Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
Organization and Business
GTT Communications, Inc. ("GTT" or the "Company") serves large enterprise and carrier clients with complex national and global networking needs, and differentiates itself from the competition by providing an outstanding service experience built on its core values of simplicity, speed and agility. The Company operates a global Tier 1 internet network ranked among the largest in the industry, and owns a fiber network that includes an expansive pan-European footprint and subsea cables. The Company's global network includes over 600 points of presence ("PoPs") spanning six continents, and the Company provides services in more than 140 countries.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the fiscal year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed on March 2, 2020. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations.
The condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and its results of operations. The operating results for the three months ended March 31, 2020 are not necessarily indicative of the results to be expected for the full fiscal year 2020 or for any other interim period. The December 31, 2019 consolidated balance sheet is condensed from the audited financial statements as of that date.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts, accruals for billing disputes and exit activities, determining useful lives for depreciation and amortization, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, assessing the fair value of derivative financial instruments, accounting for income taxes and related valuation allowances against deferred tax assets, and estimating the grant date fair values used to compute the share-based compensation expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions, including but not limited to assumptions or conditions due to uncertainty of the magnitude and duration of the impacts of the COVID-19 pandemic in the current economic environment.
Revenue Recognition
The Company's revenue is derived primarily from telecommunications services, which includes both revenue from contracts with customers and lease revenues. Lease revenue services include dark fiber, duct, and colocation services. All other services are considered revenue from contracts with customers. Revenue from contracts with customers is recognized when services are provided to the customer, in an amount that reflects the consideration the Company expects to receive in exchange for those services. Lease revenue represents an arrangement where the customer has the right to use an identified asset for a specified term and such revenue is recognized over the term the customer is given exclusive access to the asset.
Primary geographical market. The Company’s operations are located primarily in the United States and Europe. The nature and timing of revenue from contracts with customers across geographic markets is similar. The following table presents the
Company's revenue from contracts with customers disaggregated by primary geographic market based on legal entities (in millions):
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Three Months Ended March 31,
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2020
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2019
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Primary geographic market:
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United States
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$
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171.7
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$
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204.2
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Europe
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205.3
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196.5
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Other
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9.0
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11.9
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Total revenue from contracts with customers
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386.0
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412.6
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Lease revenue
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38.7
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37.6
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Total telecommunications services revenue
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$
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424.7
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$
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450.2
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Universal Service Fund ("USF"), Gross Receipts Taxes and Other Surcharges. USF fees and other surcharges billed to customers and recorded on a gross basis (as service telecommunications services revenue and cost of telecommunications services) were $5.6 million and $5.9 million for the three months ended March 31, 2020 and 2019, respectively.
Contract balances. Contract assets consist of conditional or unconditional rights to consideration. Accounts receivable represent amounts billed to customers where the Company has an enforceable right to payment for performance completed to date (i.e., unconditional rights to consideration). The Company does not have contract assets that represent conditional rights to consideration. The Company’s accounts receivable balance at March 31, 2020 and December 31, 2019 includes $134.4 million and $145.9 million, respectively, related to contracts with customers. There were no other contract assets as of March 31, 2020 or December 31, 2019.
Contract liabilities are generally limited to deferred revenue. Deferred revenue is a contract liability, representing advance consideration received from customers primarily related to the pre-paid capacity sales, where transfer of control occurs over time, and therefore revenue is recognized over the related contractual service period. The Company's contract liabilities were $82.0 million and $76.0 million as of March 31, 2020 and December 31, 2019, respectively. The change in contract liabilities during the three months ended March 31, 2020 included $3.8 million for revenue recognized that was included in the contract liability balance as of January 1, 2020 and $10.7 million for new contract liabilities net of amounts recognized as revenue during the three months ended March 31, 2020.
The following table includes estimated revenue from contracts with customers expected to be recognized for each of the years subsequent to March 31, 2020 related to performance obligations that are unsatisfied (or partially unsatisfied) at March 31, 2020 and have an original expected duration of greater than one year (amounts in millions):
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2020 remaining
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$
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13.7
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2021
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15.2
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2022
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14.4
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2023
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12.8
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2024
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8.0
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2025 and beyond
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17.9
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$
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82.0
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For a table of estimated revenue to be recognized for consolidated deferred revenue for each of the years subsequent to March 31, 2020 refer to Note 6 - Deferred revenue.
Deferred costs to obtain a contract. Deferred sales commissions were $24.7 million and $23.0 million as of March 31, 2020 and December 31, 2019, respectively. There were no other significant amounts of assets recorded related to contract costs as of March 31, 2020 or December 31, 2019.
Property and Equipment
Depreciation expense associated with property and equipment, including amortization of finance lease assets, was $46.4 million and $40.7 million for the three months ended March 31, 2020 and 2019, respectively.
The Company capitalized labor costs, including indirect and overhead costs, of $3.8 million and $4.2 million for the three months ended March 31, 2020 and 2019, respectively. The Company capitalized software costs of $1.1 million and $1.1 million for the three months ended March 31, 2020 and 2019, respectively.
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset were to exceed its estimated future undiscounted cash flows, the asset would be considered to be impaired. Impairment losses would then be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, if any, are reported at the lower of the carrying amount or fair value less costs to sell.
Disputed Supplier Expenses
In the normal course of business, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to ensure that errors in the Company's suppliers' billed invoices are identified and resolved. If the Company concludes that a vendor has billed inaccurately, the Company will record a liability only for the amount that it believes is owed. As of March 31, 2020 and December 31, 2019, the Company had open disputes not accrued for of $28.8 million and $12.2 million, respectively, and open paid disputes in the form of receivables from suppliers of $36.0 million and $10.7 million, respectively.
Newly Adopted Accounting Principles
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendment to the initial guidance, ASU 2018-19, in November 2018. The updated guidance introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The standard requires a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company adopted ASU 2016-13 as of January 1, 2020 using the modified retrospective approach related to its accounts receivables, resulting in a cumulative adjustment to retained earnings of approximately $9.1 million.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019. The removed and modified disclosures are adopted on a retrospective basis and the new disclosures are adopted on a prospective basis. The Company adopted the guidance as of January 1, 2020. The adoption of the new standard did not have a material impact on the Company's condensed consolidated financial statements.
Recent Accounting Pronouncements
Other recent accounting pronouncements issued by the FASB during 2020 and through the filing date did not and are not believed by management to have a material impact on the Company's present or historical consolidated financial statements.
