
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Indicate by check mark whether the Registrants are shell companies (as defined in Rule 12b-2 of the Act). | Yes | o | No | ý |
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Number of shares of common stock outstanding as of July 28, 2017: | 737,068,966 |
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ALTICE USA, INC. AND SUBSIDIARIES | |
FORM 10-Q | |
TABLE OF CONTENTS | |
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PART I. FINANCIAL INFORMATION | |
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Item 1. Financial Statements of Altice USA, Inc. and Subsidiaries | |
| Consolidated Balance Sheets-June 30, 2017 (Unaudited) and December 31, 2016 | |
| Consolidated Statement of Operations - Three and six months ended June 30, 2017 and 2016 (Unaudited) | |
| Consolidated Statements of Comprehensive Income (Loss) - Three and six months ended June 30, 2017 and 2016 (Unaudited) | |
| Consolidated Statement of Stockholders’ Equity - Six months ended June 30, 2017 (Unaudited) | |
| Consolidated Statement of Cash Flows - Six months ended June 30, 2017 and 2016 (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 Quarterly Report includes statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results and therefore are, or may be deemed to be, “forward‑looking statements.” These “forward‑looking statements” appear throughout this Quarterly Report and relate to matters such as anticipated future growth in revenues, operating income, cash provided by operating activities and other financial measures. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “seeks,” “potential,” “continue,” “intends,” “plans” and similar words and terms used in the discussion of future operating results, future financial performance and future events identify forward‑looking statements. All of these forward‑looking statements are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are susceptible to uncertainty and changes in circumstances.
We operate in a highly competitive, consumer and technology driven and rapidly changing business that is affected by government regulation and economic, strategic, technological, political and social conditions. Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward‑looking statements. In addition, important factors that could cause our actual results to differ materially from those in our forward‑looking statements include:
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• | competition for broadband, pay television and telephony customers from existing competitors (such as broadband communications companies, 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 five‑year plan to build a fiber-to-the-home ("FTTH") network and deploy our new home communications hub; |
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• | the effects of economic conditions or other factors which may negatively affect our customers’ demand for our products and services; |
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• | the effects of industry conditions; |
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• | demand for advertising on our cable systems; |
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• | our substantial indebtedness and debt service obligations; |
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• | adverse changes in the credit market; |
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• | 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 and other proceedings; and |
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• | other risks and uncertainties inherent in our cable and other broadband communications businesses and our other businesses, including those listed under the caption “Risk Factors” in the Company's final prospectus dated June 21, 2017 and filed with the Securities and Exchange Commission ("SEC") in accordance with Rule 424(b) of the Securities Act of 1933, as amended (the "Securities Act") on June 23, 2017 (the "Prospectus"). |
These factors are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward‑looking statements. Other unknown or unpredictable factors could cause our actual results to differ materially from those expressed in any of our forward‑looking statements.
Given these uncertainties, you are cautioned not to place undue reliance on such forward‑looking statements. The forward‑looking statements are made only as of the date of this Quarterly Report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update any forward‑looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
You should read this Quarterly Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward‑looking statements by these cautionary statements.
Certain numerical figures included in this quarterly report have been subject to rounding adjustments. Accordingly, such numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Item 1. Financial Statements
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ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands)
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ASSETS | | | |
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| June 30, 2017 | | December 31, 2016 |
| (Unaudited) | | |
| | | |
Current Assets: | | | |
Cash and cash equivalents | $ | 274,941 |
| | $ | 486,792 |
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Restricted cash | 350,372 |
| | 16,301 |
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Accounts receivable, trade (less allowance for doubtful accounts of $13,601 and $11,677) | 328,840 |
| | 349,626 |
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Prepaid expenses and other current assets | 93,312 |
| | 88,151 |
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Amounts due from affiliates | 40,106 |
| | 22,182 |
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Investment securities pledged as collateral | — |
| | 741,515 |
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Derivative contracts | 81,506 |
| | 352 |
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Total current assets | 1,169,077 |
| | 1,704,919 |
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Property, plant and equipment, net of accumulated depreciation of $1,794,110 and $1,039,297 | 6,228,668 |
| | 6,597,635 |
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Investment in affiliates | 2,019 |
| | 5,606 |
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Investment securities pledged as collateral | 1,671,818 |
| | 741,515 |
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Derivative contracts | 9,868 |
| | 10,604 |
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Other assets (including prepayments to an affiliate of $19,780 in 2017) (See Note 14) | 69,357 |
| | 48,545 |
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Amortizable customer relationships, net of accumulated amortization of $1,002,685 and $580,276 | 4,968,199 |
| | 5,345,608 |
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Amortizable trade names, net of accumulated amortization of $213,635 and $83,397 | 853,148 |
| | 983,386 |
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Other amortizable intangibles, net of accumulated amortization of $5,684 and $3,093 | 30,618 |
| | 23,650 |
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Indefinite-lived cable television franchises | 13,020,081 |
| | 13,020,081 |
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Goodwill | 7,993,469 |
| | 7,992,700 |
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Total Assets | $ | 36,016,322 |
| | $ | 36,474,249 |
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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 | June 30, 2017 | | December 31, 2016 |
| (Unaudited) | | |
Current Liabilities: | | | |
Accounts payable | $ | 684,577 |
| | $ | 697,310 |
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Accrued liabilities: | | | |
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Interest | 426,936 |
| | 576,778 |
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Employee related costs | 125,248 |
| | 232,864 |
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Other accrued expenses | 355,457 |
| | 360,677 |
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Amounts due to affiliates | 21,752 |
| | 127,363 |
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Deferred revenue | 103,428 |
| | 94,816 |
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Liabilities under derivative contracts | 81,506 |
| | 13,158 |
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Collateralized indebtedness | — |
| | 622,332 |
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Credit facility debt | 42,650 |
| | 33,150 |
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Senior notes and debentures | 1,781,549 |
| | 926,045 |
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Capital lease obligations | 12,035 |
| | 15,013 |
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Notes payable | 14,895 |
| | 5,427 |
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Total current liabilities | 3,650,033 |
| | 3,704,933 |
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Defined benefit plan obligations | 93,921 |
| | 84,106 |
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Notes payable to affiliates and related parties | — |
| | 1,750,000 |
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Other liabilities | 157,651 |
| | 113,485 |
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Deferred tax liability | 7,342,729 |
| | 7,966,815 |
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Liabilities under derivative contracts | 155,107 |
| | 78,823 |
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Collateralized indebtedness | 1,308,388 |
| | 663,737 |
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Credit facility debt | 4,820,039 |
| | 3,411,640 |
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Senior notes and debentures | 14,779,436 |
| | 16,581,280 |
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Capital lease obligations | 7,655 |
| | 13,142 |
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Notes payable | 72,736 |
| | 8,299 |
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Total liabilities | 32,387,695 |
| | 34,376,260 |
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Commitments and contingencies |
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Redeemable equity | 365,071 |
| | 68,147 |
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Stockholders' Equity: | | | |
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Preferred Stock, $.01 par value, 100,000,000 shares authorized, no shares issued and outstanding at June 30, 2017 | — |
| | — |
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Class A common stock: $0.01 par value, 4,000,000,000 shares authorized, 246,982,292 issued and outstanding at June 30, 2017 | 2,470 |
| | — |
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Class B common stock: $0.01 par value, 1,000,000,000 shares authorized, 490,086,674 issued and outstanding at June 30, 2017 | 4,901 |
| | — |
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Class C common stock: $0.01 par value, 4,000,000,000 shares authorized, no shares issued and outstanding at June 30, 2017 | — |
| | — |
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Common Stock, $.01 par value, 1,000 shares authorized, 100 shares issued and outstanding at December 31, 2016 | — |
| | — |
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Paid-in capital | 4,476,928 |
| | 3,003,554 |
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Accumulated deficit | (1,219,327 | ) | | (975,978 | ) |
| 3,264,972 |
| | 2,027,576 |
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Accumulated other comprehensive income (loss) | (2,305 | ) | | 1,979 |
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Total stockholders' equity | 3,262,667 |
| | 2,029,555 |
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Noncontrolling interest | 889 |
| | 287 |
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Total stockholders' equity | 3,263,556 |
| | 2,029,842 |
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| $ | 36,016,322 |
| | $ | 36,474,249 |
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See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (In thousands, except per share amounts) (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue (including revenue from affiliates of $253 and $394 in 2017) (See Note 14) | $ | 2,328,341 |
| | $ | 823,501 |
| | $ | 4,634,017 |
| | $ | 1,451,090 |
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Operating expenses: | | | | | | | |
Programming and other direct costs (including charges from affiliates of $1,095 and $1,830 in 2017) (See Note 14) | 758,694 |
| | 249,823 |
| | 1,517,046 |
| | 439,418 |
|
Other operating expenses (including charges from affiliates of $38,728 and $46,761 in 2017 and $2,500 and $5,000 in 2016) (See Note 14) | 593,690 |
| | 214,474 |
| | 1,207,127 |
| | 389,739 |
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Restructuring and other expense | 12,388 |
| | 99,701 |
| | 89,317 |
| | 107,270 |
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Depreciation and amortization (including impairments) | 706,787 |
| | 214,100 |
| | 1,315,511 |
| | 415,000 |
|
| 2,071,559 |
| | 778,098 |
| | 4,129,001 |
| | 1,351,427 |
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Operating income | 256,782 |
| | 45,403 |
| | 505,016 |
| | 99,663 |
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Other income (expense): | | | | | | | |
Interest expense (including interest expense to affiliates and related parties of $42,817 and $90,405 in 2017 and $5,305 in 2016) (See Note 14) | (420,372 | ) | | (293,795 | ) | | (853,666 | ) | | (569,624 | ) |
Interest income | 180 |
| | 5,968 |
| | 412 |
| | 12,383 |
|
Gain on investments, net | 57,130 |
| | 58,634 |
| | 188,788 |
| | 58,634 |
|
Loss on equity derivative contracts, net | (66,463 | ) | | (27,345 | ) | | (137,507 | ) | | (27,345 | ) |
Gain on interest rate swap contracts | 9,146 |
| | 40,241 |
| | 11,488 |
| | 40,241 |
|
Loss on extinguishment of debt and write-off of deferred financing costs (including $513,723 related to affiliates and related parties) (See Note 14) | (561,382 | ) | | (19,948 | ) | | (561,382 | ) | | (19,948 | ) |
Other income, net | 1,121 |
| | 6 |
| | 897 |
| | 17 |
|
| (980,640 | ) | | (236,239 | ) | | (1,350,970 | ) | | (505,642 | ) |
Loss before income taxes | (723,858 | ) | | (190,836 | ) | | (845,954 | ) | | (405,979 | ) |
Income tax benefit (expense) | 249,068 |
| | (91,293 | ) | | 294,976 |
| | (16,898 | ) |
Net loss | (474,790 | ) | | (282,129 | ) | | (550,978 | ) |
| (422,877 | ) |
Net loss (income) attributable to noncontrolling interests | (365 | ) | | 364 |
| | (602 | ) | | 364 |
|
Net loss attributable to Altice USA, Inc. stockholders | $ | (475,155 | ) | | $ | (281,765 | ) | | $ | (551,580 | ) | | $ | (422,513 | ) |
Basic and diluted net loss per share | $ | (0.72 | ) | | $ | (0.43 | ) | | $ | (0.84 | ) | | $ | (0.65 | ) |
Basic and diluted weighted average common shares (in thousands) | 659,145 |
| | 649,525 |
| | 654,362 |
| | 649,525 |
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See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (In thousands) (Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| | | | | | | |
Net loss | $ | (474,790 | ) | | $ | (282,129 | ) | | $ | (550,978 | ) | | $ | (422,877 | ) |
Other comprehensive income (loss): | | | | | | | |
Defined benefit pension plans: | | | | | | | |
Unrecognized actuarial loss | (4,333 | ) | | (982 | ) | | (4,333 | ) | | (982 | ) |
Applicable income taxes | 1,733 |
| | 393 |
| | 1,733 |
| | 393 |
|
Unrecognized loss arising during period, net of income taxes | (2,600 | ) | | (589 | ) | | (2,600 | ) | | (589 | ) |
Curtailment loss, net of settlement loss of $389 included in net periodic benefit cost | (2,806 | ) | | — |
| | (2,806 | ) | | — |
|
Applicable income taxes | 1,122 |
| | — |
| | 1,122 |
| | — |
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Curtailment loss, net of settlement loss included in net periodic benefit cost, net of income taxes | (1,684 | ) | | — |
| | (1,684 | ) | | — |
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Other comprehensive loss | (4,284 | ) | | (589 | ) | | (4,284 | ) | | (589 | ) |
Comprehensive loss | (479,074 | ) | | (282,718 | ) | | (555,262 | ) | | (423,466 | ) |
Comprehensive loss (income) attributable to noncontrolling interests | (365 | ) | | 364 |
| | (602 | ) | | 364 |
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Comprehensive loss attributable to Altice USA, Inc. stockholders | $ | (479,439 | ) | | $ | (282,354 | ) | | $ | (555,864 | ) | | $ | (423,102 | ) |
See accompanying notes to consolidated financial statements.
