atni_Current folio_10Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

Form 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2018

 

OR

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from           to             

 

Commission File Number 001-12593

 


 

ATN INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

47-0728886

(State or other jurisdiction of
incorporation or organization)

 

(I.R.S. Employer
Identification Number)

 

500 Cummings Center

Beverly, MA 01915

(Address of principal executive offices, including zip code)

 

(978) 619-1300

(Registrant’s telephone number, including area code)

 


 

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  ☒  No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 registrant was required to submit and post such files). Yes  ☒  No  ☐

 

Indicate by check mark whether the 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.

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

Emerging growth 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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes  ☐  No  ☒

 

As of May 9, 2018, the registrant had outstanding 15,984,021 shares of its common stock ($.01 par value).

 

 

 

1


 

ATN INTERNATIONAL, INC.

FORM 10-Q

 

Quarter Ended March 31, 2018

 

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS 

3

 

 

 

PART I—FINANCIAL INFORMATION 

4

 

 

 

Item 1 

Unaudited Condensed Consolidated Financial Statements

4

 

 

 

 

Condensed Consolidated Balance Sheets at March 31, 2018 and December 31, 2017  

4

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended  March 31, 2018 and 2017

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

Item 2 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

30-49

 

 

 

Item 3 

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4 

Controls and Procedures

49

 

 

 

PART II—OTHER INFORMATION 

50

 

 

 

Item 1 

Legal Proceedings

50

 

 

 

Item1A 

Risk Factors

50

 

 

 

Item 2 

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 5 

Other Information

51

 

 

 

Item 6 

Exhibits

52

 

 

 

SIGNATURES 

53

 

 

 

CERTIFICATIONS

 

 

 

2


 

Cautionary Statement Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q (or the “Report”) contains forward-looking statements relating to, among other matters, our future financial performance and results of operations; the estimated timeline for the rebuilding of our   operations and revenues from our customers in the U.S. Virgin Islands following the hurricanes; our estimates of total losses due to hurricanes and our estimated costs of restoring hurricane-damaged services; our ability to receive financial support from the government for our rebuild in the U.S. Virgin Islands and the timing of such support; the competitive environment in our key markets, demand for our services and industry trends; the pace of expansion and improvement of our telecommunications network and renewable energy operations including our level of estimated future capital expenditures and our realization of the benefits of these investments; the anticipated timing of our build schedule and the commencement of energy production of our India renewable energy projects; anticipated effects of recent U.S. tax changes; the timing of the sale of a portion of our wholesale wireless network and management’s plans and strategy for the future. These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results.  Actual future events and results could differ materially from the events and results indicated in these statements as a result of many factors, including, among others, (1) our ability to restore our networks and services to our customers in the U.S. Virgin Islands in an efficient and timely manner and to obtain governmental or other support necessary to fully restore services in the U.S. Virgin Islands; (2) our ability to execute planned network expansions and upgrades in our various markets; (3) the general performance of our operations, including operating margins, revenues, capital expenditures, and the future growth and retention of our major customers and subscriber base and consumer demand for solar power; (4) government regulation of our businesses, which may impact our FCC and other telecommunications licenses or our renewables business; (5) economic, political and other risks facing our operations; (6) our ability to maintain favorable roaming arrangements and satisfy the needs and demands of our major wireless customers; (7) our ability to efficiently and cost-effectively upgrade our networks and IT platforms to address  rapid and significant technological changes in the telecommunications industry; (8) the loss of or an inability to recruit skilled personnel in our various jurisdictions, including key members of management; (9) our ability to find investment or acquisition or disposition opportunities that fit the strategic goals of the Company; (10) increased competition; (11) our ability to expand our renewable energy business; (12) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (13) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (14) the occurrence of weather events and natural catastrophes; (15) our continued access to capital and credit markets; (16) the risk of currency fluctuation for those markets in which we operate; (17) satisfaction of the conditions to closing the sale of a portion of our wholesale wireless network; and (18) our ability to realize the value that we believe exists in our businesses.  These and other additional factors that may cause actual future events and results to differ materially from the events and results indicated in the forward-looking statements above are set forth more fully under Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018 and the other reports we file from time to time with the SEC.  The Company undertakes no obligation and has no intention to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors that may affect such forward-looking statements.

 

In this Report, the words “the Company”, “we,” “our,” “ours,” “us” and “ATN” refer to ATN International, Inc. and its subsidiaries. This Report contains trademarks, service marks and trade names that are the property of, or licensed by, ATN and its subsidiaries.

 

Reference to dollars ($) refer to U.S. dollars unless otherwise specifically indicated.

 

 

 

3


 

PART I—FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share data)

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

 

    

2018

    

2017

    

 

ASSETS

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

204,181

 

$

207,956

 

 

Restricted cash

 

 

1,071

 

 

833

 

 

Short-term investments

 

 

2,228

 

 

7,076

 

 

Accounts receivable, net of allowances of $15.5 million and $15.0 million, respectively

 

 

47,679

 

 

43,529

 

 

Materials and supplies

 

 

14,746

 

 

15,398

 

 

Prepayments and other current assets

 

 

33,450

 

 

68,136

 

 

Total current assets

 

 

303,355

 

 

342,928

 

 

Fixed Assets:

 

 

 

 

 

 

 

 

Property, plant and equipment

 

 

1,220,081

 

 

1,169,806

 

 

Less accumulated depreciation

 

 

(546,593)

 

 

(526,660)

 

 

Net fixed assets

 

 

673,488

 

 

643,146

 

 

Telecommunication licenses, net

 

 

95,952

 

 

95,952

 

 

Goodwill

 

 

63,970

 

 

63,970

 

 

Customer relationships, net

 

 

11,049

 

 

11,734

 

 

Restricted cash

 

 

11,944

 

 

11,101

 

 

Other assets

 

 

37,060

 

 

36,774

 

 

Total assets

 

$

1,196,818

 

$

1,205,605

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

14,192

 

$

10,919

 

 

Accounts payable and accrued liabilities

 

 

113,165

 

 

116,133

 

 

Dividends payable

 

 

2,717

 

 

2,724

 

 

Accrued taxes

 

 

12,067

 

 

6,751

 

 

Advance payments and deposits

 

 

26,750

 

 

25,178

 

 

Total current liabilities

 

 

168,891

 

 

161,705

 

 

Deferred income taxes

 

 

30,945

 

 

31,732

 

 

Other liabilities

 

 

42,264

 

 

37,072

 

 

Long-term debt, excluding current portion

 

 

140,703

 

 

144,873

 

 

Total liabilities

 

 

382,803

 

 

375,382

 

 

Commitments and contingencies (Note 13)

 

 

 

 

 

 

 

 

ATN International, Inc. Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding

 

 

 —

 

 

 —

 

 

Common stock, $0.01 par value per share; 50,000,000 shares authorized; 17,115,030 and 17,102,530 shares issued, respectively, and 15,984,021 and 16,025,745 shares outstanding respectively

 

 

170

 

 

170

 

 

Treasury stock, at cost; 1,131,009 and 1,076,785shares, respectively

 

 

(38,649)

 

 

(36,110)

 

 

Additional paid-in capital

 

 

170,069

 

 

167,973

 

 

Retained earnings

 

 

546,368

 

 

552,948

 

 

Accumulated other comprehensive income

 

 

2,649

 

 

3,746

 

 

Total ATN International, Inc. stockholders’ equity

 

 

680,607

 

 

688,727

 

 

Non-controlling interests

 

 

133,408

 

 

141,496

 

 

Total equity

 

 

814,015

 

 

830,223

 

 

