ATN International, Inc.
ATN International, Inc. (Form: 10-Q, Received: 08/08/2017 16:56:38)

Table of Contents

 

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 June 30, 2017

 

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 August 8, 2017, the registrant had outstanding  16,205,428  shares of its common stock ($.01 par value).

 

 

 


 

Table of Contents

ATN INTERNATIONAL, INC.

FORM 10-Q

 

Quarter Ended June 30, 2017

 

 

 

 

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 June 30, 2017 and December 31, 2016  

4

 

 

 

 

Condensed Consolidated Income Statements for the Three and Six Months Ended June 30, 2017 and 2016

5

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016

6

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016

7

 

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

8

 

 

 

Item 2  

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

29-57

 

 

 

Item 3  

Quantitative and Qualitative Disclosures About Market Risk

58

 

 

 

Item 4  

Controls and Procedures

58

 

 

 

PART II—OTHER INFORMATION  

59

 

 

 

Item 1  

Legal Proceedings

59

 

 

 

Item1A  

Risk Factors

59

 

 

 

Item 2  

Unregistered Sales of Equity Securities and Use of Proceeds

59

 

 

 

Item 6  

Exhibits

60

 

 

 

SIGNATURES  

61

 

 

 

CERTIFICATIONS

 

 

 

2


 

Table of Contents

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 competitive environment in our key markets, demand for our services and industry trends; the outcome of regulatory matters; changes to governmental regulations and laws affecting our business; our continued access to the credit and capital markets; the pace of our network expansion and improvement, including our level of estimated future capital expenditures and our realization of the benefits of these investments; our recent acquisitions; 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 operate our newly acquired businesses in Bermuda and the U.S. Virgin Islands and both integrate these operations into our existing operations and execute planned network expansions and upgrades; (2) the general performance of our operations, including operating margins, revenues, and the future growth and retention of our major customers and subscriber base and consumer demand for solar power; (3) government regulation of our businesses, which may impact our FCC and other telecommunications licenses or our renewables business; (4) economic, political and other risks facing our operations; (5) our ability to maintain favorable roaming arrangements; (6) our ability to efficiently and cost-effectively upgrade our networks and information technology (“IT”) platforms to address rapid and significant technological changes in the telecommunications industry; (7) the loss of or an inability to recruit skilled personnel in our various jurisdictions, including key members of management; (8) our ability to find investment or acquisition or disposition opportunities that fit our strategic goals for the Company; (9) increased competition; (10) our ability to operate and expand our renewable energy business;   (11) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (12) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; (13) the occurrence of weather events and natural catastrophes; (14) our continued access to capital and credit markets;  (15) the risk of currency fluctuation for those markets in which we operate; and (16) 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" herein and in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 1, 2017 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.

 

 

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Table of Contents

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)

 

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2017

    

2016

    

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

231,640

 

$

269,721

 

Restricted cash

 

 

714

 

 

524

 

Short-term investments

 

 

7,755

 

 

9,237

 

Accounts receivable, net of allowances of $14.5 million and $13.1 million, respectively

 

 

47,635

 

 

45,419

 

Materials and supplies

 

 

15,346

 

 

14,365

 

Prepayments and other current assets

 

 

41,245

 

 

28,103

 

Total current assets

 

 

344,335

 

 

367,369

 

Fixed Assets:

 

 

 

 

 

 

 

Property, plant and equipment

 

 

1,154,421

 

 

1,138,362

 

Less accumulated depreciation

 

 

(504,687)

 

 

(490,650)

 

Net fixed assets

 

 

649,734

 

 

647,712

 

Telecommunication licenses, net

 

 

95,952

 

 

48,291

 

Goodwill

 

 

62,873

 

 

62,873

 

Customer relationships, net

 

 

13,120

 

 

15,029

 

Restricted cash

 

 

16,157

 

 

18,113

 

Other assets

 

 

19,305

 

 

38,831

 

Total assets

 

$

1,201,476

 

$

1,198,218

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

9,850

 

$

12,440

 

Accounts payable and accrued liabilities

 

 

110,518

 

 

92,708

 

Dividends payable

 

 

5,510

 

 

5,487

 

Accrued taxes

 

 

8,326

 

 

13,531

 

Advance payments and deposits

 

 

17,620

 

 

25,529

 

Other current liabilities

 

 

67

 

 

410

 

Total current liabilities

 

 

151,891

 

 

150,105

 

Deferred income taxes

 

 

48,526

 

 

46,622

 

Other liabilities

 

 

30,777

 

 

47,939

 

Long-term debt, excluding current portion

 

 

149,832

 

 

144,383

 

Total liabilities

 

 

381,026

 

 

389,049

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

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; 17,073,725 and 16,971,634 shares issued, respectively, and 16,205,428 and 16,138,983 shares outstanding respectively

 

 

169

 

 

169

 

Treasury stock, at cost; 868,297 and 832,651shares, respectively

 