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ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (In thousands) (Unaudited) |
|
Class A Common Stock | |
Class B Common Stock | | Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Income | | Total Stockholders' Equity | | Non-controlling Interest | | Total Equity |
| | | | | | | | | | | | | | | |
Balance at January 1, 2017 | $ | — |
| | $ | — |
| | $ | 3,003,554 |
| | $ | (975,978 | ) | | $ | 1,979 |
| | $ | 2,029,555 |
| | $ | 287 |
| | $ | 2,029,842 |
|
Net loss attributable to stockholders | — |
| | — |
| | — |
| | (551,580 | ) | | — |
| | (551,580 | ) | | — |
| | (551,580 | ) |
Net income attributable to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 602 |
| | 602 |
|
Pension liability adjustments, net of income taxes | — |
| | — |
| | — |
| | — |
| | (4,284 | ) | | (4,284 | ) | | — |
| | (4,284 | ) |
Share-based compensation expense | — |
| | — |
| | 25,927 |
| | — |
| | — |
| | 25,927 |
| | — |
| | 25,927 |
|
Change in fair value of redeemable equity | — |
| | — |
| | (296,924 | ) | | — |
| | — |
| | (296,924 | ) | | — |
| | (296,924 | ) |
Contributions from stockholders | — |
| | — |
| | 1,135 |
| | — |
| | — |
| | 1,135 |
| | — |
| | 1,135 |
|
Cash distributions to stockholders | — |
| | — |
| | (839,700 | ) | | — |
| | — |
| | (839,700 | ) | | — |
| | (839,700 | ) |
Transfer of goodwill | — |
| | — |
| | (23,101 | ) | | — |
| | — |
| | (23,101 | ) | | — |
| | (23,101 | ) |
Recognition of previously unrealized excess tax benefits related to share-based awards in connection with the adoption ASU 2016-09 | — |
| | — |
| | — |
| | 308,231 |
| | — |
| | 308,231 |
| | — |
| | 308,231 |
|
Issuance of common stock pursuant to organizational transactions prior to IPO | 2,349 |
| | 4,901 |
| | 2,257,002 |
| | — |
| | — |
| | 2,264,252 |
| | — |
| | 2,264,252 |
|
Issuance of common stock pursuant to IPO | 121 |
| | — |
| | 349,035 |
| | — |
| | — |
| | 349,156 |
| | — |
| | 349,156 |
|
Balance at June 30, 2017 | $ | 2,470 |
| | $ | 4,901 |
| | $ | 4,476,928 |
| | $ | (1,219,327 | ) | | $ | (2,305 | ) | | $ | 3,262,667 |
| | $ | 889 |
| | $ | 3,263,556 |
|
See accompanying notes to consolidated financial statements.
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited) |
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash flows from operating activities: | | | |
Net loss | $ | (550,978 | ) | | $ | (422,877 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | |
Depreciation and amortization (including impairments) | 1,315,511 |
| | 415,000 |
|
Equity in net loss of affiliates | 4,122 |
| | — |
|
Gain on investments, net | (188,788 | ) | | (58,634 | ) |
Loss on equity derivative contracts, net | 137,507 |
| | 27,345 |
|
Loss on extinguishment of debt and write-off of deferred financing costs | 561,382 |
| | 19,948 |
|
Amortization of deferred financing costs and discounts (premiums) on indebtedness | 7,214 |
| | 20,535 |
|
Settlement loss related to pension plan | 389 |
| | — |
|
Share-based compensation expense | 25,927 |
| | — |
|
Deferred income taxes | (308,390 | ) | | 14,069 |
|
Excess tax benefit on share-based awards | — |
| | 82 |
|
Provision for doubtful accounts | 32,918 |
| | 13,338 |
|
Change in assets and liabilities, net of effects of acquisitions and dispositions: | | | |
Accounts receivable, trade | (8,006 | ) | | (31,330 | ) |
Other receivables | 7,952 |
| | 3,939 |
|
Prepaid expenses and other assets | (21,579 | ) | | (65,512 | ) |
Amounts due from and due to affiliates | (114,384 | ) | | 3,700 |
|
Accounts payable | 67,341 |
| | (8,599 | ) |
Accrued liabilities | (269,312 | ) | | 278,782 |
|
Deferred revenue | 10,614 |
| | 3,473 |
|
Liabilities related to interest rate swap contracts | (8,500 | ) | | (40,241 | ) |
Net cash provided by operating activities | 700,940 |
| | 173,018 |
|
Cash flows from investing activities: | | | |
|
Payment for acquisition, net of cash acquired | (43,608 | ) | | (8,988,774 | ) |
Capital expenditures | (459,662 | ) | | (129,570 | ) |
Proceeds related to sale of equipment, including costs of disposal | 1,536 |
| | 970 |
|
Increase in other investments | (3,550 | ) | | — |
|
Additions to other intangible assets | (744 | ) | | — |
|
Net cash used in investing activities | (506,028 | ) | | (9,117,374 | ) |
| | | |
ALTICE USA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (In thousands) |
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Cash flows from financing activities: | | | |
Proceeds from credit facility debt | 4,977,425 |
| | 1,820,256 |
|
Repayment of credit facility debt | (3,573,750 | ) | | (3,995,927 | ) |
Proceeds from notes payable to affiliates and related parties | — |
| | 1,750,000 |
|
Proceeds from collateralized indebtedness | 490,816 |
| | — |
|
Repayment of collateralized indebtedness and related derivative contracts | (483,081 | ) | | — |
|
Distributions to shareholders | (839,700 | ) | | — |
|
Redemption of senior notes, including premiums and fees | (979,280 | ) | | — |
|
Excess tax benefit on share-based awards | — |
| | (82 | ) |
Principal payments on capital lease obligations | (8,061 | ) | | (5,849 | ) |
Additions to deferred financing costs | (7,352 | ) | | (12,396 | ) |
Proceeds from IPO, net of fees | 349,156 |
| | — |
|
Contributions from shareholders | 1,135 |
| | 1,200,973 |
|
Net cash provided by (used in) financing activities | (72,692 | ) | | 756,975 |
|
Net increase (decrease) in cash and cash equivalents | 122,220 |
| | (8,187,381 | ) |
Cash, cash equivalents and restricted cash at beginning of year | 503,093 |
| | 8,784,935 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 625,313 |
| | $ | 597,554 |
|
See accompanying notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND RELATED MATTERS
The Company and Related Matters
Altice USA, Inc. ("Altice USA" or the "Company") was incorporated in Delaware on September 14, 2015. As of June 30, 2017, Altice USA is majority‑owned by Altice N.V., a public company with limited liability (naamloze vennootshcap) under Dutch law ("Altice N.V.").
Altice N.V., though a subsidiary, acquired Cequel Corporation ("Cequel" or "Suddenlink") on December 21, 2015 and Cequel was contributed to Altice USA on June 9, 2016. Altice USA had no operations of its own other than the issuance of debt prior to the contribution of Cequel on June 9, 2016 by Altice N.V. The results of operations of Cequel for the three and six months ended June 30, 2016 have been included in the results of operations of Altice USA for the same period, as Cequel was under common control with Altice USA. Altice USA acquired Cablevision Systems Corporation ("Cablevision" or "Optimum") on June 21, 2016 (see discussion below) and the results of operations of Cablevision are included with the results of operations of Cequel for the three and six months ended June 30, 2017. The three and six months ended June 30, 2016 operating results include the operating results of Cablevision from the date of acquisition, June 21, 2016 through June 30, 2016.
The Company classifies its operations into two reportable segments: Cablevision, which operates in the New York metropolitan area, and Cequel, which principally operates in markets in the south‑central United States.
Initial Public Offering
In June 2017, the Company completed its initial public offering ("IPO") of 71,724,139 shares of its Class A common stock (12,068,966 shares sold by the Company and 59,655,173 shares sold by existing shareholders) at a price to the public of $30.00 per share, including the underwriters full exercise of their option to purchase 7,781,110 shares to cover overallotments. Altice N.V. owns approximately 70.2% of the Company's issued and outstanding common stock, which represents approximately 98.2% of the voting power of the Company's outstanding common stock. The Company’s Class A common stock began trading on June 22, 2017, on the New York Stock Exchange under the symbol "ATUS".
In connection with the sale of its Class A common stock, the Company received proceeds of approximately $362,069, before deducting underwriting discount and expenses directly related to the issuance of the securities of $12,913. The Company did not receive any proceeds from the sale of shares by the selling stockholders. In July 2017, the Company used approximately $350,120 of the proceeds to fund the redemption of $315,779 principal amount of 10.875% senior notes that mature in 2025 issued by CSC Holdings, an indirect wholly-owned subsidiary of the Company, and the related call premium of approximately $34,341. Such cash has been classified as restricted cash on the Company's balance sheet as of June 30, 2017.
The following organizational transactions were consummated prior to the IPO:
| |
• | the Company amended and restated its certificate of incorporation to, among other things, provide for Class A common stock, Class B common stock and Class C common stock; |
| |
• | BC Partners LLP ("BCP") and Canada Pension Plan Investment Board (‘‘CPPIB and together with BCP, the‘‘Co-Investors’’) and Uppernext S.C.S.p. ("Uppernext"), an entity controlled by Mr. Patrick Drahi (founder and controlling stockholder of Altice N.V.), exchanged their indirect ownership interest in the Company for shares of the Company’s common stock; |
| |
• | Neptune Management LP (‘‘Management LP’’) redeemed its Class B units for shares of the Company’s common stock that it received from the redemption of its Class B units in Neptune Holding US LP; |
| |
• | the Company converted $525,000 aggregate principal amount of notes issued by the Company to the Co-Investors (together with accrued and unpaid interest and applicable premium) into shares of the Company’s common stock at the IPO price (see Note 9 for further details); |
| |
• | $1,225,000 aggregate principal amount of notes issued by the Company to a subsidiary of Altice N.V. (together with accrued and unpaid interest and applicable premium) was transferred to CVC 3 B.V., an indirect subsidiary of Altice N.V. ("CVC 3") and then the Company converted such notes into shares of the Company’s common |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
stock at the IPO price (see Note 9 for further details);
| |
• | the Co-Investors, Neptune Holding US LP, A4 S.A. (an entity controlled by the family of Mr. Drahi), and former Class B unitholders of Management LP (including Uppernext) exchanged shares of the Company’s common stock for new shares of the Company’s Class A common stock; and |
| |
• | CVC 3 and A4 S.A. exchanged shares of the Company’s common stock for new shares of the Company’s Class B common stock. |
Acquisition of Cablevision Systems Corporation
On June 21, 2016 (the "Cablevision Acquisition Date"), pursuant to the Agreement and Plan of Merger (the "Merger Agreement"), dated as of September 16, 2015, by and among Cablevision, Altice N.V., Neptune Merger Sub Corp., a wholly-owned subsidiary of Altice N.V. ("Merger Sub"), Merger Sub merged with and into Cablevision, with Cablevision surviving the merger (the "Cablevision Acquisition").
