Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis of our financial condition and results of operations that follows are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our condensed consolidated financial statements herein and the accompanying notes thereto, and our Annual Report on Form 10-K for the year ended December 31, 2015 (our “2015 Annual Report on Form 10-K”), and in particular, the information set forth therein under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Overview
We are a holding company that, through our 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 the Caribbean, respectively. We were incorporated in Delaware in 1987 and began trading publicly in 1991. Since that time, we have engaged in strategic acquisitions and investments to grow our operations. We continue to actively evaluate additional domestic and international acquisition, divestiture, and investment opportunities and other strategic transactions in the telecommunications, energy-related and other industries that meet our return-on-investment and other acquisition criteria. For a discussion of our investment strategy and risks involved, see “
Risk Factors—We are actively evaluating investment, acquisition and other strategic opportunities, which may affect our long-term growth prospects
.” in our 2015 Annual Report on Form 10-K.
We offer the following principal services:
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Wireless.
In the United States, we offer 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. We also offer wireless voice and data services to retail customers in Bermuda, Guyana, and in other smaller markets in the Caribbean and the United States
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Wireline.
Our wireline services include local telephone, data, and cable television services in Bermuda, Guyana, the U.S. Virgin Islands, and in other smaller markets in the Caribbean and the United States. We are the exclusive licensed provider of domestic wireline local and long-distance telephone services in Guyana and international voice and data communications into and out of Guyana. In addition, we offer wholesale long-distance voice services to telecommunications carriers. We also offer 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.
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·
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Renewable Energy.
In the United States, we provide distributed generation solar power to corporate, utility and municipal customers in Massachusetts, California and New Jersey. Beginning in April 2016, we 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 our principal subsidiaries, the segments in which we report our revenue and the markets we served as of September 30, 2016:
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Services
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Segment
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Markets
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Tradenames
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Wireless
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U.S. Telecom
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United States (rural markets)
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Commnet, Choice
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International Telecom
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Aruba, Bermuda, Guyana, U.S. Virgin Islands
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Mio, CellOne, Choice, Innovative
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Wireline
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U.S. Telecom
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United States (New England and New York State)
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Sovernet, ION, Essextel
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International Telecom
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Guyana, Bermuda, Cayman Islands, U.S. Virgin Islands, British Virgin Islands, St. Maarten
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GTT, KeyTech, Bermuda CableVision, Logic, Innovative
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Renewable
Energy
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Renewable Energy
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United States (Massachusetts, California, and New Jersey), India
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Ahana Renewables, Vibrant Energy
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We provide management, technical, financial, regulatory, and marketing services to our subsidiaries and typically receive a management fee equal to a percentage of their respective revenue. Management fees from our subsidiaries are eliminated in consolidation.
To be consistent with how management allocates resources and assesses the performance of our business operations in 2016, we updated our reportable operating segments to consist of the following: i) U.S. Telecom, consisting of our former U.S. Wireless and U.S. Wireline segments, ii) International Telecom, consisting of our former Island Wireless and International Integrated Telephony segments and the results of our KeyTech and Innovative Acquisitions as discussed below, and iii) Renewable Energy, consisting of our former Renewable Energy segment and the results of our Vibrant Energy Acquisition. The prior period segment information has been recast to conform to the current year’s segment presentation.
Acquisitions
During the nine months ended September 30, 2016, we completed acquisitions within our International Telecom, Renewable Energy and U.S. Telecom segments (the “2016 Acquisitions”).
International Telecom
During the nine months ended September 30, 2016, we completed our acquisitions of a controlling interest in KeyTech Limited as well as all of the membership interests of Caribbean Asset Holdings LLC, the holding company for the Innovative group of companies (collectively, the “2016 International Telecom Acquisitions”).
KeyTech Limited
On May 3, 2016, we completed our acquisition (the “KeyTech Acquisition”) of a controlling interest in KeyTech Limited (“KeyTech”), a publicly held Bermuda company listed on the Bermuda Stock Exchange (“BSX”) that provides broadband and cable television services and other telecommunications services to residential and enterprise customers under the “Logic” name in Bermuda and the Cayman Islands. KeyTech also owned a minority interest of approximately 43% in the Company’s consolidated subsidiary, Bermuda Digital Communications Ltd. (“BDC”), which provides wireless services in Bermuda under the “CellOne” name. 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 KeyTech. As part of the transaction, BDC was merged with and into a company within the KeyTech group and 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 KeyTech. Following the transaction, BDC became wholly owned by KeyTech, and KeyTech continues to be listed on the BSX. A portion of the cash proceeds that KeyTech received
upon closing was used to fund a one-time special dividend to KeyTech’ s existing shareholders and to retire KeyTech’s subordinated debt. On May 3, 2016, we began consolidating the results of KeyTech within our financial statements in our International Telecom segment.
The KeyTech Acquisition was accounted for as a business combination of a controlling interest in KeyTech in accordance with ASC 805 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.
Innovative
On July 1, 2016,we completed its acquisition of all of the membership interests of Caribbean Asset Holdings LLC, the holding company for the Innovative group of companies operating cable television, Internet, wireless and landline services in the U.S. Virgin Islands, British Virgin Islands and St. Maarten (“Innovative”), from the National Rural Utilities Cooperative Finance Corporation (“CFC”). We acquired the Innovative operations for a contractual purchase price of $145 million, reduced by purchase price adjustments of $4.9 million (the “Innovative Transaction”). In connection with the transaction, we financed $60 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. We funded $50.9 million of the purchase price in cash and will pay $27.8 million to fund Innovative’s pension and other postretirement benefit obligations in the fourth quarter of 2016. At September 30, 2016 approximately $1.4 million of purchase price was accrued to settle working capital adjustments. Following the purchase, our current operations in the U.S. Virgin Islands under the “Choice” name will be combined with Innovative to deliver residential and business subscribers a full range of telecommunications and media services. On July 1, 2016, we began consolidating the results of Innovative within our financial statements in our International Telecom segment.
Following the Innovative Acquisition, our current operations in the U.S. Virgin Islands under the “Choice” name will be combined with Innovative to deliver residential and business subscribers a full range of telecommunications and media services. Beginning July 1, 2016, the results of the Innovative Acquisition were included in our International Telecom segment.
The Innovative Transaction was accounted as a business combination in accordance with ASC 805. The consideration transferred of $112.3 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 related primarily to changes in working capital of $4.9 million and our agreeing to subsequently settle assumed pension
and other postretirement benefit
liabilities of $27.8 million. As of September 30, 2016, we transferred consideration of $112.3 million to the seller that was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition
Renewable Energy
Vibrant Energy
On April 7, 2016, we completed our acquisition of a solar power development portfolio in India from Armstrong Energy Global Limited (“Armstrong”), a well-known developer, builder, and owner of solar farms (the “Vibrant Energy Acquisition”). The business operates under the name Vibrant Energy. The Company also retained several Armstrong employees in the United Kingdom 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 our 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,
Business Combinations
(“ASC 805”). The total purchase consideration of $6.2 million cash was allocated to the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition.