 

(25,441)

 

 

(23,127)

 

Additional paid-in capital

 

 

163,995

 

 

160,176

 

Retained earnings

 

 

539,659

 

 

538,109

 

Accumulated other comprehensive income

 

 

3,327

 

 

1,728

 

Total ATN International, Inc. stockholders’ equity

 

 

681,709

 

 

677,055

 

Non-controlling interests

 

 

138,741

 

 

132,114

 

Total equity

 

 

820,450

 

 

809,169

 

Total liabilities and equity

 

$

1,201,476

 

$

1,198,218

 

 

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

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ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED INCOME STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Unaudited)

(In thousands, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended  June 30, 

 

Six months ended June 30, 

 

 

    

2017

    

2016

    

2017

    

2016

 

REVENUE:

 

 

 

 

 

 

 

 

 

 

 

 

 

Wireless

 

$

54,460

 

$

57,088

 

$

110,690

 

$

115,965

 

Wireline

 

 

61,459

 

 

33,976

 

 

125,259

 

 

56,421

 

Renewable energy

 

 

4,891

 

 

5,562

 

 

9,791

 

 

11,151

 

Equipment and other

 

 

2,435

 

 

3,365

 

 

5,620

 

 

6,139

 

Total revenue

 

 

123,245

 

 

99,991

 

 

251,360

 

 

189,676

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Termination and access fees

 

 

27,915

 

 

23,797

 

 

58,372

 

 

43,514

 

Engineering and operations

 

 

19,362

 

 

10,739

 

 

39,029

 

 

21,249

 

Sales, marketing and customer service

 

 

8,715

 

 

7,681

 

 

17,737

 

 

13,437

 

Equipment expense

 

 

3,008

 

 

4,133

 

 

5,553

 

 

7,362

 

General and administrative

 

 

26,000

 

 

19,298

 

 

50,349

 

 

35,670

 

Transaction-related charges

 

 

148

 

 

10,410

 

 

826

 

 

14,065

 

Restructuring charges

 

 

 —

 

 

1,785

 

 

 —

 

 

1,785

 

Depreciation and amortization

 

 

22,254

 

 

16,493

 

 

44,747

 

 

31,047

 

Impairment of  long-lived assets

 

 

 —

 

 

11,076

 

 

 —

 

 

11,076

 

Bargain purchase gain

 

 

 —

 

 

(7,304)

 

 

 —

 

 

(7,304)

 

(Gain) loss on disposition of long-lived assets

 

 

 —

 

 

(29)

 

 

1,111

 

 

(29)

 

Total operating expenses

 

 

107,402

 

 

98,079

 

 

217,724

 

 

171,872

 

Income from operations

 

 

15,843

 

 

1,912

 

 

33,636

 

 

17,804

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

347

 

 

345

 

 

633

 

 

692

 

Interest expense

 

 

(2,153)

 

 

(1,061)

 

 

(4,469)

 

 

(1,886)

 

Loss on deconsolidation of subsidiary

 

 

 —

 

 

 —

 

 

(529)

 

 

 —

 

Other expense

 

 

(532)

 

 

(137)

 

 

(1,053)

 

 

(123)

 

Other expense, net

 

 

(2,338)

 

 

(853)

 

 

(5,418)

 

 

(1,317)

 

INCOME BEFORE INCOME TAXES

 

 

13,505

 

 

1,059

 

 

28,218

 

 

16,487

 

Income taxes

 

 

2,596

 

 

2,945

 

 

5,724

 

 

7,576

 

NET INCOME (LOSS)

 

 

10,909

 

 

(1,886)

 

 

22,494

 

 

8,911

 

Net income attributable to non-controlling interests, net of tax expense of $0.1 million, $0.5 million,  $0.4 million, and $0.4 million, respectively.

 

 

(5,026)

 

 

(1,200)

 

 

(9,751)

 

 

(5,877)

 

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

 

$

5,883

 

$

(3,086)

 

$

12,743

 

$

3,034

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.36

 

$

(0.19)

 

$

0.79

 

$

0.19

 

Diluted

 

$

0.36

 

$

(0.19)

 

 

0.78

 

 

0.19

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

16,195

 

 

16,145

 

 

16,176

 

 

16,118

 

Diluted

 

 

16,274

 

 

16,145

 

 

16,263

 

 

16,221

 

DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK

 

$

0.34

 

$

0.32

 

$

0.68

 

$

0.64

 

 

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

 

 

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ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended
June 30, 

 

Six Months Ended
June 30, 

 

2017

    

2016

 

2017

    

2016

Net income (loss)

$

10,909

 

$

(1,886)

 

$

22,494

 

$

8,911

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

302

 

 

(40)

 

 

2,232

 

 

(36)

Reclassifications of gains on sale of marketable securities to net income

 

(755)

 

 

 —

 

 

(1,044)

 

 

 —

Unrealized loss on marketable securities

 