In connection with the Cablevision Acquisition, each outstanding share of the Cablevision NY Group Class A common stock, par value $0.01 per share, and Cablevision NY Group Class B common stock, par value $0.01 per share, and together with the Cablevision NY Group Class A common stock, the "Shares" other than Shares owned by Cablevision, Altice N.V. or any of their respective wholly-owned subsidiaries, in each case not held on behalf of third parties in a fiduciary capacity, received $34.90 in cash without interest, less applicable tax withholdings (the "Cablevision Acquisition Consideration").
Pursuant to an agreement, dated December 21, 2015, by and among CVC 2 B.V., CIE Management IX Limited, for and on behalf of the limited partnerships BC European Capital IX-1 through 11 and Canada Pension Plan Investment Board, certain affiliates of BCP and CPPIB (the "Co-Investors") funded approximately $1,000,000 toward the payment of the aggregate Per Share Cablevision Acquisition Consideration, and indirectly acquired approximately 30% of the Shares of Cablevision.
Also in connection with the Cablevision Acquisition, outstanding equity-based awards granted under Cablevision’s equity plans were cancelled and converted into cash based upon the $34.90 per Share Cablevision Acquisition price in accordance with the original terms of the awards. The total consideration for the outstanding CNYG Class A Shares, the outstanding CNYG Class B Shares, and the equity-based awards amounted to $9,958,323.
In connection with the Cablevision Acquisition, in October 2015, Neptune Finco Corp. ("Finco"), an indirect wholly-owned subsidiary of Altice N.V. formed to complete the financing described herein and the merger with CSC Holdings, LLC ("CSC Holdings"), a wholly-owned subsidiary of Cablevision, borrowed an aggregate principal amount of $3,800,000 under a term loan facility (the "Term Credit Facility") and entered into revolving loan commitments in an aggregate principal amount of $2,000,000 (the "Revolving Credit Facility" and, together with the Term Credit Facility, the "Credit Facilities").
Finco also issued $1,800,000 aggregate principal amount of 10.125% senior notes due 2023 (the "2023 Notes"), $2,000,000 aggregate principal amount of 10.875% senior notes due 2025 (the "2025 Notes"), and $1,000,000 aggregate principal amount of 6.625% senior guaranteed notes due 2025 (the "2025 Guaranteed Notes") (collectively the "Cablevision Acquisition Notes").
On June 21, 2016, immediately following the Cablevision Acquisition, Finco merged with and into CSC Holdings, with CSC Holdings surviving the merger (the "CSC Holdings Merger"), and the Cablevision Acquisition Notes and the Credit Facilities became obligations of CSC Holdings.
On June 21, 2016, in connection with the Cablevision Acquisition, the Company issued notes payable to affiliates and related parties aggregating $1,750,000, of which $875,000 bear interest at 10.75% and $875,000 bear interest at 11%.
The Cablevision Acquisition was accounted for as a business combination in accordance with ASC Topic 805. Accordingly, the Company stepped up 100% of the assets and liabilities assumed to their fair value at the Cablevision Acquisition Date. See Note 3 for further details.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Acquisition of Cequel Corporation
On December 21, 2015, Altice N.V., though a subsidiary, acquired approximately 70% of the total outstanding equity interests in Cequel (the "Cequel Acquisition") from the direct and indirect stockholders of Cequel Corporation (the "Sellers"). The consideration for the acquired equity interests was based on a total equity valuation for 100% of the capital and voting rights of Cequel was $3,973,528 which includes $2,797,928 of cash consideration, $675,600 of retained equity held by entities affiliated with BC Partners and CPPIB and $500,000 funded by the issuance by an affiliate of Altice N.V. of a senior vendor note that was subscribed by entities affiliated with BC Partners and CPPIB. Following the closing of the Cequel Acquisition, entities affiliated with BC Partners and CPPIB retained 30% equity interest in a parent entity of the Company. In addition, the carried interest plans of the stockholders were cashed out whereby payments were made to participants in such carried interest plans, including certain officers and directors of Cequel.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 for the year ended December 31, 2016 included in the Company's final prospectus dated June 21, 2017 and filed with the Securities and Exchange Commission ("SEC") in accordance with Rule 424(b) of the Securities Act of 1933, as amended (the "Securities Act") on June 23, 2017 (the "Prospectus").
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, 2017.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Pronouncement
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, Compensation—Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which provides simplification of income tax accounting for share-based payment awards. The new guidance became effective for the Company on January 1, 2017. Amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value will be applied using the modified retrospective transition method. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term were applied prospectively. The Company elected to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using the prospective transition method. In connection with the adoption on January 1, 2017, a deferred tax asset of approximately $308,231 for previously unrealized excess tax benefits was recognized with the offset recorded to accumulated deficit.
Recently Issued But Not Yet Adopted Accounting Pronouncements
In May 2017, the FASB issued ASU No. 2017‑09, Compensation- Stock Compensation (Topic 718). ASU No. 2017‑09 provides clarity and guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2017‑09 becomes effective for us on January 1, 2018 with early adoption permitted and will be applied prospectively.
In March 2017, the FASB issued ASU No. 2017‑07 Compensation-Retirement Benefits (Topic 715). ASU No. 2017‑07 requires that an employer disaggregate the service cost component from the other components of net benefit cost. It also provides guidance on how to present the service cost component and the other components of net benefit cost in the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
income statement and what component of net benefit cost is eligible for capitalization. ASU No. 2017‑07 becomes effective for the Company on January 1, 2018 with early adoption permitted and will be applied retrospectively. The Company has not yet completed the evaluation of the effect that ASU No. 2017‑07 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017‑04, Intangibles-Goodwill and Other (Topic 350). ASU No. 2017‑04 simplifies the subsequent measurement of goodwill by removing the second step of the two‑step impairment test. The amendment requires an entity to perform its annual, or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017‑04 becomes effective for us on January 1, 2020 with early adoption permitted and will be applied prospectively.
In January 2017, the FASB issued ASU No. 2017‑01, Business Combinations (Topic 805), Clarifying the Definition of a Business, which amends Topic 805 to interpret the definition of a business by adding guidance to assist in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The new guidance becomes effective for us on January 1, 2019 with early adoption permitted and will be applied prospectively.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows. ASU No. 2016-15 also clarifies how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The new guidance becomes effective for the Company on January 1, 2018 with early adoption permitted and will be applied retrospectively. The Company has not yet completed the evaluation of the effect that ASU No. 2016-15 will have on its consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which increases transparency and comparability by recognizing a lessee’s rights and obligations resulting from leases by recording them on the balance sheet as lease assets and lease liabilities. The new guidance becomes effective for the Company on January 1, 2019 with early adoption permitted and will be applied using the modified retrospective method. The Company has not yet completed the evaluation of the effect that ASU No. 2016-02 will have on its consolidated financial statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities. ASU No. 2016-01 modifies how entities measure certain equity investments and also modifies the recognition of changes in the fair value of financial liabilities measured under the fair value option. Entities will be required to measure equity investments that do not result in consolidation and are not accounted for under the equity method at fair value and recognize any changes in fair value in net income. For financial liabilities measured using the fair value option, entities will be required to record changes in fair value caused by a change in instrument-specific credit risk (own credit risk) separately in other comprehensive income. ASU No. 2016-01 becomes effective for us on January 1, 2018. We have not yet completed the evaluation of the effect that ASU No. 2016-01 will have on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU No. 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective and allows the use of either the retrospective or cumulative effect transition method. In August 2015, the FASB issued ASU No. 2015-14 that approved deferring the effective date by one year so that ASU No. 2014-09 would become effective for the Company on January 1, 2018. The FASB also approved, in July 2015, permitting the early adoption of ASU No. 2014-09, but not before the original effective date for the Company of January 1, 2017.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, in order to clarify the Codification and to correct any unintended application of the guidance. These items are not expected to have a significant effect on the current accounting standard. The amendments in this update affect the guidance in ASU No. 2014-09, which is not yet effective. ASU No. 2014-09 will be effective, reflecting the one-year deferral, for interim and annual periods beginning after December 15, 2017 (January 1, 2018 for the Company). Early adoption of the standard is permitted but not before the original effective date. Companies can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact that the adoption of ASU No. 2014-09 will have on its consolidated financial statements and selecting the method of transition to the new standard. The Company currently expects the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
adoption to impact the timing of the recognition of residential installation revenue and the recognition of commission expenses.
Reclassifications
Certain reclassifications have been made to the 2016 financial statements to conform to the 2017 presentation.
NOTE 3. BUSINESS COMBINATIONS
Cablevision Acquisition
As discussed in Note 1, the Company completed the Cablevision Acquisition on June 21, 2016. The acquisition was accounted for as a business combination in accordance with ASC Topic 805. Accordingly, the Company recorded the fair value of the assets and liabilities assumed at the date of acquisition.
The following table provides the allocation of the total purchase price of $9,958,323 to the identifiable tangible and intangible assets and liabilities of Cablevision based on their respective fair values. The remaining useful lives represent the period over which acquired tangible and intangible assets with a finite life are being depreciated or amortized.
|
| | | | |
| Fair Values | Estimated Useful Lives |
| | |
Current assets | $ | 1,923,071 |
| |
Accounts receivable | 271,305 |
| |
Property, plant and equipment | 4,864,621 |
| 2-18 years |
Goodwill | 5,842,172 |
| |
Indefinite-lived cable television franchises | 8,113,575 |
| Indefinite-lived |
Customer relationships | 4,850,000 |
| 8 to 18 years |
Trade names (a) | 1,010,000 |
| 12 years |
Amortizable intangible assets | 23,296 |
| 1-15 years |
Other non-current assets | 748,998 |
| |
Current liabilities | (2,311,201 | ) | |
Long-term debt | (8,355,386 | ) | |
Deferred income taxes. | (6,832,773 | ) | |
Other non-current liabilities | (189,355 | ) | |
Total | $ | 9,958,323 |
| |
| |
(a) | See Note 8 for additional information regarding a change in the remaining estimated useful lives of the Company's trade names. |
The fair value of customer relationships and cable television franchises were valued using derivations of the "income" approach. The future expected earnings from these assets were discounted to their present value equivalent.
Trade names were valued using the relief from royalty method, which is based on the present value of the royalty payments avoided as a result of the company owning the intangible asset.