U.S. Telecom
In July 2016, we acquired certain telecommunications fixed assets and the associated operations, in the western United States. The acquisition qualified as a business combination for accounting purposes. We transferred $9.1 million of cash consideration in the acquisition. The consideration transferred was preliminarily allocated to approximately $10.2 million of acquired fixed assets and $1.7 million to other net liabilities, resulting in goodwill of $0.6 million. Results of operations for the business are included in the U.S. Telecom segment and are not material to our historical results of operations.
Dispositions
Pending- U.S. Wireline Business
On August 8, 2016, we announced that we entered into an agreement to sell our U.S. Wireline business in the Northeast, including our integrated voice and data operations in New England and our wholesale transport operations in New York to an affiliate of Oak Hill Capital Partners. Following the completion of the sale, we will retain our wholesale long-distance business in our “U.S. Telecom” segment. The transaction is expected to close in the first quarter 2017, following the satisfaction of customary regulatory approvals.
Completed- Turks and Caicos Operations
During March 2015, we sold certain assets and liabilities of our Turks and Caicos business in our International Telecom segment. As a result, we recorded a loss of approximately $19.9 million arising from the deconsolidation of non-controlling interests of $20.0 million and a gain of $0.1 million arising from an excess of sales proceeds over the carrying value of net assets disposed of. The net loss on disposition is included within other income (expense) and does not relate to a strategic shift in our operations. As a result, the subsidiary’s historical results and financial position are presented within continuing operations.
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 two new funds, including the Phase I Mobility Fund (“Mobility Fund”), a one-time award meant to support wireless coverage in underserved geographic areas in the United States. We have received FCC final approvals for $24.1 million of Mobility Fund support to our 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, we committed to comply with certain additional FCC construction and other requirements. A portion of these funds will be 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 our application for the Mobility Funds, we have issued approximately $10.6 million in letters of credit to the Universal Service Administrative Company (“USAC”) to secure these obligations. If we fail to comply with any of the terms and conditions upon which the Mobility Funds were granted, or if we lose 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 and may disqualify us from the receipt of additional Mobility Fund support.
The results of our Mobility Fund projects are included within our U.S. Telecom segment. As of September 30, 2016, we had received approximately $9.3 million in Mobility Funds. Of these funds, $3.1 million was recorded as an offset to operating expenses, $5.8 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 and the remaining $0.4 million of future operating costs is recorded within current liabilities in our consolidated balance sheet as of September
30, 2016. The balance sheet presentation is based on the timing of the expected usage of the funds which will reduce future operations expenses.
Results of Operations
Three Months Ended September 30, 2016 and 2015
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Three Months Ended
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Amount of
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Percent
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September 30,
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Increase
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Increase
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2016
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2015
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(Decrease)
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(Decrease)
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REVENUE:
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Wireless
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$
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61,151
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$
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67,521
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$
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(6,370)
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(9.4)
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%
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Wireline
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66,129
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21,760
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44,369
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203.9
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Equipment and Other
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5,731
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2,449
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3,282
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134.0
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Renewable Energy
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5,784
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5,052
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732
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14.5
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Total revenue
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138,795
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96,782
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42,013
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43.4
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OPERATING EXPENSES
(
excluding depreciation and amortization unless otherwise indicated
):
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Termination and access fees
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36,728
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20,275
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16,453
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81.1
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Engineering and operations
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16,282
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11,206
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5,076
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45.3
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Sales, marketing and customer services
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8,954
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6,406
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2,548
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39.8
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Equipment expense
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3,146
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3,591
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(445)
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(12.4)
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General and administrative
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27,242
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15,654
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11,588
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74.0
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Transaction-related charges
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2,091
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2,536
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(445)
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(17.5)
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Depreciation and amortization
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21,866
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14,590
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7,276
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49.9
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Impairment of long-lived assets
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349
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—
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349
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100.0
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Loss on disposition of long-lived assets
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56
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—
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56
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100.0
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Total operating expenses
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116,714
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74,258
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42,456
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57.2
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Income from operations
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22,081
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22,524
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(443)
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(2.0)
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OTHER INCOME (EXPENSE):
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Interest income
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236
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70
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166
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237.1
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Interest expense
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(1,787)
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(865)
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(922)
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106.6
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Other income, net
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766
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53
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713
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1,345.3
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Other income (expense), net
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(785)
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(742)
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(43)
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5.8
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
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21,296
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21,782
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(486)
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(2.2)
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Income tax expense
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9,602
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10,134
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(532)
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(5.2)
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NET INCOME
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11,694
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11,648
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46
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0.4
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Net income attributable to non-controlling interests, net of tax:
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(4,523)
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(5,072)
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549
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(10.8)
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NET INCOME ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS
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$
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7,171
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$
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6,576
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$
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595
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9.0
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%
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Wireless revenue.
Our wireless revenue consists of wholesale revenue generated within our U.S. Telecom segment and retail revenue generated within both our U.S. Telecom and International Telecom segments.
Wholesale
Wholesale revenue from our U.S. Telecom segment is generated from providing mobile voice or data services to the customers of other wireless carriers, the provision of network switching services and certain transport services using our wireless networks. Wholesale revenue is primarily driven by the number of sites and base stations we operate, the amount of voice and data traffic from the subscribers of other carriers that each of these sites generates and the rates we are paid from our carrier customers for carrying that traffic.
The most significant competitive factor we face in our U.S. Telecom’s wholesale wireless business is the extent to which our carrier customers choose to roam on our networks or elect to build or acquire their own infrastructure in a market, reducing or eliminating their need for our services in those markets. Occasionally, we have entered into buildout projects with existing carrier customers to help the customer accelerate the buildout of a given area. Pursuant to these arrangements, we agree to incur the cost of building and operating a network in a newly designated area meeting specified conditions. In exchange, the carrier agrees to lease us spectrum in that area and enter into a contract with specific pricing and terms. These arrangements typically include a purchase right in favor of the carrier to purchase that portion of the network for a predetermined price, depending on when the option to purchase is exercised. We currently have one buildout arrangement of approximately 100 built cell sites, which provides the carrier with an option to purchase such sites exercisable beginning no earlier than 2018. At this time, we cannot predict whether the purchase option will be exercised.
Our U.S. Telecom’s wholesale revenue decreased by $8.9 million, or 20.6%, to $34.3 million from $43.2 million for the three months ended September 30, 2016 and 2015, respectively. This decrease was the result of a reduction in wholesale roaming rates partially offset by growth in data traffic volumes due to capacity and technology upgrades to our network and the increase in the number of base stations to 926 from 861 as of September 30, 2016 and 2015, respectively.
We expect revenues to decline and margins to contract as a result of the necessary steps we have taken to significantly reduce rates in exchange for longer‑term contracts with carriers. While we expect that wholesale data volumes will continue to increase during 2016 and into 2017 due to increased demand combined with our increased capacity, we expect that our reduced rates will more than offset any revenue increase resulting from increased data volumes. We believe that this new model has much lower risk in that the extended term and reduced pricing create a potential for a long‑lived shared infrastructure solution with carriers
Retail
Retail revenues are generated from providing mobile voice or data services to our subscribers in both our U.S. Telecom and International Telecom segments. Retail revenues also include roaming revenues generated by other carriers’ customers roaming into our retail markets.