NOTE 2 — BUSINESS ACQUISITIONS
Since its formation, the Company has consummated a number of transactions accounted for as business combinations as part of its growth strategy. The acquisitions of these businesses, which are in addition to periodic purchases of client contracts, have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network, and broaden its client base.
The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates. All of the acquisitions have been accounted for as a business combination. Accordingly, consideration paid by the Company to complete the acquisitions is initially allocated to the acquired assets and liabilities based upon their estimated acquisition date fair values. The recorded amounts for assets acquired and liabilities assumed are provisional and subject to change during the measurement period, which is up to 12 months from the acquisition date.
There were no acquisitions completed during the three months ended March 31, 2020.
For material acquisitions completed during 2019, 2018, and 2017, refer to Note 3 - Business Acquisitions to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019. During the three months ended March 31, 2020, certain immaterial measurement period adjustments were recorded to adjust provisional amounts for acquisitions completed during 2019.
Acquisition Method Accounting Estimates
The Company initially recognizes the assets and liabilities acquired from the acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is a period of no longer than one year following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
Transaction Costs
Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. There are two types of costs that the Company accounts for:
•Severance, restructuring and other exit costs
•Transaction and integration costs
Severance, restructuring and other exit costs include severance and other one-time benefits for terminated employees, termination charges for leases and supplier contracts, and other costs incurred associated with an exit activity. These costs are reported separately in the condensed consolidated statements of operations during the three months ended March 31, 2020 and 2019. Refer to Note 12 - Severance, Restructuring, and Other Exit Costs of these condensed consolidated financial statements for further information.
Transaction and integration costs include expenses associated with legal, accounting, regulatory, and other transition services rendered in connection with acquisition, travel expense, and other non-recurring direct expenses associated with acquisitions. Transaction and integration costs are expensed as incurred in support of the integration. The Company incurred transaction and integration costs of $2.2 million and $9.2 million during the three months ended March 31, 2020 and 2019, respectively. Transaction and integration costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows.
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
The goodwill balance was $1,763.7 million and $1,768.6 million as of March 31, 2020 and December 31, 2019, respectively. Additionally, the Company's intangible asset balance was $465.4 million and $490.7 million as of March 31, 2020 and December 31, 2019, respectively.
The change in the carrying amount of goodwill for the three months ended March 31, 2020 was as follows (amounts in millions):
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Goodwill - December 31, 2019
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$
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1,768.6
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Adjustments to 2019 business combinations
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(0.6)
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Foreign currency translation adjustments
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(4.3)
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Goodwill - March 31, 2020
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$
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1,763.7
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Goodwill is reviewed for impairment at least annually, in October, or more frequently if a triggering event occurs between impairment testing dates. There were no triggering events or goodwill impairments identified for the three months ended March 31, 2020 and 2019.
The following table summarizes the Company’s intangible assets as of March 31, 2020 and December 31, 2019 (amounts in millions):
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March 31, 2020
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December 31, 2019
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Amortization
Period
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Gross Asset Cost
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Accumulated Amortization
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Net Book Value
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Gross Asset Cost
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Accumulated Amortization
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Net Book Value
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Customer lists
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3-20 years
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$
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775.2
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$
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331.7
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$
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443.5
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$
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781.1
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$
|
313.7
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$
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467.4
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Non-compete agreements
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3-5 years
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4.7
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4.7
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—
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4.7
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4.6
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0.1
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Intellectual property
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10 years
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38.0
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16.3
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21.7
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38.3
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15.4
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22.9
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Tradename
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1-3 years
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6.1
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5.9
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0.2
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6.2
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5.9
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0.3
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$
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824.0
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$
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358.6
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$
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465.4
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$
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830.3
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$
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339.6
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$
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490.7
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Amortization expense was $21.1 million and $22.1 million for the three months ended March 31, 2020 and 2019, respectively.
Estimated amortization expense related to intangible assets subject to amortization at March 31, 2020 in each of the years subsequent to March 31, 2020 is as follows (amounts in millions):
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2020 remaining
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$
|
63.3
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2021
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82.6
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2022
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69.5
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2023
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57.0
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2024
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51.5
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2025 and beyond
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141.5
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Total
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$
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465.4
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The Company reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. There were no triggering events or intangible asset impairments recognized for the three months ended March 31, 2020 and 2019.
NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table summarizes the Company’s prepaid expenses and other current assets as of March 31, 2020 and December 31, 2019 (amounts in millions):
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March 31, 2020
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December 31, 2019
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Receivables from suppliers
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$
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36.0
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$
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10.7
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Prepaid cost of telecommunications services
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19.4
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11.8
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Prepaid selling, general and administrative
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12.6
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13.1
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Deferred commissions
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11.3
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9.8
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Other
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2.8
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5.0
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$
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82.1
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$
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50.4
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NOTE 5 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the Company’s accrued expenses and other current liabilities as of March 31, 2020 and December 31, 2019 (amounts in millions):
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March 31, 2020
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December 31, 2019
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Cost of telecommunications services
|
$
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91.7
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$
|
105.3
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Interest rate swaps
|
86.7
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|
|
53.5
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Compensation and benefits
|
25.6
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24.4
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Taxes payable
|
26.2
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28.3
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Selling, general and administrative
|
19.4
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18.1
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Interest
|
11.8
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0.4
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Restructuring, current portion
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6.7
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6.4
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Other
|
5.3
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4.4
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$
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273.4
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$
|
240.8
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NOTE 6 — DEFERRED REVENUE
Total deferred revenue as of March 31, 2020 and December 31, 2019 was $339.0 million and $333.5 million, respectively, consisting of unamortized prepaid services, IRUs, and deferred non-recurring revenue. Deferred revenue is recognized as current and long-term deferred revenue on the condensed consolidated balance sheets.