(90)

 

 

 —

 

 

(130)

 

 

 —

Projected pension benefit obligation

 

 —

 

 

 —

 

 

513

 

 

 —

Other comprehensive income (loss), net of tax

 

(543)

 

 

(40)

 

 

1,571

 

 

(36)

Comprehensive income

 

10,366

 

 

(1,926)

 

 

24,065

 

 

8,875

Less: Comprehensive income attributable to non-controlling interests

 

(5,026)

 

 

(1,200)

 

 

(9,751)

 

 

(5,877)

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

$

5,340

 

$

(3,126)

 

$

14,314

 

$

2,998

 

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

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ATN INTERNATIONAL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2017 AND 2016

(Unaudited)

(In thousands)

 

 

 

 

 

 

 

 

Six Months Ended June 30, 

 

2017

    

2016

Cash flows from operating activities:

 

 

 

 

 

Net income

$

22,494

 

$

8,911

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

 

 

 

 

 

Depreciation and amortization

 

44,747

 

 

31,047

Provision for doubtful accounts

 

1,906

 

 

100

Amortization and write off of debt discount and debt issuance costs

 

279

 

 

236

Stock-based compensation

 

3,786

 

 

3,633

Deferred income taxes

 

2,379

 

 

(8,775)

Loss in equity method investments

 

2,033

 

 

 —

Bargain purchase gain

 

 —

 

 

(7,304)

Loss (gain) on disposition of long-lived assets

 

1,111

 

 

(29)

Gain on sale of investments

 

(1,055)

 

 

 —

Impairment of long-lived assets

 

 —

 

 

11,076

Loss on deconsolidation of subsidiary

 

529

 

 

 —

Other non-cash activity

 

509

 

 

 —

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

 

 

 

 

 

Accounts receivable

 

(6,062)

 

 

(2,902)

Materials and supplies, prepayments, and other current assets

 

(6,586)

 

 

(4,505)

Prepaid income taxes

 

995

 

 

 —

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

 

(3,331)

 

 

(4,713)

Accrued taxes

 

(7,876)

 

 

15,294

Other assets

 

2,887

 

 

(1,854)

Other liabilities

 

6,722

 

 

10,505

Net cash provided by operating activities

 

65,467

 

 

50,720

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(78,549)

 

 

(42,727)

Purchase of securities

 

 —

 

 

(2,000)

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

 

22,597

 

 

 —

Acquisition of businesses,  net of acquired cash of  $0 and $8.3 million

 

(1,178)

 

 

(29,719)

Purchases of spectrum licenses and other intangible assets, including deposits

 

(36,832)

 

 

(10,860)

Acquisition of non-controlling interest in subsidiary

 

 —

 

 

(7,045)

Proceeds from sale of investments

 

2,761

 

 

 —

Change in restricted cash

 

1,756

 

 

1,134

Net cash used in investing activities

 

(89,445)

 

 

(91,217)

Cash flows from financing activities:

 

 

 

 

 

Dividends paid on common stock

 

(10,992)

 

 

(10,311)

Proceeds from new borrowings

 

8,571

 

 

 —

Distribution to non-controlling interests

 

(3,373)

 

 

(4,302)

Payment of debt issuance costs

 

(326)

 

 

 —

Proceeds from stock option exercises

 

274

 

 

164

Principal repayments of term loan

 

(5,447)

 

 

(4,759)

Purchase of common stock

 

(2,186)

 

 

(1,986)

Repurchases of non-controlling interests

 

(953)

 

 

 —

Investments made by minority shareholders in consolidated affiliates

 

122

 

 

21,904

Net cash (used in) provided by financing activities

 

(14,310)

 

 

710

Effect of foreign currency exchange rates on cash and cash equivalents

 

207

 

 

 —

Net change in cash and cash equivalents

 

(38,081)

 

 

(39,787)

Cash and cash equivalents, beginning of period

 

269,721

 

 

392,045

Cash and cash equivalents, end of period

$

231,640

 

$

352,258

Supplemental cash flow information:

 

 

 

 

 

Noncash investing activity:

 

 

 

 

 

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

$

13,107

 

$

12,333

 

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

 

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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 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, utility and municipal customers. Beginning in April 2016, the Company began developing projects in India to provide distributed generation solar power to corporate and utility customers. 

 

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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 June 30, 2017:

 

 

 

 

 

 

 

 

 

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 (formerly Logic), GTT+, Viya (formerly Innovative)

 

 

 

Wireless

 

Bermuda, Guyana, U.S. Virgin Islands

 

One (formerly CellOne), GTT+, Viya (formerly Innovative and Choice)

 

 

 

Video Services

 

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

 

One (formerly Bermuda CableVision), Viya (formerly Innovative), Logic, BVI Cable TV

 

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 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, 2016, filed with the SEC on March 1, 2017.

 

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.

