Estimated amortization expense related to intangible assets subject to amortization at September 30, 2017March 31, 2020 in each of the years subsequent to September 30, 2017March 31, 2020 is as follows (amounts in thousands)millions):
The following table summarizes the Company’s accrued expenses and other current liabilities as of September 30, 2017March 31, 2020 and December 31, 20162019 (amounts in thousands)millions):
|
| | | |
| Capacity Sales and IRUs |
2017 remaining | $ | 5,430 |
|
2018 | 15,681 |
|
2019 | 11,249 |
|
2020 | 10,919 |
|
2021 | 10,049 |
|
2022 and beyond | 73,347 |
|
| $ | 126,675 |
|
NOTE 67 — DEBT
As of September 30, 2017March 31, 2020 and December 31, 2016,2019, long-term debt was as follows (amounts in thousands)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 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | |
Term loan | $ | 694,750 |
| | $ | 425,775 |
|
7.875% Senior unsecured notes | 450,000 |
| | 300,000 |
|
Revolving line of credit | — |
| | 20,000 |
|
Total debt obligations | 1,144,750 |
| | 745,775 |
|
Unamortized debt issuance costs | (30,806 | ) | | (9,310 | ) |
Unamortized original issuance premium (discount), net | 1,941 |
| | (6,957 | ) |
Carrying value of debt | 1,115,885 |
| | 729,508 |
|
Less current portion | (7,000 | ) | | (4,300 | ) |
Long-term debt less current portion | $ | 1,108,885 |
| | $ | 725,208 |
|
20172018 Credit Agreement
On January 9, 2017,May 31, 2018, the Company entered into a credit agreement (the "2017"2018 Credit Agreement") that provides for (1) a $700.0$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 $75.0$200.0 million revolving linecredit facility (the "Revolving Line of credit facilityCredit Facility") (which includes a $25.0$50.0 million letter of credit facility). In addition, the Company may request incremental term loan and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0 million and an unlimited amount that is subject to pro forma compliance with certain net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0 million. The term loan facilityUS Term Loan Facility was issued at an original issuance discount of $3.5$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 term loan facilityUS Term Loan Facility and the EMEA Term Loan Facility (collectively the "Term Loan Facilities") is January 9, 2024May 31, 2025 and the maturity date of the revolving lineRevolving Line of credit facilityCredit Facility is January 9, 2022. May 31, 2023. Each maturity date may be extended per the terms of the 2018 Credit Agreement.
The principal amountamounts of the term loan facility isUS Term Loan Facility and EMEA Term Loan Facility are payable in equal quarterly installments of $1.8$4.425 million and €1.875 million, respectively, commencing on March 31, 2017September 30, 2018 and continuing thereafter until the maturity date when the remaining balancebalances of outstanding principal amount is payable in full. In addition to scheduled mandatory repayments, the Company is also required to repay an amount of up to 50% of Excess Cash Flow (as defined in the Credit Agreement). No such excess cash payments were made during the nine months ended September 30, 2017.
The Company may prepay loans under the 20172018 Credit Agreement at any time, subject to certain notice requirements, and LIBOR breakage costs.costs, and prepayment fees noted above.
At the Company'sCompany’s election, the loans under the 2017 Credit AgreementUS Term Loan Facility may be made as either Base Rate Loans or EurodollarEurocurrency Loans. The Eurodollar Loans are subject to a floor of 1.00%.
On July 10, 2017,EMEA Term Loan Facility will bear interest at the Company entered into Amendment No. 1 (the "Repricing Amendment") to the 2017 Credit Agreement. The Repricing Amendment, among other things, reducedEuropean Money Markets Institute EURIBOR plus the applicable margin. The applicable margin on Tranche Bfor the US Term Loans from 3.00% to 2.25%Loan Facility is 1.75% for Base Rate Loans and from 4.00%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 Eurodollar Loans,revolving loans denominated in Euros.
The proceeds from the US Term Loan Facility and reducedEMEA 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 on revolving loans from
2.50% to 2.00%for the 2020 EMEA Term Loan Facility is (a) 3.25% for Base Rate Loans and from 3.50%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 3.00%repay amounts outstanding under the Revolving Line of Credit Facility and for Eurodollar Loans. general corporate purposes.
The amendment also established a soft call protectionunused and available amount of 1.0% through January 10, 2018 for certain prepayments, refinancings, and amendments.the Revolving Line of Credit Facility at March 31, 2020 was as follows (amounts in millions):
The effective interest rates on the term loan at September 30, 2017 and December 31, 2016 was 4.6% and 5.8%, respectively. | | | | | |
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 20172018 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 guarantors.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 20172018 Credit Agreement does not contain a financial covenant for the term loan facility,US Term Loan Facility or the EMEA Term Loan Facility, but includesit does include a maximum consolidated net secured leverage ratioConsolidated Net Secured Leverage Ratio applicable to the revolving credit facilityRevolving Line of Credit Facility in the event that utilization exceeds 30% of the revolving loan facility commitment.
The unused and available amount At March 31, 2020, the Company's utilization (as defined) of the revolving lineRevolving Line of credit facility at September 30, 2017Credit Facility commitment was as follows:
|
| | | |
Committed capacity | $ | 75,000 |
|
Borrowings outstanding | — |
|
Letters of credit issued | (3,296 | ) |
Unused and available | $ | 71,704 |
|
approximately 26%. On October 12, 2017,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 Incremental Revolving“Unrestricted Subsidiary” (which would effectively remove such subsidiary from the restrictions of the 2018 Credit Assumption Agreement to increaseAgreement); 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 line of credit facility from $75.0under 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 $100.0 million.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
In DecemberDuring 2016 and 2017, the Company completed a3 private offering of $300.0offerings for $575.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (the "Original Notes"(collectively the “7.875% Senior Unsecured Notes”). The proceeds from the Original Notes were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia in January 2017. The Company recognized the proceeds from the privateEach offering as restricted cash and cash equivalents in its consolidated financial statements as of December 31, 2016. The funds were subsequently released with the closing of Hibernia. In connection with the offering, the Company incurred debt issuance costs of $9.7 million, of which $0.5 million was incurred in 2016 and the remainder was incurred in 2017.
In June 2017, the Company completed a private offering of $150.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (the "June 2017 Notes"). The June 2017 Notes will be treated as a single series of debt securities with the Company's Original Notes (together with the June 2017 Notes, the "Existing Notes").securities. The June 20177.875% Senior Unsecured Notes have identical terms as the Original Notes, other than the issueissuance date and offering price. The June 20177.875% Senior Unsecured Notes were issued at a combined premium of $9.0$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 offering,Interoute acquisition in May 2018, the Company incurredacquired 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 issuance costsat March 31, 2020 and December 31, 2019 was5.2% and 5.2%, respectively. The effective interest rate considers the impact of $2.9 million.the interest rate swaps.
On October 10, 2017, the Company completed a private offering of $125.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (the "October 2017 Notes"). The October 2017 Notes will be treated as a single series of debt securities with the Existing Notes. The October 2017 Notes have identical terms as the Existing Notes, other than the issue date and offering price. The October 2017 Notes were issued at a premium of $7.5 million. In connection with the offering, the Company incurred debt issuance costs of $2.0 million.
Term Loan and 7.875% Senior Unsecured NotesLong-term Debt Contractual Maturities
The aggregate contractual maturities of long-term debt (excluding unamortized debt issuance costs and unamortized OID)original issuance discounts and premiums) were as follows as of September 30, 2017March 31, 2020 (amounts in thousands)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 | |
|
| | | |
| Total debt |
2017 remaining | $ | 1,750 |
|
2018 | 7,000 |
|
2019 | 7,000 |
|
2020 | 7,000 |
|
2021 | 7,000 |
|
2022 and beyond | 1,115,000 |
|
| $ | 1,144,750 |
|
Debt Issuance Costs and Original Issuance Discounts and Premiums
The following table summarizes the debt issuance costs activity for the ninethree months ended September 30, 2017March 31, 2020 (amounts in thousands)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) | |
|
| | | | | | | | | | | | | | | |
| Term Loan | | 7.875% Senior Unsecured Notes | | Revolving Line of Credit | | Total |
Balance, December 31, 2016 | $ | (7,765 | ) | | $ | (481 | ) | | $ | (1,064 | ) | | $ | (9,310 | ) |
Debt issuance costs incurred | (14,467 | ) | | (13,660 | ) | | (1,754 | ) | | (29,881 | ) |
Amortization | 1,622 |
| | 812 |
| | 204 |
| | 2,638 |
|
Loss on debt extinguishment | 5,397 |
| | — |
| | 350 |
| | 5,747 |
|
Balance, September 30, 2017 | $ | (15,213 | ) | | $ | (13,329 | ) | | $ | (2,264 | ) | | $ | (30,806 | ) |
Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to "Long-termlong-term debt." Interest expense associated with the amortization of debt issuance costs was $1.0$1.4 million and $0.3$1.2 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $2.6 million and $1.2 million for the nine months ended September 30, 2017 and 2016,2019, respectively.
