Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 — ORGANIZATION AND BUSINESS
Organization and Business
GTT Communications, Inc. ("GTT" or the "Company") serves large enterprise and carrier clients with complex national and global networking needs, and differentiates itself from the competition by providing an outstanding service experience built on its core values of simplicity, speed and agility. The Company operates a global Tier 1 internet network ranked among the largest in the industry, and owns a fiber network that includes an expansive pan-European footprint and subsea cables. The Company's global network includes over 600 points of presence ("PoPs") spanning six continents, and the Company provides services in more than 140 countries.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC") and should be read in conjunction with the Company’s audited financial statements and footnotes thereto for the fiscal year ended December 31, 2018, included in the Company’s Annual Report on Form 10-K filed on March 1, 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted pursuant to such rules and regulations.
The condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the Company’s consolidated financial position and its results of operations. The operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results to be expected for the full fiscal year 2019 or for any other interim period. The December 31, 2018 consolidated balance sheet is condensed from the audited financial statements as of that date.
Use of Estimates and Assumptions
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates are used when establishing allowances for doubtful accounts, accruals for billing disputes and exit activities, determining useful lives for depreciation and amortization, assessing the need for impairment charges (including those related to intangible assets and goodwill), determining the fair values of assets acquired and liabilities assumed in business combinations, assessing the fair value of derivative financial instruments, accounting for income taxes and related valuation allowances against deferred tax assets, and estimating the grant date fair values used to compute the share-based compensation expense. Management evaluates these estimates and judgments on an ongoing basis and makes estimates based on historical experience, current conditions, and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.
Segment Reporting
The Company reports operating results and financial data in one operating and reporting segment. The Company's Chief Executive Officer is the chief operating decision maker and manages the Company as a single profit center in order to promote collaboration, provide comprehensive service offerings across its entire customer base, and provide incentives to employees based on the success of the organization as a whole. Although certain information regarding selected products or services is discussed for purposes of promoting an understanding of the Company's complex business, the chief operating decision maker manages the Company and allocates resources at the consolidated level.
Revenue Recognition
The Company's revenue is derived primarily from telecommunications services, which includes both revenue from contracts with customers and lease revenue. Lease revenue services include dark fiber, duct, and colocation services. All other services are considered
revenue from contracts with customers. Revenue from contracts with customers is recognized when services are provided to the customer, in an amount that reflects the consideration the Company expects to receive in exchange for those services. Lease revenue represents an arrangement where the customer has the right to use an identified asset for a specified term and such revenue is recognized over the term the customer is given exclusive access to the asset.
The Company's comprehensive portfolio of cloud networking services includes: wide area networking, including software defined wide area networking or SD-WAN; internet services; transport & infrastructure services; voice services; and other managed services.
The Company's services are provided under contracts that typically include an installation or provisioning charge along with payments of recurring charges on a monthly basis for use of the services over a committed term. The Company's contracts with customers specify the terms and conditions for providing such services, including installation date, recurring and non-recurring fees, payment terms, and length of term. These contracts call for the Company to provide the service in question (e.g., data transmission between point A and point Z), to manage the activation process, and to provide ongoing support (in the form of service maintenance and trouble-shooting) during the service term. The contracts do not typically provide the customer any rights to use specifically identifiable assets. Furthermore, the contracts generally provide the Company with discretion to engineer (or re-engineer) a particular network solution to satisfy each customer’s data transmission requirement, and typically prohibit physical access by the customer to the network infrastructure used by the Company and its suppliers to deliver the services.
Fees charged for ongoing services are generally fixed in price and billed on a recurring monthly basis (one month in advance) for a specified term. Fees may also be based on specific usage of the related services, or usage above a fixed threshold, which are billed monthly in arrears. The usage based fees represent variable consideration, however, the nature of the fees are such that the Company is not able to estimate these amounts with a high degree of certainty and therefore the usage based fees are excluded from the transaction price and are instead recognized as revenue based on actual usage charges billed using the rates and/or thresholds specified in each contract. At the end of the term, most contracts provide for a continuation of services on the same terms, either for a specified renewal period (e.g., one year) or on a month-to-month basis. Revenue is generally recognized over time for these contracts as the customers simultaneously receive and consume the benefit of the service as the Company performs. Fees may also be billed for early terminations based on contractually stated amounts. The early termination fees represent variable consideration. The Company estimates the amount of variable consideration it expects to be entitled to receive for such arrangements using the expected value method.