The basis for the valuation methods was the Company’s projections. These projections were based on management’s assumptions including among others, penetration rates for video, high speed data, and voice; revenue growth rates; operating margins; and capital expenditures. The assumptions are derived based on the Company’s and its peers’ historical operating performance adjusted for current and expected competitive and economic factors surrounding the cable industry. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows generated by the respective intangible asset. The value is highly dependent on the achievement of the future financial results contemplated in the projections. The estimates and assumptions made in the valuation are inherently subject to significant uncertainties, many of which are beyond the Company's control, and there is no assurance that these results can be achieved. The primary assumptions for which there is a reasonable possibility of the occurrence of a variation that would have significantly affected the value include the assumptions regarding revenue growth, programming expense growth rates, the amount and timing of capital expenditures and the discount rate utilized.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
In establishing fair value for the vast majority of the acquired property, plant and equipment, the cost approach was utilized. The cost approach considers the amount required to replace an asset by constructing or purchasing a new asset with similar utility, then adjusts the value in consideration of physical depreciation, and functional and economic obsolescence as of the appraisal date. The cost approach relies on management’s assumptions regarding current material and labor costs required to rebuild and repurchase significant components of our property, plant and equipment along with assumptions regarding the age and estimated useful lives of our property, plant and equipment.
The estimates of expected useful lives take into consideration the effects of contractual relationships, customer attrition, eventual development of new technologies and market competition.
Long-term debt assumed was valued using quoted market prices (Level 2). The carrying value of most other assets and liabilities approximated fair value as of the acquisition date.
As a result of applying business combination accounting, the Company recorded goodwill, which represented the excess of organization value over amounts assigned to the other identifiable tangible and intangible assets arising from expectations of future operational performance and cash generation.
The following table presents the unaudited pro forma revenue and net loss for the three and six months ended June 30, 2016 as if the Cablevision Acquisition had occurred on January 1, 2016:
|
| | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, 2016 |
Revenue | $ | 2,315,216 |
| | $ | 4,588,695 |
|
Net loss | $ | (166,360 | ) | | $ | (356,501 | ) |
The pro forma results presented above include the impact of additional amortization expense related to the identifiable intangible assets recorded in connection with the Cablevision Acquisition, additional depreciation expense related to the fair value adjustment to property, plant and equipment and the incremental interest resulting from the issuance of debt to fund the acquisitions, net of the reversal of interest and amortization of deferred financing costs related to credit facilities that were repaid on the date of the Cablevision Acquisition and the accretion/amortization of fair value adjustments associated with the long-term debt acquired.
Acquisition
In connection with the acquisition of an entity in the first quarter of 2017, the Company recorded amortizable intangibles of $45,000 relating to customer relationships and $9,400 relating to other amortizable intangibles. The Company recorded goodwill of $20,657, which represents the excess of the purchase price of approximately $75,000 over the net book value of assets acquired. These values are based on preliminary fair value information currently available, which is subject to change within the measurement period (up to one year from the acquisition date). The acquired entity is included in the Cablevision segment.
NOTE 4. NET LOSS PER SHARE ATTRIBUTABLE TO STOCKHOLDERS
Basic and diluted 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 as they are anti-dilutive. The basic weighted average number of shares used to compute basic and diluted net loss per share of 659,145,164 and 654,361,628 for the three and six months ended June 30, 2017, respectively, and 649,524,942 for the three and six months ended June 30, 2016 reflect the retroactive impact of the organizational transactions, discussed in Note 1, that occurred prior to the Company's IPO and the shares of common stock issued pursuant to the Company's IPO.
NOTE 5. GROSS VERSUS NET REVENUE RECOGNITION
In the normal course of business, 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. The Company's policy is that, in instances where the tax is being assessed directly on the Company, amounts paid to the governmental authorities and amounts received from the customers are recorded on a gross basis. That is, amounts paid
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
to the governmental authorities are recorded as programming and other direct costs and amounts received from the customer are recorded as revenue. For the three and six months ended June 30, 2017, the amount of franchise fees and certain other taxes and fees included as a component of revenue aggregated $64,804 and $129,791, respectively. For the three and six months ended June 30, 2016, the amount of franchise fees and certain other taxes and fees included as a component of revenue aggregated $17,809 and $29,897, respectively.
NOTE 6. SUPPLEMENTAL CASH FLOW INFORMATION
The Company considers the balance of its investment in funds that substantially hold securities that mature within three months or less from the date the fund purchases these securities to be cash equivalents. The carrying amount of cash and cash equivalents either approximates fair value due to the short-term maturity of these instruments or are at fair value.
The Company's non-cash investing and financing activities and other supplemental data were as follows: |
| | | | | | | |
| Six Months Ended June 30, |
| 2017 | | 2016 |
Non-Cash Investing and Financing Activities: | | | |
Continuing Operations: | | | |
Conversion of notes payable to affiliates and related parties of $1,750,000 (together with accrued and unpaid interest and applicable premium) to common stock (See Note 9) | $ | 2,264,252 |
| | $ | — |
|
Property and equipment accrued but unpaid | 87,003 |
| | 115,151 |
|
Supplemental Data: | | | |
Cash interest paid | 1,000,276 |
| | 280,687 |
|
Income taxes paid, net | 19,442 |
| | 5,218 |
|
NOTE 7. RESTRUCTURING COSTS AND OTHER EXPENSE
Restructuring
Beginning in the first quarter of 2016, the Company commenced its restructuring initiatives (the "2016 Restructuring Plan") that are intended to simplify the Company's organizational structure.
|
| | | | | | | | | | | |
The following table summarizes the activity for the 2016 Restructuring Plan during 2017: | | |
| Severance and Other Employee Related Costs | | Facility Realignment and Other Costs | | Total |
Accrual balance at December 31, 2016 | $ | 102,119 |
| | $ | 8,397 |
| | $ | 110,516 |
|
Restructuring charges (credits) | 89,040 |
| | (43 | ) | | 88,997 |
|
Payments and other | (62,896 | ) | | (2,379 | ) | | (65,275 | ) |
Accrual balance at June 30, 2017 | $ | 128,263 |
| | $ | 5,975 |
| | $ | 134,238 |
|
The Company recorded restructuring charges of $89,722 and $97,162 for the three and six months ended June 30, 2016, respectively, relating to the 2016 Restructuring Plan.
Cumulative costs to date relating to the 2016 Restructuring Plan amounted to $268,755 and $46,818 for our Cablevision segment and Cequel segments, respectively.
Transaction Costs
For the three and six months ended June 30, 2017, the Company incurred transaction costs of $142 and $320 related to the acquisition of a business during the first quarter of 2017. For the three and six months ended June 30, 2016, the Company incurred transaction costs of $9,979 and $10,108, respectively, related to the acquisitions of Cablevision and Suddenlink.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
NOTE 8. INTANGIBLE ASSETS
The following table summarizes information relating to the Company's acquired intangible assets as of June 30, 2017:
|
| | | | | | | | | | | | | |
| Amortizable Intangible Assets |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Estimated Useful Lives |
| | | | | | | |
Customer relationships | $ | 5,970,884 |
| | (1,002,685 | ) | | $ | 4,968,199 |
| | 8 to 18 years |
Trade names (a) | 1,066,783 |
| | (213,635 | ) | | 853,148 |
| | 2 to 4 years |
Other amortizable intangibles | 36,302 |
| | (5,684 | ) | | 30,618 |
| | 1 to 15 years |
| $ | 7,073,969 |
| | $ | (1,222,004 | ) | | $ | 5,851,965 |
| | |
| |
(a) | On May 23, 2017, Altice N.V. announced the adoption of a global brand which will replace the Company's brands in the future, reducing the remaining useful lives of these trade name intangibles. The Company has estimated the remaining useful lives to be 3 years from the date of the adoption, which reflects one year as an in-use asset and two years as a defensive asset. Amortization expense is calculated on an accelerated basis based on the Company's estimate of the intangible asset during the in-use period. The remaining estimated value of the defensive asset once it is no longer in use will be amortized over the defensive period. Estimated amortization expense related to the Optimum and Lightpath trade names are approximately $545,805 for 2017 (of which $122,818 has been expensed through June 30, 2017), $355,006 for 2018, $46,627 for 2019 and $18,140 through May 2020. |
Amortization expense for the three and six months ended June 30, 2017 aggregated $317,219, and $555,238, respectively, and for the three and six months ended June 30, 2016 aggregated $32,389 and $144,324, respectively.
The following table summarizes information relating to the Company's acquired indefinite-lived intangible assets as of June 30, 2017:
|
| | | | | | | | | | | |
| Cablevision | | Cequel | | Total |
Cable television franchises | $ | 8,113,575 |
| | $ | 4,906,506 |
| | $ | 13,020,081 |
|
Goodwill | 5,839,728 |
| | 2,153,741 |
| | 7,993,469 |
|
Total | $ | 13,953,303 |
| | $ | 7,060,247 |
| | $ | 21,013,550 |
|
The carrying amount of goodwill is presented below:
|
| | | |
Gross goodwill as of January 1, 2017 | $ | 7,992,700 |
|
Goodwill recorded in connection with acquisition in first quarter 2017 (Cablevision Segment) | 20,657 |
|
Adjustments to purchase accounting relating to Cablevision Acquisition | 3,213 |
|
Transfer of Cablevision goodwill related to Altice Technical Services US Corp. (See Note 14 for further details) | (23,101 | ) |
Net goodwill as of June 30, 2017 | $ | 7,993,469 |
|
NOTE 9. DEBT
CSC Holdings Credit Facilities
In connection with the Cablevision Acquisition, in October 2015, Finco, a wholly-owned subsidiary of the Company, which merged with and into CSC Holdings on June 21, 2016, entered into a senior secured credit facility, which currently provides U.S. dollar term loans currently in an aggregate principal amount of $3,000,000 (the “CVC Term Loan Facility”, and the term loans extended under the CVC Term Loan Facility, the “CVC Term Loans”) and U.S. dollar revolving loan commitments in an aggregate principal amount of $2,300,000 (the “CVC Revolving Credit Facility” and, together with the Term Loan Facility, the “CVC Credit Facilities”), which are governed by a credit facilities agreement entered into by, inter alios, CSC Holdings, certain lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
and security agent (as amended, restated, supplemented or otherwise modified on June 20, 2016, June 21, 2016, July 21, 2016, September 9, 2016, December 9, 2016 and March 15, 2017, respectively, and as further amended, restated, supplemented or otherwise modified from time to time, the “Credit Facilities Agreement”).
The amendment to the CVC Credit Facilities Agreement entered into on March 15, 2017 (“Extension Amendment”) increased the Term Loan by $500,000 to $3,000,000 and the maturity date for this facility was extended to July 17, 2025. The closing of the Extension Amendment occurred in April 2017 and the proceeds were used to refinance the entire $2,493,750 principal amount of existing Term Loans and redeem $500,000 of the 8.625% Senior Notes due September 2017 issued by Cablevision. In connection with the Extension Amendment and the redemption of the senior notes, the Company recorded a loss on extinguishment of debt and write-off of deferred financings costs aggregating $18,976.
During the six months ended June 30, 2017, CSC Holdings borrowed $725,000 under its revolving credit facility ($500,000 was used to make cash distributions to its shareholders) and made repayments aggregating $250,000 with cash on hand. In July 2017, CSC Holdings borrowed $125,000 under its revolving credit facility.
Under the Extension Amendment, the Company is required to make scheduled quarterly payments equal to 0.25% (or $7,500 of the principal amount of the Term Loan, with the remaining balance scheduled to be paid on July 17, 2025, beginning with the fiscal quarter ending September 30, 2017.