Retail revenue accounted for the remaining $26.9 million and $24.3 million of our wireless revenue for the three months ended September 30, 2016 and 2015, respectively, an increase of $2.6 million, or 10.7%. Of this increase, $0.5 million was attributable to our 2016 International Telecom Acquisitions with the remaining increase being attributable to our U.S. Telecom’s retail business. During late 2015, we modified our definition of an active subscriber which resulted in a decrease in wireless subscribers. This change was retroactively applied to the reported subscribers for September 30, 2015. Our wireless subscribers increased slightly to 353,000 from 352,000 as of September 30, 2016 and 2015, respectively.
We expect retail revenues to remain relatively unchanged in future periods. Growth in revenue from anticipated subscriber growth may be offset by a decline in roaming revenues because many visitors’ home market carriers continue to charge their customers unusually high rates for roaming services, resulting in lowered overall roaming traffic in these markets. Roaming revenues in these markets are also subject to seasonality and can fluctuate between quarters.
Wireline revenue.
Wireline revenue is generated by our International Telecom and U.S. Telecom segments. Within our International Telecom segment, revenue is generated in Bermuda and the Caribbean (including the U.S. Virgin Islands) and includes internet, voice, international long-distance and media service revenues. In our U.S. Telecom segment, revenue is generated by our integrated voice and data operations in New England, our wholesale transport operations in New York and our wholesale long-distance voice services to telecommunications carriers. Wireline revenue includes basic service fees, measured service revenue, and internet access fees, as well as installation charges for new lines, monthly line rental charges, long-distance or toll charges, and maintenance.
Wireline revenue increased by $44.3 million, or 203.2%, to $66.1 million for the three months ended September 30, 2016 from $21.8 million for the three months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which generated $43.7 million of wireline revenue during the three months ended September 30, 2016. The remaining increase in wireline revenue was generated by our integrated voice and data operations as well as our wholesale transport operations within our U.S. Telecom segment as a result of increased traffic volumes.
On August 8, 2016, we announced that we had entered into an agreement to sell our U.S. Wireline business in the Northeast, including our integrated voice and data operations in New England and our wholesale transport operations in New York, which generate a combined $21 million in revenue per year, to an affiliate of Oak Hill Capital Partners. Following the completion of the sale, we will retain our wholesale long-distance business in our “U.S. Telecom” segment. The transaction is expected to close in the first quarter of 2017, following the satisfaction of customary regulatory approvals. We expect that wireline revenue within the U.S. Telecom segment will remain relatively unchanged until the close of the transaction and that our remaining U.S. Telecom wireline revenue will be immaterial to the segment.
Within our International Telecom segment, we anticipate that wireline revenue from our international long‑distance business in Guyana will continue to decrease, principally as a result of the loss of market share, should we cease to be the exclusive provider of domestic fixed and international long‑distance service in Guyana, whether by reason of the Government of Guyana implementing recently-passed legislation or new regulations or lack of enforcement of our exclusive rights. While the loss of our exclusive rights will likely cause an immediate reduction in
our wireline revenue, over the longer term, such declines may be offset by increased revenue from data services to consumers and enterprises in Guyana, an increase in regulated local calling rates in Guyana, an increase in wholesale transport services and large enterprise and agency sales in the United States. We anticipate that wireline revenue within our USVI business will remain fairly consistent in future periods.
We currently cannot predict when or if the Government of Guyana will take any action to implement such legislation or any other action that would otherwise affect our exclusive rights in Guyana. See Note 13 to the Unaudited Condensed Consolidated Financial Statements included in this Report.
Renewable Energy revenue.
Renewable energy revenue represents revenue from the sale of electricity through long-term (10 to 25 years) power purchase agreements (“PPAs”) as well as the sale of solar renewable energy credits (“SRECs”).
Renewable energy revenue increased $0.7 million, or 13.7%, to $5.8 million from $5.1 million for the three months ended September 30, 2016 and 2015, respectively. This increase was primarily the result of increased production and certain customer contract price escalations.
Our PPAs, which are typically priced at or below local retail electricity rates, allow our customers to secure electricity at predictable and stable prices over the duration of their long-term contract. As such, our PPAs provide us with high-quality contracted cash flows, which will continue over their average remaining life. For these reasons, we expect that Renewable Energy revenue from our current portfolio of commercial solar projects will remain fairly consistent in future periods.
With the closing of our Vibrant Energy Acquisition, we are currently developing projects in India to provide distributed generation solar power to corporate and utility customers and expect to begin generating revenue during the fourth quarter of 2016 or first quarter of 2017, with a target of development of at least 250 MW in solar energy projects through the end of 2018. When fully developed, we expect that margins from this portfolio of projects will be in line with our current domestic solar operations.
Equipment and other revenue.
Equipment and other revenue represents wireless equipment sales, primarily handsets, to retail telecommunications customers within both our U.S. Telecom and International Telecom
segments. Equipment and other revenue also includes equipment rental income within our International Telecom segment and consulting fees within our Renewable Energy segment.
Equipment and other revenue increased by $3.3 million, or 137.5% to $5.7 million for the three months ended September 30, 2016 from $2.4 million for the three months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which generated $2.9 million of equipment and other revenue during the three months ended September 30, 2016. Other markets within our International Telecom segment increased their equipment and other revenues by $0.3 million.
We believe that equipment and other revenue could continue to increase at a slower pace as a result of gross subscriber additions, continued growth in smartphone penetration and continued customer incentives such as device subsidies.
Termination and access fee.
Termination and access fee expenses are charges that we pay for voice and data transport circuits (in particular, the circuits between our wireless sites and our switches), internet capacity, other access fees we pay to terminate our calls, customer bad debt expense, telecommunication spectrum fees and direct costs associated with our Renewable Energy segment.
Termination and access fees increased by $16.4 million, or 80.8%, to $36.7 million for the three months ended September 30, 2016 from $20.3 million for the three months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which incurred $16.6 million of termination and access fees during the three months ended September 30, 2016. Our U.S. telecom segment incurred an increase in termination and access fees of $0.4 million as a result of increased traffic volumes within our wholesale long-distance voice operations. This increase was partially offset by decreases within the Guyana market of our other International Telecom segment’s operations of $0.6 million.
We expect that these expenses will increase upon the completion of the Vibrant Energy construction projects but will remain fairly consistent as a percentage of revenues in future periods.
Engineering and operations expenses.
Engineering and operations expenses include the expenses associated with developing, operating and supporting our expanding telecommunications networks and renewable energy operations, including the salaries and benefits paid to employees directly involved in the development and operation of our networks and renewable energy operations.
Engineering and operations expenses increased by $5.1 million, or 45.5%, to $16.3 million from $11.2 million for the three months ended September 30, 2016 and 2015, respectively. The increase was primarily the result of our 2016 International Telecom Acquisitions which incurred $7.2 million of engineering and operations expenses during the three months ended September 30, 2016. This increase was partially offset by a $1.2 million reduction in our Guyana operations and a $1.1 million reduction in our U.S. Telecom segment which both experienced operating efficiencies during the quarter.
In the near term, we expect to incur additional engineering and operations expenses necessary to continue the construction of our Vibrant Energy projects and complete technology upgrades released to our acquired International Telecom businesses. However, upon completion of the construction, we expect that engineering and operations will remain fairly consistent as a percentage of revenues.
Sales and marketing expenses.
Sales and marketing expenses include salaries and benefits we pay to sales personnel, customer service expenses, sales commissions and the costs associated with the development and implementation of our promotion and marketing campaigns.