Significant changes in deferred revenue balances during the period are as follows (amounts in millions):
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Three Months Ended March 31, 2020
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Contract Term
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Less than 1 Year
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Greater than 1 Year
|
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Total
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Balance, December 31, 2019
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|
$
|
22.5
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$
|
311.0
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$
|
333.5
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Revenue recognized from beginning balance
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|
(17.9)
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|
(10.3)
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(28.2)
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Increase in deferred revenue (gross)
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|
49.2
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|
|
10.9
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|
|
60.1
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Revenue recognized on increase in deferred revenue
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|
(22.0)
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|
|
(0.2)
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|
(22.2)
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|
|
|
|
|
|
|
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Foreign currency translation adjustments
|
|
(0.1)
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|
|
(4.1)
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|
|
(4.2)
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Balance, March 31, 2020
|
|
$
|
31.7
|
|
|
$
|
307.3
|
|
|
$
|
339.0
|
|
Remaining amortization at March 31, 2020 and in each of the years subsequent to March 31, 2020 is as follows (amounts in millions):
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Contract Term
|
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Less than 1 Year
|
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Greater than 1 Year
|
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Total
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2020 remaining
|
$
|
31.6
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|
|
$
|
32.7
|
|
|
$
|
64.3
|
|
|
2021
|
0.1
|
|
|
41.3
|
|
|
41.4
|
|
|
2022
|
—
|
|
|
37.8
|
|
|
37.8
|
|
|
2023
|
—
|
|
|
36.0
|
|
|
36.0
|
|
|
2024
|
—
|
|
|
28.2
|
|
|
28.2
|
|
|
2025 and beyond
|
—
|
|
|
131.3
|
|
|
131.3
|
|
|
|
$
|
31.7
|
|
|
$
|
307.3
|
|
|
$
|
339.0
|
|
NOTE 7 — DEBT
As of March 31, 2020 and December 31, 2019, long-term debt was as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
US Term loan due 2025
|
$
|
1,739.0
|
|
|
$
|
1,743.5
|
|
|
EMEA Term loan due 2025
|
951.5
|
|
|
828.8
|
|
|
7.875% Senior unsecured notes due 2024
|
575.0
|
|
|
575.0
|
|
|
Revolving line of credit due 2023
|
65.0
|
|
|
140.0
|
|
|
Other secured loans
|
2.1
|
|
|
4.3
|
|
|
Total debt obligations
|
3,332.6
|
|
|
3,291.6
|
|
|
Unamortized debt issuance costs
|
(26.6)
|
|
|
(28.0)
|
|
|
Unamortized original issuance discount, net
|
(48.0)
|
|
|
(40.8)
|
|
|
Carrying value of debt
|
3,258.0
|
|
|
3,222.8
|
|
|
Less current portion
|
(29.6)
|
|
|
(30.2)
|
|
|
Long-term debt less current portion
|
$
|
3,228.4
|
|
|
$
|
3,192.6
|
|
2018 Credit Agreement
On May 31, 2018, the Company entered into a credit agreement (the "2018 Credit Agreement") that provides for (1) a $1,770.0 million term loan B facility (the "US Term Loan Facility"), (2) a €750.0 million term loan B facility (the "EMEA Term Loan Facility"), and (3) a $200.0 million revolving credit facility (the "Revolving Line of Credit Facility") (which includes a $50.0 million letter of credit facility). The US Term Loan Facility was issued at an original issuance discount of $8.9 million and the EMEA Term Loan Facility was issued at an original issuance discount of €3.8 million. The Company is the borrower under the U.S. Term Loan Facility and the Revolving Line of Credit Facility. The Company's wholly-owned subsidiary GTT Communications B.V. is the borrower under the EMEA Term Loan Facility (the "EMEA Borrower").
The maturity date of the US Term Loan Facility and the EMEA Term Loan Facility (collectively the "Term Loan Facilities") is May 31, 2025 and the maturity date of the Revolving Line of Credit Facility is May 31, 2023. Each maturity date may be extended per the terms of the 2018 Credit Agreement.
The principal amounts of the US Term Loan Facility and EMEA Term Loan Facility are payable in equal quarterly installments of $4.425 million and €1.875 million, respectively, commencing on September 30, 2018 and continuing thereafter until the maturity date when the remaining balances of outstanding principal amount is payable in full.
The Company may prepay loans under the 2018 Credit Agreement at any time, subject to certain notice requirements, LIBOR breakage costs, and prepayment fees noted above.
At the Company’s election, the US Term Loan Facility may be made as either Base Rate Loans or Eurocurrency Loans. The EMEA Term Loan Facility will bear interest at the European Money Markets Institute EURIBOR plus the applicable margin. The applicable margin for the US Term Loan Facility is 1.75% for Base Rate Loans and 2.75% for Eurocurrency Loans, subject to a “LIBOR floor” of 0.00%. The applicable margin for the EMEA Term Loan Facility is 3.25%, subject to a “EURIBOR floor” of 0.00%. The applicable margin for revolving loans under the Revolving Line of Credit Facility is 1.75% for Base Rate Loans, 2.75% for Eurocurrency Loans denominated in U.S. Dollars and certain other approved currencies other than Euros, and 3.25% for revolving loans denominated in Euros.
The proceeds from the US Term Loan Facility and EMEA Term Loan Facility were used to finance the acquisition of Interoute Communications Holdings S.A., to repay amounts outstanding under the Company's prior term loan facility, and to pay costs associated with such transactions.
On June 5, 2019, the Company entered into an Incremental Revolving Credit Assumption Agreement ("Incremental Agreement") to the 2018 Credit Agreement. The Incremental Agreement establishes $50.0 million in new revolving credit commitments, bringing the total sum of revolving credit commitments under the 2018 Credit Agreement, as modified by the Incremental Agreement, to $250.0 million. The revolving credit commitments made pursuant to the Incremental Agreement have terms and conditions identical to the existing revolving credit commitments under the 2018 Credit Agreement.
On February 28, 2020, the Company entered into an amendment to the 2018 Credit Agreement (“Amendment No. 2”), which established incremental term loan commitments for $140 million of EMEA term loans (the “2020 EMEA Term Loan Facility”), bringing the total amounts of EMEA term loans outstanding under the 2018 Credit Agreement, as modified by Amendment No. 2, to €750 million in Euro-denominated loans and $140 million in US Dollar-denominated loans. The EMEA term loans under the 2020 EMEA Term Loan Facility were incurred with an original issue discount of $5.6 million.