The CVC Credit Facilities permit CSC Holdings to request revolving loans, swing line loans or letters of credit from the revolving lenders, swingline lenders or issuing banks, as applicable, thereunder, from time to time prior to November 30, 2021, unless the commitments under the CVC Revolving Credit Facility have been previously terminated.
Loans comprising each eurodollar borrowing or alternate base rate borrowing, as applicable, bear interest at a rate per annum equal to the adjusted LIBO rate or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is:
| |
• | in respect of the CVC Term Loans, (i) with respect to any alternate base rate loan, 1.25% per annum and (ii) with respect to any eurodollar loan, 2.25% per annum, and |
| |
• | in respect of the CVC Revolving Credit Facility loans (i) with respect to any alternate base rate loan, 2.25% per annum and (ii) with respect to any eurodollar loan, 3.25% per annum. |
The CVC Credit Facilities Agreement requires CSC Holdings to prepay outstanding CVC Term Loans, subject to certain exceptions and deductions, with (i) 100% of the net cash proceeds of certain asset sales, subject to reinvestment rights and certain other exceptions; and (ii) commencing with the fiscal year ending December 31, 2017, a pari ratable share (based on the outstanding principal amount of the Term Loans divided by the sum of the outstanding principal amount of all pari passu indebtedness and the Term Loans) of 50% of annual excess cash flow, which will be reduced to 0% if the consolidated net senior secured leverage ratio of CSC Holdings is less than or equal to 4.5 to 1.
The obligations under the CVC Credit Facilities are guaranteed by each restricted subsidiary of CSC Holdings (other than CSC TKR, LLC and its subsidiaries and certain excluded subsidiaries) (the “Initial Guarantors”) and, subject to certain limitations, will be guaranteed by each future material wholly-owned restricted subsidiary of CSC Holdings. The obligations under the CVC Credit Facilities (including any guarantees thereof) are secured on a first priority basis, subject to any liens permitted by the Credit Facilities, by capital stock held by CSC Holdings or any guarantor in certain subsidiaries of CSC Holdings, subject to certain exclusions and limitations.
The CVC Credit Facilities Agreement includes certain negative covenants which, among other things and subject to certain significant exceptions and qualifications, limit CSC Holdings' ability and the ability of its restricted subsidiaries to: (i) incur or guarantee additional indebtedness, (ii) make investments, (iii) create liens, (iv) sell assets and subsidiary stock, (v) pay dividends or make other distributions or repurchase or redeem our capital stock or subordinated debt, (vi) engage in certain transactions with affiliates, (vii) enter into agreements that restrict the payment of dividends by subsidiaries or the repayment of intercompany loans and advances; and (viii) engage in mergers or consolidations. In addition, the CVC Revolving Credit Facility includes a financial maintenance covenant solely for the benefit of the lenders under the CVC Revolving Credit Facility consisting of a maximum consolidated net senior secured leverage ratio of CSC Holdings and its restricted subsidiaries of 5.0 to 1.0. The financial covenant will be tested on the last day of any fiscal quarter, but only if on such day there are outstanding borrowings under the CVC Revolving Credit Facility (including swingline loans but excluding any cash collateralized letters of credit and undrawn letters of credit not to exceed $15,000).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The CVC 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 CVC Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the CVC Credit Facilities and all actions permitted to be taken by a secured creditor.
CSC Holdings was in compliance with all of its financial covenants under the CVC Credit Facilities as of June 30, 2017.
Cequel Credit Facilities
On June 12, 2015, Altice US Finance I Corporation entered into a senior secured credit facility which currently provides term loans in an aggregate principal amount of $1,265,000 (the “Cequel Term Loan Facility” and the term loans extended under the Cequel Term Loan Facility, the “Cequel Term Loans”) and revolving loan commitments in an aggregate principal amount of $350,000 (the “Cequel Revolving Credit Facility” and, together with the Cequel Term Loan Facility, the “Cequel Credit Facilities”) which are governed by a credit facilities agreement entered into by, inter alios, Altice US Finance I Corporation, certain lenders party thereto and JPMorgan Chase Bank, N.A. (as amended, restated, supplemented or otherwise modified on October 25, 2016, December 9, 2016 and March 15, 2017, and as further amended, restated, supplemented or modified from time to time, the “Cequel Credit Facilities Agreement”).
The amendment to the Cequel Credit Facilities Agreement entered into on March 15, 2017 (“Cequel Extension Amendment”) increased the Term Loan by $450,000 to $1,265,000 and the maturity date for this facility was extended to July 28, 2025. The closing of the Extension Amendment occurred in April 2017 and the proceeds were used to refinance the entire $812,963 principal amount of loans under the Term Loan and redeem $450,000 of the 6.375% Senior Notes due September 15, 2020. In connection with the Cequel Extension Amendment and the redemption of the senior notes, the Company recorded a loss on extinguishment of debt and write-off of deferred financings costs aggregating $28,684.
Under the Cequel Extension Amendment, the Company is required to make scheduled quarterly payments equal to 0.25% (or $3,163) of the principal amount of the Cequel Term Loan, with the remaining balance scheduled to be paid on July 28, 2025, beginning with the fiscal quarter ending September 30, 2017.
Loans comprising each eurodollar borrowing or alternate base rate borrowing, as applicable, bear interest at a rate per annum equal to the adjusted LIBO rate or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is:
| |
• | in respect of the Cequel Term Loans, (i) with respect to any alternate base rate loan, 1.25% per annum and (ii) with respect to any eurodollar loan, 2.25% per annum, and |
| |
• | in respect of Cequel Revolving Credit Facility loans (i) with respect to any alternate base rate loan, 2.25% per annum and (ii) with respect to any eurodollar loan, 3.25% per annum. |
The Cequel Credit Facilities Agreement requires Altice US Finance I Corporation to prepay outstanding Term Loans, subject to certain exceptions and deductions, with (i) 100% of the net cash proceeds of certain asset sales, subject to reinvestment rights and certain other exceptions; and (ii) a pari ratable share (based on the outstanding principal amount of the Cequel Term Loans divided by the sum of the outstanding principal amount of all pari passu indebtedness and the Cequel Term Loans) of 50% of annual excess cash flow, which will be reduced to 0% if the consolidated net senior secured leverage ratio is less than or equal to 4.5:1.
The debt under the Cequel Credit Facility is secured by a first priority security interest in the capital stock of Suddenlink and substantially all of the present and future assets of Suddenlink and its restricted subsidiaries, and is guaranteed by Cequel Communications Holdings II, LLC, a subsidiary of Cequel (the "Parent Guarantor"), as well as all of Suddenlink’s existing and future direct and indirect subsidiaries, subject to certain exceptions set forth in the Cequel Credit Facilities Agreement. The Cequel Credit Facilities Agreement contains customary representations, warranties and affirmative covenants. In addition, the Cequel Credit Facilities Agreement contains restrictive covenants that limit, among other things, the ability of Suddenlink and its subsidiaries to incur indebtedness, create liens, engage in mergers, consolidations and other fundamental changes, make investments or loans, engage in transactions with affiliates, pay dividends, and make acquisitions and dispose of assets. The Cequel Credit Facilities Agreement also contains a maximum senior secured leverage maintenance covenant of 5.0 times EBITDA as defined in the Cequel Credit Facilities Agreement. Additionally, the Cequel Credit Facilities Agreement contains customary events of default, including failure to make payments, breaches of covenants and representations, cross defaults to other indebtedness, unpaid judgments, changes of control
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
and bankruptcy events. The lenders’ commitments to fund amounts under the revolving credit facility are subject to certain customary conditions.
As of June 30, 2017, Cequel was in compliance with all of its financial covenants under the Cequel Credit Facilities Agreement.
The following table provides details of the Company's outstanding credit facility debt (net of unamortized financing costs and unamortized discounts):
|
| | | | | | | | | | | | | | | | | |
| | | | | | | Carrying Amount (a) |
| Maturity Date | | Interest Rate | | Principal | | June 30, 2017 | | December 31, 2016 |
CSC Holdings Restricted Group: | | | | | | | | | |
Revolving Credit Facility (b) | $20,000 on October 9, 2020, remaining balance on November 30, 2021 | | 4.50% | | $ | 650,256 |
| | $ | 622,829 |
| | $ | 145,013 |
|
Term Loan Facility | July 17, 2025 | | 3.46% | | 3,000,000 |
| | 2,983,199 |
| | 2,486,874 |
|
Cequel: | | | | | | | | | |
Revolving Credit Facility (c) | November 30, 2021 | | — | | — |
| | — |
| | — |
|
Term Loan Facility | July 28, 2025 | | 3.47% | 812,963 |
| 1,265,000 |
| 0.00003982 |
| 1,256,661 |
| | 812,903 |
|
| | | | | $ | 4,915,256 |
| | 4,862,689 |
| | 3,444,790 |
|
Less: Current portion | 42,650 |
| | 33,150 |
|
Long-term debt | $ | 4,820,039 |
| | $ | 3,411,640 |
|
| |
(a) | The carrying amount is net of the unamortized deferred financing costs and/or discounts/premiums. |
| |
(b) | At June 30, 2017, $91,273 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $1,558,471 of the facility was undrawn and available, subject to covenant limitations. |
| |
(c) | At June 30, 2017, $16,575 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $333,425 of the facility was undrawn and available, subject to covenant limitations. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Senior Guaranteed Notes and Senior Notes and Debentures
The following table summarizes the Company's senior guaranteed notes, senior secured notes and senior notes and debentures:
|
| | | | | | | | | | | | | | | | | | |
| | | | | Interest Rate | | Principal Amount | | Carrying Amount (a) |
Issuer | Date Issued | | Maturity Date | | | | June 30, 2017 | | December 31, 2016 |
CSC Holdings (b)(f) | February 6, 1998 | | February 15, 2018 | | 7.875 | % | | $ | 300,000 |
| | $ | 305,850 |
| | $ | 310,334 |
|
CSC Holdings (b)(f) | July 21, 1998 | | July 15, 2018 | | 7.625 | % | | 500,000 |
| | 514,838 |
| | 521,654 |
|
CSC Holdings (c)(f) | February 12, 2009 | | February 15, 2019 | | 8.625 | % | | 526,000 |
| | 547,630 |
| | 553,804 |
|
CSC Holdings (c)(f) | November 15, 2011 | | November 15, 2021 | | 6.750 | % | | 1,000,000 |
| | 955,805 |
| | 951,702 |
|
CSC Holdings (c)(f) | May 23, 2014 | | June 1, 2024 | | 5.250 | % | | 750,000 |
| | 655,256 |
| | 650,193 |
|
CSC Holdings (e) | October 9, 2015 | | January 15, 2023 | | 10.125 | % | | 1,800,000 |
| | 1,776,278 |
| | 1,774,750 |
|
CSC Holdings (e)(k) | October 9, 2015 | | October 15, 2025 | | 10.875 | % | | 2,000,000 |
| | 1,971,393 |
| | 1,970,379 |
|
CSC Holdings (e) | October 9, 2015 | | October 15, 2025 | | 6.625 | % | | 1,000,000 |