The following table summarizes the original issuance discount(discount) and premium activity for the ninethree months ended September 30, 2017March 31, 2020 (amounts in thousands)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) | |
|
| | | | | | | | | | | |
| Term Loan | | 7.875% Senior Unsecured Notes | | Total |
Balance, December 31, 2016 | $ | (6,957 | ) | | $ | — |
| | $ | (6,957 | ) |
New Original Issuance (Discount)/Premium | (3,500 | ) | | 9,000 |
| | 5,500 |
|
Amortization | 781 |
| | (283 | ) | | 498 |
|
Loss on debt extinguishment | 2,900 |
| | — |
| | 2,900 |
|
Balance, September 30, 2017 | $ | (6,776 | ) | | $ | 8,717 |
| | $ | 1,941 |
|
OID isOriginal issuance discounts and premiums are presented in the condensed consolidated balance sheets as a reduction to "Long-termlong-term debt." Interest expense, net associated with the amortization Amortization of OIDoriginal issuance discounts and premiums was $(27) thousand$1.8 million and $0.3$1.9 million for the three months ended September 30, 2017March 31, 2020 and 2016, respectively, and $0.5 million and $0.6 million for the nine months ended September 30, 2017 and 2016,2019, respectively.
NOTE 8 — FAIR VALUE MEASUREMENTS
The Company expensed an aggregatemeasures 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 $3.0 millionthe fair value hierarchy as of March 31, 2020 and $8.6 millionDecember 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 and OID that did not qualifyor 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 deferral as a "Loss on debt extinguishment" in the condensed consolidated statements of operations for the three and nine months ended September 30, 2017, respectively.
Previous Debt Agreement - October 2015 Credit Agreement
On October 22, 2015, the Company entered into a credit agreement (the “October 2015 Credit Agreement”) that provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit (which includes a $15.0 million letter of credit facility and a $10.0 million swingline facility). As of December 31, 2016, the Company had drawn $20.0 million under the revolving lineother secured loans for which carrying value approximates fair value.
of credit and had $29.5 million of borrowing capacity available. Amounts outstanding under October 2015 Credit agreement were paid in full at the closing of the 2017 Credit Agreement. The previous term loan was issued at an OID of $8.0 million.
NOTE 79 — 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 Plan.Option and Incentive Plan (the "GTT Stock Plan"). The GTT Stock Plan is limited to an aggregate 9,500,00014,250,000 shares of which 8,174,24012,622,117 have been issued and are outstanding as of September 30, 2017.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 75% annually or quarterly over the following three years.
Time-based restricted stock granted under the GTT Stock Plan is valued at the GTT closingshare price of our common stock priceas 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 closingshare 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.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 expenseexpenses in the condensed consolidated statements of operations (amounts in thousands)millions):
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
| 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | |
Stock options | $ | 354 |
| | $ | 446 |
| | $ | 1,029 |
| | $ | 1,178 |
| Stock options | $ | — | | | $ | 0.2 | | |
Restricted stock | 5,666 |
| | 4,356 |
| | 14,802 |
| | 9,625 |
| Restricted stock | 8.2 | | | 8.3 | | |
ESPP | 38 |
| | 42 |
| | 129 |
| | 93 |
| ESPP | 0.1 | | | 0.2 | | |
Total | $ | 6,058 |
| | $ | 4,844 |
| | $ | 15,960 |
| | $ | 10,896 |
| Total | $ | 8.3 | | | $ | 8.7 | | |
As of September 30, 2017,March 31, 2020, there was $47.1$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 thousands)millions):
| | | | | | | | | | | |
| 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.
|
| | | | | |
| September 30, 2017 |
| Unrecognized Compensation Cost | | Weighted Average Remaining Period to be Recognized (Years) |
Time-based stock options | $ | 2,229 |
| | 1.68 |
Time-based restricted stock | 33,511 |
| | 2.45 |
Performance-based restricted stock | 11,349 |
| | 1.39 |
Total | $ | 47,089 |
| | 2.16 |
The following tables summarizetable summarizes the stock options and restricted stock granted during the three and nine months ended September 30, 2017March 31, 2020 and 20162019 (amounts in thousands,millions, except shares data):
| | | | | | | | | | | | | | | |
| 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 | | | | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Time-based stock options granted | — |
| | 3,000 |
| | — |
| | 158,958 |
|
Fair value of stock options granted | $ | — |
| | $ | 30 |
| | $ | — |
| | $ | 971 |
|
| | | | | | | |
Time-based restricted stock granted | 258,088 |
| | 100,059 |
| | 949,896 |
| | 629,362 |
|
Fair value of time-based restricted stock granted | $ | 8,076 |
| | $ | 1,846 |
| | $ | 28,066 |
| | $ | 9,170 |
|
No stock options were issued in any period presented.
Performance-based Restricted Stock
The Company granted $8.5 million of restricted stock during 2014 and early 2015 contingent upon the achievement of certain performance criteria (the "2014 Performance Awards"). The fair value of the 2014 Performance Awards was calculated using the value of GTT common stock on the grant date. The Company started recognizing share-based compensation expense for these grants when the achievement of the performance criteria became probable, which was in the third quarter of 2015. The 2014 Performance Awards started vesting in the fourth quarter of 2015 when the performance criteria were met and they will continue to vest ratably through the third quarter of 2017. As of September 30, 2017, the 2014 Performance Awards were fully vested.
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 will continue throughconcluded 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. Expense recognition will continue throughThe Company did not recognize share-based compensation expense related to the fourth quarter of 2019.2015 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 $1.5 million and $4.2$1.1 million for the three and nine months ended September 30, 2017, respectively. NoMarch 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 duringshare-based compensation expense related to the comparable 2016 period.2017 Performance Awards of $1.0 million and $1.8 million for the three months ended March 31, 2020 and 2019, respectively. As of September 30,March 31, 2020, $5.4 million of unvested 2017 unamortizedPerformance Awards had been forfeited due to departures and remaining unrecognized compensation cost related to the unvested 20152017 Performance Awards was $11.3$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 0 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 lessorlesser 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 September 30, 2017, 444,994March 31, 2020, 241,902 shares were available for issuance under the ESPP.
NOTE 810 — 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):
| | | | | | | | | | | | | | | |
| 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 updateupdates 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.