The 2020 EMEA Term Loan Facility has terms substantially identical to the existing EMEA Term Loan Facility, except that: (1) each quarterly amortization payment on the 2020 EMEA Term Loan Facility will be $350,000; (2) the EMEA Term Loan Facility has a prepayment penalty of 2.0% for certain mandatory and voluntary prepayments occurring on or prior to the one year anniversary of the effective date of the EMEA Term Loan Facility and 1.0% for certain mandatory and voluntary prepayments occurring following the one year anniversary of the effective date of the EMEA Term Loan Facility and until the second year anniversary thereof; (3) Amendment No. 2 added, for the benefit of the lenders under the 2020 EMEA Term Loan Facility, the same covenant restrictions contained in Amendment No. 1, except that (a) the amount of secured debt that can be incurred on a pari passu basis with the 2020 EMEA Term Loan Facility and certain types of debt incurred by non-credit parties is limited to $50 million in the aggregate and (b) certain excess asset sale proceeds will be required to prepay outstanding EMEA term loans or reinvest in long-term assets useful in the business within 30 days following receipt of such proceeds, which covenant restrictions will remain in place for so long as the existing Revolving Line of Credit Facility and the 2020 EMEA Term Loan Facility remain in effect; and (4) the applicable margin for the 2020 EMEA Term Loan Facility is (a) 3.25% for Base Rate Loans and 4.25% for Eurocurrency Loans for the first two years following the effective date of the 2020 EMEA Term Loan Facility and (b) 3.75% for Base Rate Loans and 4.75% for Eurocurrency Loans on and following the second anniversary of the effective date of the 2020 EMEA Term Loan Facility.
The proceeds of the 2020 EMEA Term Loan Facility were used to repay amounts outstanding under the Revolving Line of Credit Facility and for general corporate purposes.
The unused and available amount of the Revolving Line of Credit Facility at March 31, 2020 was as follows (amounts in millions):
|
|
|
|
|
|
|
|
Committed capacity
|
$
|
250.0
|
|
|
Borrowings outstanding
|
(65.0)
|
|
|
Letters of credit issued
|
(10.9)
|
|
|
Unused and available
|
$
|
174.1
|
|
The obligations of the Company under the 2018 Credit Agreement are secured by the substantial majority of the tangible and intangible assets of the Company. The obligations of the Company under the U.S. Term Loan Facility and the Revolving Line of Credit Facility are guaranteed by certain of its domestic subsidiaries, but not by any of the Company’s foreign subsidiaries. The obligations of the EMEA Borrower under the EMEA Term Loan Facility are guaranteed by the Company and certain of its domestic and foreign subsidiaries. None of the foreign subsidiary guarantors of the EMEA Term Loan Facility provide cross-guarantees of the guarantees of the EMEA Term Loan Facility provided by the Company and its domestic subsidiaries.
The 2018 Credit Agreement does not contain a financial covenant for the US Term Loan Facility or the EMEA Term Loan Facility, but it does include a maximum Consolidated Net Secured Leverage Ratio applicable to the Revolving Line of Credit Facility in the event that utilization exceeds 30% of the revolving loan facility commitment. At March 31, 2020, the Company's utilization (as defined) of the Revolving Line of Credit Facility commitment was approximately 26%. On August 8, 2019, the Company entered into Amendment No. 1 to the 2018 Credit Agreement, which amends the Consolidated Net Secured Leverage Ratio applicable to the Revolving Line of Credit Facility for each fiscal quarter ending September 30, 2019 through December 31, 2020. If triggered, the covenant, as amended, requires the Company to maintain a Consolidated Net Secured Leverage Ratio, on a Pro Forma Basis, below the maximum ratio specified as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter Ending
|
|
Maximum Ratio
|
|
March 31, 2020
|
|
6.50:1
|
|
June 30, 2020
|
|
6.50:1
|
|
September 30, 2020
|
|
6.25:1
|
|
December 31, 2020
|
|
6.25:1
|
|
March 31, 2021
|
|
5.50:1
|
|
June 30, 2021
|
|
5.00:1
|
|
September 30, 2021
|
|
5.00:1
|
|
December 31, 2021
|
|
4.50:1
|
|
March 31, 2022
|
|
4.50:1
|
|
June 30, 2022 and thereafter
|
|
4.25:1
|
While the financial covenant was not required to be measured as a result of the utilization level of the Revolving Line of Credit Facility as of March 31, 2020, the Company's Consolidated Net Secured Leverage Ratio, as defined in the 2018 Credit Agreement, was approximately 6.53:1.
In addition, Amendment No. 1 to the 2018 Credit Agreement added certain restrictions, which remain in place from the effective date of the Amendment No. 1 until the delivery of the compliance certificate for the quarter ending March 31, 2021, demonstrating compliance with the Consolidated Net Secured Leverage Ratio for that quarter, including without limitation the following: the Company and its restricted subsidiaries (as defined in the 2018 Credit Agreement) may not make certain dividends, distributions and other restricted payments (as defined in the 2018 Credit Agreement), including that the Company may not pay dividends; the Company and its restricted subsidiaries may not designate any subsidiary an “Unrestricted Subsidiary” (which would effectively remove such subsidiary from the restrictions of the 2018 Credit Agreement); the Company and its restricted subsidiaries may not make “permitted acquisitions” (as defined in the 2018 Credit Agreement) or certain other investments, unless the Company and its restricted subsidiaries have liquidity (i.e., unrestricted cash and cash equivalents and availability under the revolving credit facility under the 2018 Credit Agreement) of at least $250 million (other than the acquisition of KPN Eurorings B.V., a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands with respect to which this liquidity requirement is not applicable); and the amount of incremental borrowings under the 2018 Credit Agreement that the Company and its subsidiaries may request when the Consolidated Net Secured Leverage Ratio is above 4.40 to 1.00 the Company and its subsidiaries was reduced to $300 million minus amounts previously requested (which amount is $50 million requested under the Incremental Agreement described above).
Interest Rate Swaps
In April and May 2018, the Company entered into the following interest rate swap arrangements to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on our term loans under the 2018 Credit Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade date
|
April 6, 2018
|
|
May 17, 2018
|
|
May 17, 2018
|
|
May 17, 2018
|
|
Notional amount (in millions)
|
$
|
500.0
|
|
|
$
|
200.0
|
|
|
$
|
300.0
|
|
|
€
|
317.0
|
|
|
Term (years)
|
5
|
|
7
|
|
3
|
|
7
|
|
Effective date
|
4/30/2018
|
|
6/29/2018
|
|
6/29/2018
|
|
6/29/2018
|
|
Termination date
|
4/30/2023
|
|
5/31/2025
|
|
6/30/2021
|
|
5/31/2025
|
|
Fixed rate
|
2.6430
|
%
|
|
3.0370
|
%
|
|
2.8235
|
%
|
|
0.8900
|
%
|
|
Floating rate
|
1-month LIBOR
|
|
1-month LIBOR
|
|
1-month LIBOR
|
|
1-month EURIBOR
|
The interest rate swaps do not qualify for hedge accounting.