| | 986,078 |
| | 985,469 |
|
CSC Holdings (g) | September 23, 2016 | | April 15, 2027 | | 5.500 | % | | 1,310,000 |
| | 1,304,241 |
| | 1,304,025 |
|
Cablevision (c)(f) | September 23, 2009 | | September 15, 2017 | | 8.625 | % | | 400,000 |
| | 403,493 |
| | 926,045 |
|
Cablevision (c)(f) | April 15, 2010 | | April 15, 2018 | | 7.750 | % | | 750,000 |
| | 760,944 |
| | 767,545 |
|
Cablevision (c)(f) | April 15, 2010 | | April 15, 2020 | | 8.000 | % | | 500,000 |
| | 490,455 |
| | 488,992 |
|
Cablevision (c)(f) | September 27, 2012 | | September 15, 2022 | | 5.875 | % | | 649,024 |
| | 565,594 |
| | 559,500 |
|
Cequel and Cequel Capital Senior Notes (d) | Oct. 25, 2012 Dec. 28, 2012 | | September 15, 2020 | | 6.375 | % | | 1,050,000 |
| | 1,023,771 |
| | 1,457,439 |
|
Cequel and Cequel Capital Senior Notes (d) | May 16, 2013 Sept. 9, 2014 | | December 15, 2021 | | 5.125 | % | | 1,250,000 |
| | 1,127,096 |
| | 1,115,767 |
|
Altice US Finance I Corporation Senior Secured Notes (h) | June 12, 2015 | | July 15, 2023 | | 5.375 | % | | 1,100,000 |
| | 1,081,157 |
| | 1,079,869 |
|
Cequel and Cequel Capital Senior Notes (i) | June 12, 2015 | | July 15, 2025 | | 7.750 | % | | 620,000 |
| | 603,635 |
| | 602,925 |
|
Altice US Finance I Corporation Senior Notes (j) | April 26, 2016 | | May 15, 2026 | | 5.500 | % | | 1,500,000 |
| | 1,487,471 |
| | 1,486,933 |
|
| | | | | | | $ | 17,005,024 |
| | 16,560,985 |
| | 17,507,325 |
|
Less: Current portion | | 1,781,549 |
| | 926,045 |
|
Long-term debt | | $ | 14,779,436 |
| | $ | 16,581,280 |
|
| |
(a) | The carrying amount of the notes is net of the unamortized deferred financing costs and/or discounts/premiums. |
| |
(b) | The debentures are not redeemable by CSC Holdings prior to maturity. |
| |
(c) | Notes are redeemable at any time at a specified "make-whole" price plus accrued and unpaid interest to the redemption date. |
| |
(d) | The Company may redeem some or more of all the notes at the redemption price set forth in the relevant indenture, plus accrued and unpaid interest. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
| |
(e) | The Company may redeem some or all of the 2023 Notes at any time on or after January 15, 2019, and some or all of the 2025 Notes and 2025 Guaranteed Notes at any time on or after October 15, 2020, at the redemption prices set forth in the relevant indenture, plus accrued and unpaid interest, if any. The Company may also redeem up to 40% of each series of the Cablevision Acquisition Notes using the proceeds of certain equity offerings before October 15, 2018, at a redemption price equal to 110.125% for the 2023 Notes, 110.875% for the 2025 Notes and 106.625% for the 2025 Guaranteed Notes, in each case plus accrued and unpaid interest. In addition, at any time prior to January 15, 2019, CSC Holdings may redeem some or all of the 2023 Notes, and at any time prior to October 15, 2020, the Company may redeem some or all of the 2025 Notes and the 2025 Guaranteed Notes, at a price equal to 100% of the principal amount thereof, plus a “make whole” premium specified in the relevant indenture plus accrued and unpaid interest. |
| |
(f) | The carrying value of the notes was adjusted to reflect their fair value on the Cablevision Acquisition Date (aggregate reduction of $52,788). |
| |
(g) | The 2027 Guaranteed Notes are redeemable at any time on or after April 15, 2022 at the redemption prices set forth in the indenture, plus accrued and unpaid interest, if any. In addition, up to 40% may be redeemed for each series of the 2027 Guaranteed Notes using the proceeds of certain equity offerings before October 15, 2019, at a redemption price equal to 105.500%, plus accrued and unpaid interest. |
| |
(h) | Some or all of these notes may be redeemed at any time on or after July 15, 2018, plus accrued and unpaid interest, if any. Up to 40% of the notes may be redeemed using the proceeds of certain equity offerings before July 15, 2018, at a redemption price equal to 105.375%. |
| |
(i) | Some or all of these notes may be redeemed at any time on or after July 15, 2020, plus accrued and unpaid interest, if any. Up to 40% of the notes may be redeemed using the proceeds of certain equity offerings before July 15, 2018, at a redemption price equal to 107.750%. |
| |
(j) | Some or all of these notes may be redeemed at any time on or after May 15, 2021, plus accrued and unpaid interest, if any. Up to 40% of the notes may be redeemed using the proceeds of certain equity offerings before May 15, 2019, at a redemption price equal to 105.500%. |
| |
(k) | In July 2017, the Company used approximately $350,120 of the proceeds from the IPO to fund the redemption of $315,779 principal amount of CSC Holdings senior notes due October 2025, and the related call premium of approximately $34,341. |
The indentures under which the senior notes and debentures were issued contain various covenants. The Company was in compliance with all of its financial covenants under these indentures as of June 30, 2017.
Notes Payable to Affiliates and Related Parties
On June 21, 2016, in connection with the Cablevision Acquisition, the Company issued notes payable to affiliates and related parties aggregating $1,750,000, of which $875,000 bore interest at 10.75% and were due on December 20, 2023 and $875,000 bore interest at 11% and were due on December 20, 2024.
As discussed in Note 1, in connection with the Company's IPO, the Company converted the notes payable to affiliates and related parties (together with accrued and unpaid interest of $529 and applicable premium of $513,723) into shares of the Company’s common stock at the IPO price. The premium was recorded as a loss on extinguishment of debt on the Company's statement of operations for the three and six months ended June 30, 2017. In connection with the conversion of the notes, the Company recorded a credit to paid in capital of $2,264,252.
For the three and six months ended June 30, 2017, the Company recognized $42,817 and $90,405, respectively, of interest expense related to these notes prior to their conversion.
Summary of Debt Maturities
The future maturities of debt payable by the Company under its various debt obligations outstanding as of June 30, 2017, including notes payable, collateralized indebtedness (see Note 10), and capital leases, are as follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | |
Years Ending December 31, | Cablevision | | Cequel | | Total |
2017 | $ | 749,636 |
| | $ | 6,728 |
| | $ | 756,364 |
|
2018 | 1,593,481 |
| | 13,040 |
| | 1,606,521 |
|
2019 | 562,207 |
| | 12,830 |
| | 575,037 |
|
2020 | 530,305 |
| | 1,062,713 |
| | 1,593,018 |
|
2021 | 3,139,894 |
| | 1,262,723 |
| | 4,402,617 |
|
Thereafter | 10,058,245 |
| | 4,429,003 |
| | 14,487,248 |
|
NOTE 10. DERIVATIVE CONTRACTS AND COLLATERALIZED INDEBTEDNESS
Prepaid Forward Contracts
The Company has entered into various transactions to limit the exposure against equity price risk on its shares of Comcast Corporation ("Comcast") common stock. The Company has monetized all of its stock holdings in Comcast through the execution of prepaid forward contracts, collateralized by an equivalent amount of the respective underlying stock. At maturity, the contracts provide for the option to deliver cash or shares of Comcast stock with a value determined by reference to the applicable stock price at maturity. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share while allowing the Company to retain upside appreciation from the hedge price per share to the relevant cap price.
The Company received cash proceeds upon execution of the prepaid forward contracts discussed above which has been reflected as collateralized indebtedness in the accompanying 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 statement 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 June 30, 2017, 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 and it diversifies its equity derivative contracts among various counterparties to mitigate exposure to any single financial institution. All of the counterparties to such transactions carry investment grade credit ratings as of June 30, 2017.
Interest Rate Swap Contracts
In June 2016, the Company entered into two new fixed to floating interest rate swap contracts. One fixed to floating interest rate swap is converting $750,000 from a fixed rate of 1.6655% to six-month LIBO rate and a second tranche of $750,000 from a fixed rate of 1.68% to six-month LIBO rate. The objective of these swaps is to cover the exposure of the 2026 Senior Secured Notes to changes in the market interest rate. These swap contracts were not designated as hedges for accounting purposes. Accordingly, the changes in the fair value of these interest rate swap contracts are recorded through the statement of operations.
The Company does not hold or issue derivative instruments for trading or speculative purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
The following represents the location of the assets and liabilities associated with the Company's derivative instruments within the consolidated balance sheets:
|
| | | | | | | | | | | | | | | | | | |
| | | | Asset Derivatives | | Liability Derivatives |
Derivatives Not Designated as Hedging Instruments | | Balance Sheet Location | | Fair Value at June 30, 2017 | | Fair Value at December 31, 2016 | | Fair Value at June 30, 2017 | | Fair Value at December 31, 2016 |
| | | | | | | | | | |
Prepaid forward contracts | | Derivative contracts, current | | $ | 81,506 |
| | $ | 352 |
| | $ | 81,506 |
| | $ | 13,158 |
|
Prepaid forward contracts | | Derivative contracts, long-term | | 9,868 |
| | 10,604 |
| | 84,784 |
| | — |
|
Interest rate swap contracts | | Liabilities under derivative contracts, long-term | | — |
| | — |
| | 70,323 |
| | 78,823 |
|
| | | | $ | 91,374 |
| | $ | 10,956 |
| | $ | 236,613 |
| | $ | 91,981 |
|
Losses related to the Company's equity derivative contracts related to the Comcast common stock for the three and six months ended June 30, 2017 of $66,463 and $137,507, respectively, are reflected in loss on equity derivative contracts, net in the Company's consolidated statement of operations.
For the three and six months ended June 30, 2017, the Company recorded a gain on investments of $57,130 and $188,788, respectively, representing the net increase in the fair values of the investment securities pledged as collateral.
For the three and six months ended June 30, 2017, the Company recorded a gain on interest rate swap contracts of $9,146 and $11,488, respectively.
Settlements of Collateralized Indebtedness
The following table summarizes the settlement of the Company's collateralized indebtedness relating to Comcast shares that were settled by delivering cash equal to the collateralized loan value, net of the value of the related equity derivative contracts during the six months ended June 30, 2017:
|
| | | |
Number of shares (a) | 16,139,868 |
|
Collateralized indebtedness settled | $ | (467,803 | ) |
Derivatives contracts settled | (15,278 | ) |
| (483,081 | ) |
Proceeds from new monetization contracts | 490,816 |
|
Net cash proceeds | $ | 7,735 |
|
______________________ | |
(a) | Share amounts are adjusted for the 2 for 1 stock split in February 2017. |
The cash to settle the collateralized indebtedness was obtained from the proceeds of new monetization contracts covering an equivalent number of Comcast shares. The terms of the new contracts allow the Company to retain upside participation in Comcast shares up to each respective contract's upside appreciation limit with downside exposure limited to the respective hedge price.