Sales and marketing expenses increased by $2.6 million, or 40.6%, to $9.0 million from $6.4 million for the three months ended September 30, 2016 and 2015, respectively. Our 2016 International Telecom Acquisitions incurred $3.1 million of expenses during the three months ended September 30, 2016. Partially offsetting this increase was a $0.5
million decrease in our Guyana operations which incurred higher than usual sales and marketing expenses during 2015 in connection with product rebranding initiatives.
We expect that sales, marketing and customer service expenses remain fairly consistent as a percentage of revenues in future periods.
Equipment expenses.
Equipment expenses include the costs of our handset and customer resale equipment in our retail businesses.
Equipment expenses decreased by $0.5 million, or 13.9%, to $3.1 million for the three months ended September 30, 2016 from $3.6 million for the three months ended September 30, 2015. The decrease was primarily the result of a decrease in handset sales within the retail operations of our U.S. Telecom segment and in data modem sales within our International Telecom segment.
We believe that equipment expenses could continue to increase as a result of the increase in demand for smartphones and modems by our subscribers partially driven by customer incentives such as device subsidies.
General and administrative expenses.
General and administrative expenses include salaries, benefits and related costs for general corporate functions including executive management, finance and administration, legal and regulatory, facilities, information technology and human resources. General and administrative expenses also include internal costs associated with our performance of due-diligence in connection with acquisition activities.
General and administrative expenses increased by $11.5 million, or 73.2%, to $27.2 million for the three months ended September 30, 2016 from $15.7 million for the three months ended September 30, 2015. The 2016 International Telecom Acquisitions contributed $10.8 million of this increase. Of the remaining $0.7 million increase, $1.2 million was incurred within our corporate overhead to help support our recent acquisitions and $0.6 million was incurred within our Renewable Energy segment in connection with our recent Vibrant Energy Acquisition. Partially offsetting these increases was a $1.2 million reduction in general and administrative expenses within the Guyana market of our International Telecom segment as a result of certain prior year legal charges and current year operating efficiencies.
We expect that these general and administrative expenses will remain fairly consistent as a percentage of revenues in future periods. However, we also expect to incur additional general and administrative expenses necessary to continue the construction of our Vibrant Energy projects that will disproportionately affect our Renewable Energy results until such projects start to become operational.
Transaction-related charges.
Transaction-related charges include the external costs, such as legal, tax, accounting and consulting fees directly associated with acquisition and disposition-related activities, which are expensed as incurred. Transaction-related charges do not include internal costs, such as employee salary and travel-related expenses, incurred in connection with acquisitions or dispositions or any integration-related costs.
We incurred $2.1 million and $2.5 million of transaction‑related charges during the three months ended September 30, 2016 and 2015, respectively. A majority of the 2016 expenses was related to the 2016 International Telecom acquisitions and our pending sale of our U.S. Wireline business.
We expect that transaction- related expenses will continue throughout the remainder of 2016 related to our pending U.S. Wireline business, albeit at a substantially reduced amount. Thereafter, transaction related expenses will continue to be incurred from time to time as we continue to explore additional acquisition and investment opportunities.
Depreciation and amortization expenses.
Depreciation and amortization expenses represent the depreciation and amortization charges we record on our property and equipment and on certain intangible assets.
Depreciation and amortization expenses increased by $7.3 million, or 50.0%, to $21.9 million for the three months ended September 30, 2016 from $14.6 million for the three months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which recognized $7.0 million of depreciation and
amortization expense during the three months ended September 30, 2016 as well as increases of $0.5 million and $0.3 million of expense within our U.S. Telecom segment and corporate overhead, respectively, as a result of our expanding telecom networks and an increase in corporate overhead assets, respectively. These increases were partially offset by a decrease of $0.4 million within our other businesses within our International Telecom segment.
We expect depreciation expense to increase as we acquire more tangible assets to expand or upgrade our telecommunications networks, build or acquire solar power generating facilities and amortize intangible assets recorded in connection with acquisitions.
Impairment of long-lived assets
. During the three months ended September 30, 2016, we assessed the value of a tradename used within our International Telecom segment. As a result of that assessment, we concluded that the book value such tradename exceeded its fair value and as a result, we recorded a non-cash impairment charge of $0.3 million during the three months ended September 30, 2016.
Loss on disposition of long-lived assets.
During the three months ended September 30, 2016, we disposed of certain assets within our International Telecom segment and recognized a loss on such disposition of $0.1 million.
Interest income.
Interest income represents interest earned on our cash, cash equivalents, restricted cash and short term investment balances.
Interest income increased to $0.2 million from $0.1 million for the three months ended September 30, 2016 and 2015, respectively. We expect that interest income may decline in future periods as we deploy cash balances for acquisitions and the development of our solar portfolio in India.
Interest expense.
We incur interest expense on the financed portion of the Innovative Acquisition purchase price, the term loans assumed in the KeyTech and Ahana Acquisitions, commitment fees, letter of credit fees, amortization of debt issuance costs and interest incurred on our outstanding credit facilities.
Interest expense increased by $0.9 million to $1.8 million from $0.9 million for the three months ended September 30, 2016 and 2015, respectively. The increase reflects the interest on the debt assumed with the KeyTech Acquisition and interest incurred on debt used to finance a portion of the Innovative Acquisition.
We expect that interest expense will decline in future periods as our amortizing term loans are repaid.
Other income (expense), net.
Other income (expense), net represents miscellaneous non-operational income we earned or expenses we incurred. Other income (expense), net was $0.8 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively. The majority of other income (expense), net for the three months ended September 30, 2016 is the result of a gain on a foreign currency transaction.
Income taxes.
Our effective tax rates for the three months ended September 30, 2016 and 2015 were 45.1% and 46.5%, respectively. The effective tax rate for the three months ended September 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) the mix of income generated among the jurisdictions in which we operate, and (iii) $1.6 million provision (net) to record multiple discrete items. The effective tax rate for the three months ended September 30, 2015 was impacted by the following items: (i) the $19.9 million loss on deconsolidation within our International Telecom business that had no tax benefit and (ii) the mix of income generated among the jurisdictions in which we operate. Our 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. Our consolidated tax rate will continue to be impacted by the mix of income generated among the jurisdictions in which we operate.
Net income attributable to non-controlling interests.
Net income attributable to non-controlling interests reflected an allocation of $4.5 million and $5.1 million of income generated by our less than wholly-owned subsidiaries for the three months ended September 30, 2016 and 2015, respectively.
Net income attributable to ATN International, Inc. stockholders.
Net income attributable to ATN International, Inc. stockholders increased to $7.2 million from $6.6 million for the three months ended September 30, 2016 and 2015, respectively.
On a per share basis, net income increased to $0.44 per diluted share from $0.41 per diluted share for the three months ended September 30, 2016 and 2015, respectively.