Total liabilities and equity

 

$

1,196,818

 

$

1,205,605

 

 

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

4


 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

    

2018

    

2017

    

 

REVENUE:

 

 

 

 

 

 

 

 

Wireless

 

$

50,548

 

$

58,925

 

 

Wireline

 

 

48,096

 

 

64,159

 

 

Renewable energy

 

 

5,831

 

 

5,031

 

 

Total revenue

 

 

104,475

 

 

128,115

 

 

OPERATING EXPENSES (excluding depreciation and amortization unless otherwise indicated):

 

 

 

 

 

 

 

 

Termination and access fees

 

 

25,914

 

 

33,003

 

 

Engineering and operations

 

 

18,152

 

 

19,683

 

 

Sales, marketing and customer service

 

 

8,562

 

 

9,035

 

 

General and administrative

 

 

25,540

 

 

24,356

 

 

Transaction-related charges

 

 

27

 

 

677

 

 

Depreciation and amortization

 

 

21,305

 

 

22,494

 

 

Loss on disposition of long-lived assets

 

 

284

 

 

1,111

 

 

Loss on damaged assets and other hurricane related charges, net of insurance recovery

 

 

482

 

 

 —

 

 

Total operating expenses

 

 

100,266

 

 

110,359

 

 

Income from operations

 

 

4,209

 

 

17,756

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

Interest income

 

 

366

 

 

286

 

 

Interest expense

 

 

(2,204)

 

 

(2,316)

 

 

Loss on deconsolidation of subsidiary

 

 

 —

 

 

(529)

 

 

Other income (expense)

 

 

(753)

 

 

(485)

 

 

Other expense, net

 

 

(2,591)

 

 

(3,044)

 

 

INCOME BEFORE INCOME TAXES

 

 

1,618

 

 

14,712

 

 

Income tax provisions

 

 

3,921

 

 

3,128

 

 

NET INCOME (LOSS)

 

 

(2,303)

 

 

11,584

 

 

Net income attributable to non-controlling interests, net of tax expense of $0.3 million and $0.3 million, respectively.

 

 

(3,252)

 

 

(4,725)

 

 

NET INCOME (LOSS) ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS

 

$

(5,555)

 

$

6,859

 

 

NET INCOME (LOSS) PER WEIGHTED AVERAGE SHARE ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS:

 

 

 

 

 

 

 

 

Basic

 

$

(0.35)

 

$

0.42

 

 

Diluted

 

$

(0.35)

 

$

0.42

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

Basic

 

 

16,019

 

 

16,157

 

 

Diluted

 

 

16,019

 

 

16,246

 

 

DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK

 

$

0.17

 

$

0.34

 

 

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

 

 

5


 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017 (Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

2018

    

2017

Net income (loss)

 

$

(2,303)

 

$

11,584

Other comprehensive income:

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(1,032)

 

 

1,930

Reclassifications of gains on sale of marketable securities to net income

 

 

 —

 

 

(289)

Unrealized gain on securities

 

 

139

 

 

(41)

Projected pension benefit obligation, net of tax of $0 and $0.4 million

 

 

 —

 

 

513

Other comprehensive income (loss), net of tax

 

 

(893)

 

 

2,113

Comprehensive income (loss)

 

 

(3,196)

 

 

13,697

Less: Comprehensive income attributable to non-controlling interests

 

 

(3,252)

 

 

(4,725)

Comprehensive income (loss) attributable to ATN International, Inc.

 

$

(6,448)

 

$

8,972

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

6


 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2018

    

2017

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

$

(2,303)

 

$

11,584

Adjustments to reconcile net income to net cash flows provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

21,305

 

 

22,494

Provision for doubtful accounts

 

796

 

 

854

Amortization and write off of debt discount and debt issuance costs

 

197

 

 

112

Stock-based compensation

 

1,576

 

 

1,666

Deferred income taxes

 

(1,089)

 

 

 —

Loss on disposition of long-lived assets

 

284

 

 

1,111

Loss on deconsolidation of subsidiary

 

 —

 

 

529

Other non-cash activity

 

449

 

 

375

Changes in operating assets and liabilities, excluding the effects of acquisitions and dispositions:

 

 

 

 

 

Accounts receivable

 

(5,061)

 

 

(5,860)

Materials and supplies, prepayments, and other current assets

 

3,991

 

 

(1,789)

Prepaid income taxes

 

 —

 

 

995

Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities

 

(2,306)

 

 

(14,465)

Accrued taxes

 

3,292

 

 

4,341

Other assets

 

(581)

 

 

2,033

Other liabilities

 

1,994

 

 

8,109

Net cash provided by operating activities

 

22,544

 

 

32,089

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(21,041)

 

 

(45,702)

Hurricane rebuild capital expenditures

 

(30,851)

 

 

 —

Hurricane insurance proceeds

 

34,606

 

 

 —

Government grants

 

5,400

 

 

 —

Divestiture of businesses,  net of transferred cash of $2.1 million

 

 —

 

 

22,597

Proceeds from sale of investments

 

4,809

 

 

483

Net cash used in investing activities

 

(7,077)

 

 

(22,622)

Cash flows from financing activities:

 

 

 

 

 

Dividends paid on common stock

 

(2,724)

 

 

(5,487)

Distribution to non-controlling interests

 

(12,424)

 

 

(2,828)

Principal repayments of term loan

 

(938)

 

 

(4,442)

Purchase of common stock

 

(2,041)

 

 

(2,121)

Repurchases of non-controlling interests

 

(3)

 

 

(819)

Investments made by minority shareholders in consolidated affiliates

 

 —

 

 

69

Net cash used in provided by financing activities

 

(18,130)

 

 

(15,628)

Effect of foreign currency exchange rates on cash and cash equivalents

 

(31)

 

 

207

Net change in cash, cash equivalents, and restricted cash

 

(2,694)

 

 

(5,954)

Total cash, cash equivalents, and restricted cash, beginning of period

 

219,890

 

 

288,358

Total cash, cash equivalents, and restricted cash, end of period

$

217,196

 

$

282,404

Noncash investing activity:

 

 

 

 

 

Purchases of property, plant and equipment included in accounts payable and accrued expenses

$

20,068

 

$

14,174

 

The accompanying condensed notes are an integral part of these condensed consolidated financial statements.

 

 

7


 

ATN INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1.ORGANIZATION AND BUSINESS OPERATIONS

 

The Company is a holding company that, through its operating subsidiaries, (i) provides wireless and wireline telecommunications services in North America, Bermuda and the Caribbean, (ii) develops, owns and operates commercial distributed generation solar power systems in the United States and India, and (iii) owns and operates terrestrial and submarine fiber optic transport systems in the United States and in the Caribbean. The Company was incorporated in Delaware in 1987 and began trading publicly in 1991. Since that time, the Company has engaged in strategic acquisitions and investments to grow its operations. The Company actively evaluates additional domestic and international acquisition, divestiture, and investment opportunities and other strategic transactions in the telecommunications, energy-related and other industries that meet its return-on-investment and other acquisition criteria.

 

The Company offers the following principal services:

 

·

Wireless.  In the United States, the Company offers wholesale wireless voice and data roaming services to national, regional, local and selected international wireless carriers in rural markets located principally in the Southwest and Midwest United States. The Company also offers wireless voice and data services to retail and wholesale customers in Bermuda, Guyana, the U.S. Virgin Islands, and the United States.