Additionally, in April 2017, the Company entered into new monetization contracts related to 32,153,118 shares of Comcast common stock held by Cablevision, which synthetically reversed the existing contracts related to these shares (the "Synthetic Monetization Closeout"). As the existing collateralized debt matures, the Company will settle the contracts with proceeds received from the new monetization contracts. The new monetization contracts mature on April 28, 2021. The new monetization contracts provide the Company with downside protection below the hedge price of $35.47 and upside benefit of stock price appreciation up to $44.72 per share. In connection with the execution of these contracts, the Company recorded (i) the fair value of the equity derivative contracts of $64,793 (in a net asset position), (ii) notes payable of $111,657, representing the fair value of the existing equity derivative contracts, in a liability position, and (iii) a discount on notes payable of $46,864.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
NOTE 11. FAIR VALUE MEASUREMENT
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| |
• | Level I - Quoted prices for identical instruments in active markets. |
| |
• | Level II - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| |
• | Level III - Instruments whose significant value drivers are unobservable. |
The following table presents for each of these hierarchy levels, the Company's financial assets and financial liabilities that are measured at fair value on a recurring basis:
|
| | | | | | | | | |
| Fair Value Hierarchy | | June 30, 2017 | | December 31, 2016 |
Assets: | | | | | |
Money market funds (of which $350,120 and $14,700 is classified as restricted cash as of June 30, 2017 and December 31, 2016, respectively) | Level I | | $ | 438,719 |
| | $ | 100,139 |
|
Investment securities pledged as collateral | Level I | | 1,671,818 |
| | 1,483,030 |
|
Prepaid forward contracts | Level II | | 91,374 |
| | 10,956 |
|
Liabilities: | | | | | |
Prepaid forward contracts | Level II | | 166,290 |
| | 13,158 |
|
Interest rate swap contracts | Level II | | 70,323 |
| | 78,823 |
|
The Company's cash equivalents, investment securities and investment securities pledged as collateral are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
The Company's derivative contracts and liabilities under derivative contracts on the Company's balance sheets are valued using market-based inputs to valuation models. These valuation models require a variety of inputs, including contractual terms, market prices, yield curves, and measures of volatility. When appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit risk considerations. Such adjustments are generally based on available market evidence. Since model inputs can generally be verified and do not involve significant management judgment, the Company has concluded that these instruments should be classified within Level II of the fair value hierarchy.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate fair value of each class of financial instruments for which it is practicable to estimate:
Credit Facility Debt, Collateralized Indebtedness, Senior Notes and Debentures, Senior Secured Notes, Senior Guaranteed Notes, Notes Payable to Affiliates and Related Parties 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:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | |
| | | June 30, 2017 | | December 31, 2016 |
| Fair Value Hierarchy | | Carrying Amount (a) | | Estimated Fair Value | | Carrying Amount (a) | | Estimated Fair Value |
Altice USA debt instruments: | | | | | | | | | |
Notes payable to affiliates | Level II | | $ | — |
| | $ | — |
| | $ | 1,750,000 |
| | $ | 1,837,876 |
|
CSC Holdings debt instruments: | | | |
| | |
| | |
| | |
|
Credit facility debt | Level II | | 3,606,028 |
| | 3,650,256 |
| | 2,631,887 |
| | 2,675,256 |
|
Collateralized indebtedness | Level II | | 1,308,388 |
| | 1,272,012 |
| | 1,286,069 |
| | 1,280,048 |
|
Senior guaranteed notes | Level II | | 2,290,319 |
| | 2,492,803 |
| | 2,289,494 |
| | 2,416,375 |
|
Senior notes and debentures | Level II | | 6,727,050 |
| | 7,792,459 |
| | 6,732,816 |
| | 7,731,150 |
|
Notes payable | Level II | | 87,631 |
| | 124,979 |
| | 13,726 |
| | 13,260 |
|
Cablevision senior notes | Level II | | 2,220,486 |
| | 2,428,236 |
| | 2,742,082 |
| | 2,920,056 |
|
Cequel debt instruments: | | |
|
| |
|
| |
|
| |
|
|
Cequel credit facility | Level II | | 1,256,661 |
| | 1,265,000 |
| | 812,903 |
| | 815,000 |
|
Senior secured notes | Level II | | 2,568,628 |
| | 2,728,250 |
| | 2,566,802 |
| | 2,689,750 |
|
Senior notes | Level II | | 2,754,502 |
| | 3,045,246 |
| | 3,176,131 |
| | 3,517,275 |
|
| | | $ | 22,819,693 |
| | $ | 24,799,241 |
| | $ | 24,001,910 |
| | $ | 25,896,046 |
|
| |
(a) | Amounts are net of unamortized deferred financing costs and discounts. |
The fair value estimates related to the Company's debt instruments presented above are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NOTE 12. INCOME TAXES
The Company files a federal consolidated and certain state combined income tax returns with its 80% or more owned subsidiaries.
The Company recorded income tax benefit of $249,068 and $294,976 for the three and six months ended June 30, 2017, respectively, reflecting an effective tax rate of 34% and 35%, respectively. Nondeductible share-based compensation expense for the three and six months ended June 30, 2017 reduced income tax benefit by $7,231 and $10,371, respectively. The Company is required to use an estimated annual effective tax rate to measure the income tax benefit or expense recognized in an interim period.
The Company recorded income tax expense of $91,293 and $16,898 for the three and six months ended June 30, 2016, respectively. On June 9, 2016 the common stock of Cequel Corporation was contributed to the Company. On June 21, 2016, the Company completed its acquisition of Cablevision. Accordingly, Cequel and Cablevision joined the federal consolidated and certain state combined income tax returns of the Company. As a result, the applicate tax rate used to measure deferred tax assets and liabilities increased, resulting in a non-cash deferred income tax charge of $153,660 in the second quarter of 2016. In addition, there was no state income tax benefit on the pre-merger accrued interest at Finco, resulting in additional deferred tax expense of $7,506 and $15,846 for the three and six months ended June 30, 2016, respectively.
On January 1, 2017, the Company adopted ASU 2016-09 using the prospective transition method with respect to the presentation of excess tax benefits in the statement of cash flows. In connection with the adoption, a deferred tax asset of $308,231 for previously unrealized excess tax benefits related to share-based payment awards was recognized with the offset recorded to accumulated deficit.
As of June 30, 2017, the Company's federal net operating losses (“NOLs”) were approximately $2,893,000. The utilization of certain pre-merger NOLs of Cablevision and Cequel are limited pursuant to Internal Revenue Code Section 382. The Company does not expect such limitations to impact the ability to utilize the NOLs prior to their expiration.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
NOTE 13. SHARE BASED COMPENSATION
Certain employees of the Company and its affiliates received awards of units in a carry unit plan of Neptune Management LP, an entity which has an ownership interest in the Company. The awards generally vest as follows: 50% on the second anniversary of June 21, 2016 for Cablevision employees or December 21, 2015 for Cequel employees ("Base Date"), 25% on the third anniversary of the Base Date, and 25% on the fourth anniversary of the Base Date. Neptune Holding US GP LLC, the general partner of Neptune Management LP, has the right to repurchase (or to assign to an affiliate, including the Company, the right to repurchase) vested awards held by employees for sixty days following their termination. For performance-based awards under the plan, vesting occurs upon achievement or satisfaction of a specified performance condition. The Company considered the probability of achieving the established performance targets in determining the share-based compensation with respect to these awards at the end of each reporting period. The carry unit plan has 259,442,785 units authorized for issuance, of which 214,545,833 have been issued to employees of the Company and 13,800,000 have been issued to employees of Altice N.V. and affiliated companies as of June 30, 2017.
Beginning on the fourth anniversary of the Base Date, the holders of carry units have an annual opportunity (a sixty day period determined by the administrator of the plan) to sell their units back to Neptune Holding US GP LLC (or affiliate, including the Company, designated by Neptune Holding US GP). Accordingly, the carry units are presented as temporary equity on the consolidated balance at fair value. Adjustments to fair value at each reporting period are recorded in paid-in capital.
The right of Neptune Holding US GP LLC to assign to an affiliate, including the Company, the right to repurchase an employee’s vested units during the sixty-day period following termination, or to satisfy its obligation to repurchase an employee’s vested units during annual 60 day periods following the fourth anniversary of the Base Date, may be exercised by Neptune Holding US GP LLC in its discretion at the time a repurchase right or obligation arises. The carry unit plan requires the purchase price payable to the employee or former employee, as the case may be, to be paid in cash, a promissory note (with a term of not more than 3 years and bearing interest at the long-term applicable federal rate under Section 1274(d) of the Internal Revenue Code) or combination thereof, in each case as determined by Neptune Holding US GP LLC in its discretion at the time of the repurchase. Neptune Holding US GP LLC expects that vested units will be redeemed for shares of Class A common stock upon vesting.
The Company measures the cost of employee services received in exchange for carry units based on the fair value of the award at grant date. For carry unit awards granted in 2016, an option pricing model was used which requires subjective assumptions for which changes in these assumptions could materially affect the fair value of the carry units outstanding. The time to liquidity event assumption was based on management’s judgment. The equity volatility assumption was estimated using the historical weekly volatility of publicly traded comparable companies. The risk-free rate assumed in valuing the units was based on the U.S. Constant Maturity Treasury Rates for a period matching the expected time to liquidity event. The discount for lack of marketability was based on Finnerty's (2012) average-strike put option model.
For carry unit awards granted in the first and second quarter of 2017, the Company estimated the grant date fair value based on the value established in the Company's IPO.
The following table summarizes activity relating to carry units:
|
| | | | | | | | | |
| Number of Time Vesting Awards | | Number of Performance Based Vesting Awards | | Weighted Average Grant Date Fair Value |
Balance, December 31, 2016 | 192,800,000 |
| | 10,000,000 |
| | $ | 0.37 |
|
Granted | 28,025,000 |
| | — |
| | 3.14 |
|
Forfeited | (2,479,166 | ) | | — |
| | 0.37 |
|
Balance, June 30, 2017 | 218,345,834 |
| | 10,000,000 |
| | 0.71 |
|
Awards vested at June 30, 2017 | — |
| | — |
| | |
The weighted average fair value per unit was $1.76 and $4.45 as of December 31, 2016 and June 30, 2017, respectively. For the three and six months ended June 30, 2017, the Company recognized an expense of $18,079 and $25,927 related to the push down of share-based compensation related to the carry unit plan of which approximately $17,454 and $24,702
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
related to units granted to employees of the Company and $624 and $1,225 related to employees of Altice N.V. and affiliated companies allocated to the Company.
NOTE 14. AFFILIATE AND RELATED PARTY TRANSACTIONS
Equity Method Investments
In July 2016, the Company completed the sale of a 75% interest in Newsday LLC ("Newsday") to an employee of the Company. The Company retained the remaining 25% ownership interest. Effective July 7, 2016, the operating results of Newsday are no longer consolidated with those of the Company and the Company's 25% interest in the operating results of Newsday is recorded on the equity basis.
At June 30, 2017, the Company's 25% investment in Newsday and its 25% interest in i24NEWS, Altice N.V.'s 24/7 international news and current affairs channel aggregated $2,019 and is included in investments in affiliates on our consolidated balance sheets. The operating results of Newsday and i24NEWS are recorded on the equity basis. For the three and six months ended June 30, 2017, the Company recorded equity in net loss of Newsday of $27 and $1,537, respectively, and equity in net loss of I24NEWS of $1,338 and $2,585, respectively.
Affiliate and Related Party Transactions
As the transactions discussed below were conducted between subsidiaries of Altice N.V. under common control and equity method investees, amounts charged for certain services may not have represented amounts that might have been received or incurred if the transactions were based upon arm's length negotiations.
Altice Technical Services US Corp. ("ATS")
ATS is a wholly-owned subsidiary of Altice Technical Service B.V., a 70% owned subsidiary of Altice N.V. ATS was formed to provide network construction and maintenance services and commercial and residential installations, disconnections, and maintenance.
In the second quarter of 2017, the Company entered into an Independent Contractor Agreement with ATS that governs the terms of the services described above. The Company believes the services it receives from ATS will be of higher quality and at a lower cost than the Company could achieve without ATS, including for the construction of our new FTTH network. The Company also entered into a transition services agreement (“TSA”) 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 that generally ends on December 31, 2017, although the term can be extended on a service-by-service basis. The TSA requires ATS to reimburse the Company for its cost to provide such services.