Results of Operations
Nine Months Ended September 30, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
Amount of
|
|
Percent
|
|
|
|
September 30,
|
|
Increase
|
|
Increase
|
|
|
|
2016
|
|
2015
|
|
(Decrease)
|
|
(Decrease)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
|
|
|
|
|
Wireless
|
|
$
|
177,300
|
|
$
|
185,272
|
|
$
|
(7,972)
|
|
(4.3)
|
%
|
Wireline
|
|
|
122,190
|
|
|
63,520
|
|
|
58,670
|
|
92.4
|
|
Equipment and Other
|
|
|
12,046
|
|
|
8,030
|
|
|
4,016
|
|
50.0
|
|
Renewable Energy
|
|
|
16,935
|
|
|
15,631
|
|
|
1,304
|
|
8.3
|
|
Total revenue
|
|
$
|
328,471
|
|
$
|
272,453
|
|
$
|
56,018
|
|
20.6
|
%
|
OPERATING EXPENSES
(
excluding depreciation and amortization unless otherwise indicated
):
|
|
|
|
|
|
|
|
|
|
|
|
|
Termination and access fees
|
|
|
80,479
|
|
|
57,755
|
|
|
22,724
|
|
39.3
|
|
Engineering and operations
|
|
|
36,270
|
|
|
28,591
|
|
|
7,679
|
|
26.9
|
|
Sales and marketing
|
|
|
22,387
|
|
|
17,634
|
|
|
4,753
|
|
27.0
|
|
Equipment expense
|
|
|
10,498
|
|
|
10,228
|
|
|
270
|
|
2.6
|
|
General and administrative
|
|
|
63,949
|
|
|
43,992
|
|
|
19,957
|
|
45.4
|
|
Transaction-related charges
|
|
|
16,156
|
|
|
2,852
|
|
|
13,304
|
|
466.5
|
|
Restructuring charges
|
|
|
1,785
|
|
|
—
|
|
|
1,785
|
|
100.0
|
|
Depreciation and amortization
|
|
|
52,913
|
|
|
43,813
|
|
|
9,100
|
|
20.8
|
|
Impairment of long-lived assets
|
|
|
11,425
|
|
|
—
|
|
|
11,425
|
|
100.0
|
|
Bargain purchase gain
|
|
|
(7,304)
|
|
|
—
|
|
|
(7,304)
|
|
(100.0)
|
|
Loss (gain) on disposition of long-lived asset
|
|
|
27
|
|
|
(2,823)
|
|
|
2,850
|
|
(101.0)
|
|
Total operating expenses
|
|
$
|
288,585
|
|
$
|
202,042
|
|
$
|
86,543
|
|
42.8
|
%
|
Income from operations
|
|
$
|
39,886
|
|
$
|
70,411
|
|
$
|
(30,525)
|
|
(43.4)
|
%
|
OTHER INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
929
|
|
|
280
|
|
|
649
|
|
231.8
|
|
Interest expense
|
|
|
(3,674)
|
|
|
(2,433)
|
|
|
(1,241)
|
|
51.0
|
|
Loss on deconsolidation of subsidiary
|
|
|
—
|
|
|
(19,937)
|
|
|
19,937
|
|
(100.0)
|
|
Other income (expense), net
|
|
|
643
|
|
|
118
|
|
|
525
|
|
444.9
|
|
Other income (expense), net
|
|
$
|
(2,102)
|
|
$
|
(21,972)
|
|
$
|
19,870
|
|
(90.4)
|
%
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
|
|
|
37,784
|
|
|
48,439
|
|
|
(10,655)
|
|
(22.0)
|
|
Income tax expense
|
|
|
17,178
|
|
|
22,655
|
|
|
(5,477)
|
|
(24.2)
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
20,606
|
|
|
25,784
|
|
|
(5,178)
|
|
(20.1)
|
|
INCOME FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
$
|
—
|
|
$
|
390
|
|
$
|
(390)
|
|
(100.0)
|
%
|
NET INCOME
|
|
|
20,606
|
|
|
26,174
|
|
|
(5,568)
|
|
(21.3)
|
|
Net income attributable to non-controlling interests, net of tax:
|
|
|
(10,400)
|
|
|
(13,417)
|
|
|
3,017
|
|
(22.5)
|
|
NET INCOME ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS
|
|
$
|
10,206
|
|
$
|
12,757
|
|
$
|
(2,551)
|
|
(20.0)
|
%
|
Wholesale
Our U.S. Telecom’s wholesale revenue decreased by $9.4 million, or 8.3%, to $103.1 million from $112.5 million for the nine months ended September 30, 2016 and 2015, respectively. This decrease was the result of a reduction in wholesale roaming rates partially offset by growth in data traffic volumes due to capacity and technology upgrades to our network and the increase in the number of base stations to 926 from 861 as of September 30, 2016 and 2015, respectively.
Retail
Retail revenue accounted for the remaining $74.2 million and $72.8 million of our wireless revenue for the nine months ended September 30, 2016 and 2015, respectively, an increase of $1.4 million, or 1.9%. Of this increase, our 2016 International Telecom Acquisitions generated $0.5 million of retail wireless revenue with the remaining increase being attributable to our U.S. telecom’s retail business. During late 2015, we modified our definition of an active subscriber which resulted in a decrease in wireless subscribers. This change was retroactively applied to the reported subscribers for September 30, 2015. Our wireless subscribers slightly increased to 353,000 from 352,000 as of September 30, 2016 and 2015, respectively. However, a decrease in roaming revenue due to anticipated rate declines resulted in the decline in retail revenue.
Wireline revenue.
Wireline revenue increased by $58.7 million, or 92.4%, to $122.2 million for the nine months ended September 30, 2016 from $63.5 million for the nine months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which generated $57.0 million of wireline revenue during the nine months ended September 30, 2016. The remaining increase was generated by our Guyana market as a result of increased subscribers and related broadband data revenues.
Renewable energy revenue.
Renewable energy revenue increased $1.3 million, or 8.3%, to $16.9 million from $15.6 million for the nine months ended September 30, 2016 and 2015, respectively. This increase was primarily the result of increased production and certain customer contract price escalations.
Equipment and other revenue.
Equipment and other revenue increased by $4.0 million, or 50.0% to $12.0 million for the nine months ended September 30, 2016 from $8.0 million for the nine months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which incurred $3.7 million of equipment and other revenue during the nine months ended September 30, 2016.
Termination and access fee expenses.
Termination and access fees increased by $22.7 million, or 39.3%, to $80.5 million for the nine months ended September 30, 2016 from $57.8 million for the nine months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which incurred $22.0 million of termination and access fees during the nine months ended September 30, 2016. These increases were partially offset by decreases in other markets within our International Telecom segment of $0.6 million and a decrease of $0.5 million as a result of the March 2015 sale of our operations in Turks and Caicos.
Termination and access fees increased by $1.8 million within the wholesale wireless operations of our U.S. Telecom segment as a result of increased data traffic volumes, costs related to additional technologies and the expansion and upgrade of our networks.
Engineering and operations expenses.
Engineering and operations expenses increased by $7.7 million, or 26.9%, to $36.3 million from $28.6 million for the nine months ended September 30, 2016 and 2015, respectively. The increase was primarily the result of our 2016 International Telecom Acquisitions which incurred $8.2 million of engineering and operations expenses during the three months ended September 30, 2016. This increase was partially offset by a $0.4 million reduction in our U.S. Telecom segment which experienced operating efficiencies during the nine months ended September 30, 2016.
Sales and marketing expenses.