 

Certain reclassifications have been made in the prior period financial statements to conform the Company’s consolidated income statements to how management analyzes its operations in the current period.  The changes did not impact operating income.  For the three months ended June 30, 2016 the aggregate impact of the changes included a

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decrease to termination and access fees of $1.4 million, an increase to engineering and operations expenses of $1.8 million, an increase to sales and marketing expenses of $0.6 million, an increase in equipment expense of $0.1 million, and a decrease to general and administrative expenses of $1.1 million. For the six months ended June 30, 2016 the aggregate impact of the changes included a decrease to termination and access fees of $2.6 million, an increase to engineering and operations expenses of $2.5 million, an increase to sales and marketing expenses of $1.2 million, an increase in equipment expense of $0.1 million, and a decrease to general and administrative expenses of $1.2 million.

 

The Company’s effective tax rate for the three months ended June 30, 2017 and 2016 was 19.2% and 278.2%, respectively.  The Company’s effective tax rates for the six months ended June 30, 2017 and 2016 were 20.3% and 46.0%, respectively.  The effective tax rate for the three months ended June 30, 2017 was primarily impacted by the following items: (i) a  benefit for the net capital loss due to the stock sales of the Company’s businesses in New England, New York and St. Maarten, and (ii) an increase in the mix of income generated among lower tax jurisdictions in which the Company operates.  The effective tax rate for the three months ended June 30, 2016 was impacted by the following items: (i) certain transactional charges incurred in connection with our recent acquisitions that had no tax benefit, (ii) an impairment charge to write down the value of assets related to the Company’s businesses in New England and New York , (iii) the cumulative rate impact resulting from a change to the annual forecasted rate, applied against a lower pretax book income in the period, and  (iv) the mix of income generated among the jurisdictions in which the Company operates.  The effective tax rate for the six months ended June 30, 2017 was primarily impacted by the following items: (i) a benefit for the net capital loss due to the stock sales of the Company’s 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 effective tax rate for the six months ended June 30, 2016 was primarily impacted by the following items: (i) certain transactional charges incurred in connection with acquisitions that had no tax benefit, (ii) an impairment charge to write down the value of assets related to the Company’s U.S. Wireline business, and (iii) the mix of income generated among the jurisdictions in which the Company operates. 

 

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 standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. The FASB has since modified the standard with several ASU’s which must be adopted concurrently. The Company is currently evaluating the overall impact and the method of adoption of ASU 2014-09, including the latest developments from the Transition Resources Group. Areas most likely impacted may include, but not be limited to, the following:

 

·

The timing of revenue recognition and the allocation of revenue between equipment and services.  The Company expects a larger impact to its wireline and wireless contracts with a duration of greater than twelve months.  However, the Company earns a substantial amount of its wireline and wireless revenue from month-to-month contracts and the standard will have less of an impact on the timing of this revenue. 

 

·

The new standard will require certain amounts be recorded in accounts receivable and deferred revenues on the balance sheet and enhanced disclosures around performance obligations.

 

·

Overall, with the exception of the impacts mentioned above, we do not expect the standard will result in a substantive change to the method or allocation of revenues between services and equipment or the timing of revenue recognition.

 

The Company is in the process of determining quantitative information related to the impact of the new standard and our initial assessment may change due to changes in contractual terms or new service and product offerings.  The Company will adopt the standard on January 1, 2018.  The Company currently expects to use the

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modified retrospective adoption method which requires it to apply the standard only to the most current period presented with the cumulative effect of applying the standard being recognized at the adoption date.

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements - Going Concern (Subtopic 205-40),” which requires management to assess a company’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. ASU 2014-15 is effective for annual reporting periods ending after December 15, 2016. Early application is permitted. The Company adopted this guidance for the fourth quarter ended December 31, 2016. The adoption of this guidance did not impact The Company’s Consolidated Financial Statements.

 

In April 2015, the FASB issued ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance about whether a cloud computing arrangement includes software and how to account for the license for software.  The new guidance does not change the accounting for a customer’s accounting for service contracts.  The adoption of ASU 2015-05 by the Company on January 1, 2017 did not have a material impact on the Company’s financial position, result of operations or cash flows.

 

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 standard further clarifies the classification of the following: (i) debt prepayment or debt extinguishment costs; (ii) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (iii) contingent consideration payments made after a business combination; (iv) proceeds from the settlement of insurance claims; (v) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (vi) distributions received from equity method investees; (vii) beneficial interests in securitization transactions; and (viii) separately identifiable cash flows and application of the predominance principle. ASU 2016-15 will become effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ASU 2016-15 is to be applied using a retrospective transition method for each period presented. The Company is currently evaluating the impact of the new standard on its Consolidated Financial Statements.

 

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 will be effective for the Company on January 1, 2018. The Company is evaluating the potential impact that this standard may have on its results of operations.

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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. ASU 2016-18 is effective for annual reporting periods, including interim periods within those periods, beginning after December 15, 2017, with early adoption permitted. The Company is evaluating the potential impact that this standard may have on its Consolidated Financial Statements.