For the nine months ended September 30, 2017, theThe 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 benefitassets. A significant piece of $22.7objective 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 which included $5.4and $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 discreteoperating losses, temporary changes to the prior and future limitations on interest deductions, and technical corrections from prior tax benefits primarily attributablelegislation for tax depreciation of certain qualified improvement property. The Company has evaluated the provisions of the CARES Act relating to excessincome taxes which will result in adjustments to certain deferred tax benefits from share-based compensation.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 912 — 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 acquisitiontermination of Hibernia, Perseus, and Global Capacity.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 total exit costs recorded and paid relating to the acquisitions mentioned above are summarized as follows for the ninethree months ended September 30, 2017March 31, 2020 (amounts in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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
|
| | | | | | | | | | | | | | | |
| Balance, December 31, 2016 | | Charges and Adjustments | | Payments | | Balance, September 30, 2017 |
Employee Termination Benefits | $ | 42 |
| | $ | 16,132 |
| | $ | (7,349 | ) | | $ | 8,825 |
|
Contract Terminations: | | | | | | | |
Lease terminations | 859 |
| | 3,491 |
| | (744 | ) | | 3,606 |
|
Other contract terminations | 2,346 |
| | 2,225 |
| | (1,332 | ) | | 3,239 |
|
| $ | 3,247 |
| | $ | 21,848 |
| | $ | (9,425 | ) | | $ | 15,670 |
|
The total exit costs recordedCompany enters into contracts to lease real estate, equipment, and paid relatingvehicles, and has identified embedded leases within its colocation, dark fiber, and duct supplier contracts. The lease contracts have remaining lease terms up to prior year acquisitions are summarized31 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 nine months ended September 30, 2016period was as follows (amounts in thousands)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):
|
| | | | | | | | | | | | | | | |
| Balance, December 31, 2015 | | Charges and Adjustments | | Payments | | Balance, September 30, 2016 |
Employee Termination Benefits | $ | 1,903 |
| | $ | 870 |
| | $ | (2,728 | ) | | $ | 45 |
|
Contract Terminations: | | | | | | | |
Lease terminations | 1,503 |
| | — |
| | (838 | ) | | 665 |
|
Other contract terminations | 3,427 |
| | (102 | ) | | (586 | ) | | 2,739 |
|
| $ | 6,833 |
| | $ | 768 |
| | $ | (4,152 | ) | | $ | 3,449 |
|
| | | | | | | | | | | |
| 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 1014 — 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 September 30, 2017March 31, 2020 (amounts in thousands)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 | |
|
| | | | | | | | | | | | | | | |
| Network Supply | | Office Space | | Capital Leases | | Other |
2017 remaining | $ | 40,310 |
| | $ | 1,726 |
| | $ | 560 |
| | $ | 796 |
|
2018 | 115,656 |
| | 5,774 |
| | 1,277 |
| | 628 |
|
2019 | 62,454 |
| | 4,962 |
| | 223 |
| | 1,500 |
|
2020 | 21,314 |
| | 3,974 |
| | — |
| | 1,500 |
|
2021 | 7,008 |
| | 3,462 |
| | — |
| | 1,125 |
|
2022 and beyond | 44,100 |
| | 7,992 |
| | — |
| | — |
|
| $ | 290,842 |
| | $ | 27,890 |
| | $ | 2,060 |
| | $ | 5,549 |
|
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 September 30, 2017,March 31, 2020, the Company had purchase obligations of $290.8$1,185.9 million associated with the telecommunications services that the Company has contracted to purchase from its suppliers.suppliers that are not accounted for as operating leases. The Company’s supplier agreements fall into two2 key categories, the Company's core networkIP backbone and customerclient specific locations (also referred to as 'last mile'"last mile" locations). Supplier agreements associated with the Company's core networkIP backbone are typically contracted on a one-yearone year term and do not relate to any specific underlying customerclient commitments. The short-term duration allows the Company to take advantage of favorable pricing trends.
Supplier agreements associated with the Company's customerclient specific locations, which representsrepresent the substantial majority of the Company's network spending, are typically contracted so the terms and conditions in both the vendor and customerclient 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 customers'clients' commitments to purchase the services associated with those obligations.
Office Space and Leases
The Company is currently headquartered in McLean, Virginia and has 17 other offices throughout North America, seven offices in Europe, one office in India, two offices in Hong Kong, and two offices in Brazil. The Company records rent expense using the straight-line method over the term of the respective lease agreement. Office facility rent expense was $1.1 million and $0.7 million for the three months ended September 30, 2017 and 2016, respectively, and $3.2 million and $2.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Legal Proceedings
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. As of September 30, 2017,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 flows.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.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as the consolidated financial statements and Management's Discussion and Analysis ("MD&A") ofin our Annual Report.Report on Form 10-K for the fiscal year ended December 31, 2019. In addition to historical consolidated financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs.
We have attempted to identify these forward-looking statements by the use of words such as “may,” “will,” “seek,” “expects,” “anticipates,” “believes,” “targets,” “intends,” “should,” “estimates,” “could,” “continue,” “assume,” “projects,” “plans” or similar expressions.Our actual results, performance or achievements could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include, those discussed below. but are not limited to:
•We are subject to risks associated with the actions of network providers and a concentrated number of vendors and clients.
•We could be subject to cyber-attacks and other security breaches.
•Our network could suffer serious disruption if certain locations experience damage or as we add features and update our network.
•We are subject to risks associated with purchase commitments to vendors for longer terms or in excess of the volumes committed by our underlying clients, or sales commitments to clients that extend beyond our commitments from our underlying suppliers.
•We may be unable to establish and maintain peering relationships with other providers or agreements with carrier neutral data center operators.
•Our business, results of operation and financial condition are subject to the impacts of the COVID-19 pandemic and related market and economic conditions.
•We may be affected by information systems that do not perform as expected or by consolidation, competition, regulation, or a downturn in our industry.
•We may be liable for the material that content providers distribute over our network.
•We have generated net losses historically and may continue to do so.
•We may fail to successfully integrate any future acquisitions or to efficiently manage our growth.
•We may be unable to retain or hire key employees.
•We are subject to risks relating to the international operations of our business.
•We may be affected by future increased levels of taxation.
•We have substantial indebtedness, which could prevent us from fulfilling our obligations under our debt agreements or subject us to interest rate risk.
For a more complete description of the risks noted above and other risks that could cause our actual results to materially differ from our current expectations, please see Part I, Item 1A “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2019, which we refer to as our Annual Report.Report and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. We assume no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law.
Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “GTT,” or the “Company” mean GTT Communications, Inc. together with its consolidated subsidiaries.
Executive Summary
GTT Communications, Inc. isserves 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 our core values of simplicity, speed and agility. We operate a providerTier 1 internet network ranked among the largest in the industry, and own a fiber network that includes an expansive pan-European footprint and subsea cables. Our global network includes over 600 unique points of presence (PoPs) spanning six continents, and we provide services in more than 140 countries. Our comprehensive portfolio of cloud networking services to multinational clients. We offer a broad portfolio of globalincludes:
•Wide area networking, including software-defined wide area networking (“SD-WAN”), multiprotocol label switching ("MPLS"), and virtual private LAN service ("VPLS");
•Internet, including IP transit, dedicated internet access, and broadband internet;
•Transport, including dedicated Ethernet and video transport;
•Infrastructure, including wavelength, colocation, and dark fiber;
•Unified Communication ("UC"), including Session Initiation Protocol ("SIP") trunking, cloud unified communication service, and traditional analog voice (POTS);
•Managed network services, including: private networking services, Internet services, optical transport,including managed networkingequipment and managed security; and
•Advanced solutions, including premium security services, voicehybrid cloud services, database and unified communication services,application management.
Impact of the COVID-19 Pandemic
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic, which continues to be spread throughout the U.S. and video transport services.
Our global Tier 1 IP network delivers connectivity forthe world. The impact from the rapidly changing market and economic conditions due to the COVID-19 outbreak is uncertain. It has disrupted the business of our clients aroundand suppliers, will impact our business and consolidated results of operations and could impact our financial condition in the world.future. While we have not incurred significant disruptions thus far from the COVID-19 outbreak, we are unable to accurately predict the full impact that COVID-19 will have due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact to the business of our customers and partners and other factors identified in Part II, Item 1A “Risk Factors” in this Form 10-Q. We provide servicesbelieve that our financial resources will allow us to leading multinational enterprise, carrier,manage the impact of COVID-19 on our business operations for the foreseeable future, but we are continuing to actively monitor the situation and government customersare developing plans should we begin to experience material impacts.
During the three months ended March 31, 2020, the pandemic did not have a material impact on our financial results.
With respect to the remainder of 2020, the negative impact COVID-19 may have on the broader global economy and the pace of the economic recovery is unknown.Given the unknown magnitude of the depth and duration of this crisis, we anticipate a more challenging macroeconomic environment in over 100 countries. We strivethe remainder of the year.
In March 2020, we directed our workforce to differentiate ourselveswork from home and severely limited all international and domestic travel.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors” of this Quarterly Report on Form 10-Q.However, based on our competition by delivering servicecurrent revenue outlook, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our clients with simplicity, speed,operations and agility.meet our foreseeable cash requirements through at least the next 12 months from the date of this filing.
We deliver six primary service offerings to our customers:Wide Area Networking
Private Networking Services
We provide Layer 2 (Ethernet) and Layer 3 (MPLS and IP-VPN) privatea variety of wide area networking solutions to meet the growing needs of multinational enterprises, carriers, service providers,our clients, including SD-WAN, MPLS, and content delivery networks regardless of location. We designVPLS. Our wide area networking solutions are positioned to provide the highest network quality and implement custom private, public, and hybrid cloud network solutions for our customers,value with global reach, offering bandwidth speeds from 10 Mbps to 100 Gbps per port with burstable and aggregate bandwidth capabilities. All services are available onOur VPLS service provides an any-to-any Layer 2 Virtual Private Network ("VPN") service in a protected basisfully meshed configuration with multiple classes of service for prioritization of traffic types. Our MPLS service is an any-to-any Layer 3 IP VPN service with the abilityoption of full management in a meshed configuration, providing a private IP network based on the client’s routing plan.