During the second quarter of 2017, a substantial portion of the Company's technical workforce at the Cablevision segment either accepted employment with ATS or became employees of ATS and ATS commenced operations and began to perform services for the Company. It is anticipated that a substantial portion of the Cequel segment technical workforce will become employees of ATS later in 2017.
From the formation of ATS and up until an equity contribution was made by its parent in June 2017, ATS met the definition of a variable interest entity in accordance with ASC 810-10-15-14. The Company evaluated whether its arrangement under the terms of the Independent Contractor Agreement is a variable interest, whether the Company is the primary beneficiary and whether the Company should consolidate ATS. The Company concluded that it is not the primary beneficiary of ATS because ATS is controlled by its parent, which in turn is controlled by Altice N.V. who has the power to direct the most significant activities of ATS.
As of June 30, 2017, the Company had a prepayment balance of $19,780 to ATS for construction services, which is reflected in other assets on the Company's balance sheet.
The Company reduced goodwill to reflect the preliminary estimate of the historical value of the goodwill associated with the transfer to ATS described above of $23,101, that has been recorded as a reduction to stockholders' equity.
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 N.V. and Newsday:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Revenue | $ | 253 |
| | $ | — |
| | $ | 394 |
| | $ | — |
|
Operating expenses: | |
| | | | | | |
Programming and other direct costs | $ | (1,095 | ) | | $ | — |
| | $ | (1,830 | ) | | $ | — |
|
Other operating expenses, net | (37,633 | ) | | (2,500 | ) | | (44,931 | ) | | (5,000 | ) |
Operating expenses, net | (38,728 | ) | | (2,500 | ) | | (46,761 | ) | | (5,000 | ) |
| | | | | | | |
Interest expense (a) | (42,817 | ) | | (5,305 | ) | | (90,405 | ) | | (5,305 | ) |
Loss on extinguishment of debt and write-off of deferred financing costs | (513,723 | ) | | — |
| | (513,723 | ) | | — |
|
Net charges | $ | (595,015 | ) | | $ | (7,805 | ) | | $ | (650,495 | ) | | $ | (10,305 | ) |
Capital Expenditures | $ | 25,157 |
| | $ | — |
| | $ | 26,049 |
| | $ | — |
|
| |
(a) | See Note 8 for a discussion of interest expense related to notes payable to affiliates and related parties of $42,817 and $90,405 for the three and six months ended June 30, 2017, respectively. |
Revenue
The Company recognized revenue in connection with sale of advertising to Newsday.
Programming and other direct costs
Programming and other direct costs include costs incurred by the Company for the transport and termination of voice and data services provided by a subsidiary of Altice N.V.
Other operating expenses
Other operating expenses includes charges of $28,967 from ATS for the three and six months ended June 30, 2017 pursuant to the independent contractor agreement discussed above.
A subsidiary of Altice N.V. provides certain executive services, including, prior to the IPO, CEO, CFO and COO services, to the Company. Compensation under the terms of the agreement is an annual fee of $30,000 to be paid by the Company. Fees associated with this agreement recorded by the Company amounted to approximately $7,500 and $15,000, for the three and six months ended June 30, 2017, respectively, and $2,500 and $5,000 for the three and six months ended June 30, 2016, respectively. As of June 20, 2017, the CEO, CFO and COO became employees of the Company and the agreement was assigned to Altice N.V. by a subsidiary of Altice N.V.
Other operating expenses includes a credit of $359 and $841 for transition services provided to Newsday for the three and six months ended June 30, 2017.
Capital Expenditures
Capital expenditures include $16,684 for installation and construction activities performed by ATS for the three and six months ended June 30, 2017 and $8,473 and $9,365, respectively, for equipment purchases and software development services provided by Altice Management International and other Altice NV 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:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
Due from: | | | |
Altice US Finance S.A. (a) | $ | 12,951 |
| | $ | 12,951 |
|
Newsday (b) | 6,886 |
| | 6,114 |
|
Altice Management Americas (b) | 9,420 |
| | 3,117 |
|
ATS (b)(e) | 6,776 |
| | — |
|
I24 (b) | 4,009 |
| | — |
|
Other Altice N.V. subsidiaries (b) | 64 |
| | — |
|
| $ | 40,106 |
| | $ | 22,182 |
|
Due to: | | | |
CVC 3BV (c) | — |
| | 71,655 |
|
Neptune Holdings US LP (c) | — |
| | 7,962 |
|
Altice Management International (d) | 15,199 |
| | 44,121 |
|
Newsday (b) | 354 |
| | 275 |
|
Other Altice N.V. subsidiaries (f) | 6,199 |
| | 3,350 |
|
| $ | 21,752 |
| | $ | 127,363 |
|
| |
(a) | Represents interest on senior notes paid by the Company on behalf of the affiliate. |
| |
(b) | Represents amounts paid by the Company on behalf of the respective related party and for Newsday and ATS, the net amounts due from the related party also include charges for certain transition services provided. |
| |
(c) | Represents distributions payable to shareholders. |
| |
(d) | Amounts payable as of June 30, 2017 primarily represent amounts due for certain executive services provided by the affiliate. Amounts payable as of December 31, 2016 primarily represent amounts due for equipment purchases and software development services discussed above. |
| |
(e) | See discussion above regarding the Company's agreement with Altice Technical Services. |
| |
(f) | Represents amounts due to affiliates for services provided to the Company. |
The table above does not include notes payable to affiliates and related parties of $1,750,000 and the related accrued interest of $102,557 as of December 31, 2016, respectively, which is reflected in accrued interest in the Company's balance sheets. See discussion in Note 9.
In the second quarter of 2017, the Company made cash distributions aggregating $839,700 to shareholders, $500,000 of which were funded with proceeds from borrowings under CSC Holdings' revolving credit facility.
NOTE 15. COMMITMENTS AND CONTINGENCIES
Legal Matters
Cable Operations Litigation
In re Cablevision Consumer Litigation:
Following expiration of the affiliation agreements for carriage of certain Fox broadcast stations and cable networks on October 16, 2010, News Corporation terminated delivery of the programming feeds to the Company, and as a result, those stations and networks were unavailable on the Company's cable television systems. On October 30, 2010, the Company and Fox reached an agreement on new affiliation agreements for these stations and networks, and carriage was restored. Several purported class action lawsuits were subsequently filed on behalf of the Company's customers seeking recovery for the lack of Fox programming. Those lawsuits were consolidated in an action before the U. S. District Court for the Eastern District of New York, and a consolidated complaint was filed in that court on February 22,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
2011. Plaintiffs asserted claims for breach of contract, unjust enrichment, and consumer fraud, seeking unspecified compensatory damages, punitive damages and attorneys' fees. On March 28, 2012, the Court ruled on the Company's motion to dismiss, denying the motion with regard to plaintiffs' breach of contract claim, but granting it with regard to the remaining claims, which were dismissed. On April 16, 2012, plaintiffs filed a second consolidated amended complaint, which asserts a claim only for breach of contract. The Company's answer was filed on May 2, 2012. On October 10, 2012, plaintiffs filed a motion for class certification and on December 13, 2012, a motion for partial summary judgment. On March 31, 2014, the Court granted plaintiffs' motion for class certification, and denied without prejudice plaintiffs' motion for summary judgment. On May 30, 2014, the Court approved the form of class notice, and on October 7, 2014, approved the class notice distribution plan. The class notice distribution has been completed, and the opt-out period expired on February 27, 2015. Expert discovery commenced on May 5, 2014, and concluded on December 8 and 28, 2015, when the Court ruled on the pending expert discovery motions. On January 26, 2016, the Court approved a schedule for filing of summary judgment motions. Plaintiffs filed a motion for summary judgment on March 31, 2016. The Company filed its own summary judgment motion on June 13, 2016. The motions for summary judgment have been denied with leave to re-file in the event the discussions between the parties are not successful. The parties have entered into a settlement agreement, which is subject to Court approval. As of December 31, 2016, the Company had an estimated liability associated with a potential settlement totaling $5,200. During the six months ended June 30, 2017, the Company recorded an additional liability of $800. The amount ultimately paid in connection with the proposed settlement could exceed the amount recorded.
Patent Litigation
Cablevision is named as a defendant in certain lawsuits claiming infringement of various patents relating to various aspects of the Company's businesses. In certain of these cases other industry participants are also defendants. In certain of these cases the Company expects that any potential liability would be the responsibility of the Company's equipment vendors pursuant to applicable contractual indemnification provisions. The Company believes that the claims are without merit and intends to defend the actions vigorously, but is unable to predict the outcome of these lawsuits or reasonably estimate a range of possible loss.
In addition to the matters discussed above, the Company is party to various lawsuits, some involving claims for substantial damages. Although the outcome of these other matters cannot be predicted and the impact of the final resolution of these other matters on the Company's results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these other lawsuits will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.
NOTE 16. SEGMENT INFORMATION
The Company classifies its operations into two reportable segments: Cablevision and Cequel. The Company's reportable segments are strategic business units that are managed separately. The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment Adjusted EBITDA, a non-GAAP measure. The Company defines Adjusted EBITDA as net income (loss) excluding income taxes, income (loss) from discontinued operations, non-operating other income or expenses, loss on extinguishment of debt and write-off of deferred financing costs, gain (loss) on interest rate swap contracts, gain (loss) on equity derivative contracts, gain (loss) on investments, interest expense (including cash interest expense), interest income, depreciation and amortization (including impairments), share-based compensation expense or benefit, restructuring expense or credits and transaction expenses. The Company has presented the components that reconcile Adjusted EBITDA to operating income, an accepted GAAP measure for the three and six months ended June 30, 2017 and 2016 below:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except share and per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 | | Three Months Ended June 30, 2016 |
| Cablevision | | Cequel | | Total | | Cablevision (a) | | Cequel | | Total |
Operating income (loss) | $ | 113,312 |
| | $ | 143,470 |
| | $ | 256,782 |
| | $ | (72,080 | ) | | $ | 117,483 |
| | $ | 45,403 |
|
Share-based compensation | 11,960 |
| | 6,119 |
| | 18,079 |
| | — |
| | — |
| | — |
|
Restructuring and other expense | 11,171 |
| | 1,217 |
| | 12,388 |
| | 98,715 |
| | 986 |
| | 99,701 |
|
Depreciation and amortization (including impairments) | 542,201 |
| | 164,586 |
| | 706,787 |
| | 44,560 |
| | 169,540 |
| | 214,100 |
|
Adjusted EBITDA | $ | 678,644 |
| | $ | 315,392 |
| | $ | 994,036 |
| | $ | 71,195 |
| | $ | 288,009 |
| | $ | 359,204 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2017 | | Six months ended June 30, 2016 |
| Cablevision | | Cequel | | Total | | Cablevision (a) | | Cequel | | Total |
Operating income (loss) | $ | 233,480 |
| | $ | 271,536 |
| | $ | 505,016 |
| | $ | (72,080 | ) | | $ | 171,743 |
| | $ | 99,663 |
|
Share-based compensation | 17,042 |
| | 8,885 |
| | 25,927 |
| | — |
| | — |
| | — |
|
Restructuring and other expense | 69,818 |
| | 19,499 |
| | 89,317 |
| | 98,715 |
| | 8,555 |
| | 107,270 |
|
Depreciation and amortization (including impairments) | 985,377 |
| | 330,134 |
| | 1,315,511 |
| | 44,560 |
| | 370,440 |
| | 415,000 |
|
Adjusted EBITDA | $ | 1,305,717 |
| | $ | 630,054 |
| | $ | 1,935,771 |
| | $ | 71,195 |
| | $ | 550,738 |
| | |