The fair value of the interest rate swaps at March 31, 2020 and December 31, 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
December 31, 2019
|
|
|
|
Derivative Instrument
|
Aggregate Notional Amount
|
Effective Date
|
Maturity Date
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Interest rate swap
|
$
|
500.0
|
|
4/30/2018
|
4/30/2023
|
|
$
|
—
|
|
|
$
|
(36.1)
|
|
|
$
|
—
|
|
|
$
|
(18.2)
|
|
|
Interest rate swap
|
$
|
200.0
|
|
6/29/2018
|
5/31/2025
|
|
—
|
|
|
(27.1)
|
|
|
—
|
|
|
(15.3)
|
|
|
Interest rate swap
|
$
|
300.0
|
|
6/29/2018
|
6/30/2021
|
|
—
|
|
|
(9.5)
|
|
|
—
|
|
|
(5.8)
|
|
|
Interest rate swap
|
€
|
317.0
|
|
6/29/2018
|
5/31/2025
|
|
—
|
|
|
(14.0)
|
|
|
—
|
|
|
(14.2)
|
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(86.7)
|
|
|
$
|
—
|
|
|
$
|
(53.5)
|
|
The Company records the fair value of interest rate swaps in its condensed consolidated balance sheets within prepaid expenses and other current assets when in an asset position and within accrued expenses and other current liabilities when in a liability position. Due to the change in fair value of its interest rate swaps, the Company recognized a loss of $33.5 million and $15.3 million in other expense, net for the three months ended March 31, 2020 and 2019, respectively.
7.875% Senior Unsecured Notes
During 2016 and 2017, the Company completed three private offerings for $575.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (collectively the “7.875% Senior Unsecured Notes”). Each offering was treated as a single series of debt securities. The 7.875% Senior Unsecured Notes have identical terms other than the issuance date and offering price. The 7.875% Senior Unsecured Notes were issued at a combined premium of $16.5 million.
The 7.875% Senior Unsecured Notes are guaranteed by the Company’s domestic subsidiaries that guarantee the Company’s obligations under the U.S. Term Loan Facility and the Revolving Line of Credit Facility, but not by any of the Company’s foreign subsidiaries. We are in compliance with the subsidiary guarantee requirements for the 7.875% Senior Unsecured Notes.
Other Secured Loans
In connection with the Interoute acquisition in May 2018, the Company acquired other loans secured by certain network assets. The balance of other secured loans at March 31, 2020 and December 31, 2019 was $2.1 million and $4.3 million, respectively.
Effective Interest Rate
The effective interest rate on the Company's long-term debt at March 31, 2020 and December 31, 2019 was 5.2% and 5.2%, respectively. The effective interest rate considers the impact of the interest rate swaps.
Long-term Debt Contractual Maturities
The aggregate contractual maturities of long-term debt (excluding unamortized debt issuance costs and unamortized original issuance discounts and premiums) were as follows as of March 31, 2020 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
Total Debt
|
|
2020 remaining
|
|
$
|
22.9
|
|
|
2021
|
|
27.3
|
|
|
2022
|
|
27.5
|
|
|
2023
|
|
92.5
|
|
|
2024
|
|
602.4
|
|
|
2025 and beyond
|
|
2,560.0
|
|
|
|
|
$
|
3,332.6
|
|
Debt Issuance Costs and Original Issuance Discounts and Premiums
The following table summarizes the debt issuance costs activity for the three months ended March 31, 2020 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Term Loan
|
|
EMEA Term Loan
|
|
7.875% Senior Unsecured Notes
|
|
Revolving Line of Credit
|
|
Total
|
|
Balance, December 31, 2019
|
$
|
(9.9)
|
|
|
$
|
(2.7)
|
|
|
$
|
(12.3)
|
|
|
$
|
(3.1)
|
|
|
$
|
(28.0)
|
|
|
Debt issuance costs incurred
|
—
|
|
|
(2.3)
|
|
|
—
|
|
|
—
|
|
|
(2.3)
|
|
|
Amortization
|
0.4
|
|
|
0.3
|
|
|
0.5
|
|
|
0.2
|
|
|
1.4
|
|
|
Loss on debt extinguishment
|
—
|
|
|
2.3
|
|
|
—
|
|
|
—
|
|
|
2.3
|
|
|
Balance, March 31, 2020
|
$
|
(9.5)
|
|
|
$
|
(2.4)
|
|
|
$
|
(11.8)
|
|
|
$
|
(2.9)
|
|
|
$
|
(26.6)
|
|
Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to long-term debt. Interest expense associated with the amortization of debt issuance costs was $1.4 million and $1.2 million for the three months ended March 31, 2020 and 2019, respectively.
The following table summarizes the original issuance (discount) and premium activity for the three months ended March 31, 2020 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Term Loan
|
|
EMEA Term Loan
|
|
7.875% Senior Unsecured Notes
|
|
Total
|
|
Balance, December 31, 2019
|
$
|
(34.2)
|
|
|
$
|
(18.7)
|
|
|
$
|
12.1
|
|
|
$
|
(40.8)
|
|
|
New Original Issuance Discount
|
—
|
|
|
(5.6)
|
|
|
—
|
|
|
(5.6)
|
|
|
Fees paid to lenders
|
—
|
|
|
(3.4)
|
|
|
—
|
|
|
(3.4)
|
|
|
Amortization
|
1.4
|
|
|
0.9
|
|
|
(0.5)
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020
|
$
|
(32.8)
|
|
|
$
|
(26.8)
|
|
|
$
|
11.6
|
|
|
$
|
(48.0)
|
|
Original issuance discounts and premiums are presented in the condensed consolidated balance sheets as a reduction to long-term debt. Amortization of original issuance discounts and premiums was $1.8 million and $1.9 million for the three months ended March 31, 2020 and 2019, respectively.
NOTE 8 — FAIR VALUE MEASUREMENTS
The Company measures certain financial assets and liabilities at fair value on a recurring basis. For additional information on the Company's fair value policies refer to Note 2 - Significant Accounting Policies to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Recurring Fair Value Measurements
The following table presents the Company's financial assets and liabilities that are required to be measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of March 31, 2020 and December 31, 2019. There were no transfers between Level 1 and Level 2 during the three months ended March 31, 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
(86.7)
|
|
|
$
|
—
|
|
|
$
|
(86.7)
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in Active Markets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swap agreements
|
$
|
(53.5)
|
|
|
$
|
—
|
|
|
$
|
(53.5)
|
|
|
$
|
—
|
|
Non-recurring Fair Value Measurements
In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a non-recurring basis as required by GAAP.