SD-WAN is an enterprise networking technology in the stage of accelerated market adoption with projected high growth based on industry forecasts. The software-based network intelligence in SD-WAN enables more efficient delivery of traffic across a mix of access types, accelerates the speed of service deployments, and improves application visibility and performance. GTT’s SD-WAN delivers managed global connectivity, enhanced application performance and control, and secure access to specify pre-configured alternate routescloud-based services and applications. Our service leverages GTT’s global, Tier 1 IP network, securely connecting client locations to minimizeany destination on the impactinternet or to any cloud service provider. We offer the widest range of anyaccess options and use multiple network disruption.technologies, allowing us to provide tailored solutions to meet the specific requirements of our clients.
Through GTT's privatewide area networking services, clients can securely connect to cloud service providers in data centers and exchanges around the world. Our Cloud Connect feature provides private, secure, pre-established connectivity to leading cloud
service providers. ClientsUsing GTT's global network, clients can connect to GTT in oneany office location and have access to a broad cloud service provider ecosystem from anywhere in the world.world and to any application in the cloud.
Internet Services
WeGTT operates one of the largest Tier 1 global IP networks. Utilizing that platform we offer domestic and multinational customersclients scalable, high-bandwidth global Internetinternet connectivity and IP transit with guaranteed availability and packet delivery. Over 60 percent of our clients' IP traffic is delivered on-net, utilizing our Tier 1 global IP network that is ranked among the largest in the industry for the breadth of connections to other autonomous systersm ("AS") numbers.*
Our Internetinternet services offer flexible connectivity with multiple port interfaces including Fast Ethernet, Gigabit Ethernet, 10 Gigabit Ethernet, andports available at up to 100 Gigabit Ethernet.Gbps. We also offer a wide range of broadband internet and wireless internet access services. We support a dual stack of IPv4 and IPv6 protocols, enabling the delivery of seamless IPv6 services alongside existing IPv4 services.
* Based on CAIDA's ranking of AS which approximately map to internet service providers and organizations (which are a collection of one or more ASes). This ranking is derived from topological data collected by CAIDA's Archipelago Measurement Infrastructure and Border Gateway Protocol (BGP) routing data collected by the Route Views Project and RIPE NCC.
Optical Transport
GTT offers transport services, including dedicated ethernet and video transport.
GTT’s ethernet service enables clients to design a network environment best suited to their needs, with point-to-point and point-to-multipoint topology options, and dynamic or fixed routing. GTT’s ethernet direct service provides enhanced performance capabilities for clients seeking guaranteed routes and latency Service-Level Agreement ("SLAs") between key data centers and carrier hotels over a service-specific platform.
We offer video transport for clients in the media and entertainment industry, designed to support broadcast quality transmission of live events, sports entertainment, and news. We can manage individual services, multicast distribution, and entire client networks, supporting all video formats required for today's media workflow.
Infrastructure
We provide a full suite of optical transportinfrastructure services over a coreour fiber network, enabling cloud-based applications and the transport of high volume data between data centers, large enterprise office locations, and media hubs. Our native wavelength product is designed to deliver scalable high performance optical connectivity over a state-of-the-art dense wave division multiplexing ("DWDM") platform. Our service is differentiated based on uniquean expansive pan-European fiber footprint and subsea cable infrastructure, network diversity, and low latency connections between major financial and commercial centers in North America and Europe. Our clients for these services include Internet-basedinternet-based technology companies and OTTs,Over-The-Tops, large banks, and other service providers requiring network infrastructure. All services are available on a protected basis with the ability to specify pre-configured alternate routes to minimize the impact of any network disruption.
Additionally, we provideGTT’s wavelength service is designed to deliver scalable high-performance optical connectivity over a state-of-the-art dense wave division multiplexing platform. We offer low latency services between the major financial centers and exchanges, tailored to meet the requirements of proprietary trading firms for the fastest connections. Our service provides theIn particular, GTT's Express transatlantic cable offers industry leading lowest latency performance of the Express transatlantic subsea cable connectingbetween North America and Europe. We also offer dark fiber and duct services across our fiber network.
We offer colocation services in over 100 facilities in Europe which is wholly owned and operated by GTT.North America. The turnkey service offering includes cabinets, racks, suites, and technical support services, providing clients with efficient and secure access to other carrier networks.
Unified Communication
We offer unified communications globally including local voice services in over 55 countries around the world, along with global long-distance and toll-free services. Our Session Initiation Protocol trunking service delivers worldwide Public Switched Telephone Network access to client telephony equipment over an integrated data connection, driving efficiency and productivity organization-wide while allowing clients to retain control of their core voice infrastructure. Our Cloud UC service allows clients to eliminate traditional voice infrastructure with communication services delivered through the cloud, based on a soft client, offering a wide array of features and customization choices for each site and user. In the US, we offer traditional analog voice services for clients with legacy or specialized telephony needs.
Managed Network and Security Services
We offer fully managed network services, including managed equipment and security.
GTT's managed security services, and managed secure access, enabling customers to focus on their core business. These end-to-end services cover the design, procurement, implementation, monitoring, and maintenance of a customer’s network.
Managed CPE. Managed CPEequipment provides a turnkey solution for the end-to-end management of customer premise equipment, from premises through the core network.equipment. This includes the design, procurement, implementation, monitoring, and maintenance of equipment including routers, switches, servers, and Wi-Fi access points.
Security Services. OurGTT's managed security is available as a cloud-based andor premises-based security services provideservice and provides a comprehensive, multi-layered security solution that protects the network while meeting the most stringent security standards. Our Unified Threat Management (“UTM”)unified threat management services include advanced firewall, intrusion detection, anti-virus, web filtering, and anti-spam. UTM services also coverWe offer a broadfull range of compliance requirements, offering customers Security-as-a-Service versions of managed logging, vulnerability scanning,compliancy packages, which include developing, deploying, configuring, and monitoring network and security information management that meet numerousassets, and providing documentation to comply with audits.
Advanced Solutions
The advanced solutions portfolio comprises three areas - (i) advanced security, standards,(ii) hybrid cloud, and (iii) advanced and professional services.
GTT’s advanced security portfolio provides premium and standard security services including Payment Card Industry / Cardholdersecurity consulting, Security Information and Event Management/Security Program compliance.
Managed Secure Access. Our Managed Secure Access service provides clients of all sizes with secure remote access to their network applications from any device, anywhere, anytime from any authorized user. Managed Secure Access extends network reach, allowing trusted users to establishOperations Center event monitoring and response and other advanced security options on a secure data connection from any browser or device using Transport Layer Security to encrypt all traffic and protect the network from unauthorized users.
Managed Software Defined Wide Area Networking (“SD-WAN”). Leveraging our success to date in delivering hybrid WAN services, GTT’s Managed SD-WAN service provides our clients with optimized application performance and cost-effective network expansion,customized basis, as well as dynamic bandwidth management,firewalling, Distributed Denial-of-Service and the ability to integrate cost-effective network technologies into the corporate WAN. With a Tier 1 IP network, extensive connectivity to leadingother services.
GTT’s hybrid cloud service providers across 300+provides cloud and compute infrastructure services underpinned by GTT's cloud networking capabilities. We provide managed hybrid compute capabilities utilizing our own global points of presence,compute platform, Virtual Data Center, as well as public cloud offerings from Amazon Web Services and Microsoft Azure.
GTT’s advanced services portfolio provides a broad portfolioarray of diverse last mile connectivity options to any location inmanaged services for our clients including tailored SLAs covering networking, compute, and application infrastructure. These services include consultancy and support for database systems - Oracle, Microsoft SQL, MySQL and others - as well as services further up the world, application stack.
GTT is well positioned to deliver managed SD-WAN services.
Voice and Unified Communication Services
Our SIP Trunking service isprovides an enterprise-built unified communications offering that integrates voice, video, and chat onto a single IP connection, driving efficiency and productivity organization-wide. Our Enterprise PBX service allows clients to eliminate traditional voice infrastructure with communicationarray of professional services delivered through the cloud. The offering includes fully hosted and hybrid models for maximum flexibility.
Video Transport Services
We provide a suite of fully-managed video transport services. Our services are designed to support our clients' requirementsclients and augment the standard portfolio services, providing service, technical, and project management, as well as consultancy for stringent broadcast quality, providing 100% quality of service for transmission of live events, sports entertainment, and news. Our service options include Dedicated, Occasional Use, and IP Video. We manage individual services, multicast distribution, and entire client networks, supporting all forms of signal management required for today's media workflow. GTT's video transport services are based onour clients across the core principle of "any signal, any format, anywhere." Our clients include many of the world's top broadcasters and cable programming providers.globe.