Sales and marketing expenses increased by $4.8 million, or 27.3%, to $22.4 million from $17.6 million for the nine months ended September 30, 2016 and 2015, respectively. Our 2016
International Telecom Acquisitions incurred $4.0 million of sales and marketing expenses during the nine months ended September 30, 2016. The remaining $0.8 million increase was primarily incurred within our International Telecom segment as a result of increased promotional spending in Guyana.
Equipment expenses.
Equipment expenses increased by $0.3 million, or 2.9%, to $10.5 million for the nine months ended September 30, 2016 from $10.2 million for the nine months ended September 30, 2015. The increase was primarily the result of an increase in handset and data modem sales within our International Telecom segment and an increase in handset sales in the retail operations within our U.S. Telecom segment.
General and administrative expenses.
General and administrative expenses increased by $19.9 million, or 45.2%, to $63.9 million for the nine months ended September 30, 2016 from $44.0 million for the nine months ended September 30, 2015. The 2016 International Telecom Acquisitions incurred $14.4 million of this increase. Of the remaining $5.5 million increase, $3.1 million was incurred within our corporate overhead to help support our recent acquisitions, $0.9 million was incurred within our Renewable Energy segment in connection with our recent Vibrant Energy Acquisition and $2.1 million was incurred within our U.S. Telecom segment primarily as a result of the conclusion of a transition services agreement entered into to provide support services following the sale of our Alltel business which was accounted for as an offset to the expenses in previous periods. These increases were partially offset by a decrease of $0.5 million within our International Telecom segment as a result of the March 2015 sale of our operations in Turks and Caicos.
Transaction-related charges.
We incurred $16.2 million and $2.9 million of transaction‑related charges during the nine months ended September 30, 2016 and 2015, respectively. A substantial majority of the 2016 expenses was related to the Vibrant Energy, KeyTech and Innovative Acquisitions.
Restructuring charges.
During the nine months ended September 30, 2016, we incurred $1.8 million of certain non-recurring restructuring costs in connection with the KeyTech Acquisition.
Depreciation and amortization expenses.
Depreciation and amortization expenses increased by $9.1 million, or 20.8%, to $52.9 million for the nine months ended September 30, 2016 from $43.8 million for the nine months ended September 30, 2015. The increase was primarily the result of our 2016 International Telecom Acquisitions which recognized $9.5 million of expense during the nine months ended September 30, 2016 as well as increases of $0.6 million and $0.8 million of expense within our U.S. Telecom segment and corporate overhead, respectively, as a result of our expanding telecom networks and an increase in corporate overhead assets, respectively. These increases were partially offset by a decrease of $1.9 million in our other businesses within our International Telecom segment including the effects of the March 2015 sale of our operations in Turks and Caicos.
Impairment of long-lived assets
. During June 2016, as a result of recent industry consolidation activities and a review of strategic alternatives for our U.S. Wireline business in the Northeast, the Company identified factors indicating the carrying amount of certain assets may not be recoverable. More specifically, the factors included the competitive environment, recent industry consolidation, and the Company’s view of future opportunities in the market which began to evolve in the second quarter of 2016 as discussed in Note 6 to the Unaudited Condensed Consolidated Financial Statements included in this report.
As a result of this transaction and the recent developments in the market, we determined it was appropriate to assess the reporting unit’s assets for impairment. The reporting unit holds three types of assets for purposes of impairment testing: i) other assets such as accounts receivable and inventory, ii) long lived assets such as property plant and equipment, and iii) goodwill. We first assessed the other assets for impairment and determined no impairment was appropriate. Second, the property, plant and equipment was assessed for impairment. The impairment test compared the undiscounted cash flows from the use and eventual disposition of the asset group to its carrying amount and determined the carrying amount was not recoverable. The impairment loss of $3.6 million was equal to the amount by which the carrying amount exceeded the fair value. Third management assessed goodwill for impairment following the two step impairment test. The carrying amount of the reporting unit exceeded its fair value, after considering the $3.6 million asset impairment. The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill to measure the amount of impairment loss. The impairment loss equaled $7.5 million. We utilized the income approach, with Level 3 valuation inputs, which considered both the
purchase agreement and cash flows discounted at a rate of 14% in its fair value calculations. In total, we recorded an impairment charge of $11.1 million. The impairment charge is included in income from operations for the nine months ended September 30, 2016.
We also assessed the value of a tradename used within our International Telecom segment. As a result of that assessment, we concluded that the book value of such tradename exceeded its fair value and as a result, we recorded a non-cash impairment charge of $0.3 million during the nine months ended September 30, 2016.
Bargain purchase gain.
In connection with the KeyTech Transaction, we recorded a bargain purchase gain of $7.3 million during the nine months ended September 30, 2016. The purchase price and resulting bargain purchase gain are the result of the market conditions and competitive environment in which KeyTech operates along with the Company's strategic position and resources in those same markets. Both companies realized that their combined resources would accelerate the transformation of both companies to better serve customers in these markets. The bargain purchase gain is included in operating income in the accompanying income statement for the nine months ended September 30, 2016.
Gain on disposition of long-lived assets.
During the nine months ended September 30, 2015, we sold certain network assets and telecommunications licenses in our U.S. Telecom segment and recognized a gain on such disposition of $2.8 million.
Interest income.
Interest income increased to $0.9 million from $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.
Interest expense.
Interest expense increased by $1.3 million to $3.7 million from $2.4 million for the nine months ended September 30, 2016 and 2015, respectively. The increase reflects the interest on the debt assumed with the KeyTech Acquisition and interest incurred on debt used to finance a portion of the Innovative Acquisition.
Other income (expense), net.
Other income (expense), net represents miscellaneous non-operational income we earned or expenses we incurred. Other income (expense), net was $0.6 million and $0.1 million for the nine months ended September 30, 2016 and 2015, respectively. The majority of other income (expense), net for the nine months ended September 30, 2016 is the result of a $0.4 million gain on a foreign currency transaction.
Income taxes.
Our effective tax rates for the nine months ended September 30, 2016 and 2015 were 45.5% and 46.8%, respectively. The effective tax rate for the nine months ended September 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 our wireline business, (iii) the mix of income generated among the jurisdictions in which we operate, and (iv) $2.2 million provision (net) to record multiple discrete items. The effective tax rate for the nine months ended September 30, 2015 was impacted by the following items: (i) the $19.9 million loss on deconsolidation within its International Telecom business that had no tax benefit and (ii) the mix of income generated among the jurisdictions in which we operate. Our 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. Our consolidated tax rate will continue to be impacted by the mix of income generated among the jurisdictions in which we operate.
Net income attributable to non-controlling interests.
Net income attributable to non-controlling interests reflected an allocation of $10.4 million and $13.4 million of income generated by our less than wholly-owned subsidiaries for the nine months ended September 30, 2016 and 2015, respectively.
Net income attributable to ATN International, Inc. stockholders.
Net income attributable to ATN International, Inc. stockholders decreased to $10.2 million from $12.8 million for the nine months ended September 30, 2016 and 2015, respectively.
On a per share basis, net income decreased to $0.63 per diluted share from $0.79 per diluted share for the nine months ended September 30, 2016 and 2015, respectively.
Regulatory and Tax Issues
We are involved in a number of regulatory and tax proceedings. A material and adverse outcome in one or more of these proceedings could have a material adverse impact on our financial condition and future operations. For discussion of ongoing proceedings, see Note 13 to the Unaudited Condensed Consolidated Financial Statements in this Report.