 

·

Wireline.  The Company’s wireline services include local telephone and data services in Bermuda, the Cayman Islands, Guyana, the U.S. Virgin Islands, and the United States.  The Company’s wireline services also include video services in Bermuda, the Cayman Islands, and the U.S Virgin Islands.  In addition, the Company offers wholesale long‑distance voice services to telecommunications carriers. Through March 8, 2017, the Company also offered facilities‑based integrated voice and data communications services and wholesale transport services to enterprise and residential customers in New England, primarily Vermont, and in New York State.

·

Renewable Energy.   In the United States, the Company provides distributed generation solar power to corporate and municipal customers. The Company also owns and develops projects in India providing distributed generation solar power to corporate customers.  

 

The following chart summarizes the operating activities of the Company’s principal subsidiaries, the segments in which the Company reports its revenue and the markets it served as of March 31, 2018:

 

 

 

 

 

 

 

 

 

Segment

   

Services

   

Markets

   

Tradenames

 

U.S. Telecom

 

Wireless

 

United States (rural markets)

 

Commnet, Choice, Choice NTUA Wireless

 

 

 

Wireline

 

United States

 

Essextel

 

International Telecom

 

Wireline

 

Bermuda, Guyana, U.S. Virgin Islands, Cayman Islands

 

One, GTT+, Viya, Logic, Fireminds

 

 

 

Wireless

 

Bermuda, Guyana, U.S. Virgin Islands

 

One, GTT+, Viya

 

 

 

Video Services

 

Bermuda, U.S. Virgin Islands, Cayman Islands

 

One, Viya, Logic

 

Renewable Energy

 

Solar

 

United States (Massachusetts, California, and New Jersey), India

 

Ahana Renewables, Vibrant Energy

 

 

The Company actively evaluates potential acquisitions, investment opportunities and other strategic transactions, both domestic and international, that meet its return on investment and other criteria. The Company provides management, technical, financial, regulatory, and marketing services to its subsidiaries and typically receives a

8


 

management fee equal to a percentage of their respective revenue. Management fees from subsidiaries are eliminated in consolidation.

 

 

2. BASIS OF PRESENTATION

 

The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial information included herein is unaudited; however, the Company believes such information and the disclosures herein are adequate to make the information presented not misleading and reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial position and results of operations for such periods. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results of interim periods may not be indicative of results for the full year.  These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 1, 2018.

 

The consolidated financial statements include the accounts of the Company, its majority-owned subsidiaries and certain entities, which are consolidated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) authoritative guidance on the consolidation of variable interest entities, since it is determined that the Company is the primary beneficiary of these entities.

 

The Company’s effective tax rate for the three months ended March 31, 2018 and 2017 was 242.3% and 21.3%, respectively.  The effective tax rate for the three months ended March 31, 2018 was primarily impacted by the following items: (i) a $695 thousand provision for the intercompany sale of assets from the U.S. to the U.S. Virgin Islands,  (ii) a $286 thousand increase (net) in unrecognized tax benefits recognized discretely, and (iii) the mix of income generated among the jurisdictions in which the Company operates along with the exclusion of losses in jurisdictions where it cannot benefit from those losses as required by ASC 740-270-30-36(a), primarily in the U.S. Virgin Islands and India.   The effective tax rate for the three months ended March 31, 2017 was impacted by the following items:  (i) an approximate 7.2% benefit for the net capital loss due to the stock sales of our businesses in New England, New York and St. Maarten, and (ii) the mix of income generated among the jurisdictions in which the Company operates.  The Company’s effective tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax contingencies. The Company’s consolidated tax rate will continue to be impacted by any transactional or one-time items in the future and the mix of income in any given year generated among the jurisdictions in which it operates.  The effective tax rate in 2018 could be affected by adjustments to the provisional amounts recorded under the guidance of SAB 118 for the one-time transition tax and the revaluation of deferred tax assets and liabilities due to the U.S. statutory rate change in 2017 however no change has been recorded as of March 31, 2018.  While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from its accrued positions as a result of uncertain and complex application of tax law and regulations.  Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management. Accordingly, the Company could record additional provisions or benefits for U.S. federal, state, and foreign tax matters in future periods as new information becomes available. 

 

 

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, which provides a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this standard on January 1, 2018.  Refer to Note 3.

 

9


 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company adopted this standard on January 1, 2018.  The Company holds $20.1 million of equity investments that do not have readily determinable fair values.  As a result these investments are measured at cost less impairments, adjusted for observable price changes of similar investments of the same issuer.  The Company performs a qualitative impairment assessment of these investments quarterly by reviewing available information.  The Company has not adjusted the cost of these investments since acquisition.  As of March 31, 2018, the Company held $0.5 million of equity investments with readily determinable fair values.  On January 1, 2018, the date ASU 2016-01 was adopted, the company reclassified $0.2 million of unrealized gains on this investment to retained earnings. 

 

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)”, which provides comprehensive lease accounting guidance.  The standard requires entities to recognize lease assets and liabilities on the balance sheet as well as disclosure of key information about leasing arrangements.  ASU 2016-02 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.  The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements.

 

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The standard is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. The Company adopted ASU 2016-09 on January 1, 2017. The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid-in capital pools. This had no impact on the Company’s historical results.  Also as a result of the adoption, the Company changed its policy election to account for forfeitures as they occur rather than on an estimated basis. The change resulted in the Company reclassifying $0.3 million from additional paid-in capital to retained earnings for the net cumulative-effect adjustment in stock compensation expense related to prior periods.

 

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which provides further clarification on eight cash flow classification issues. The Company adopted this standard on January 1, 2018.  In November 2016, the FASB issued Accounting Standards Update 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” or ASU 2016-18. The amendments in ASU 2016-18 are intended to reduce diversity in practice related to the classification and presentation of changes in restricted or restricted cash equivalents on the statement of cash flows. The amendments in ASU 2016-18 require that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on January 1, 2018. 

 

The Company’s statement of cash flows reports the cash effects during a period of an entity’s operations, its investing transaction, and its financing transactions.  The statement of cash flows explains the change during the period in the total cash which includes cash equivalents as well as restricted cash.  The Company applies the predominance principle to classify separately identifiable cash flows based on the nature of the underlying cash flows.   Debt prepayment or extinguishment costs are classified as cash outflows from financing activities.  Contingent consideration payments made three months or less after a business combination are classified as investing activities and those made after that time are classified as financing activities.  Proceeds from the settlement of insurance claims are classified on the basis of the nature of the loss.  Prior to January 1, 2018, the Company classified all payments made in a business

10


 

combination as investing activities and did not include restricted cash in total cash.  This change impacted the Company’s cash flows for the three months ended March 31, 2017 as indicated below (amounts in thousands):

 

 

 

 

 

 

 

 

Statement of Cash flows - Three months ended March 31, 2017

 

 

 

 

 

 

 

Reported

 

Change

 

Under previous guidance

Net cash provided by operating activities

$

32,089

$

 —

$

32,089

Net cash used in investing activities

 

(22,622)

 

1,770

 

(20,852)

Net cash used in financing activities

 

(15,628)

 

 —

 

(15,628)

Effect of foreign currency exchange rates on total cash

 

207

 

 —

 

207

Net change in total cash

$

(5,954)

$

1,770

$

(4,184)

Total cash, beginning of period

 

288,358

 

(18,637)

 

269,721

Total cash, end of period

$

282,404

$

(16,867)

$

265,537

 

In October 2016 the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory”. The new standard eliminates all intra-entity sales of assets other than inventory, the exception under current standards that permits the tax effects of intra-entity asset transfers to be deferred until the transferred asset is sold to a third party or otherwise recovered through use. As a result, a reporting entity would recognize the tax expense from the sale of the asset in the seller’s tax jurisdiction when the transfer occurs. Any deferred tax asset that arises in the buyer’s jurisdiction would also be recognized at the time of the transfer. The new standard was effective for the Company on January 1, 2018. There was not a material impact to the Consolidated Financial Statements upon adoption.