CustomerClient and Network Supplier Contracts
Our customerclient contracts generallyare most commonly two to three years for the initial term but can range from one to five years or more for the initial term.sometimes longer. Following the initial term, these agreements typically provide for automatic renewal for specified periods ranging from one month to one year. Our prices are fixed for the duration of the contract, and we typically bill monthly in advance for such services. If a customerclient terminates its agreement, the terms of our customerclient contracts typically require full recovery of any amounts due for the remainder of the term or, at a minimum, our liability to any underlying suppliers.
Our revenue is composed of three primary categories that include recurring revenue non-recurring revenue, and usagenon-recurring revenue. Recurring revenue relates to contracted ongoing service that is generally fixed in price and paid by the customerclient on a monthly basis for the contracted term. For the ninethree months ended September 30, 2017,March 31, 2020, recurring revenue was approximately 93%94% of our total revenue. Non-recurring revenue primarily includes the amortization of previously collected installation and equipment charges to customers, andclients, one-time termination charges for customersclients who cancel their services prior to the contract termination date. Usagedate, and usage revenue which represents variable revenue based on whether a customerclient exceeds its committed usage threshold as specified in the contract.
Our network supplier contracts do not have any market related net settlement provisions. We have not entered into, and do not plan to enter into, any supplier contracts which involve financial or derivative instruments. The supplier contracts are entered into solely for the direct purchase of telecommunications capacity, which is resold by us in the normal course of business.
Other than cost of telecommunication services provided, our most significant operating expenses are employment costs. As of September 30, 2017,March 31, 2020, we had 1,166approximately 3,100 full-time equivalent employees. For the ninethree months ended September 30, 2017,March 31, 2020, the total employee cash compensation and benefits represented approximately 12%14% of total revenue.
Recent Developments Affecting Our Results
Business Acquisitions
Since our formation, we have consummated a number of transactions accounted for as business combinations which were executed as part of our strategy of expanding through acquisitions. These acquisitions, which are in addition to our periodic purchases of customerclient contracts, have allowed us to increase the scale at which we operate which in turn affords us the ability to increase our operating leverage, extend our network, and broaden our customerclient base. The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates.
Hibernia
In January 2017, we acquired Hibernia Networks ("Hibernia") for $529.6 million in cash consideration, of which $14.6 million was net cash acquired, and 3,329,872 unregistered shares of our common stock. The results of Hibernia have been included from January 1, 2017.
Perseus
In June 2017, we acquired Perseus Telecom ("Perseus") for $37.5 million in cash consideration andThere were no acquisitions completed during the assumption of approximately $1.9 million in capital leases. The results of Perseus have been included from June 1, 2017.
Global Capacity
In September 2017, we acquired Global Capacity for $104.0 million in cash consideration, of which $4.0 million was net cash acquired, and 1,850,000 unregistered shares of our common stock. The results of Global Capacity have been included from September 15, 2017.
Asset Purchases
Periodically we acquire customer contracts that we account for as an asset purchase and record a corresponding intangible asset that is amortized over its assumed useful life. During the ninethree months ended September 30,March 31, 2020.
For material acquisitions completed during 2019, 2018, and 2017, we acquired customer contracts for an aggregate purchase price of $37.3 million, of which $14.9 million was paid duringrefer to Note 3 - Business Acquisitions to the nine months ended September 30, 2017 at the acquisitions' respective closing dates. Of the remaining $22.4 million, $2.9 million was paid during the nine months ended September 30, 2017 and the remaining $19.5 million is expected to be paidconsolidated financial statements contained in the remainder of 2017 and 2018, subject toCompany's Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
any indemnification claims made through the final payment date. During 2016, we acquired customer contracts for an aggregate purchase price of $41.3 million, of which $20.0 million was paid in 2016 at the respective closing dates, and $6.0 million was paid during the nine months ended September 30, 2016. Of the remaining $21.3 million, $18.0 million was paid during the nine months ended September 30, 2017 and the remaining $3.3 million is expected to be paid in the remainder of 2017, subject to any indemnification claims made through the final payment dates.
Indebtedness
The following summarizes our long-term debt at September 30, 2017As of March 31, 2020 and December 31, 20162019, long-term debt was as follows (amounts in thousands)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 | |
|
| | | | | | | |
| September 30, 2017 | | December 31, 2016 |
| | | |
Term loan | $ | 694,750 |
| | $ | 425,775 |
|
7.875% Senior unsecured notes | 450,000 |
| | 300,000 |
|
Revolving line of credit | — |
| | 20,000 |
|
Total debt obligations | 1,144,750 |
| | 745,775 |
|
Unamortized debt issuance costs | (30,806 | ) | | (9,310 | ) |
Unamortized original issuance premium (discount), net | 1,941 |
| | (6,957 | ) |
Carrying value of debt | 1,115,885 |
| | 729,508 |
|
Less current portion | (7,000 | ) | | (4,300 | ) |
| $ | 1,108,885 |
| | $ | 725,208 |
|
2017 Credit Agreement
In January 2017, weOn May 31, 2018, the Company entered into a credit agreement (the "2017"2018 Credit Agreement") that provides for (1) a $700.0$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 $75.0$200.0 million revolving linecredit facility (the "Revolving Line of credit facilityCredit Facility") (which includes a $25.0$50.0 million letter of credit facility). In addition, we may request incremental term loan commitments and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $150.0$575.0 million and an unlimited amount that is subject to pro forma compliance with certaina net secured leverage ratio tests provided, however, that incremental revolving loan commitments may not exceed $25.0test. 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 maturity date of the term loan facility is January 2024 and the maturity date of the revolving loan facility is January 2022. The principal amount of the term loan facility is payable in equal quarterly installments of $1.8 million, commencing on March 31, 2017 and continuing thereafter until the maturity date, when the remaining balance of outstanding principal amount is payable in full. In addition to scheduled mandatory repayments, the Company is also required to repay an amount of up to 50% of Excess Cash Flow (as defined in the Credit Agreement). No such excess cash payments were made during the nine months ended September 30, 2017.
We may prepay loans under the 2017 Credit Agreement at any time, subject to certain notice requirements and LIBOR breakage costs.
At our election, the loans under the 2017 Credit Agreement may be made as either Base Rate Loans or Eurodollar Loans. The Eurodollar Loans are subject to a floor of 1.00%.
In July 2017, we entered into Amendment No. 1 (the "Repricing Amendment") to the 2017 Credit Agreement. The Repricing Amendment, among other things, reduced the applicable margin on Tranche B Term Loans from 3.00% to 2.25% for Base Rate Loans and from 4.00% to 3.25% for Eurodollar Loans, and reduced the applicable margin on Revolving Loans from 2.50% to 2.00% for Base Rate Loans and from 3.50% to 3.00% for Eurodollar Loans. The amendment also established a soft call protection of 1.0% through January 10, 2018 for certain prepayments, refinancings, and amendments.
In October 2017,On June 5, 2019, we entered into an Incremental Revolving Credit Assumption Agreement ("Incremental Agreement") to increase ourthe 2018 Credit Agreement. The Incremental Agreement establishes $50.0 million in new revolving linecredit commitments, bringing the total sum of revolving credit facility from $75.0 millioncommitments under the 2018 Credit Agreement, as modified by the Incremental Agreement, to $100.0$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.
The 2017obligations 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 term loan facility,US Term Loan Facility or the EMEA Term Loan Facility, but includesit does include a maximum consolidated net secured leverage ratioConsolidated Net Secured Leverage Ratio applicable to the revolving credit facilityRevolving Line of Credit Facility in the event that utilization exceeds 30% of the revolving loan facility commitment. At March 31, 2020, our utilization (as
defined) of the Revolving Line of Credit Facility commitment was approximately 26%. On August 8, 2019, we 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 us to maintain a Consolidated Net Secured Leverage Ratio, on a Pro Forma Basis, below the maximum ratio specified as follows:
7.875% Senior Unsecured Notes | | | | | | | | |
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, our Consolidated Net Secured Leverage Ratio, as defined in the 2018 Credit Agreement, was 6.53:1.
In December 2016 we completedaddition, 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 offeringlimited liability company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of $300.0 million aggregate principalthe Netherlands with respect to which this liquidity requirement is not applicable); and the amount of 7.875% senior unsecured notes dueincremental 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).
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 2024 (the "Original Notes"). 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 Original Notes2020 EMEA Term Loan Facility were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia in January 2017. We recognized the proceeds from the private offering as restricted cash and cash equivalents in our consolidated financial statements as of December 31, 2016, which were subsequently released with the closing of Hibernia. In connection with the offering, we incurred debt issuance costs of $9.7 million, of which $0.5 million was incurred in 2016 and the remainder was incurred in 2017.