The Company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Primary geographical market. The Company’s operations are located primarily in the United States and Europe. The nature and timing of revenue from contracts with customers across geographic markets is similar. The following table presents the Company's revenue from contracts with customers disaggregated by primary geographic market based on legal entities (in millions):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Primary geographic market:
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United States
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$
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191.9
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$
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190.0
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$
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589.3
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$
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569.6
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Europe
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178.9
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206.6
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560.4
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385.9
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Other
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9.7
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13.2
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33.1
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22.6
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Total revenue from contracts with customers
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380.5
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409.8
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1,182.8
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978.1
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Lease revenue
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39.5
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38.8
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121.2
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57.9
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Total telecommunications services revenue
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$
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420.0
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$
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448.6
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$
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1,304.0
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$
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1,036.0
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Contracts with multiple performance obligations. The majority of the Company’s contracts with customers have a single performance obligation - telecommunication services. The related installation services are generally considered not material within the context of the contract and the Company does not recognize these immaterial promised services as a separate performance obligation. Certain contracts with customers may include multiple performance obligations, specifically when the Company sells its connectivity services in addition to customer premise equipment ("CPE"). For such arrangements, revenue is allocated to each performance obligation based on its relative standalone selling price. The standalone selling price for each performance obligation is based on observable prices charged to customers in similar transactions or using expected cost plus margin.
The Company applies permitted practical expedients to its revenue recognition. The Company does not adjust the promised amount of consideration for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Prepaid Capacity Sales and Indefeasible Right to Use. The Company sells capacity on a long-term basis, where a certain portion of the contracted revenue is prepaid upon acceptance of the service by the customer. This prepaid amount is initially recorded as deferred revenue and amortized ratably over the term of the contract. Certain of these prepaid capacity sales are in the form of Indefeasible Rights to Use ("IRUs"), where the customer has the right to use the capacity of the fiber optic cable for a specified term. The Company records revenues from these prepaid leases of fiber optic cable IRUs over the term that the customer is given exclusive access to the assets.
Universal Service Fund ("USF"), Gross Receipts Taxes and Other Surcharges. The Company is liable in certain cases for collecting regulatory fees and/or certain sales taxes from its customers and remitting the fees and taxes to the applicable governing authorities. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue. Conversely, USF contributions are assessed to the Company by and paid to the Universal Service Administration Company ("USAC") and are based on the Company’s interstate and inter-nation end-user revenues. The Company may assess its customers a separate fee to recoup its USF expense. These fees are included in telecommunications services revenue and costs of telecommunications services. USF fees and other surcharges billed to customers and recorded on a gross basis (as service telecommunications services revenue and cost of telecommunications services) were $6.6 million and $5.3 million for the three months ended September 30, 2019 and 2018, respectively, and $18.4 million and $17.5 million for the nine months ended September 30, 2019 and 2018, respectively.
Contract balances. Contract assets consist of conditional or unconditional rights to consideration. Accounts receivable represent amounts billed to customers where the Company has an enforceable right to payment for performance completed to date (i.e., unconditional rights to consideration). The Company does not have contract assets that represent conditional rights to consideration. The Company’s accounts receivable balance at September 30, 2019 and December 31, 2018 includes $166.2 million and $157.6 million, respectively, related to contracts with customers. There were no other contract assets as of September 30, 2019 or December 31, 2018.
Contract liabilities are generally limited to deferred revenue. Deferred revenue is a contract liability, representing advance consideration received from customers primarily related to the pre-paid capacity sales noted above, where transfer of control occurs over time, and therefore revenue is recognized over the related contractual service period. The Company's contract liabilities were $71.4 million and $75.7 million as of September 30, 2019 and December 31, 2018, respectively. The change in contract liabilities during the nine months ended September 30, 2019 included $20.6 million for revenue recognized that was included in the contract liability balance as of January 1, 2019 and $17.6 million for new contract liabilities net of amounts recognized as revenue during the period.