Assets measured at fair value on a non-recurring basis include goodwill, tangible assets, and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).
Other Fair Value Measurements
As of March 31, 2020 and December 31, 2019, the carrying amounts reflected in the accompanying consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and other current liabilities approximated fair value due to the short-term nature of these instruments.
The table below presents the fair values for the Company's long-term debt as well as the input level used to determine these fair values as of March 31, 2020 and December 31, 2019. The carrying amounts exclude any debt issuance costs or original issuance discount (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
|
|
Total Carrying Value in Consolidated Balance Sheet
|
|
|
|
Unadjusted Quoted Prices in Active Markets for Identical Assets or Liabilities (1)
(Level 1)
|
|
|
|
|
|
March 31, 2020
|
|
December 31, 2019
|
|
March 31, 2020
|
|
December 31, 2019
|
|
Liabilities not recorded at fair value in the Financial Statements:
|
|
|
|
|
|
|
|
|
|
Long-term debt, including the current portion:
|
|
|
|
|
|
|
|
|
|
US Term loan due 2025
|
|
$
|
1,739.0
|
|
|
$
|
1,743.5
|
|
|
$
|
1,208.6
|
|
|
$
|
1,464.5
|
|
|
EMEA Term loan due 2025
|
|
951.5
|
|
|
828.8
|
|
|
777.9
|
|
|
787.9
|
|
|
7.875% Senior unsecured notes due 2024
|
|
575.0
|
|
|
575.0
|
|
|
370.9
|
|
|
435.6
|
|
|
Revolving line of credit due 2023
|
|
65.0
|
|
|
140.0
|
|
|
65.0
|
|
|
140.0
|
|
|
Other secured loans
|
|
2.1
|
|
|
4.3
|
|
|
2.1
|
|
|
4.3
|
|
|
Total long-term debt, including current portion
|
|
$
|
3,332.6
|
|
|
$
|
3,291.6
|
|
|
$
|
2,424.5
|
|
|
$
|
2,832.3
|
|
(1) Fair value based on the bid quoted price, except for the revolving line of credit and other secured loans for which carrying value approximates fair value.
NOTE 9 — SHARE-BASED COMPENSATION
Share-Based Compensation Plan
The Company grants share-based equity awards, including stock options and restricted stock, under the GTT Communications, Inc. 2018 Stock Option and Incentive Plan (the "GTT Stock Plan"). The GTT Stock Plan is limited to an aggregate 14,250,000 shares of which 12,622,117 have been issued and are outstanding as of March 31, 2020.
The GTT Stock Plan permits the granting of time-based stock options, time-based restricted stock, and performance-based restricted stock to employees and consultants of the Company, and non-employee directors of the Company.
Time-based options granted under the GTT Stock Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than 10 years from the grant date. The Company uses the Black-Scholes option-pricing model to determine the fair value of its stock option awards at the time of grant. The stock options generally vest over four years with 25% of the options becoming exercisable one year from the date of grant and the remaining vesting annually or quarterly over the following three years.
Time-based restricted stock granted under the GTT Stock Plan is valued at the share price of our common stock as reported on the NYSE on the date of grant. Time-based restricted stock generally vests over four years with 25% of the shares becoming unrestricted one year from the date of grant and the remaining vesting 75% annually or quarterly over the following three years.
Performance-based restricted stock is granted under the GTT Stock Plan subject to the achievement of certain performance measures. Once achievement of these performance measures is considered probable, the Company starts to expense the fair value of the grant over the vesting period. The performance-based restricted stock is valued at the share price of our common stock as reported on the NYSE on the date of grant. The performance grant vests quarterly over the vesting period once achievement of the performance measure has been met and approved by the Compensation Committee, typically one to two years.
The Compensation Committee of the Board of Directors, as administrator of the GTT Stock Plan, has the discretion to authorize a different vesting schedule for any awards.
In 2019, the Company implemented a sell-to-cover program for employees who elect to sell shares to cover any withholding taxes due upon vesting. Previously the Company netted shares upon vesting and paid the withholding taxes directly.
Share-Based Compensation Expense
The following tables summarize the share-based compensation expense recognized as a component of selling, general and administrative expenses in the condensed consolidated statements of operations (amounts in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Stock options
|
$
|
—
|
|
|
$
|
0.2
|
|
|
|
|
|
|
Restricted stock
|
8.2
|
|
|
8.3
|
|
|
|
|
|
|
ESPP
|
0.1
|
|
|
0.2
|
|
|
|
|
|
|
Total
|
$
|
8.3
|
|
|
$
|
8.7
|
|
|
|
|
|
As of March 31, 2020, there was $50.1 million of total unrecognized compensation cost related to unvested share-based compensation awards. The following table summarizes the unrecognized compensation cost and the weighted average period over which the cost is expected to be amortized (amounts in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
|
|
Unrecognized Compensation Cost
|
|
Weighted Average Remaining Period to be Recognized (Years)
|
|
Time-based stock options
|
$
|
—
|
|
|
0.25
|
|
Time-based restricted stock
|
48.1
|
|
|
2.64
|
|
Performance-based restricted stock (1)
|
2.0
|
|
|
0.25
|
|
Total
|
$
|
50.1
|
|
|
2.54
|
(1) Excludes $8.1 million, $25.1 million, and $12.1 million of unrecognized compensation cost related to the 2020 Performance Awards, 2018 Performance Awards, and 2017 Performance Awards, respectively, where achievement of the performance criteria was not probable as of March 31, 2020.
The following table summarizes the restricted stock granted during the three months ended March 31, 2020 and 2019 (amounts in millions, except shares data):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Time-based restricted stock granted
|
1,183,525
|
|
|
598,141
|
|
|
|
|
|
|
Fair value of time-based restricted stock granted
|
$
|
14.6
|
|
|
$
|
19.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-based restricted stock granted
|
651,350
|
|
|
24,000
|
|
|
|
|
|
|
Fair value of performance-based restricted stock granted
|
$
|
8.1
|
|
|
$
|
0.8
|
|
|
|
|
|
No stock options were issued in any period presented.