 

In January 2017, the FASB issued Accounting Standards Update 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business,” or ASU 2017-01. The amendments in ASU 2017-01 provide a screen to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. Under ASU 2017-01, an entity first determines whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this threshold is met, the set is not a business and the entity then evaluates whether the set meets the requirement that a business include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs. ASU 2017-01 also narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. ASU 2017-01 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. The Company prospectively adopted ASU 2017-01 in the fourth quarter of 2016.  The Company expects that the standard will result in accounting for more transactions as asset acquisitions as opposed to business combination.

 

In January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” or ASU 2017-04. The amendments in ASU 2017-04 simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities. Instead, under the amendments in ASU 2017-04, an entity performs its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but not more than the total amount of goodwill allocated to the reporting unit. ASU 2017-04 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2019, with early adoption permitted. The Company adopted this standard in the third quarter of 2017. 

 

In March 2017, the FASB issued ASU 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). The new guidance requires the service cost component to be presented separately from the other components of net benefit costs. Service cost will be presented with other employee compensation cost within operations. The other components of net

11


 

benefit cost, such as interest cost, amortization of prior service cost and gains or losses are required to be presented outside of operations. The Company adopted this standard on January 1, 2018. 

 

The company sponsors pension and other postretirement benefit plans for employees of certain subsidiaries. Net periodic pension expense consists of service cost, interest cost, expected return on plan assets, and amortization of actuarial gains and losses.  Service cost is recognized in operating income and all other components of pension expense are recognized in other income in the Company’s Income Statement. The Company recognizes a pension or other postretirement plan’s funded status as either an asset or liability in its consolidated balance sheet. Actuarial gains and losses are reported as a component of other comprehensive income and amortized through other income in subsequent periods.  Prior to January 1, 2018, all components of pension expense were recognized in operating income.  This change impacted the Company’s Income Statement for the three months ended March 31, 2017 by increasing operating expenses $37 thousand and decreasing other income by the same amount.  There was no impact on income before income taxes.  The Company elected the practical expedient allowing the use of the amounts disclosed for the various components of net benefit cost in the pension and other postretirement benefit plans footnote as the basis for the retrospective application.

 

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”). The standard: (a) expands and refines hedge accounting for both financial and non-financial risk components, (b) aligns the recognition and presentation of the effects of hedging instruments and hedge items in the financial statements, and (c) includes certain targeted improvements to ease the application of current guidance related to the assessment of hedge effectiveness. The guidance is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including the adoption in an interim period. If an entity early adopts in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The guidance related to cash flow and net investment hedges existing at the date of adoption should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The guidance related to presentation and disclosure should be applied prospectively. The Company is currently assessing the impact of ASU 2017-12 on its Consolidated Financial Statements.

 

In February 2018, the FASB issued ASU 2018-02 “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” (“ASU 2018-02”).  The standard gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income that were impacted by the 2017 Tax Cuts and Jobs Act.  The guidance is effective for all entities for fiscal years beginning after December 31, 2018 and interim periods within those fiscal years.  Early adoption is permitted.  The guidance may be applied in the period of adoption or retrospectively to each impacted period.  The Company has elected to early adopt ASU 2018-02 on its consolidated financial Statements and apply it to the period of adoption.  The impact of the adoption results in a $0.8 million reclassification from accumulated other comprehensive income to retained earnings, which is offset by an equivalent valuation allowance, the net impact is zero.

 

 

 

3.  Revenue Recognition

 

The Company’s significant accounting policies are detailed in “Note 2 – Summary of Significant Accounting Policies” within Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2017.  The Company’s accounting policies are updated as a result of adopting Revenue Recognition - ASC 606 – Revenue from Contracts with Customers (‘ASC 606’) on January 1, 2018.  The adoption of ASC 606 impacted the accounting for contract acquisition costs, multiyear retail wireless contracts with promotional discounts, and deferral of certain activation fees as further described below.

 

Revenue Recognition – The Company earns revenue from its telecommunication and renewable energy operations.  The Company recognizes revenue through the following steps:

 

-

Identification of the contract with a customer

-

Identification of the performance obligations in the contract

12


 

-

Determination of the transaction price

-

Allocation of the transaction price to the performance obligations in the contract

-

Recognize revenue when, or as, we satisfy performance obligations

 

Revenue Recognition- Telecommunications

 

Wireless revenue consists of wholesale and retail revenue.  Wholesale revenue is generated from providing mobile voice and data services to the customers of other wireless carriers, the provision of network switching services and certain transport services using the Company’s wireless networks.  The transaction price of some wholesale revenue contracts includes variable consideration in the form of volume discounts.  Management uses its judgment based on projected transaction volumes to estimate the transaction price and to allocate the transaction price to the performance obligations in the contract.  Revenue is recognized over time as the service is rendered to the customer.  Retail revenue is generated from providing mobile voice and data services to subscribers as well as roaming services provided to other carriers’ customers roaming into our retail markets. This revenue is recognized over time as the service is rendered.  Lastly, wireless revenue includes revenues from equipment sold to customers which is recognized when the equipment is delivered to the customer. 

 

Management considers transactions where customers purchase subsidized or discounted equipment and mobile voice or data services to be a single contract.  For these contracts, the transaction price is allocated to the equipment and mobile service based on their standalone selling prices.  The standalone selling price is based on the amount the Company charges for the equipment and service to similar customers.  Equipment revenue is recognized when the equipment is delivered to customers and service revenue is recognized as service is rendered.

 

Wireline revenue is generated from access and usage fees for internet, voice and video services charged to subscribers as well as wholesale long-distance voice services provided to telecommunication carriers at contracted rates.  Revenue from these contracts is recognized over time as the service is rendered to the customer.

 

The Company’s wireless and wireline contracts occasionally include promotional discounts such as free service periods or discounted products.  If a contract contains a substantive termination penalty, the transaction price is allocated to the performance obligations based on standalone selling price resulting in accelerated revenue recognition and the establishment of a contract asset that will be recognized over the life of the contract.  If a contract includes a promotional discount but no substantive termination penalty the discount is recorded in the promotional period and no contract asset it established. The Company’s customers have the option to purchase additional telecommunication services.  Generally, these options are not performance obligations and are excluded from the transaction price because they do not provide the customers with a material right. 

 

The Company may charge upfront fees for activation and installation of some of its products and services.  These fees are reviewed to determine if they represent a separate performance obligation.  If they are not a separate performance obligation, the contract price associated with them is allocated to the contract’s performance obligations based on relative standalone selling price and is recognized when and as those performance obligations are satisfied.  If the fees represent a performance obligation they are recognized when delivered to the customer based on standalone selling price.

 

Sales and use and state excise taxes collected from customers that are remitted to the governmental authorities are reported on a net basis and excluded from the revenues and sales.

 

 

 

13


 

Revenue Recognition-Renewable Energy

 

Revenue from the Company’s Renewable Energy segment is generated from the sale of electricity through power purchase agreements (“PPA’s”) with various customers that generally range from 10 to 25 years.  The Company recognizes revenue at contractual PPA rates over time as electricity is generated simultaneously consumed by the customer.  The Company’s Renewable Energy segment also generates revenue from the sale of Solar Renewable Energy Credits (“SRECs”).  Revenue is recognized over time as SRECs are sold through long-term purchase agreements at the contractual rate specified in the agreement.