In June 2017, we completed a private offering of $150.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024 (the "June 2017 Notes"). The June 2017 Notes will be treated as a single series of debt securities with the Company's Original Notes (together with the Original Notes, the "Existing Notes"). The June 2017 Notes have identical terms as the Original Notes, other than the issue date and offering price. The June 2017 Notes were issued at a premium of $9.0 million. In connection with the offering, we incurred debt issuance costs of $2.9 million.
In October 2017, we completed a private offering of $125.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024 (the "October 2017 Notes"). The October 2017 Notes will be treated as a single series of debt securities with the Existing Notes. The October 2017 Notes have identical terms as the Existing Notes, other than the issue date and offering price. The October 2017 Notes were issued at a premium of $7.5 million. In connection with the offering, we incurred debt issuance costs of $2.0 million.
Previous Debt Agreement
In October 2015, we entered into the October 2015 Credit Agreement, which provided for a $400.0 million term loan facility and a $50.0 million revolving line of credit facility (which included a $15.0 million letter of credit facility and a $10.0 million swingline facility). As of December 31, 2016, we had drawn $20.0 million under the revolving line of credit and had $29.5 million of available borrowing capacity. Amountsused to repay amounts outstanding under the October 2015Revolving Line of Credit Agreement were repaid in full in connection with the 2017 Credit Agreement. The previous term loan was issued at an OID of $8.0 million.
Facility and for general corporate purposes.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with GAAP. For information regarding our critical accounting policies and estimates, please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates" contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 20162019 and Note 12 - Significant Accounting Policies to our consolidated financial statements contained therein. There have been no material changes to the critical accounting policies previously disclosed in that report.report, except as described in Note 1 - Organization and Business to our condensed consolidated financial statements contained herein.
Results of Operations
Three months ended September 30, 2017March 31, 2020 compared to three months ended September 30, 2016March 31, 2019
Overview. The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information for the three months ended September 30, 2017March 31, 2020 and 20162019 (amounts in thousands)millions):
| | | Three Months Ended September 30, | | Three Months Ended March 31, | |
| 2017 | | 2016 | | $ Variance | % Change | | 2020 | | 2019 | | $ Variance | | % Change |
| | | | | | | | | | | | | | |
Revenue: | | | | | | | Revenue: | |
Telecommunications services | $ | 198,858 |
| | $ | 131,851 |
| | $ | 67,007 |
| 50.8 | % | Telecommunications services | $ | 424.7 | | | $ | 450.2 | | | $ | (25.5) | | | (5.7) | % |
| | | | | |
|
| |
Operating expenses: | | | | | | | Operating expenses: | |
Cost of telecommunications services | 100,068 |
| | 68,184 |
| | 31,884 |
| 46.8 | % | Cost of telecommunications services | 237.7 | | | 241.8 | | | (4.1) | | | (1.7) | % |
Selling, general and administrative expenses | 51,966 |
| | 37,177 |
| | 14,789 |
| 39.8 | % | Selling, general and administrative expenses | 108.2 | | | 104.1 | | | 4.1 | | | 3.9 | % |
Severance, restructuring and other exit costs | 11,125 |
| | (625 | ) | | 11,750 |
| (1,880.0 | )% | Severance, restructuring and other exit costs | 2.1 | | | 2.8 | | | (0.7) | | | (25.0) | % |
Depreciation and amortization | 32,847 |
| | 14,880 |
| | 17,967 |
| 120.7 | % | Depreciation and amortization | 67.5 | | | 62.8 | | | 4.7 | | | 7.5 | % |
| | | | | | | |
| Total operating expenses | 196,006 |
| | 119,616 |
| | 76,390 |
| 63.9 | % | Total operating expenses | 415.5 | | | 411.5 | | | 4.0 | | | 1.0 | % |
| | | | | | | |
Operating income | 2,852 |
| | 12,235 |
| | (9,383 | ) | (76.7 | )% | Operating income | 9.2 | | | 38.7 | | | (29.5) | | | (76.2) | % |
| | | | | |
|
| | | | | | | |
Other expense: | | | | | | | |
Other expenses: | | Other expenses: | |
Interest expense, net | (18,251 | ) | | (7,123 | ) | | (11,128 | ) | 156.2 | % | Interest expense, net | (48.8) | | | (48.2) | | | (0.6) | | | 1.2 | % |
Loss on debt extinguishment | (2,988 | ) | | — |
| | (2,988 | ) | * |
| Loss on debt extinguishment | (2.3) | | | — | | | (2.3) | | | * | |
Other expense, net | 220 |
| | (74 | ) | | 294 |
| (397.3 | )% | |
Other expenses, net | | Other expenses, net | (43.3) | | | (16.0) | | | (27.3) | | | 170.6 | % |
| | | | | |
|
| |
Total other expense | (21,019 | ) | | (7,197 | ) | | (13,822 | ) | 192.1 | % | |
Total other expenses | | Total other expenses | (94.4) | | | (64.2) | | | (30.2) | | | 47.0 | % |
| | | | | |
|
| |
(Loss) income before income taxes | (18,167 | ) | | 5,038 |
| | (23,205 | ) | (460.6 | )% | |
Loss before income taxes | | Loss before income taxes | (85.2) | | | (25.5) | | | (59.7) | | | 234.1 | % |
| | | | | |
|
| |
(Benefit from) provision for income taxes | (8,648 | ) | | (89 | ) | | (8,559 | ) | * |
| (Benefit from) provision for income taxes | (1.9) | | | 1.8 | | | (3.7) | | | (205.6) | % |
| |
| | |
| | |
|
| |
Net (loss) income | $ | (9,519 | ) | | $ | 5,127 |
| | $ | (14,646 | ) | (285.7 | )% | |
Net loss | | Net loss | $ | (83.3) | | | $ | (27.3) | | | $ | (56.0) | | | 205.1 | % |
| * - Not meaningful | * - Not meaningful | * - Not meaningful | |
Revenue
Our revenue increaseddecreased by $67.0$25.5 million, or 50.8%5.7%, from $131.9$450.2 million for the three months ended September 30, 2016March 31, 2019 to $198.9$424.7 million for the three months ended September 30, 2017.March 31, 2020. Recurring revenue was approximately 94% and 93% of total revenue for the three months ended March 31, 2020 and 2019, respectively. The increasedecrease in revenue was primarily due to the acquisitions of Hibernia, Perseus, and Global Capacity, as well as rep-driven growthnegative net installs,
non-recurring revenue, and the purchaseeffects of certain customer contracts.fluctuating foreign currency exchange rates, partially offset by an increase in revenue from the 2019 acquisition of KPN International ("KPN").
On a constant currency basis using the average exchange rates in effect during the three months ended September 30, 2016,March 31, 2019, revenue would have been lowerhigher by $1.1$5.8 million for the three months ended September 30, 2017.March 31, 2020.
Cost of Telecommunications Services Provided
Cost of telecommunications services provided increaseddecreased by $31.9$4.1 million, or 46.8%1.7%, from $68.2$241.8 million for the three months ended September 30, 2016March 31, 2019 to $100.1$237.7 million for the three months ended September 30, 2017.March 31, 2020. Recurring cost of telecommunications services was approximately 92% and 94% of total cost of telecommunications services for the three months ended March 31, 2020 and 2019, respectively. Consistent with our increasedecrease in revenue, the increasedecrease in cost of telecommunications services provided was principally driven by the acquisitions of Hibernia, Perseus, and Global Capacity, as well as rep-driven growtha corresponding reduction in costs related to negative net installs, cost synergies realized in 2020, and the purchaseeffects of certain customer contracts.fluctuating foreign currency exchange rates, partially offset by an increase in cost of telecommunications services from KPN.
On a constant currency basis using the average exchange rates in effect during the three months ended September 30, 2016,March 31, 2019, cost of telecommunications services provided would have been lowerhigher by $0.4$3.1 million for the three months ended September 30, 2017.March 31, 2020.