The following table includes estimated revenue from contracts with customers expected to be recognized for each of the years subsequent to September 30, 2019 related to performance obligations that are unsatisfied (or partially unsatisfied) at September 30, 2019 and have an original expected duration of greater than one year (amounts in millions):
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2019 remaining
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$
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6.3
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2020
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14.5
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2021
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12.9
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2022
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11.7
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2023
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10.2
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2024 and beyond
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15.8
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$
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71.4
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For a table of estimated revenue to be recognized for consolidated deferred revenue for each of the years subsequent to September 30, 2019 refer to Note 6 - Deferred revenue.
Deferred costs to obtain a contract. The Company defers sales commissions earned by its sales force when they are considered to be incremental and recoverable costs of obtaining a contract with a customer. These costs are deferred and then amortized over a period of benefit which is determined by taking into consideration the Company's customer contracts and other factors. Amortization
of sales commissions expense is included in selling, general and administrative expenses. Installation costs related to provisioning of communications services that the Company incurs from third-party suppliers, directly attributable and necessary to fulfill particular service contracts, and which costs would not have been incurred but for the occurrence of that service contract, are recorded as deferred contract costs and expensed ratably over the contractual term of service in the same manner as the deferred revenue arising from that contract. Based on historical experience, the Company believes the initial contractual term is the best estimate for the period of earnings.
Deferred sales commissions were $8.0 million and $3.4 million as of September 30, 2019 and December 31, 2018, respectively. There were no other significant amounts of assets recorded related to contract costs as of September 30, 2019 or December 31, 2018.
Cost of Telecommunications Services
Cost of telecommunications services includes direct costs incurred in accessing other telecommunications providers’ networks in order to maintain the Company's global Tier 1 IP network and provide telecommunication services to the Company's customers, including access, co-location, usage-based charges, and certain excise taxes and surcharges recorded on a gross basis.
Leases
A lease is a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment (i.e., an identified asset) for a period of time in exchange for consideration.
Lessee
Lease contracts from a lessee perspective are classified as either operating or finance. Operating leases are included in Operating lease right of use assets, Operating lease liabilities, and Operating lease liabilities, long-term portion. Finance leases are included in Property and equipment, net, Finance lease liabilities, and Finance lease liabilities, long-term portion.
For operating leases, the Company recognizes a lease liability equal to the present value of the remaining lease payments, and a right of use asset equal to the lease liability, subject to certain adjustments. The Company uses its incremental borrowing rate for leases which do not have a readily determinable implicit rate to determine the present value of the lease payments. The Company’s incremental borrowing rates are the rates of interest that it would have to borrow on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment. Operating leases result in a straight-line lease expense, while finance leases result in an accelerated expense pattern.
The lease term at the lease commencement date is determined based on the non-cancellable period for which the Company has the right to use the underlying asset, together with any periods covered by an option to extend the lease if the Company is reasonably certain to exercise that option. The Company considers a number of factors when evaluating whether the options in its lease contracts are reasonably certain of exercise, such as length of time before option exercise, expected value of the leased asset at the end of the initial lease term, importance of the lease to overall operations, costs to negotiate a new lease, and any contractual or economic penalties.
Certain of the Company’s leases include variable lease costs to reimburse the lessor for real estate tax and insurance expenses, and non-lease components that transfer an additional service to the Company, such as common area maintenance services. The Company has elected not to separate the accounting for lease components and non-lease components for lessee contracts, for all classes of leased assets except for its dark fiber arrangements.
Lessor
Lease contracts from a lessor perspective are classified as either sales-type, direct financing, or operating. Lessor arrangements include dark fiber, duct, and colocation services. The arrangements are operating leases that can also include non-lease components such as operations and maintenance or power services. For its dark fiber and duct arrangements, the Company accounts for lease and non-lease components separately. Revenue attributable to the lease components in these arrangements is recognized on a straight-line basis over the term of the lease while revenue attributable to non-lease components is accounted for in accordance with other applicable GAAP. The Company has elected not to separate the accounting for non-lease components from lease components in its accounting for colocation arrangements.
Marketing and Advertising Costs
Costs related to marketing and advertising are expensed as incurred and included in selling, general and administrative expenses in the condensed consolidated statements of operations. Third-party marketing and advertising expense was $2.1 million and $2.7 million for the three months ended September 30, 2019 and 2018, respectively, and $7.2 million and $6.8 million for the nine months ended September 30, 2019 and 2018, respectively.