 

Disaggregation

 

The Company's revenue is presented on a disaggregated basis in Note 12 based on an evaluation of disclosures outside the financial statements, information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments and other information that is used for performance evaluation and resource allocations. This includes revenue from wireline, wireless and renewable energy, as well as domestic versus international wireline and wireless services. This disaggregation of revenue depicts how the nature, amount, timing and uncertain of revenue and cash flows are affected by economic factors.

 

Contract Assets and Liabilities

 

The Company recognizes contract assets and liabilities on its balance sheet.  Contract assets represent unbilled amounts typically resulting from retail wireless contracts with both a multiyear service period and a promotional discount.  In these contracts the revenue recognized exceeds the amount billed to the customer.  The current portion of the contract asset is recorded in prepayments and other current asset and the noncurrent portion is included in other assets on our balance sheets.  Contract liabilities consist of advance payments and billings in excess of revenue recognized.  Retail revenue for postpaid customers is generally billed one month in advance and recognized over the period that the corresponding service is rendered to customers.  To the extent the service is not provided by the reporting date the amount is recognized as a contract liability.  Prepaid service, including mobile voice and data services, sold to customers is recorded as deferred revenue prior to the commencement of services. Contract liabilities are recorded in advanced payments and deposits on our balance sheets.  Contracts asset and liabilities consisted of the following (amounts in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

January 1, 2018

 

$ Change

 

% Change

Contract asset – current

$

1,309

$

1,176

$

133

 

11%

Contract asset – noncurrent

 

498

 

453

 

45

 

10%

Contract liabilities

 

(9,827)

 

(9,912)

 

85

 

-1%

Net contract liability

$

(8,020)

$

(8,283)

$

263

 

-3%

 

The contract asset-current is included in prepayments and other current assets, the contract asset – noncurrent is included in other assets, and the contract liabilities are included in advance payments and deposits on the Company’s balance sheet.  The increase in our net contract liability was due to the timing of customer prepayments and contract billings.  In the first quarter of 2018, we recognized revenue of $9.6 million related to our January 1, 2018 contract liability and amortized $0.3 million of the January 1, 2018 contract asset into revenue.  There was no revenue recognized in the period related to performance obligations that were satisfied or partially satisfied in previous periods.   

 

Contract Acquisition Costs

 

The Company pays sales commissions to its employees and agents for obtaining customer contracts.  These costs are incremental because they would not have been incurred if the contract was not obtained.  The Company recognizes an asset for these costs and subsequently amortizes the asset on a systematic basis consistent with the pattern of the transfer of the services to the customer.  The amortization period, which is between 2 and 6 years, considers both the original contract period as well as anticipated contract renewals as appropriate.  The amortization period includes renewal commissions when those commissions are not commensurate with new commissions.  The Company estimates

14


 

anticipated contract renewals based on its actual renewals in recent periods. When the expected amortization period is one year or less the Company utilizes the practical expedient and expenses the costs as incurred.  Our March 31, 2018 balance sheet includes current contract acquisition costs of $1.1 million in prepayments and other current assets and long term contract acquisition costs of $0.8 million in other assets.  The Company amortized $0.3 million of contract acquisition cost during the three months ended March 31, 2018.

 

Remaining Performance Obligations

 

Remaining performance obligations represent the transaction price allocated to unsatisfied performance obligations of certain multiyear retail wireless contracts that include a promotional discount.  The transaction price allocated to unsatisfied performance obligations was $10.3 million at March 31, 2018.  The Company expects to satisfy the remaining performance obligations and recognize the transaction price within 24 months.  The Company has certain retail, wholesale, and renewable energy contracts where transaction price is allocated to remaining performance obligations however the company omits these contracts from the disclosure by applying the right to invoice, one year or less, and wholly unsatisfied performance obligation practical expedients.

 

Impacts of adoption in the current period

 

The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method.  The Company elected the practical expedient to apply the new guidance only to contracts that were not substantially complete at the adoption date.   The cumulative effect of adopting ASC 606 resulted in a contract asset of $1.6 million of which $1.2 million was recorded in prepayments and other current assets and $0.4 million was recorded in other assets, contract liability of $0.2 million recorded in advance payments and deposits, contract acquisition costs of $1.5 million of which $0.9 million was recorded in prepayments and other current assets and $0.6 million was recorded in other assets, and a deferred tax liability of $0.3 with the offset of $1.5 million recorded to retained earnings and $1.1 million recorded to minority interest.  The tables below identify changes to the Company’s financial statements as of March 31, 2018 and for the three months then ended as a result of the adoption of ASC 606 as compared to previous revenue guidance (amounts in thousands):

 

15


 

 

 

 

 

 

 

 

Balance Sheet - March 31, 2018

 

 

 

 

 

 

 

 

 

Reported

 

Change

 

Under previous guidance

Prepayments and other current assets

$

33,450

$

(2,426)

$

31,024

 

 

 

 

 

 

 

Total current assets

$

303,355

$

(2,426)

$

300,929

 

 

 

 

 

 

 

Other assets

$

37,060

$

(1,298)

$

35,762

 

 

 

 

 

 

 

Total Assets

$

1,196,818

$

(3,724)

$

1,193,094

 

 

 

 

 

 

 

Advance payments and deposits

$

26,750

$

(277)

$

26,473

Accrued taxes

 

12,067

 

(93)

 

11,974

 

 

 

 

 

 

 

Total current liabilities

$

168,891

$

(370)

$

168,521

 

 

 

 

 

 

 

Deferred income taxes

$

30,945

$

(301)

$

30,644

 

 

 

 

 

 

 

Total Liabilities

$

382,803

$

(671)

$

382,132

 

 

 

 

 

 

 

Retained Earnings

$

546,368

$

(1,725)

$

544,643

Minority Interest

$

133,408

$

(1,328)

$

132,080

 

 

 

 

 

 

 

Total Equity

$

814,015

$

(3,053)

$

810,962

 

 

 

 

 

 

 

Total Liabilities and Equity

$

1,196,818

$

(3,724)

$

1,193,094

 

 

 

 

 

 

 

 

 

Statement of Operations - Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

Reported

 

Change

 

Under previous guidance

Wireless Revenue

$

50,548

$

(133)

$

50,415

 

 

 

 

 

 

 

Total Revenue

$

104,475

$

(133)

$

104,342

 

 

 

 

 

 

 

Sales, marketing and customer service

$

8,562

$

378

$

8,940

 

 

 

 

 

 

 

Total Expenses

$

100,266

$

378

$

100,644

 

 

 

 

 

 

 

Income from operations

$

4,209

$

(511)

$

3,698

Income before taxes

 

1,618

 

(511)

 

1,107

Income tax provision

 

3,921

 

(93)

 

3,828

 

 

 

 

 

 

 

Net loss

$

(2,303)

$

(418)

$

(2,721)

Net income attributable  to non-controlling interests

 

(3,252)

 

181

 

(3,071)

Net loss attributable to ATN International, Inc. stockholders

$

(5,555)

$

(237)

$

(5,792)

 

 

 

 

16


 

 

 

 

 

 

 

 

 

 

 

Statement of Comprehensive Loss- Three months ended March 31, 2018

 

 

 

 

 

 

 

Reported

 

Change

 

Under previous guidance

Net Loss

$

(2,303)

$

(418)

$

(2,721)

Other comprehensive loss, net of tax

 

(893)

 

 —

 

(893)

Comprehensive loss

 

(3,196)

 

(418)

 

(3,614)

Less: Comprehensive income attributable to non-controlling interests

 

(3,252)

 

181

 

(3,071)

Comprehensive loss attributable to ATN International, Inc.