Operating Expenses
Selling, General and Administrative Expenses. SG&A Selling, general and administrative expenses increased by $14.8$4.1 million, or 39.8%3.9%, from $37.2$104.1 million for the three months ended September 30, 2016March 31, 2019 to $52.0$108.2 million for the three months ended September 30, 2017.March 31, 2020. The following table
summarizes the major categories of selling, general and administrative expenses for the three months ended September 30, 2017March 31, 2020 and 20162019 (amounts in thousands)millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | | | | | |
| 2020 | | 2019 | | $ Variance | | % Change |
Employee related compensation (excluding share-based compensation) | $ | 59.6 | | | $ | 53.6 | | | $ | 6.0 | | | 11.2 | % |
Share-based compensation | 8.3 | | | 8.7 | | | (0.4) | | | (4.6) | % |
Transaction and integration expense | 2.2 | | | 9.2 | | | (7.0) | | | (76.1) | % |
Other SG&A(1) | 38.1 | | | 32.6 | | | 5.5 | | | 16.9 | % |
Total | $ | 108.2 | | | $ | 104.1 | | | $ | 4.1 | | | 3.9 | % |
|
| | | | | | | | | | | | | | |
| Three Months Ended September 30, |
| 2017 | | 2016 | | $ Variance | | % Change |
Employee related compensation (excluding share-based compensation) | $ | 24,686 |
| | $ | 17,917 |
| | $ | 6,769 |
| | 37.8 | % |
Share-based compensation | 6,058 |
| | 4,844 |
| | 1,214 |
| | 25.1 | % |
Transaction and integration expense | 3,367 |
| | 801 |
| | 2,566 |
| | 320.3 | % |
Other SG&A(1) | 17,855 |
| | 13,615 |
| | 4,240 |
| | 31.1 | % |
Total | $ | 51,966 |
| | $ | 37,177 |
| | $ | 14,789 |
| | 39.8 | % |
(1) Includes bad debt expense, professional fees, marketing costs, facilities, and other general support costs.
Employee related compensation increased primarily due to the Hibernia acquisition.an increased investment in headcount. Share-based compensation expense increasesdecreases were primarily driven by the recognition of share-based compensation for2015 performance awards and an increasebecoming fully vested in the aggregate valuefirst quarter of employee equity awards.the prior year. Transaction and integration costs increases were driven by final integration costs relateddecreased as we have not made any acquisitions in 2020 and we continue to Hiberniamove away from the 2018 and transaction costs associated with the acquisitions of Perseus and Global Capacity.2019 Acquisitions. Other SG&A expense increases were principally driven by the acquisition of Hibernia.
Severance, Restructuring and Other Exit Costs. For the three months ended September 30, 2017, we incurred restructuring charges of $11.1 million relating to the Hibernia, Perseus, and Global Capacity acquisitions. During the three months ended September 30, 2016, we reversed restructuring charges of $0.6 million related to the February 2016 acquisition of Telnes Broadband ("Telnes").
Depreciation and Amortization. Amortization of intangible assets increased $6.9 million or 67.7%, from $10.1 million to $17.0 million for the three months ended September 30, 2017, primarily due to the additional definite-lived intangible assets recordedan increase in the Hibernia acquisition. Depreciation expense increased $11.1 million, or 233.9% from $4.8 million to $15.9 million for the three months ended September 30, 2017, primarily due to the assets acquired from the Hibernia acquisition.bad debt expense.
Other Expense. Other expense increased by $13.8 million to $21.0 million for the three months ended September 30, 2017 compared to the three months ended September 30, 2016. This is primarily attributed to higher interest expense due to higher debt levels driven by the Hibernia, Perseus, and Global Capacity acquisitions as well as a loss on debt extinguishment of $3.0 million incurred in connection with the Repricing Amendment.
On a constant currency basis using the average exchange rates in effect during the three months ended September 30, 2016, operatingMarch 31, 2019, selling, general and administrative expenses would have been lowerhigher by $0.2$1.1 million for the three months ended September 30, 2017. Selling, general and administrative expenses are the only operating expenses that would have been impacted by the change in exchange rates.March 31, 2020.
Nine months ended September 30, 2017 compared to nine months ended September 30, 2016
Overview. The financial information presented in the tables below is comprised of the unaudited condensed consolidated financial information for the nine months ended September 30, 2017 and 2016 (amounts in thousands):
|
| | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Variance | % Change |
| | | | | | |
Revenue: | | | | | | |
Telecommunications services | $ | 567,439 |
| | $ | 385,201 |
| | $ | 182,238 |
| 47.3 | % |
| | | | | | |
Operating expenses: | | | | | | |
Cost of telecommunications services | 284,855 |
| | 202,653 |
| | 82,202 |
| 40.6 | % |
Selling, general and administrative expenses | 151,595 |
| | 105,311 |
| | 46,284 |
| 43.9 | % |
Severance, restructuring and other exit costs | 21,848 |
| | 870 |
| | 20,978 |
| 2,411.3 | % |
Depreciation and amortization | 94,670 |
| | 46,139 |
| | 48,531 |
| 105.2 | % |
| | | | | | |
Total operating expenses | 552,968 |
| | 354,973 |
| | 197,995 |
| 55.8 | % |
| | | | | | |
Operating income | 14,471 |
| | 30,228 |
| | (15,757 | ) | (52.1 | )% |
| | | | | | |
Other expense: | | | | | | |
Interest expense, net | (50,707 | ) | | (21,620 | ) | | (29,087 | ) | 134.5 | % |
Loss on debt extinguishment | (8,647 | ) | | (1,632 | ) | | (7,015 | ) | * |
|
Other expense, net | 184 |
| | (542 | ) | | 726 |
| (133.9 | )% |
| | | | | | |
Total other expense | (59,170 | ) | | (23,794 | ) | | (35,376 | ) | 148.7 | % |
| |
| | |
| | | |
(Loss) income before income taxes | (44,699 | ) | | 6,434 |
| | (51,133 | ) | (794.7 | )% |
| | | | | | |
(Benefit from) provision for income taxes | (22,719 | ) | | 320 |
| | (23,039 | ) | * |
|
| |
| | |
| | | |
Net (loss) income | $ | (21,980 | ) | | $ | 6,114 |
| | $ | (28,094 | ) | (459.5 | )% |
* - Not meaningful |
Revenue
Our revenue increased by $182.2 million, or 47.3%, from $385.2 million for the nine months ended September 30, 2016 to $567.4 million for the nine months ended September 30, 2017. The increase was primarily due to the acquisitions of Hibernia, Perseus, and Global Capacity, as well as rep-driven growth and the purchase of certain customer contracts.
On a constant currency basis using the average exchange rates in effect during the nine months ended September 30, 2016, revenue would have been higher by $6.9 million for the nine months ended September 30, 2017.
Cost of Telecommunications Services Provided
Cost of telecommunications services provided increased by $82.2 million, or 40.6%, from $202.7 million for the nine months ended September 30, 2016 to $284.9 million for the nine months ended September 30, 2017. Consistent with our increase in revenue, the increase in cost of telecommunications services provided was principally driven by the acquisitions of Hibernia, Perseus, and Global Capacity, as well as rep-driven growth and the purchase of certain customer contracts.
On a constant currency basis using the average exchange rates in effect during the nine months ended September 30, 2016, cost of telecommunications services provided would have been higher by $3.2 million for the nine months ended September 30, 2017.
Operating Expenses
Selling, General and Administrative Expenses. SG&A expenses increased by $46.3 million, or 43.9%, from $105.3 million for the nine months ended September 30, 2016 to $151.6 million for the nine months ended September 30, 2017. The following table
summarizes the major categories of selling, general and administrative expenses for the nine months ended September 30, 2017 and 2016 (amounts in thousands):
|
| | | | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 | | $ Variance | | % Change |
Employee related compensation (excluding share-based compensation) | $ | 70,438 |
| | $ | 51,838 |
| | $ | 18,600 |
| | 35.9 | % |
Share-based compensation | 15,960 |
| | 10,896 |
| | 5,064 |
| | 46.5 | % |
Transaction and integration expense | 13,794 |
| | 3,124 |
| | 10,670 |
| | 341.5 | % |
Other SG&A(1) | 51,403 |
| | 39,453 |
| | 11,950 |
| | 30.3 | % |
Total | $ | 151,595 |
| | $ | 105,311 |
| | $ | 46,284 |
| | 43.9 | % |
(1) Includes bad debt expense, professional fees, marketing costs, facilities, and other general support costs.
Employee related compensation increased primarily due to the Hibernia acquisition. Share-based compensation expense increases were driven by the recognition of share-based compensation for performance awards and an increase in the aggregate value of employee equity awards. Transaction and integration costs increases were driven by final integration costs related to Hibernia and transaction costs associated with the acquisition of Perseus and Global Capacity. Other SG&A expense increases were principally driven by the acquisition of Hibernia.
Severance, Restructuring and Other Exit Costs. For the ninethree months ended September 30, 2017,March 31, 2020, we incurred severance, restructuring and other exit costs of $2.1 million primarily costs associated with charges incurred in connection with the termination of $21.8certain lease facilities. For the three months ended March 31, 2019, we incurred exit costs of $2.8 million primarily relating to the Hibernia, Perseus, and Global Capacity acquisitions. We incurred $0.9 million related to the acquisition of Telnes for the nine months ended September 30, 2016.Interoute Communications Holdings S.A ("Interoute").