Liquidity and Capital Resources
Historically, we have met our operational liquidity needs through a combination of cash on hand and internally generated funds and have funded capital expenditures and acquisitions with a combination of internally generated funds, cash on hand, proceeds from dispositions and borrowings under our credit facilities. We believe our current cash, cash equivalents and availability under our current credit facility will be sufficient to meet our cash needs for at least the next twelve months for working capital needs and capital expenditures.
Uses of Cash
Acquisitions and Investments.
Historically, we have funded our acquisitions with a combination of cash on hand and borrowings under our credit facilities. During the three months ended June 30, 2016, we funded the KeyTech Acquisition and Vibrant Energy Acquisition with $33.4 million and $3.5 million, respectively, of cash (net of cash acquired). During the three months ended September 30, 2016, we funded the Innovative Acquisition with $50.9 million in cash and financed the remaining $60.0 million of the purchase price with a loan from an affiliate of the seller, the Rural Telephone Finance Cooperative. During the fourth quarter of 2016, we expect to pay an additional $27.8 million for the Innovative Acquisition in connection with our funding of Innovative’s pension and other postretirement benefit plans.
We continue to explore opportunities to expand our telecommunications and renewable energy businesses or acquire new businesses and licenses in the United States, the Caribbean and elsewhere. Such acquisitions, including acquisitions of renewable energy assets, may require external financing. While there can be no assurance as to whether, when or on what terms we will be able to acquire any such businesses or licenses or make such investments, such acquisitions may be accomplished through the issuance of shares of our capital stock, payment of cash or incurrence of additional debt. From time to time, we may raise capital ahead of any definitive use of proceeds to allow us to move more quickly and opportunistically if an attractive investment materializes.
As of September 30, 2016, we had approximately $294.4 million in cash, cash equivalents, restricted cash and short term investments. Of this amount, $103.3 million was held by our foreign subsidiaries and is permanently invested outside the United States.
We expect to pay an additional $27.8 million for the funding of Innovative’s pension plans and postretirement benefit plans in connection with our Innovative Acquisition.
In addition, we had approximately $118.9 million of debt as of September 30, 2016. How and when we deploy our balance sheet capacity will figure prominently in our longer-term growth prospects and stockholder returns.
Capital Expenditures.
A significant use of our cash has been for capital expenditures to expand and upgrade our telecommunications networks as well as for acquisitions.
For the nine months ended
September 30, 2016
and 2015, we spent approximately $78.5 million and $46.0 million, respectively, on capital expenditures. The following notes our capital expenditures, by operating segment, for these periods (in thousands):
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Capital
Expenditures
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U.S.
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International
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Renewable
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Reconciling
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Nine months ended September 30,
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Telecom
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Telecom
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Energy
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Items (1)
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Consolidated
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2016
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$
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26,709
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$
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36,543
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$
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10,326
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$
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4,877
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$
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78,455
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2015
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27,632
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15,797
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26
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2,576
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46,031
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(1) Reconciling items refer to corporate overhead costs and consolidating adjustments.
We are continuing to invest in upgrading and expanding our telecommunications networks and renewable energy assets in many of our markets, along with upgrading our operating and business support systems. We currently anticipate that capital expenditures for the combined U.S. Telecom and International Telecom segments, including the recent KeyTech and Innovative Acquisitions, for the year ending December 31, 2016 will be between $95 million and $110 million and capital expenditures for our Renewable Energy segment will be between $40 million and $50 million for the year ending December 31, 2016.
We expect to fund our current capital expenditures primarily from our current cash balances and cash generated from operations.
Income taxes.
We have historically used cash‑on‑hand to make payments for income taxes. Our policy is to indefinitely reinvest the undistributed earnings of our foreign subsidiaries, and accordingly, no provision for federal income taxes has been made on accumulated earnings of foreign subsidiaries. For the nine months ended September 30, 2016 and 2015, our effective tax rates were 45.5% and 46.8%, respectively, as a result of certain acquisition and disposition related charges being incurred which had no tax benefit.
Dividends.
We use cash-on-hand to make dividend payments to our common stockholders when declared by our Board of Directors. For the three months ended September 30, 2016, our Board declared dividends to our stockholders, which includes a $0.34 per share dividend declared on September 19, 2016 and paid on October 7, 2016, of $5.5 million. We have declared quarterly dividends for the last 72 fiscal quarters.
Stock repurchase plan.
In September 2004, our Board of Directors approved a $5.0 million stock buyback plan (the “2004 Repurchase Plan”). Through September 19, 2016, we repurchased $4.1 million of our common stock, including $2.0 million during the third quarter of 2016, under the 2004 Repurchase Plan.
On September 19, 2016, our Board of Directors authorized the repurchase of up to $50.0 million of our common stock from time to time on the open market or in privately negotiated transactions (the “2016 Repurchase Plan”). The 2016 Repurchase Plan replaces the 2004 Repurchase Plan. As of September 30, 2016, we have not repurchased any of our common stock under the 2016 Repurchase Plan.
Sources of Cash
Total liquidity.
As of September 30, 2016, we had approximately $294.4 million in cash, cash equivalents, restricted cash and short term investments a decrease of $97.6 million from the December 31, 2015 balance of $392.0 million. The decrease is primarily attributable to the use of $152.5 million to fund our 2016 Acquisitions and $89.3 million for our capital expenditures (which includes $10.9 million of deposits made in connection with an upcoming spectrum license auction). These uses were partially offset by cash provided by our operating activities of $92.1 million. During the fourth quarter of 2016, we expect to pay an additional $27.8 million for the funding of Innovative’ s pension plans and postretirement benefit plans in connection with our Innovative Acquisition.
Cash provided by operations.
Cash provided by operating activities was $92.1 million for the nine months ended September 30, 2016 as compared to $113.1 million for the nine months ended September 30, 2015. The decrease of $21.0 million included a decrease in cash provided by operations within our U.S. Telecom segment of $17.2 million primarily related to a reduction in wholesale roaming rates, and decreases in cash provided by operations within our International Telecom and Renewable Energy segments of $8.0 million and $5.9 million, respectively, primarily as a result of certain expenses incurred within both of these segments for acquisition related charges. Cash flow from operations within our corporate overhead decreased by $6.0 million primarily in preparation for the completion of the 2016 Acquisitions.
Cash used in investing activities.
Cash used in investing activities was $278.1 million and $12.8 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in usage of cash for investing activities of $265.3 million was primarily related to the use of $152.5 million to fund our 2016 Acquisitions, an increase in our capital expenditures (which includes $10.9 million for the purchases of spectrum licenses and related deposits) of $43.3 million, and a $27.8 million increase in restricted cash that will be contributed to Innovatives pension and other postretirement benefit plans. In addition, the nine months ended September 30, 2015 includes $39.0 million of cash provided by the final receipt of the escrowed funds from our 2013 sale of the retail wireless business operated under the Alltel name.
Cash provided by (used in) financing activities.
For the nine months ended September 30, 2016, cash provided by financing activities was $46.6 million as compared to cash used in financing activities of $28.8 million for the nine months ended September 30, 2015. The $75.4 million increase was primarily the result of $60.0 million of borrowings used to fund a portion of the Innovative Acquisition and an investment made by a minority shareholder of $21.9 million during the nine months ended September 30, 2016.