 

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 standard will result in its 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 is evaluating the potential impact that this standard may have on its Consolidated Financial Statements.

 

3. 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 and income taxes. Actual results could differ significantly from those estimates.

 

4. ACQUISITIONS AND DISPOSITIONS

 

International Telecom

 

One Communications (formerly KeyTech Limited)

 

On May 3, 2016, the Company completed its acquisition of a controlling interest in One Communications Ltd. (formerly known as KeyTech Limited, “One Communications”), a publicly held Bermuda company listed on the Bermuda Stock Exchange (“BSX”) that provides broadband and video services and other telecommunications services to

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residential and enterprise customers in Bermuda and the Cayman Islands (the “One Communications Acquisition”).   Subsequent to the completion of the Company’s acquisition, One Communications changed its legal name from KeyTech Limited and changed its “CellOne” and “Logic” trade names in Bermuda to “One Communications”.   Prior to the Company’s acquisition, One Communications also owned a minority interest of approximately 43% in the Company’s previously held and consolidated subsidiary, Bermuda Digital Communications Ltd. (“BDC”), that provides wireless services in Bermuda. As part of the transaction, the Company contributed its ownership interest of approximately 43% in BDC and approximately $42 million in cash in exchange for a 51% ownership interest in One Communications. As part of the transaction, BDC was merged with and into a company within the One Communications group.  The approximate 15% interest in BDC held in the aggregate by BDC’s minority shareholders was converted into the right to receive common shares in One Communications. Following the transaction, BDC became wholly owned by One Communications, and One Communications continues to be listed on the BSX. A portion of the cash proceeds that One Communications received upon closing was used to fund a one-time special dividend to One Communications’ existing shareholders and to retire One Communications’ subordinated debt. On May 3, 2016, the Company began consolidating the results of One Communications within our financial statements in our International Telecom segment.

 

The One Communications Acquisition was accounted for as a business combination of a controlling interest in One Communications in accordance with ASC 805, Business Combinations , and the acquisition of an incremental ownership interest in BDC in accordance with ASC 810,  Consolidation .  The total purchase consideration of $41.6 million of cash was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition. 

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Consideration Transferred

 

 

 

Cash consideration - One Communications

$

34,518

 

Cash consideration - BDC

 

7,045

 

Total consideration transferred

 

41,563

 

Non-controlling interests - One Communications

 

32,909

 

Total value to allocate

$

74,472

 

Value to allocate - One Communications

 

67,427

 

Value to allocate - BDC

 

7,045

 

 

 

 

 

Purchase price allocation One Communications:

 

 

 

Cash

 

8,185

 

Accounts receivable

 

6,451

 

Other current assets

 

3,241

 

Property, plant and equipment

 

100,892

 

Identifiable intangible assets

 

10,590

 

Other long term assets

 

3,464

 

Accounts payable and accrued liabilities

 

(16,051)

 

Advance payments and deposits

 

(6,683)

 

Current debt

 

(6,429)

 

Long term debt

 

(28,929)

 

Net assets acquired

 

74,731

 

 

 

 

 

Gain on One Communications bargain purchase

$

7,304

 

 

 

 

 

Purchase price allocation BDC:

 

 

 

Carrying value of BDC non-controlling interest acquired

 

2,940

 

 

 

 

 

Excess of purchase price paid over carrying value of non-controlling interest acquired

$

4,105

 

 

The acquired property, plant and equipment is comprised of telecommunication equipment located in Bermuda and the Cayman Islands.   The property, plant and equipment was valued using the income and cost approaches.  Cash flows were discounted at an approximate 15% rate to determine fair value under the income approach.  The property, plant and equipment have useful lives ranging from 3 to 18 years and the customer relationships acquired have useful lives ranging from 9 to 12 years.  The fair value of the non-controlling interest was determined using the income approach and a discount rate of approximately 15%.  The acquired receivables consist of trade receivables incurred in the ordinary course of business.  The Company has subsequently collected the full amount of the receivables.

 

The purchase price and resulting bargain purchase gain are the result of the market conditions and competitive environment in which One Communications operates along with the Company's strategic position and resources in those same markets.  Each of the Company and One Communications realized that their combined resources could better serve customers in Bermuda.  The bargain purchase gain is included in operating income for the year ended December 31, 2016. 