$

(6,448)

$

(237)

$

(6,685)

 

 

 

 

 

 

 

 

 

Statement of Cash Flows - Three months ended March 31, 2018

 

 

 

 

 

 

 

 

 

Reported

 

Change (1)

 

Under previous guidance

Net income (loss)

$

(2,303)

$

(418)

$

(2,721)

 

 

 

 

 

 

 

Materials and supplies, prepayments and other current assets

$

3,991

$

350

$

4,341

Accrued taxes

 

3,292

 

(93)

 

3,199

Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities

 

(2,306)

 

(46)

 

(2,352)

Other assets

$

(581)

$

207

$

(374)

 

(1)

The adoption of ASC 606 had no impact on operating cash flows, investing cash flows, financing cash flows and net change in total cash.

 

 

 

 

4. USE OF ESTIMATES

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates relate to the allowance for doubtful accounts, useful lives of the Company’s fixed and finite-lived intangible assets, allocation of purchase price to assets acquired and liabilities assumed in business combinations, fair value of indefinite-lived intangible assets, goodwill, assessing the impairment of assets, revenue, and income taxes. Actual results could differ significantly from those estimates.

 

 

 

5. IMPACT OF HURRICANES IRMA AND MARIA

 

During September 2017, the Company’s operations and customers in the U.S. Virgin Islands were severely impacted by Hurricanes Irma and subsequently Maria (collectively, the “Hurricanes”).  Both its wireless and wireline networks and commercial operations were severely damaged by these storms.  As a result of the significant damage to its wireline network and the ongoing lack of consistent commercial power in the territory, the Company was unable to provide most of its wireline services.

 

As a result of the Hurricanes, the Company recorded a net pre-tax loss within its consolidated statement of operations of $4.0 million during the year ended December 31, 2017.  This loss consists of $35.4 million of damaged assets, net of insurance proceeds of $34.6 million which the Company received in February 2018. This loss also includes

17


 

$3.2 million of additional operating expenses that the Company specifically incurred to address the impact of the Hurricanes.

 

In connection with the above, the Company also determined there was a triggering event to assess the related reporting unit’s goodwill and indefinite lived intangible assets for impairment.  After consideration of the write-downs of other assets within the reporting unit described above, the impairment test for goodwill and indefinite lived intangible assets was performed by comparing the fair value of the reporting unit to its carrying amount. The Company calculated the fair value of the reporting unit by utilizing an income approach, with Level 3 valuation inputs, including a cash flow discount rate of 14.5%.  Determining fair value requires the exercise of significant judgment, including judgments about appropriate discount rates, perpetual growth rates, and the amount and timing of expected future cash flows. The discount rate was based on a weighted‑average cost of capital, which represents the average rate the business would pay its providers of debt and equity. The cash flows employed in the discounted cash flow analysis were derived from internal and external forecasts.  The impairment assessment concluded that no impairment was required for the goodwill and indefinite lived intangible assets because the fair value of the reporting unit exceeded its carrying amount. 

 

 

6. ACQUISITIONS AND DISPOSITIONS  

 

International Telecom

 

 

Disposition

 

On August 18, 2017, the Company completed the sale of the Viya cable operations located in the British Virgin Islands.  The company did not recognize a gain or loss on the transaction. 

 

On January 3, 2017, the Company completed the sale of the Viya cable operations located in St. Maarten for $4.8 million and recognized a gain of $0.1 million on the transaction. 

 

 

The results of the British Virgin Islands and St. Maarten operations are not material to the Company’s historical results of operations. Since the dispositions do not relate to a strategic shift in its operations, the historical results and financial position of the operations are presented within continuing operations.

 

 

U.S. Telecom

 

 

Disposition

 

On March 8, 2017, the Company completed the sale  of its integrated voice and data communications and wholesale transport businesses in New England and New York for consideration of $25.9 million (the “Sovernet Transaction”).  The consideration included $20.9 million of cash, $3.0 million of receivables, and $2.0 million of contingent consideration.  The $3.0 million of receivables are held in escrow to satisfy working capital adjustments in favor of the acquirer, to fund certain capital expenditure projects related to the assets sold and to secure the Company’s indemnification obligations.  The contingent consideration represents the fair value of future payments related to certain operational milestones of the disposed assets.  The value of the contingent consideration was up to $4.0 million based on whether or not the operational milestones are achieved by December 31, 2017.  The table below identifies the assets and liabilities transferred (amounts in thousands):

 

18


 

 

 

 

 

Consideration Received

$

25,926

 

 

 

 

 

Assets and liabilities disposed

 

 

 

Cash

 

1,821

 

Accounts receivable

 

1,696

 

Inventory

 

639

 

Prepaid

 

1,034

 

Property, plant and equipment

 

25,294

 

Other assets

 

288

 

Accounts payable and accrued liabilities

 

(1,718)

 

Advance payments and deposits

 

(1,897)

 

Net assets disposed

 

27,157

 

 

 

 

 

Consideration less net assets disposed

 

(1,231)

 

 

 

 

 

Transaction costs

 

(1,156)

 

 

 

 

 

Loss

$

(2,387)

 

 

Prior to the closing of the transaction, the Company repurchased non-controlling interests from minority shareholders in a Sovernet subsidiary for $0.7 million.  The non-controlling interest had a book value of zero.  Additionally the Company recorded a loss on deconsolidation of $0.5 million. 

   

The Company incurred $1.2 million of transaction related charges pertaining to legal, accounting and consulting services associated with the transaction, of which $0.6 million were incurred during the year ended December 31, 2017.  Since the Sovernet disposition does not relate to a strategic shift in our operations, the historic results and financial position of the operations are presented within continuing operations.

 

Subsequent to close of the Sovernet Transaction, management continually monitored and assessed the probability of earning the contingent consideration.  In September 2017, based on progress toward achieving the operational milestones, and the December 31, 2017 deadline under which to do so, management determined that earning the contingent consideration was unlikely.  As a result the fair value of the contingent consideration was reduced to zero.  The amount was recorded as a loss on disposition of assets within operating income during the year ended December 31, 2017.  The disposed assets did not achieve the operational milestones by the December 31 deadline. 

 

 

7. FAIR VALUE MEASUREMENTS

 

In accordance with the provisions of fair value accounting, a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability and defines fair value based upon an exit price model.

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The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:

 

 

 

 

Level 1

 

Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 assets and liabilities include money market funds, debt and equity securities and derivative contracts that are traded in an active exchange market.

 

 

 

 

Level 2

 

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange‑traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes corporate obligations and non‑exchange traded derivative contracts.

 

 

 

 

Level 3

 

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments and intangible assets that have been impaired whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

 

20


 

Assets and liabilities of the Company measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2018

 

 

 

 

 

    

 

 

    

Significant Other

    

 

 

 

 

 

Quoted Prices in

 

Observable

 

 

 

 

 

 

Active Markets

 

Inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

Total

 

Certificates of deposit

 

$

 —

 

$

380

 

$

380

 

Money market funds

 

 

2,388

 

 

 —

 

 

2,388

 

Short term investments

 

 

471

 

 

1,757

 

 

2,228

 

Commercial paper

 

 

 —

 

 

50,549

 

 

50,549

 

Interest rate swap

 

 

 —

 

 

186

 

 

186

 

Total assets and liabilities measured at fair value

 

$

2,859

 

$

52,872

 

$

55,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

    

 

 

    

Significant Other

    

 

 

 

 

 

Quoted Prices in

 

Observable

 

 

 

 

 

 

Active Markets

 

Inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

Total

 

Certificates of deposit

 

$

 —

 

$

391

 

$

391

 

Money market funds

 

 

2,894

 

 

 —

 

 

2,894

 

Short term investments

 

 

555

 

 

6,521

 

 

7,076

 

Commercial paper

 

 

 —

 

 

49,954

 

 

49,954

 

Interest rate swap

 

 

 —

 

 

52

 

 

52

 

Total assets and liabilities measured at fair value

 

$

3,449

 

$

56,918

 

$

60,367

 

 

Certificate of Deposit

 

As of March 31, 2018 and December 31, 2017, this asset class consisted of a time deposit at a financial institution denominated in U.S. dollars. The asset class is classified within Level 2 of the fair value hierarchy because the fair value was based on observable market data.