Performance-based Restricted Stock
The Company granted $17.4 million of restricted stock during 2015 and 2017 contingent upon the achievement of certain performance criteria (the "2015 Performance Awards"). The fair value of the 2015 Performance Awards was calculated using the value of GTT common stock on the respective grant dates. Upon announcement of the Hibernia acquisition in November 2016, the achievement of two of the four performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition concluded during the first quarter of 2019. Additionally, upon announcement of the Global Capacity acquisition in June 2017, the achievement of the final two performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. The Company did not recognize share-based compensation expense related to the 2015 Performance awards during the three months ended March 31, 2020 as the awards were fully vested. The Company recognized share-based compensation expense related to the 2015 Performance Awards of $1.1 million for the three months ended March 31, 2019. As of December 31, 2019, the 2015 Performance Awards were fully vested, and accordingly, the Company recognized no share-based compensation expense for the three months ended March 31, 2020.
The Company granted $32.6 million of restricted stock during 2017 and 2018 contingent upon the achievement of certain performance criteria (the "2017 Performance Awards"). The fair value of the 2017 Performance Awards was calculated using the value of GTT common stock on the grant date. Upon the closing of the Interoute acquisition in May 2018, the achievement of two
of the four performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition is expected to continue through the second quarter of 2020. The Company recognized share-based compensation expense related to the 2017 Performance Awards of $1.0 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. As of March 31, 2020, $5.4 million of unvested 2017 Performance Awards had been forfeited due to departures and remaining unrecognized compensation cost related to the unvested 2017 Performance Awards was $13.8 million, inclusive of unrecognized compensation cost where achievement of the performance criteria was not probable as of March 31, 2020.
The Company granted $31.2 million of restricted stock during 2018 and 2019 contingent upon the achievement of certain performance criteria (the "2018 Performance Awards"). The fair value of the 2018 Performance Awards was calculated using the value of GTT common stock on the grant date. As of March 31, 2020, achievement of the performance criteria was not probable. Accordingly, the Company recognized no share-based compensation expense for the three months ended March 31, 2020. As of March 31, 2020, $6.1 million of unvested 2018 Performance Awards had been forfeited due to departures and remaining unrecognized compensation cost related to the unvested 2018 Performance Awards was $25.1 million.
The Company granted $8.1 million of restricted stock during the three months ended March 31, 2020 contingent upon the achievement of certain performance criteria ("the 2020 Performance Awards"). The fair value of the 2020 Performance Awards was calculated using the value of GTT common stock on the grant date. As of March 31, 2020, achievement of the performance criteria was not probable. Accordingly, the Company recognized no share-based compensation expense for the three months ended March 31, 2020.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP") that permits eligible employees to purchase common stock through payroll deductions at the lesser of the opening stock price or 85% of the closing stock price of the common stock during each of the three-month offering periods. The Company expenses the discount offered as additional share-based compensation expense. The offering periods generally commence on the first day and the last day of each quarter. At March 31, 2020, 241,902 shares were available for issuance under the ESPP.
NOTE 10 — LOSS PER SHARE
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per share reflects, in periods with earnings and in which it has a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants.
The table below details the calculations of loss per share (in millions, except for share and per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Numerator for basic and diluted EPS – net loss available to common stockholders
|
$
|
(83.3)
|
|
|
$
|
(27.3)
|
|
|
|
|
|
|
Denominator for basic EPS – weighted average shares
|
57,259,699
|
|
|
55,839,212
|
|
|
|
|
|
|
Effect of dilutive securities
|
—
|
|
|
—
|
|
|
|
|
|
|
Denominator for diluted EPS – weighted average shares
|
57,259,699
|
|
|
55,839,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(1.45)
|
|
|
$
|
(0.49)
|
|
|
|
|
|
|
Diluted
|
$
|
(1.45)
|
|
|
$
|
(0.49)
|
|
|
|
|
|
All outstanding stock options were anti-dilutive as of March 31, 2020 and 2019 due to the net loss incurred during the periods. There were approximately 376,960 and 474,880 outstanding stock options as of March 31, 2020 and 2019, respectively.
NOTE 11 — INCOME TAXES
The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate, adjusted for the effect of discrete items arising in the quarter. Each quarter the Company updates its estimate of the annual effective tax rate.
The quarterly tax provision and the quarterly estimate of the Company's annual effective tax rate is subject to significant variation due to several factors, including variability in accurately predicting pre-tax and taxable income (loss) and the mix of jurisdictions to which they relate, effects of acquisitions and integrations, audit-related developments, changes in the Company's stock price, foreign currency gains (losses), and tax law developments. Additionally, the Company's effective tax rate may be more or less volatile based on the amount of pre-tax income or loss and impact of discrete items.
The Company recorded a (benefit from) provision for income taxes of $(1.9) million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company's existing deferred tax assets. A significant piece of objective negative evidence identified during the Company's evaluation was the cumulative loss incurred over the three year period ended December 31, 2019. Such objective evidence limits the ability to consider other subjective evidence, such as the Company's forecasts of future taxable income and tax planning strategies. On the basis of this evaluation as of March 31, 2020 and December 31, 2019, the Company recognized a valuation allowance against its net U.S. deferred tax assets under the criteria of ASC 740 of $100.7 million and $100.7 million, respectively, and the Company recognized a valuation allowance against its net foreign deferred tax assets under the criteria of ASC 740 of $111.3 million and $110.6 million, respectively. The amount of U.S. deferred tax asset considered realizable, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable, however, could be adjusted if objective negative evidence in the form of cumulative losses is no longer present and additional weight is given to subjective evidence such as forecasted taxable income. The Company will continue to evaluate the need to record valuation allowances against deferred tax assets and will make adjustments in accordance with ASC 740.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) was signed into law in response to the COVID-19 pandemic. The CARES Act provides numerous tax provisions and stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property. The Company has evaluated the provisions of the CARES Act relating to income taxes which will result in adjustments to certain deferred tax assets and liabilities. Due to the Company’s U.S. valuation allowance, the Company does not expect the provisions of the CARES Act to have a material impact on its consolidated financial statements.
NOTE 12 — SEVERANCE, RESTRUCTURING, AND OTHER EXIT COSTS
The Company incurred severance, restructuring and other exit costs associated with 2019 and 2018 acquisitions and in connection with the termination of certain facility leases. These costs include employee severance costs, termination costs associated with facility leases and network agreements, and other exit costs related to the transactions. The Company records the current portion of severance, restructuring and other exit costs as a component of accrued expenses and other current liabilities and the long-term portion of severance, restructuring and other exit costs as a component of other long-term liabilities.