Share-Based Compensation
The Company issues three types of equity grants under its share-based compensation plan: time-based restricted stock, time-based stock options, and performance-based restricted stock. The time-based restricted stock and stock options generally vest over a four year period, contingent upon meeting the requisite service period requirement. Performance awards typically vest over a shorter period, e.g. one to two years, starting when the performance criteria established in the grant have been met.
The share price of the Company's common stock as reported on the New York Stock Exchange ("NYSE") on the date of grant is used as the fair value for all restricted stock. The Company uses the Black-Scholes option-pricing model to determine the estimated fair value for stock options. Critical inputs into the Black-Scholes option-pricing model include the following: option exercise price, fair value of the stock price, expected life of the option, annualized volatility of the stock, annual rate of quarterly dividends on the stock, and risk-free interest rate.
Implied volatility is calculated as of each grant date based on our historical stock price volatility along with an assessment of a peer group. Other than the expected life of the option, volatility is the most sensitive input to our option grants. The risk-free interest rate used in the Black-Scholes option-pricing model is determined by referencing the U.S. Treasury yield curve rates with the remaining term equal to the expected life assumed at the date of grant. Forfeitures are estimated based on our historical analysis of attrition levels. Forfeiture estimates are updated quarterly for actual forfeitures.
The share-based compensation expense for time-based restricted stock and stock options is recognized on a straight-line basis over the vesting period. The Company begins recognizing share-based compensation expense for performance awards when the Company considers the achievement of the performance criteria to be probable through the expected vesting period.
Income Taxes
Income taxes are accounted for under the asset and liability method pursuant to GAAP. Under this method, deferred tax assets and liabilities are recognized for the expected future impacts attributable to the differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period of the change. Further, deferred tax assets are recognized for the expected realization of available net operating loss and tax credit carryforwards. A valuation allowance is recorded on gross deferred tax assets when it is "more likely than not" that such asset will not be realized. When evaluating the realizability of deferred tax assets, all evidence, both positive and negative, is evaluated. Items considered in this analysis include the ability to carry back losses, the reversal of temporary differences, tax planning strategies, and expectations of future earnings. The Company reviews its deferred tax assets on a quarterly basis to determine if a valuation allowance is required based upon these factors. Changes in the Company's assessment of the need for a valuation allowance could give rise to a change in such allowance, potentially resulting in additional expense or benefit in the period of change.
The Company's income tax provision includes U.S. federal, state, local, and foreign income taxes and is based on pre-tax income or loss. In determining the annual effective income tax rate, the Company analyzes various factors, including its annual earnings and taxing jurisdictions in which the earnings were generated, transfer pricing methods, the impact of state and local income taxes, and its ability to use tax credits and net operating loss carryforwards.
Under GAAP, the amount of tax benefit to be recognized is the amount of benefit that is "more likely than not" to be sustained upon examination. The Company analyzes its tax filing positions in all of the U.S. federal, state, local, and foreign tax jurisdictions where it is required to file income tax returns, as well as for all open tax years in these jurisdictions. If, based on this analysis, the Company determines that uncertainties in tax positions exist, a liability is established in the consolidated financial statements. The Company recognizes accrued interest and penalties related to unrecognized tax positions in the provision for income taxes.
Comprehensive Loss
In addition to net loss, comprehensive loss includes certain charges or credits to equity occurring other than as a result of transactions with stockholders. For the Company, this consists of foreign currency translation adjustments.
Loss Per Share
Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Diluted loss per share reflects, in periods with earnings and in which it has a dilutive effect, the effect of common shares issuable upon exercise of stock options and warrants.