 

Money Market Funds

 

As of March 31, 2018 and December 31, 2017, this asset class consisted of a money market portfolio that comprises Federal government and U.S. Treasury securities. The asset class is classified within Level 1 of the fair value hierarchy because its underlying investments are valued using quoted market prices in active markets for identical assets.

 

Short Term Investments and Commercial Paper

 

As of March 31, 2018 and December 31, 2017, this asset class consisted of short term foreign and U.S. corporate bonds, equity securities, and commercial paper. Corporate bonds and commercial paper are classified within Level 2 of the fair value hierarchy because the fair value is based on observable market data.  Equity securities are classified within Level 1 because fair value is based on quoted market prices in active markets for identical assets.  The Company held equity securities with a fair value of $0.5 million at March 31, 2018 and net income for the three months then ended included $0.1 million of losses on these securities.  

 

Other Fair Value Disclosures

The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments. The fair value of the interest rate swap is measured using level 2 inputs.

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At March 31, 2018, the Company holds $20.1 million of equity securities consisting of non-controlling investments in privately held companies. These investments, which the Company does not have the ability to exercise significant influence, are without readily determinable fair values. The investments are measured at cost, less any impairment, adjusted for observable price changes of similar investments of the same issuer. Fair value is not estimated for these investments if there are no identified events or changes in circumstances that may have an effect on the fair value of the investment. The carrying value of the strategic investments was $20.1 million at March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018 no impairments or price adjustments were recorded on the investments.  Strategic investments are included with other assets on the consolidated balance sheets.

The fair value of long-term debt is estimated using Level 2 inputs.  At March 31, 2018, the fair value of long-term debt, including the current portion, was $158.1 million and its book value was $154.9 million.  At December 31, 2017, the fair value of long-term debt, including the current portion, was $159.2 million and its book value was $155.8 million.

 

8. LONG-TERM DEBT

 

The Company has a credit facility with CoBank, ACB and a syndicate of other lenders to provide for a $225 million revolving credit facility (the “Credit Facility”) that includes (i) up to $10 million under the Credit Facility for standby or trade letters of credit, (ii) up to $25 million under the Credit Facility for letters of credit that are necessary or desirable to qualify for disbursements from the FCC’s mobility fund and (iii) up to $10 million under a swingline sub-facility.

Amounts the Company may borrow under the Credit Facility bear interest at a rate equal to, at its option, either (i) the London Interbank Offered Rate (LIBOR) plus an applicable margin ranging between 1.50% to 1.75% or (ii) a base rate plus an applicable margin ranging from 0.50% to 0.75%.  Swingline loans will bear interest at the base rate plus the applicable margin for base rate loans.  The base rate is equal to the higher of (i) 1.00% plus the higher of (x) the one-week LIBOR and (y) the one-month LIBOR; (ii) the federal funds effective rate (as defined in the Credit Facility) plus 0.50% per annum; and (iii) the prime rate (as defined in the Credit Facility). The applicable margin is determined based on the ratio (as further defined in the Credit Facility) of the Company’s indebtedness to EBITDA. Under the terms of the Credit Facility, the Company must also pay a fee ranging from 0.175% to 0.250% of the average daily unused portion of the Credit Facility over each calendar quarter.

 

On January 11, 2016, the Company amended the Credit Facility to increase the amount the Company is permitted to invest in “unrestricted” subsidiaries of the Company, which are not subject to the covenants of the Credit Facility, from $275.0 million to $400.0 million (as such increased amount shall be reduced from time to time by the aggregate amount of certain dividend payments to the Company’s stockholders).    The Amendment also provides for the incurrence by the Company of incremental term loan facilities, when combined with increases to revolving loan commitments under the Credit Facility, in an aggregate amount not to exceed $200.0 million, which facilities shall be subject to certain conditions, including pro forma compliance with the total net leverage ratio financial covenant under the Credit Facility.

 

   The Credit Facility contains customary representations, warranties and covenants, including a financial covenant that imposes a maximum ratio of indebtedness to EBITDA as well as covenants limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. In addition, the Credit Facility contains a financial covenant that imposes a maximum ratio of indebtedness to EBITDA. As of March 31, 2018, the Company was in compliance with all of the financial covenants of the Credit Facility.

 

As of March 31, 2018, the Company had no borrowings under the Credit Facility. 

Ahana Debt

On December 24, 2014, in connection with the Ahana Acquisition, the Company assumed $38.9 million in long-term debt (the “Original Ahana Debt”).  The Original Ahana Debt included multiple loan agreements with banks

22


 

that bore interest at rates between 4.5% and 6.0%, matured at various times between 2018 and 2023 and were secured by certain solar facilities.  Repayment of the Original Ahana Debt was being made in cash on a monthly basis until maturity.

 

The Original Ahana Debt also included a loan from Public Service Electric & Gas (the “PSE&G Loan”).  The PSE&G Loan bears interest at 11.3%, matures in 2027, and is secured by certain solar facilities.  Repayment of the Original Ahana Debt with PSE&G can be made in either cash or solar renewable energy credits (“SRECs”), at the Company’s discretion, with the value of the SRECs being fixed at the time of the loan’s closing.  Historically, the Company has made all repayments of the PSE&G Loan using SRECs.

 

On December 19, 2016, Ahana’s wholly owned subsidiary, Ahana Operations, issued $20.6 million in aggregate principal amount of 4.427% senior notes due 2029 (the “Series A Notes”) and $45.2 million in aggregate principal amount of 5.327% senior notes due 2031 (the “Series B Notes” and collectively with the Series A Notes and the PSE&G Loan, the “Ahana Debt”).  Interest and principal are payable semi-annually, until the respective maturity dates of March 31, 2029 (for the Series A Notes) and September 30, 2031 (for the Series B Notes).  Cash flows generated by the solar projects that secure the Series A Notes and Series B Notes are only available for payment of such debt and are not available to pay other obligations or the claims of the creditors of Ahana or its subsidiaries. However, subject to certain restrictions, Ahana Operations holds the right to the excess cash flows not needed to pay the Series A Notes and Series B Notes and other obligations arising out of the securitizations.  The Series A and Series B Notes are secured by certain assets of Ahana and are guaranteed by certain of its subsidiaries.

 

A portion of the proceeds from the issuances of the Series A Notes and Series B Notes were used to repay the Original Ahana Debt in full except for the PSE&G Loan which remains outstanding after the refinancing.

 

The Series A Notes and the Series B Notes contain customary representations, warranties and certain affirmative and negative covenants, which limit additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes.  The Series A Notes and Series B Notes are subject to financial covenants that imposes 1) a maximum debt service coverage ratio and 2) a maximum ratio of the present value of Ahana’s future cash flow to the aggregate principal amounts of all outstanding obligations.  These financial covenants are tested semi-annually for Ahana Operations on a consolidated basis and on an individual basis for certain subsidiaries.  Both the Series A Notes and Series B Notes may be redeemed at any time, in whole or part, subject to a make-whole premium.  As of March 31, 2018, the Company was in compliance with all of the financial covenants of the Series A Notes and the Series B Notes.