The exit costs recorded and paid are summarized as follows for the three months ended March 31, 2020 (amounts in millions):
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2019
|
|
Charges
|
|
|
|
Payments
|
|
|
|
Balance, March 31, 2020
|
|
Employee termination benefits
|
$
|
2.7
|
|
|
$
|
0.1
|
|
|
|
|
$
|
(0.6)
|
|
|
|
|
$
|
2.2
|
|
|
Lease terminations
|
7.6
|
|
|
2.0
|
|
|
|
|
(0.8)
|
|
|
|
|
8.8
|
|
|
Other contract terminations
|
3.6
|
|
|
—
|
|
|
|
|
(0.4)
|
|
|
|
|
3.2
|
|
|
|
$
|
13.9
|
|
|
$
|
2.1
|
|
|
|
|
$
|
(1.8)
|
|
|
|
|
$
|
14.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2019, the Company incurred severance, restructuring and other exit costs of $2.8 million and made payments of $8.4 million.
NOTE 13 — LEASES
The Company enters into contracts to lease real estate, equipment, and vehicles, and has identified embedded leases within its colocation, dark fiber, and duct supplier contracts. The lease contracts have remaining lease terms up to 31 years and certain leases include options to extend the lease term. The Company is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
The Company's lease expense is split between cost of telecommunications services and selling, general and administrative expenses in the condensed consolidated statement of operations based on the use of the asset for which lease expense is being paid. The components of lease expense for the period were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
Operating lease expense
|
$
|
23.8
|
|
|
$
|
28.6
|
|
|
|
|
|
|
Finance lease expense:
|
|
|
|
|
|
|
|
|
Amortization of right of use assets
|
0.5
|
|
|
0.6
|
|
|
|
|
|
|
Interest on lease liabilities
|
1.3
|
|
|
1.1
|
|
|
|
|
|
|
Total finance lease expense
|
1.8
|
|
|
1.7
|
|
|
|
|
|
|
Short-term lease expense
|
5.0
|
|
|
6.2
|
|
|
|
|
|
|
Variable lease expense
|
5.6
|
|
|
7.7
|
|
|
|
|
|
|
Total lease expense
|
$
|
36.2
|
|
|
$
|
44.2
|
|
|
|
|
|
Supplemental cash flow information related to leases for the period was as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2020
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
21.7
|
|
|
$
|
34.0
|
|
|
Operating cash flows from finance leases
|
1.3
|
|
|
1.1
|
|
|
Financing cash flows from finance leases
|
2.1
|
|
|
0.6
|
|
|
|
|
|
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
2.4
|
|
|
8.0
|
|
|
Right of use assets obtained in exchange for new finance lease liabilities
|
1.0
|
|
|
—
|
|
Supplemental balance sheet information related to leases for the period was as follows:
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
Weighted average remaining lease term (amounts in years)
|
|
|
Operating leases
|
6.25
|
|
Finance leases
|
22.82
|
|
|
|
|
Weighted average discount rate
|
|
|
Operating leases
|
5.6
|
%
|
|
Finance leases
|
13.0
|
%
|
Maturities of lease liabilities were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
|
2020 remaining
|
$
|
68.0
|
|
|
$
|
5.1
|
|
|
2021
|
81.5
|
|
|
5.1
|
|
|
2022
|
63.5
|
|
|
5.2
|
|
|
2023
|
48.0
|
|
|
5.2
|
|
|
2024
|
34.3
|
|
|
5.3
|
|
|
2025 and beyond
|
95.3
|
|
|
111.2
|
|
|
Total lease payments
|
390.6
|
|
|
137.1
|
|
|
Less: Present value discount
|
(63.3)
|
|
|
(95.3)
|
|
|
Present value of lease obligations
|
$
|
327.3
|
|
|
$
|
41.8
|
|
NOTE 14 — COMMITMENTS AND CONTINGENCIES
Estimated annual commitments under contractual obligations, excluding those related to long-term debt and operating and finance leases, are as follows at March 31, 2020 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Network Supply
|
|
Other
|
|
2020 remaining
|
$
|
369.1
|
|
|
$
|
12.1
|
|
|
2021
|
367.1
|
|
|
6.6
|
|
|
2022
|
272.5
|
|
|
3.7
|
|
|
2023
|
85.0
|
|
|
2.8
|
|
|
2024
|
26.6
|
|
|
2.4
|
|
|
2025 and beyond
|
65.6
|
|
|
7.2
|
|
|
|
$
|
1,185.9
|
|
|
$
|
34.8
|
|
Refer to Note 7 - Debt for the aggregate contractual maturities of long-term debt (excluding unamortized debt issuance costs and unamortized original issuance discounts and premiums) at March 31, 2020 and refer to Note 13 - Leases for the aggregate contractual maturities of operating leases and finance leases at March 31, 2020.
Network Supply Agreements
As of March 31, 2020, the Company had purchase obligations of $1,185.9 million associated with the telecommunications services that the Company has contracted to purchase from its suppliers that are not accounted for as operating leases. The Company’s supplier agreements fall into two key categories, the Company's core IP backbone and client specific locations (also referred to as "last mile" locations). Supplier agreements associated with the Company's core IP backbone are typically contracted on a one year term and do not relate to any specific underlying client commitments. The short-term duration allows the Company to take advantage of favorable pricing trends.
Supplier agreements associated with the Company's client specific locations, which represent the substantial majority of the Company's network spending, are typically contracted so the terms and conditions in both the vendor and client contracts are substantially the same in terms of duration and capacity. The back-to-back nature of the Company’s contracts means that its network supplier obligations are generally mirrored by its clients' commitments to purchase the services associated with those obligations.
Legal Proceedings
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. Except as disclosed below, the Company does not believe that it is a party to any current or pending legal action that could reasonably be expected to have a material adverse effect on its financial condition or results of operations and cash flow.
On July 30, 2019, a purported class action complaint was filed against the Company and certain of its current and former officers and directors in the U.S District Court for the Eastern District of Virginia (Case No. 1:19-cv-00982) on behalf of certain GTT stockholders. The complaint alleges that defendants made false or misleading statements and omissions of purportedly material
fact, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, in connection with disclosures relating to GTT's acquisition and integration of Interoute Communications Holdings S.A. The complaint seeks unspecified damages. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. At this time, no assessment can be made as to its likely outcome or whether the outcome will be material to the Company.