Depreciation and Amortization. Amortization of intangible assets increased $20.0decreased $1.0 million or 67.9%5%, from $29.5$22.1 million for the ninethree months ended September 30, 2016March 31, 2019 to $49.6$21.1 million for the ninethree months ended September 30, 2017,March 31, 2020, primarily due to intangibles from prior year acquisitions becoming fully amortized during the additional definite-lived intangible assets recorded incurrent and prior periods partially offset by the Hibernia acquisition.amortization of KPN intangibles. Depreciation expense increased $28.5$5.7 million or 171.5%14%, from $16.6 million to $45.1$40.7 million for the ninethree months ended September 30, 2017,March 31, 2019 to $46.4 million for the three months ended March 31, 2020, primarily due to the assets acquired from the Hibernia acquisition.depreciation on prior year and current year capital expenditures as well as depreciation of KPN assets.
Other Expense. Other expense increased by $35.4$30.2 million to $59.2$94.4 million for the ninethree months ended September 30, 2017March 31, 2020, compared to $64.2 million for the ninethree months ended September 30, 2016.March 31, 2019. This is primarily attributed to higher interest expense due to higher debt levels driven by the Hibernia, Perseus, and Global Capacity acquisitions as well asthree months ended March 31, 2020 including a non-cash mark-to-market loss on debt extinguishmentderivative financial instruments of $8.6$33.5 million incurred in connection withwhereas the 2017 Credit Agreement and Repricing Amendment.three months ended March 31, 2019 included a non-cash mark-to-market gain on derivative financial instruments of $15.3 million.
On a constant currency basis using the average exchange rates in effect during the nine months ended September 30, 2016, operating expenses would have been higher by $0.9 million for the nine months ended September 30, 2017. Selling, general and administrative expenses are the only operating expenses that would have been impacted by the change in exchange rates.
Liquidity and Capital Resources
In March 2020, the World Health Organization declared the outbreak of COVID-19 to be a pandemic. COVID-19 has caused, and could continue to cause, significant disruptions to the U.S. and global economy. The impact from the rapidly changing market and economic conditions due to the COVID-19 outbreak is uncertain and ensuring adequate liquidity is critical. We believe that our financial resources will allow us to manage the anticipated impact of COVID-19 on our business operations for the foreseeable future, but we are continuing to actively monitor the situation and are developing plans should we begin to experience material impacts.
Cash from operations could also be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.However, based on our current revenue outlook, we believe that existing cash balances, together with funds generated from operations and amounts available under our credit facility, will be sufficient to finance our operations and meet our foreseeable cash requirements through at least the next 12 months from the date of this filing.
Our primary sources of liquidity have been cash provided by operations, equity offerings, and debt financings. Our principal uses of cash have been for acquisitions, working capital, capital expenditures, and debt service requirements. We anticipate that our principal uses of cash in the future will be for acquisitions, capital expenditures, working capital, and debt service.
Management monitors cash flow and liquidity requirements on a regular basis, including an analysis of the anticipated working capital requirements for the next 12 months.months from the date of this filing. This analysis assumes our ability to manage expenses, capital expenditures, indebtedness, and the anticipated growth of revenue.revenue trajectory. If our operating performance differs significantly from our forecasts, we may be required to reduce our operating expenses and curtail capital spending, and we may not remain in compliance with our debt covenants. In addition, if we are unable to fully fund our cash requirements through operations and current cash on hand, we may need to obtain additional financing through a combination of equity and debt financings and/or renegotiation of terms of our existing debt. If any such activities become necessary, there can be no assurance that we would be successful in obtaining additional financing or modifying our existing debt terms.
As of September 30, 2017, we had approximately $34.8 million in cash and cash equivalents, and our current liabilities were $203.8 million, including $17.6 million of earn-outs and holdback obligations, $15.7 million of accrued severance and exit costs,
$17.2 million of deferred revenue associated with prior period capacity sales we acquired from Hibernia, and $41.3 million of unearned revenue for amounts billed in advance to customers.
Our capital expenditures increaseddecreased by $9.1$10.1 million, or 50.8%31.5% from $17.8$32.1 million (7.1% of revenue) for the ninethree months ended September 30, 2016March 31, 2019 to $26.9$22.0 million (5.2% of revenue) for the ninethree months ended September 30, 2017. The increase in capital expenditures was due to our growth and the acquisition of Hibernia.March 31, 2020. We anticipate that we will incur capital expenditures in the range of 5% to 6%approximately 5-6% of revenue for 2017.going forward. We continue to expect that our capital expenditures will be primarily success-based, i.e., in support of specific revenue opportunities.
We believe that our cash flows from operating activities, in addition to cash on-hand and undrawn Revolving Line of Credit Facility, will be sufficient to fund our operating activities and capital expenditures for the foreseeable future, and in any event for at least the next 12 to 18 months.months from the date of this filing. However, no assurance can be given that this will be the case.
The Company may also, from time-to-time, seek to retire or purchase its outstanding debt obligations and/or equity in open market purchases, block trades, privately negotiated purchase transactions, exchange transactions or otherwise and may seek to refinance some or all of its indebtedness based upon market conditions. Any such retirement, purchase or exchange of debt and/or equity may be funded with operating cash flows of the business or other sources and will depend upon prevailing market conditions, liquidity requirements, contractual restrictions and other factors, and the amounts involved may be material.
Cash Flows
The following table summarizes the components of our cash flows for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 (amounts in thousands)millions):
| | Condensed Consolidated Statements of Cash Flows | Nine Months Ended September 30, | |
Condensed Consolidated Statements of Cash Flows Data | | Condensed Consolidated Statements of Cash Flows Data | Three Months Ended March 31, | |
| 2017 | | 2016 | | $ Variance | | 2020 | | 2019 | | $ Variance |
Net cash provided by operating activities | $ | 47,091 |
| | $ | 32,767 |
| | $ | 14,324 |
| Net cash provided by operating activities | $ | 41.5 | | | $ | 16.1 | | | $ | 25.4 | |
Net cash used in investing activities | (390,318 | ) | | (37,959 | ) | | (352,359 | ) | Net cash used in investing activities | (22.0) | | | (32.6) | | | 10.6 | |
Net cash provided by financing activities | 349,221 |
| | 7,871 |
| | 341,350 |
| Net cash provided by financing activities | 42.9 | | | 10.7 | | | 32.2 | |
Our largest source of cash provided by operating activities is monthly recurring revenue from our customers.clients. Our primary uses of cash are payments to network suppliers, compensation-related costs, interest expense, and third-party vendors such as agents, contractors, and professional service providers.
In addition to financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”("GAAP"), from time to time we may use or publicly disclose certain "non-GAAP financial measures" in the course of our financial presentations, earnings releases, earnings conference calls, and otherwise. For these purposes, the U.S. Securities and Exchange Commission (“SEC”("SEC") defines a "non-GAAP financial measure" as a numerical measure of historical or future financial performance, financial positions, or cash flows that (i) exclude amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in financial statements, and (ii) include amounts, or is subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure so calculated and presented.
Non-GAAP financial measures are provided as additional information to investors to provide an alternative method for assessing our financial condition and operating results. We believe that these non-GAAP measures, when taken together with our GAAP financial measures, allow us and our investors to better evaluate our performance and profitability. These measures are not in accordance with, or a substitute for, GAAP, and may be different from or inconsistent with non-GAAP financial measures used by other companies. These measures should be used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures.
Pursuant to the requirements of Regulation G, whenever we refer to a non-GAAP financial measure we will also generally present the most directly comparable financial measure calculated and presented in accordance with GAAP, along with a reconciliation of the differences between the non-GAAP financial measure we reference with such comparable GAAP financial measure.
Adjusted EBITDA is defined by us as income/(loss) before interest, income taxes, depreciation and amortization ("EBITDA") adjusted to exclude severance, restructuring and other exit costs, acquisition-related transaction and integration costs, losses on extinguishment of debt, share-based compensation, and from time to time, other non-cash or non-recurring items.
We use Adjusted EBITDA to evaluate operating performance, and this financial measure is among the primary measures we use for planning and forecasting future periods. We further believe that the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view results in a manner similar to the method used by management and makes it easier to compare our results with the results of other companies that have different financing and capital structures. The 2017 Credit Agreement does not containIn addition, we have debt covenants that are based on a financial covenant for the term loan facility, but includes a maximum consolidated net secured leverage ratio that utilizes a modified EBITDA calculation.calculation, as defined by our Credit