 

The Company capitalized $2.8 million of fees associated with the Series A and Series B Notes which is recorded as a reduction to the debt carrying amount and will be amortized over the life of the notes.   

 

As of March 31, 2018, $2.3 million of the Original Ahana Debt, $61.5 million of the Series A Notes and Series B Notes remained outstanding, and $2.6 million of the capitalized fees remain unamortized.

 

One Communications Debt

In connection with the One Communications Transaction on May 3, 2016, the Company assumed $35.4 million in debt (the “One Communications Debt”) in the form of a loan from HSBC Bank Bermuda Limited.  The One Communications Debt was scheduled to mature in 2021, was bearing interest at the three-month LIBOR rate plus a margin of 3.25%, and had repayment being made quarterly.  The One Communications Debt contained customary representations, warranties and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and a financial covenant that limited the maximum ratio of indebtedness less cash to annual operating cash flow.

 

On May 22, 2017, the Company amended and restated the One Communications Debt to increase the original facility to $37.5 million.  The amended and restated debt is scheduled to mature on May 22, 2022 and bears an interest at the three month LIBOR rate plus an applicable margin rate ranging between 2.5% to 2.75% paid quarterly.  The amended and restated One Communications Debt contains customary representations, warranties and affirmative and

23


 

negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and financial covenants that limit the ratio of tangible net worth to long term debt and total net debt to EBITDA and require a minimum debt service coverage ratio (net cash generated from operating activities plus interest expense less net capital expenditures to debt repayments plus interest expense).  The Company was in compliance with its covenants as of March 31, 2018

 

As a condition of the amended and restated agreement, within 90 days of the refinance date the Company is required to enter into a hedging arrangement with a notional amount equal to at least 30% of the outstanding loan balance and a term corresponding to the maturity of the One Communications Debt.  As of July 2017, we entered into an amortizing interest rate swap.  This swap has been designated as a cash flow hedge, has an original notional amount of $11.0 million, has an interest rate of 1.874%, and expires in March 2022.

 

In connection with the amended and restated debt, the Company increased the limit of its overdraft facility from $5.0 million to $10.0 million.  This facility has an interest rate of three month LIBOR plus 1.75%.

 

The Company capitalized $0.3 million of fees associated with the One Communications Debt, which is recorded as a reduction to the debt carrying amount and will be amortized over the life of the debt.   

 

As of March 31, 2018, $34.7 million of the One Communications Debt was outstanding, there were no borrowings under the overdraft facility, and $0.3 million of the capitalized fees remain unamortized.

 

Viya Debt (formerly Innovative Debt)

 

On July 1, 2016, the Company and certain of our subsidiaries entered into a $60.0 million loan agreement with Rural Telephone Finance Cooperative (the “Viya Debt”). The Viya Debt agreement contains customary representations, warranties and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and a financial covenant that limits the maximum ratio of indebtedness less up to $50.0 million of cash to annual operating cash flow (the “Net Leverage Ratio”).  This covenant is tested on an annual basis.  Interest is paid quarterly at a fixed rate of 4.0% and principal repayment is not required until maturity on July 1, 2026.  Prepayment of the Viya Debt may be subject to a fee under certain circumstances.  The debt is secured by certain assets of the Company’s Viya subsidiaries and is guaranteed by us.   In addition, the Company began funding the restoration of Viya’s network through an intercompany loan arrangement which exceeded certain limitations on Viya incurring additional debt.  RTFC consented to these intercompany advances and a copy of their consent is including in the exhibits hereto.

 

The Company paid a fee of $0.9 million to lock the interest rate at 4% per annum over the term of the debt.  The fee was recorded as a reduction to the debt carrying amount and will be amortized over the life of the loan. 

 

As of March 31, 2018, $60.0 million of the Viya Debt remained outstanding and $0.7 million of the rate lock fee was unamortized.

 

9. GOVERNMENT GRANTS

 

The Company has received funding from the U.S. Government and its agencies under Stimulus and Universal Services Fund programs.  These are generally designed to fund telecommunications infrastructure expansion into rural or underserved areas of the United States.  The fund programs are evaluated to determine if they represent funding related to capital expenditures (capital grants) or operating activities (income grants).

 

Phase I Mobility Fund Grants

 

As part of the Federal Communications Commission’s (“FCC”) reform of its Universal Service Fund (“USF”) program, which previously provided support to carriers seeking to offer telecommunications services in high-cost areas and to low-income households, the FCC created the Phase I Mobility Fund (“Phase I Mobility Fund”), a one-time award meant to support wireless coverage in underserved geographic areas in the United States. The Company has received $21.1 million of Phase I Mobility Fund support to its wholesale wireless business (the “Mobility Funds”) to expand voice and broadband networks in certain geographic areas in order to offer either 3G or 4G coverage. As part of the

24


 

receipt of the Mobility Funds, the Company committed to comply with certain additional FCC construction and other requirements. A portion of these funds was used to offset network capital costs and a portion is used to offset the costs of supporting the networks for a period of five years from the award date.

 

The Mobility Funds projects and their results are included within our U.S. Telecom segment. As of December 31 2017, the Company had received approximately $21.1 million in Mobility Funds. Of these funds, $7.2 million was recorded as an offset to the cost of the property, plant, and equipment associated with these projects and, consequentially, a reduction of future depreciation expense.  The remaining $13.9 million received offsets operating expenses, of which $11.9 million has been recorded to date and $2.0 million is recorded within current liabilities in the Company’s consolidated balance sheet as of March 31, 2018. The balance sheet presentation is based on the timing of the expected usage of the funds which will reduce future operations expenses through the expiration of the arrangement in July 2018.

 

Tribal Bidding Credit

 

As part of the broadcast television spectrum incentive auction, the FCC implemented a tribal lands bidding credit to encourage growth of wireless services on the lands of federally recognized tribes.  The Company received $7.4 million under this program in the first quarter of 2018.  A portion of these funds will be used to offset network capital costs and a portion will be used to offset the costs of supporting the networks.  The Company’s current estimate is to use $5.4 million to offset capital costs which will subsequently reduce future depreciation expense and $2.0 million to offset the cost of supporting the network which will reduce future operating expense.  The credits are subject to certain requirements, including deploying service by January 2021 and meeting minimum coverage metrics.  If the requirements are not met the funds are subject to claw back provisions.  The Company currently expects to comply with all requirements.

 

E-Rate

 

The Universal Service Administrative Company established the universal service Schools and Libraries Program (“E-Rate”) to provide discounted telecommunication access to eligible schools and libraries.  The program awards providers grants to build network connectivity to eligible participants.  The grants are distributed upon completion of a project.  At March 31, 2018, the Company was awarded approximately $15.4 million of E-Rate grants with construction completion obligations between June 2019 and June 2020.  Once the networks are constructed the Company is obligated to provide service to the program participants.  The Company is in various stages of constructing the networks and has not received any of the funds.  The Company expects to meet all requirements associated with the grants.

 

25


 

10. EQUITY

 

Stockholders’ equity was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  March 31, 

 

 

 

2018

 

2017

 

 

 

ATN

 

Non-Controlling

 

 

 

 

ATN

 

Non-Controlling

 

Total

 

 

    

International, Inc.

    

Interests

    

Total Equity

    

International, Inc.

    

Interests

    

Equity

 

Equity, beginning of period