 

Viya (formerly Innovative)

 

On July 1, 2016, the Company completed its acquisition of all of the membership interests of Caribbean Asset Holdings LLC (“CAH”), the holding company for the group of companies operating video services, Internet, wireless and landline services in the U.S. Virgin Islands, British Virgin Islands and through January 2017, St. Maarten

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(collectively, “Viya”), from the National Rural Utilities Cooperative Finance Corporation (“CFC”).  In April 2017, the U.S. Virgin Islands operations and the Company’s existing wireless operations rebranded their tradenames from “Innovative” and “Choice”, respectively, to “Viya.” The Company acquired the Viya operations for a contractual purchase price of $145.0 million, reduced by purchase price adjustments of $5.3 million (the “Viya Transaction”).  In connection with the transaction, the Company financed $60.0 million of the purchase price with a loan from an affiliate of CFC, the Rural Telephone Finance Cooperative (“RTFC”) on the terms and conditions of a Loan Agreement by and among RTFC, CAH and ATN VI Holdings, LLC, the parent entity of CAH and a wholly-owned subsidiary of the Company.  The Company funded the remaining purchase price with (i) $51.9 million in cash paid to CFC, (ii) $22.5 million in additional cash paid directly to fund Viya’ s pension in the fourth quarter of 2016, and (iii) $5.3 million recorded as restricted cash to satisfy Viya’ s other postretirement benefit plans.  On July 1, 2016, the Company began consolidating the results of Viya within its financial statements in its International Telecom segment.

 

The Viya Transaction was accounted as a business combination in accordance with ASC 805.  The consideration transferred to CFC of $111.9 million, and used for the purchase price allocation, differed from the contractual purchase price of $145.0 million due to certain GAAP purchase price adjustments including a reduction of $5.3 million related to working capital adjustments and the Company assuming pension and other postretirement benefit liabilities of $27.8 million as discussed above.  The Company transferred $51.9 million in cash and $60.0 million in loan proceeds to CFC for total consideration of $111.9 million that was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.  The table below represents the allocation of the consideration transferred to the net assets of Viya based on their acquisition date fair values:

 

 

 

 

 

Consideration Transferred

$

111,860

 

Non-controlling interests

 

221

 

Total value to allocate

 

112,081

 

 

 

 

 

Purchase price allocation:

 

 

 

Cash

 

4,229

 

Accounts receivable

 

6,553

 

Materials & supplies

 

6,533

 

Other current assets

 

1,927

 

Property, plant and equipment

 

108,284

 

Telecommunication licenses

 

7,623

 

Goodwill

 

20,586

 

Intangible assets

 

7,800

 

Other Assets

 

4,394

 

Accounts payable and accrued liabilities

 

(15,971)

 

Advance payments and deposits

 

(7,793)

 

Deferred tax liability

 

(2,935)

 

Pension and other postretirement benefit liabilities

 

(29,149)

 

Net assets acquired

$

112,081

 

 

The acquired property, plant and equipment is comprised of telecommunication equipment located in the U.S Virgin Islands, British Virgin Islands and St. Maarten.  The property, plant and equipment was valued using the income and cost approaches.  Cash flows were discounted between 14% and 25% based on the risk associated with the cash flows to determine fair value under the income approach.  The property, plant and equipment have useful lives ranging from 1 to 18 years and the customer relationships acquired have useful lives ranging from 7 to 13 years.  The fair value of the non-controlling interest was determined using the income approach with discount rates ranging from 15% to 25%.  The acquired receivables consist of trade receivables incurred in the ordinary course of business.  The Company has collected full amount of the receivables. The Company recorded a liability equal to the funded status of the plans in its purchase price allocation.  Discount rates between 3.6% and 3.9% were used to determine the pension and postretirement benefit obligations.

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The goodwill generated from the Viya Transaction is primarily related to value placed on the acquired employee workforces, service offerings, and capabilities of the acquired businesses as well as expected synergies from future combined operations.  The goodwill is not deductible for income tax purposes.

 

The Company acquired Viya’s pension and other postretirement benefit plans as part of the transaction.  The plans cover employees located in the U.S. Virgin Islands and consist of noncontributory defined benefit pension plans and noncontributory defined medical, dental, vision and life benefit plans.  As noted above, the contractual purchase price included an adjustment related to the funded status of Viya’s pension and other postretirement benefit plans.  As contemplated by the transaction, the Company contributed approximately $22.5 million during the fourth quarter of 2016 to Viya’s pension plans.  This payment is recorded as a cash outflow from operations in the statement of cash flows as of December 31, 2016.  At June 30, 2017, the Company held $5.1 million of restricted cash equal to the unfunded status of the other postretirement benefit plans.  The cash is restricted due to the Company’s intent to use the cash to satisfy future postretirement benefit obligations.

 

Disposition

 

On December 15, 2016, the Company transferred control of its subsidiary in Aruba to another stockholder in a nonreciprocal transfer.  Subsequent to that date, it no longer consolidated the results of the operations of the Aruba business. 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. 

 

On June 12, 2017, the Company entered into an agreement to sell the Viya cable operations located in the British Virgin Islands.  The Company is currently valuing the transaction considerations and expects it to approximate the carrying value of the assets.  The transaction is expected to close in the third quarter of 2017.