The table below details the calculations of loss per share (in millions, except for share and per share amounts):
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Three Months Ended September 30,
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Nine Months Ended September 30,
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2019
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2018
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2019
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2018
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Numerator for basic and diluted EPS – net loss available to common stockholders
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$
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(26.2
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)
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$
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(23.4
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)
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$
|
(86.8
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)
|
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$
|
(190.4
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)
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Denominator for basic EPS – weighted average shares
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56,370,178
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|
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54,671,787
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|
|
56,154,427
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|
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49,210,929
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Effect of dilutive securities
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—
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|
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—
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|
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—
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|
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—
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Denominator for diluted EPS – weighted average shares
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56,370,178
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|
|
54,671,787
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|
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56,154,427
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49,210,929
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Loss per share:
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Basic
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$
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(0.46
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)
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$
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(0.43
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)
|
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$
|
(1.55
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)
|
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$
|
(3.87
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)
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Diluted
|
$
|
(0.46
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)
|
|
$
|
(0.43
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)
|
|
$
|
(1.55
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)
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$
|
(3.87
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)
|
All outstanding stock options were anti-dilutive as of September 30, 2019 and 2018 due to the net loss incurred during the periods. There were approximately 430,000 and 526,000 outstanding stock options as of September 30, 2019 and 2018, respectively.
Cash and Cash Equivalents
Cash and cash equivalents may include deposits with financial institutions as well as short-term money market instruments, certificates of deposit and debt instruments with maturities of three months or less when purchased.
The Company invests its cash and cash equivalents and short-term investments in accordance with the terms and conditions of its 2018 Credit Agreement (as defined in Note 7 - Debt), which seeks to ensure both liquidity and safety of principal. The Company’s policy limits investments to instruments issued by the U.S. government and commercial institutions with strong investment grade credit ratings, and places restrictions on the length of maturity. As of September 30, 2019, the Company held no investments in auction rate securities, collateralized debt obligations, structured investment vehicles, or non-government guaranteed mortgage-backed securities.
Restricted Cash and Cash Equivalents
Cash and cash equivalents that are contractually restricted from operating use are classified as restricted cash and cash equivalents. The Company had no restricted cash and cash equivalents as of September 30, 2019 or December 31, 2018.
Accounts Receivable, Net
Accounts receivable balances are stated at amounts due from the customer net of an allowance for doubtful accounts. Credit extended is based on an evaluation of the customer’s financial condition and is granted to qualified customers on an unsecured basis.
The Company, pursuant to its standard service contracts, is typically entitled to impose a monthly finance charge of a certain percentage per month with respect to amounts that are past due. The Company’s standard terms require payment within 30 days of the date of the invoice. The Company treats invoices as past due when they remain unpaid, in whole or in part, beyond the payment date set forth in the applicable service contract.
The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade receivables are past due, the customer’s payment history and current ability to pay its obligation to the Company, and the condition of the general economy. Specific reserves are also established on a case-by-case basis by management. Credit losses have historically been within management's estimates. Actual bad debts, when determined, reduce the allowance, the adequacy of which management then reassesses. The Company writes off accounts after a determination by management that the amounts are no longer likely to be
collected, following the exercise of reasonable collection efforts, and upon management's determination that the costs of pursuing collection outweigh the likelihood of recovery. The allowance for doubtful accounts was $8.0 million and $11.1 million as of September 30, 2019 and December 31, 2018, respectively.
Property and Equipment
Property and equipment are stated at cost, net of accumulated depreciation. Depreciation on these assets is computed on a straight-line basis over the estimated useful lives of the assets. Assets are recorded at acquired cost. Costs associated with the initial customer installations and upgrade of services and acquiring and deploying customer premise equipment, including materials, internal labor costs, and related indirect labor costs are also capitalized. Indirect and overhead costs include payroll taxes, insurance, and other benefits. Capitalized labor costs include the direct costs of engineers and service delivery technicians involved in the installation and upgrades of services, and the costs of support personnel directly involved in capitalizable activities, such as project managers and supervisors. Internal labor costs are based on standards developed by position for the percentage of time spent on capitalizable projects while overhead costs are capitalized based on standards developed from historical information. Costs for repairs and maintenance, disconnecting service, or reconnecting service are expensed as incurred. The Company capitalized labor costs, including indirect and overhead costs, of $4.6 million and $3.0 million for the three months ended September 30, 2019 and 2018, respectively, and $13.1 million and $9.2 million for the nine months ended September 30, 2019 and 2018, respectively. Assets and liabilities under finance leases are recorded at the lesser of the present value of the aggregate future minimum lease payments or the fair value of the assets under lease. Leasehold improvements and assets under finance leases are amortized over the shorter of the term of the lease, excluding optional extensions, or the useful life. Expenditures for maintenance and repairs are expensed as incurred. Depreciable lives used by the Company for its classes of assets are as follows:
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Freehold buildings
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30 years
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Furniture and fixtures
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7 years
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Fiber optic cable
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20 years
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Duct
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40 years
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Fiber optic network equipment
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3 - 15 years
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Leasehold improvements
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up to 10 years
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Computer hardware and software
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3-5 years
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The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. If the carrying amount of an asset were to exceed its estimated future undiscounted cash flows, the asset would be considered to be impaired. Impairment losses would then be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of, if any, are reported at the lower of the carrying amount or fair value less costs to sell.