Credit facility.
On December 19, 2014, we amended and restated our then existing credit facility with CoBank, ACB and a syndicate of other lenders to provide for a $225.0 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 $25.0 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 $10.0 million under a swingline sub-facility.
Amounts we may borrow under the Credit Facility bear interest at a rate equal to, at our 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 Agreement) of our indebtedness to EBITDA. Under the terms of the Credit Facility, we 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.
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 by us 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 by us that imposes a maximum ratio of indebtedness to EBITDA. As of September 30, 2016, we were in compliance with all of the financial covenants of the Credit Facility.
On January 11, 2016, we amended the Credit Facility to provide for lender consent to, among other actions, (i) the contribution by the Company of all of its equity interests in ATN Bermuda Holdings, Ltd. to ATN Overseas Holdings, Ltd. in connection with the KeyTech Transaction, and subject to the closing of the KeyTech Transaction, a one-time, non-pro rata cash distribution by KeyTech of $12.7 million to certain of KeyTech’s shareholders; and (ii) the incurrence by certain subsidiaries of the Company of secured debt in an aggregate principal amount not to exceed $60.0 million in connection with our option to finance a portion of the Innovative Transaction. The Amendment increases 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.
As of September 30, 2016, we had no borrowings under the Credit Facility and approximately $10.6 million of outstanding letters of credit.
Ahana Debt
In connection with the Ahana Acquisition on December 24, 2014, we assumed $38.9 million in debt (the “Ahana Debt”). The Ahana Debt includes multiple loan agreements with banks that bear interest at rates between 4.5% and 6.0%, mature at various times between 2018 and 2023 and are secured by certain solar facilities. Repayment of the Ahana Debt with the banks is made on a monthly basis until maturity.
The Ahana Debt includes a loan from Public Service Electric & Gas (PSE&G). The note payable to PSE&G bears interest at 11.3%, matures in 2027, and is secured by certain solar facilities. Repayment of the Ahana Debt with PSE&G can be made in either cash or SRECs, at our discretion. The value of the SRECs was fixed at the time of the loan’s closing.
As of September 30, 2016, $27.7 million of the Ahana Debt remained outstanding.
KeyTech Debt
In connection with the KeyTech Transaction on May 3, 2016, we assumed $35.4 million in debt (the “KeyTech Debt”) in the form of a loan from
HSBC Bank Bermuda Limited. The KeyTech Debt matures in 2021, bears interest of the three-month LIBOR plus a margin of 3.25%, and repayment is made quarterly until maturity. The debt is secured by the property and assets of certain KeyTech subsidiaries.
As of September 30, 2016, $32.1 million of the KeyTech Debt remained outstanding.
Innovative Debt
We funded the Innovative Acquisition with $50.9 million in cash and financed the remaining $60.0 million of the purchase price with a loan from an affiliate of the seller, the Rural Telephone Finance Cooperative. 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. Interest is paid quarterly and principal repayment is not required until maturity on July 1, 2026.
As of September 30, 2016, $60.0 million of the Innovative Debt remained outstanding and $0.8 million of the rate lock fee were unamortized.
Factors Affecting Sources of Liquidity
Internally generated funds.
The key factors affecting our internally generated funds are demand for our services, competition, regulatory developments, economic conditions in the markets where we operate our businesses and industry trends within the telecommunications and renewable energy industries.
Restrictions under Credit Facility.
Our Credit Facility contains customary representations, warranties and covenants, including 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 September 30, 2016, we were in compliance with all of the financial covenants of the Credit Facility.
Capital markets.
Our ability to raise funds in the capital markets depends on, among other things, general economic conditions, the conditions of the telecommunications and renewable energy industries, our financial performance, the state of the capital markets and our compliance with Securities and Exchange Commission (“SEC”) requirements for the offering of securities. On June 6, 2014, the SEC declared effective our “universal” shelf registration statement. This filing registered potential future offering of our securities.
Completed Acquisitions.
As discussed above, we funded the 2016 Acquisitions with $152.5 million of cash, net of cash acquired. In addition, we financed $60.0 million of the Innovative Acquisition purchase price with a loan from an affiliate of the seller, the Rural Telephone Finance Cooperative.
During the fourth quarter of 2016, we expect to pay an additional $27.8 million for the funding of Innovative’ s pension plans and postretirement benefit plans in connection with our Innovative Acquisition.
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. On July 9, 2015, the FASB approved the deferral of the new standard's effective date by one year. The new standard is now effective for annual reporting periods beginning after December 15, 2017. The FASB will permit companies to adopt the new standard early, but not before the original effective date of annual reporting periods beginning after December 15, 2016. We are currently evaluating the adoption method options and the impact of the new guidance on our consolidated financial statements.
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 will be effective for annual reporting periods ending after December 15, 2016. Early application is permitted. We do not expect the adoption of ASU 2014-15 to have an impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which amends the presentation of debt issuance costs on the consolidated balance sheet. Under the new guidance, debt issuance costs are presented as a direct deduction from the carrying amount of the debt liability rather than as an asset. We adopted the standard on January 1, 2016 and it did not have a material impact on our consolidated financial statements and related disclosures.
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 that software license. The new guidance does not change the accounting for a customer’s accounting for service contracts. The standard is effective beginning January 1, 2017, with early adoption permitted, and may be applied prospectively or retrospectively. We do not expect ASU 2015-05 to have a material impact on our consolidated financial position, results of operations or cash flows.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”, which provides updated guidance related to simplifying the accounting for measurement period adjustments related to business combinations. The amended guidance eliminates the requirement to retrospectively
account for adjustments made during the measurement period. The standard was adopted on January 1, 2016 and did not have a material impact on our consolidated financial position, results 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. We are currently evaluating the impact of the new guidance on our 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. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and early adoption is permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.
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 should be applied using a retrospective transition method for each period presented. We are currently evaluating the impact of the new standard on our consolidated financial statements.
In October 2016 the FASB issued ASU No. 2016-16,
Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory
. The new standard eliminates for 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 us on January 1, 2018. We are currently evaluating the potential impact that this standard may have on its results of operations.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Exchange Sensitivity.
The only foreign currency for which we have a material exposure is the Guyana dollar because a significant portion of our Guyana revenues and expenditures are transacted in Guyana dollars. The exchange rate has remained consistent at 210 Guyana dollars to 1 U.S. dollar since 2014 and remained at 210 Guyana dollars to 1 U.S. dollar as of September 30, 2016. The results of future operations may be affected by changes in the value of the Guyana dollar.
Upon the completion of the Vibrant Energy construction projects, we will have additional foreign currency exchange exposure to the Indian Rupee (INR) and British Pound Sterling (GBP). We will assess the impact of that exposure in future periods.
Interest Rate Sensitivity.
As of September 30, 2016, we had $28.5 million of variable rate debt outstanding, which we assumed as a part of the KeyTech Acquisition and is subject to fluctuations in interest rates. Our interest expense may be affected by changes in interest rates. We may have additional exposure to fluctuations in interest rates if we again borrow amounts under our revolver loan within our Credit Facility.
Item 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016. Disclosure controls and procedures, as defined in Rules 13a‑15(e) and 15d‑15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost‑benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2016, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.