 

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

 

U.S. Telecom

 

Acquisition

 

In July 2016, the Company acquired certain telecommunications fixed assets and the associated operations located in the western United States.  The acquisition qualified as a business combination for accounting purposes.  The Company transferred $9.1 million of cash consideration in the acquisition.  The consideration transferred was allocated to $10.2 million of acquired fixed assets, $3.5  million of deferred tax liabilities, and $0.7 million to other net liabilities, and the resulting $3.1 million in goodwill which is not deductible for income tax purposes. Results of operations for the business are included in the U.S. Telecom segment and are not material to the Company’s historical results of operations. 

 

Disposition

 

On August 4, 2016, the Company entered into a stock purchase agreement to sell its integrated voice and data communications and wholesale transport businesses in New England and New York (“Sovernet”).  On March 8, 2017, the Company completed the sale 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 could be up to $4.0 million based on whether or not the

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operational milestones are achieved by December 31, 2017.  The table below identifies the assets and liabilities transferred (amounts in thousands):

 

 

 

 

 

Consideration Transferred

$

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 $1.1 million of transaction related charges pertaining to legal, accounting and consulting services associated with the transaction, of which $ 0.5 million were incurred during the six months ended June 30, 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.

 

Prior to the Sovernet Transaction, in the second quarter of 2016, the Company recorded an impairment loss of $11.1 million on assets related to Sovernet.  The impairment consisted of a $3.6 million impairment of property, plant and equipment and $7.5 million impairment of goodwill.

 

Pro forma Results

 

The following table reflects unaudited pro forma operating results of the Company for the three and six months ended June 30, 2016 as if the One Communications and Viya Transactions occurred on January 1, 2016.  The pro forma amounts adjust One Communications’ and Viya’s results to reflect the depreciation and amortization that would have been recorded assuming the fair value adjustments to property, plant and equipment and intangible assets had been applied from January 1, 2016.  Also, the pro forma results were adjusted to reflect changes to the acquired entities’ capital structure related to the transaction.  One Communications’ results reflect the retirement of $24.7 million of debt.  Viya’s results reflect the retirement of $185.8 million of debt and the addition of $60 million of purchase price debt.  Finally, the Company’s results were adjusted to reflect the Company’s incremental ownership in BDC.  The pro forma results were not adjusted for the Vibrant Energy Acquisition because that transaction was not material to the Company’s historical results. 

 

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The pro forma results for the three and six months ended June 30, 2016 include $1.1 million and $5.4 million, respectively, of impairment charges recorded by One Communications and Viya prior to the Company’s acquisition of the business.  Amounts are presented in thousands, except per share data.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

(unaudited)

 

2016

 

2016

 

 

 

As

 

Pro-

 

As

 

Pro-

 

 

 

Reported

 

Forma

 

Reported

 

Forma

 

Revenue

 

$

99,991

 

$

132,444

 

$

189,676

 

$

268,301

 

Net income attributable to ATN International, Inc. Stockholders

 

 

(3,086)

 

 

(463)

 

 

3,034

 

 

5,596

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

(0.19)

 

 

(0.03)

 

 

0.19

 

 

0.35

 

Diluted

 

 

(0.19)

 

 

(0.03)

 

 

0.19

 

 

0.34

 

 

The unaudited pro forma data is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the acquisitions had been consummated on these dates or of future operating results of the combined company following the transactions.  

 

Renewable Energy

 

Vibrant Energy

 

On April 7, 2016, the Company completed its acquisition of a solar power development portfolio in India (the “Vibrant Energy Acquisition”). The business operates under the name Vibrant Energy.  The Company also retained several employees of the seller in the UK and India who are employed by the Company to oversee the development, construction and operation of the India solar projects. The projects to be developed initially are located in the states of Andhra Pradesh and Telangana and are based on a commercial and industrial business model, similar to the Company’s existing renewable energy operations in the United States.  As of April 7, 2016, the Company began consolidating the results of Vibrant Energy in its financial statements within its Renewable Energy segment.

 

The Vibrant Energy Acquisition was accounted for as a business combination in accordance with ASC 805.  The total purchase consideration of $6.2 million was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.  The table below represents the allocation of the consideration transferred to the net assets of Vibrant Energy based on their acquisition date fair values (in thousands):

 

 

 

 

Consideration Transferred

$

6,193

 

 

 

 

 

 

Purchase price allocation:

 

 

Cash

 

136

Prepayments and other assets

 

636

Property, plant and equipment

 

7,321

Goodwill

 

3,279

Accounts payable and accrued liabilities

 

(5,179)

Net assets acquired

$

6,193

 

  The consideration transferred includes $4.9 million paid as of June 30, 2017 and $1.3 million payable at future dates, which is contingent upon the passage of time and achievement of initial production milestones that are considered probable.  The acquired property, plant and equipment is comprised of solar equipment and the accounts payable and accrued liabilities consists mainly of amounts payable for certain asset purchases.  The fair value of the property, plant, and equipment was based on recent acquisition costs for the assets, given their recent purchase dates from third parties. 