Software Capitalization
Software development costs include costs to develop software programs to be used solely to meet the Company's internal needs. The Company capitalizes development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed. Subsequent additions, modifications or upgrades to internal-use software are capitalized only to the extent that they allow the software to perform a function it previously did not perform. Software maintenance, data conversion and training costs are expensed in the period in which they are incurred. The Company capitalized software costs of $1.1 million and $1.4 million for the three months ended September 30, 2019 and 2018, respectively, and $3.3 million and $3.6 million for the nine months ended September 30, 2019 and 2018, respectively.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the net identifiable assets acquired in a business combination. Goodwill is reviewed for impairment at least annually, in October, or more frequently if a triggering event occurs between impairment testing dates. The Company operates as a single operating segment and as a single reporting unit for the purpose of evaluating goodwill impairment. The Company's impairment assessment begins with a qualitative assessment to determine whether it is more likely than not that fair value of the reporting unit is less than its carrying value. The qualitative assessment includes comparing the overall financial performance of the Company against the planned results used in the last quantitative goodwill impairment test. Additionally, the Company's fair value is assessed in light of certain events and circumstances, including macroeconomic conditions, industry and market considerations, cost factors, and other relevant entity and Company specific events. The selection and assessment
of qualitative factors used to determine whether it is more likely than not that the fair value of a reporting unit exceeds the carrying value involves significant judgment and estimates. If it is determined under the qualitative assessment that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then a quantitative impairment test is performed. Under the quantitative impairment test, the estimated fair value of the reporting unit would be compared with its carrying value (including goodwill). If the fair value of the reporting unit exceeds its carrying value then no impairment exists. If the estimated fair value of the reporting unit is less than its carrying value, an impairment loss would be recognized for the excess of the carrying value of the reporting unit over the fair value, not to exceed the carrying amount of goodwill.
Fair value of the Company under the quantitative impairment test is determined using a combination of both income and market-based approaches, weighted 40% and 60%, respectively. The assumptions which have the most significant effect on fair value derived using the income approach are (1) revenue growth rates, (2) the discount rate, (3) terminal growth rates, and (4) foreign currency rates. The assumptions used in the market approach include (1) the stock price of the Company and (2) the selection of comparable companies.
The Company identified a triggering event during the three months ended June 30, 2019 due to the significant decline in its stock price. Accordingly, the Company performed an assessment of fair value using policy outlined above and concluded no impairment existed at that time. The Company again identified a triggering event during the three months ended September 30, 2019 due to the further decline in its stock price. Accordingly, the Company performed another assessment of fair value using policy outlined above. There were no triggering events or goodwill impairments identified for the nine months ended September 30, 2018.
Based upon the results of its fair value analysis for the three months ended September 30, 2019, the Company’s estimated fair value exceeded its carrying value by approximately 17%. Management considers the assumptions used in its analysis to be its best estimates across a range of possible outcomes based on available evidence at the time of the assessment. While the Company concluded no impairment at this time, the Company’s goodwill is at risk of future impairment in the event of significant unexpected changes in the Company’s forecasted future results and cash flows, or if there is a negative change in the long-term outlook for the business or in other factors such as the discount rate, or if there is a further decline in the stock price.
Intangible assets arising from business combinations, such as acquired customer contracts and relationships (collectively "customer relationships"), trade names, and/or intellectual property, are initially recorded at fair value. The Company amortizes these intangible assets over the determined useful life which generally ranges from 3 to 20 years. The Company reviews its intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be fully recoverable. There were no triggering events or intangible asset impairments recognized for the nine months ended September 30, 2019 and 2018.
Business Combinations
The Company includes the results of operations of the businesses that it acquires commencing on the respective dates of acquisition. The Company allocates the fair value of the purchase price of its acquisitions to the assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of the purchase price over the fair values of these identifiable assets and liabilities is recorded as goodwill.