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The goodwill is not deductible for income tax purposes and primarily relates to the assembled workforce of the business acquired.

 

5. 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.

 

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.

 

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Assets and liabilities of the Company measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 are summarized as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2017

 

 

 

 

 

 

 

 

    

 

 

    

Significant Other

    

 

 

 

 

 

 

 

 

Quoted Prices in

 

Observable

 

Unobservable

 

 

 

 

 

 

Active Markets

 

Inputs

 

Inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

(Level 3)

 

Total

 

Certificates of deposit

 

$

 —

 

$

391

 

$

 —

 

$

391

 

Money market funds

 

$

3,563

 

$

 —

 

$

 —

 

$

3,563

 

Short term investments

 

$

262

 

$

7,493

 

$

 —

 

$

7,755

 

Commercial Paper

 

$

 —

 

$

49,957

 

$

 —

 

$

49,957

 

Contingent Consideration

 

$

 —

 

$

 —

 

$

2,000

 

$

2,000

 

Total assets measured at fair value

 

$

3,825

 

$

57,841

 

$

2,000

 

$

63,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

    

 

 

    

Significant Other

    

 

 

 

 

 

Quoted Prices in

 

Observable

 

 

 

 

 

 

Active Markets

 

Inputs

 

 

 

 

Description

 

(Level 1)

 

(Level 2)

 

Total

 

Certificates of deposit

 

$

 —

 

$

391

 

$

391

 

Money market funds

 

$

29,027

 

$

 —

 

$

29,027

 

Short term investments

 

$

1,751

 

$

7,486

 

$

9,237

 

Commercial Paper

 

$

 —

 

$

29,981

 

$

29,981

 

Total assets measured at fair value

 

$

30,778

 

$

37,858

 

$

68,636

 

 

Certificate of Deposit

 

As of June 30, 2017 and December 31, 2016, 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 June 30, 2017 and December 31, 2016, 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 June 30, 2017 and December 31, 2016, this asset class consisted of short term foreign and U.S. corporate bonds and equity securities. Corporate bonds 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.

 

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 long-term debt is estimated using Level 2 inputs.  At June 30, 2017, the fair value of long-term debt, including the current portion, was $ 163.2 million and its book value was $ 159.7 million.  At December 31, 2016, the fair value of long-term debt, including the current portion, was $15 9.9 million and its book value was $ 156.8 million.

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The Company calculates the fair value of the Sovernet Transactions contingent consideration using Level 3 inputs.

6. 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 June 30, 2017, the Company was in compliance with all of the financial covenants of the Credit Facility.

 

As of June 30, 2017, the Company had no borrowings under the Credit Facility and approximately $1.2 million of outstanding letters of credit.

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 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.

 

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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 beginning on March 31, 2017, 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 June 30, 2017, 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 June 30, 2017, $2.4 million of the Original Ahana Debt, $64.6 million of the Series A Notes and Series B Notes remained outstanding, and $2.8 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.  As of March 31, 2017, $28.9 million of the One Communications Debt was outstanding. 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 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 covenants are tested annually commencing the fiscal year ending December 31, 2017.

 

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 equal to at least 30% of the notional amount and term corresponding to the maturity of the One Communications Debt. 

 

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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 June 30, 2017, $36.6 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 its subsidiaries entered into a $60.0 million loan agreement (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 cash to annual operating cash flow.  The covenant is tested on an annual basis commencing in 2017.  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 the Company.

 

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 June 30, 2017, $60.0 million of the Viya Debt remained outstanding and $0.8 million of the rate lock fee was unamortized.

 

7. 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 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. In connection with the Mobility Funds, the Company has approximately $1.2 million in letters of credit outstanding as of June 30, 2017, to the Universal Service Administrative Company (“USAC”) to secure these obligations. If the Company fails to comply with any of the terms and conditions upon which the Mobility Funds were granted, or if it loses eligibility for the Mobility Funds, USAC will be entitled to draw the entire amount of the letter of credit applicable to the affected project plus penalties.

 

The Mobility Funds projects and their results are included within our U.S. Telecom segment. As of June 30, 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 $7. million has been recorded to date, $ 5.9  million is recorded within current liabilities, and the remaining $ 0.5  million is recorded within long term liabilities in the Company’s consolidated balance sheet as of June

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30, 2017. 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.

 

8. EQUITY

 

Stockholders’ equity was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 

 

 

 

2017

 

2016

 

 

 

ATN

 

Non-Controlling

 

 

 

 

ATN

 

Non-Controlling

 

Total

 

 

    

International, Inc.

    

Interests

    

Total Equity

    

International, Inc.

    

Interests

    

Equity

 

Equity, beginning of period

 

$

677,055

 

$

132,114

 

$

809,169

 

$

680,299

 

$

81,425

 

$

761,724

 

Stock-based compensation

 

 

3,764

 

 

 —

 

 

3,764

 

 

3,626

 

 

 —

 

 

3,626