Disputed Supplier Expenses
In the normal course of business, the Company identifies errors by suppliers with respect to the billing of services. The Company performs bill verification procedures to ensure that errors in the Company's suppliers' billed invoices are identified and resolved. If the Company concludes that a vendor has billed inaccurately, the Company will record a liability only for the amount that it believes is owed. As of September 30, 2019 and December 31, 2018, the Company had open disputes not accrued for of $12.6 million and $9.1 million, respectively.
Acquisition Holdbacks
Acquisition holdbacks represent fixed deferred consideration to be paid out at some point in the future, typically on the one-year anniversary of an acquisition or asset purchase. The portion of the deferred consideration due within one year is recorded as a current liability until paid, and any consideration due beyond one year is recorded in other long-term liabilities. The Company had no acquisition holdbacks as of September 30, 2019. As of December 31, 2018, acquisition holdbacks were included within Accrued expenses and other current liabilities within the condensed consolidated balance sheets.
Debt Issuance Costs
Debt issuance costs represent costs that qualify for deferral associated with the issuance of new debt or the modification of existing debt facilities. The unamortized balance of debt issuance costs is presented as a reduction to the carrying value of long-term debt. Debt issuance costs are amortized and recognized on the condensed consolidated statements of operations as interest expense. The unamortized debt issuance costs were $29.2 million and $31.6 million as of September 30, 2019 and December 31, 2018, respectively.
Original Issuance Discounts and Premiums
Original issuance discounts and premiums is the difference between the face value of debt and the amount of principal received when the debt was originated. When the debt reaches maturity, the face value of the debt is payable. The Company recognizes original issuance discounts and premiums by accretion of the discount or premium as interest expense, net over the term of the debt. The unamortized portion of the original issuance discounts and premiums was a $42.4 million net discount and a $47.8 million net discount as of September 30, 2019 and December 31, 2018, respectively.
Translation of Foreign Currencies
For non-U.S. subsidiaries, the functional currency is evaluated at the time of the Company's acquisition of such subsidiaries and on a periodic basis for financial reporting purposes. These condensed consolidated financial statements have been reported in U.S. Dollars by translating asset and liability amounts of foreign subsidiaries at the closing currency exchange rate, equity amounts at historical rates, and the results of operations and cash flow at the average currency exchange rate prevailing during the periods reported. The net effect of such translation gains and losses are reflected in accumulated other comprehensive loss in the stockholders' equity section of the condensed consolidated balance sheets.
Transactions denominated in foreign currencies other than a subsidiary's functional currency are recorded at the rates of exchange prevailing at the time of the transaction. Monetary assets and liabilities denominated in foreign currencies are remeasured at the rate of exchange prevailing at the balance sheet date. Exchange differences arising upon settlement of a transaction are reported in the condensed consolidated statements of operations in other expense, net.
Derivative Financial Instruments
The Company may use derivatives to partially offset its business exposure to foreign currency or interest rate risk on expected future cash flows. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. The Company does not hold derivatives for trading purposes.
As of September 30, 2019 and December 31, 2018, the Company had derivative financial instruments in the form of interest rate swaps outstanding. The interest rate swaps were not designated as hedges and therefore do not qualify for hedge accounting. Refer to Note 7 - Debt for further information.
Derivatives that are not designated as hedging instruments are adjusted to fair value through earnings on the condensed consolidated statement of operations as other expense, net. The Company recognized a loss of $6.6 million and a gain of $8.3 million during the three months ended September 30, 2019 and 2018, respectively, and losses of $41.8 million and $107.0 million during the nine months ended September 30, 2019 and 2018, respectively, due to the change in fair value of its derivative financial instruments.
The Company records the fair value of its derivative financial instruments in the condensed consolidated balance sheet as a component of other current assets when in a net asset position and a component of accrued expenses and other current liabilities when in a net liability position.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date. The Company classifies certain assets and liabilities based on the following hierarchy of fair value:
|
|
Level 1:
|
Quoted prices for identical assets or liabilities in active markets that can be assessed at the measurement date.
|
|
|
Level 2:
|
Inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
|
|
|
Level 3:
|
Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument's valuation.
|
When determining the fair value measurements for assets and liabilities required to be recorded at fair value, management considers the principal or most advantageous market in which it would transact and considers risks, restrictions, or other assumptions that market participants would use when pricing the asset or liability.
Recurring Fair Value Measurements
In accordance with GAAP, certain assets and liabilities are required to be recorded at fair value on a recurring basis. For the Company, the only assets or liabilities adjusted to fair value on a recurring basis are its derivative financial instruments.
The Company measures all derivatives at fair value and recognizes them as either assets or liabilities in its condensed consolidated balance sheets. The Company's derivative financial instruments are valued primarily using models based on readily observable market parameters for all substantial terms of our derivative contracts, and therefore have been classified as Level 2. None of the Company's derivative financial instruments qualify for hedge accounting, and therefore all changes in the fair values of derivative instruments are recognized in earnings in the current period.
The following table presents the Company's financial assets and liabilities that are required to be measured and recognized at fair value on a recurring basis classified under the appropriate level of the fair value hierarchy as of September 30, 2019 and December 31, 2018 (in millions). There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2019 or 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 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
|
$
|
(63.5
|
)
|
|
$
|
—
|
|
|
$
|
(63.5
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
|
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
|
$
|
(22.4
|
)
|
|
$
|
—
|
|
|
$
|
(22.4
|
)
|
|
$
|
—
|
|
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 September 30, 2019 and December 31, 2018, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, and accounts payable 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 September 30, 2019 and December 31, 2018. The carrying amounts exclude any debt issuance costs or original issuance discount:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
Total Carrying Value in Condensed Consolidated Balance Sheet
|
|
Unadjusted Quoted Prices in Active Markets for Identical Assets or Liabilities (1)
(Level 1)
|
(amounts in millions)
|
|
September 30, 2019
|
|
December 31, 2018
|
|
September 30, 2019
|
|
December 31, 2018
|
Liabilities not recorded at fair value in the Financial Statements:
|
|
|
|
|
|
|
|
|
Long-term debt, including the current portion:
|
|
|
|
|
|
|
|
|
US Term loan
|
|
$
|
1,747.9
|
|
|
$
|
1,761.2
|
|
|
$
|
1,398.3
|
|
|
$
|
1,648.9
|
|
EMEA Term loan
|
|
807.2
|
|
|
857.6
|
|
|
686.2
|
|
|
827.5
|
|
7.875% Senior unsecured notes
|
|
575.0
|
|
|
575.0
|
|
|
327.8
|
|
|
488.8
|
|
Revolving line of credit
|
|
85.0
|
|
|
59.0
|
|
|
85.0
|
|
|
59.0
|
|
Other secured loans
|
|
6.5
|
|
|
18.1
|
|
|
6.5
|
|
|
18.1
|
|
Total long-term debt, including current portion
|
|
$
|
3,221.6
|
|
|
$
|
3,270.9
|
|
|
$
|
2,503.8
|
|
|
$
|
3,042.3
|
|
(1) Fair value based on the bid quoted price, except for the revolving credit facility and other secured loans for which carrying value approximates fair value.
Concentrations of Credit Risk
Financial instruments potentially subject to concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. At times during the periods presented, the Company had funds in excess of $250,000 insured by the U.S. Federal Deposit Insurance Corporation, or in excess of similar Deposit Insurance programs outside of the United States, on deposit at various financial institutions. Management believes the Company is not exposed to significant credit risk due to the financial position of the depository institutions in which those deposits are held.
The Company's trade accounts receivable are generally unsecured and geographically dispersed. No single customer's trade accounts receivable balance as of September 30, 2019 or December 31, 2018 exceeded 10% of the Company's consolidated accounts receivable, net. No single customer accounted for more than 5% of revenue for the three or nine months ended September 30, 2019 or 2018.
Newly Adopted Accounting Principles
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases ("ASC 842"). ASC 842, including all the related amendments subsequent to its issuance, requires most leases (with the exception of leases with terms of less than one year) to be recognized on the balance sheet as an asset and a lease liability. The Company adopted ASC 842 as of January 1, 2019 and applied the optional transition relief method available in the standard. The Company has continued to apply ASC 840, including its disclosure requirements, to the comparative periods presented.
The Company elected the package of practical expedients available in the standard, and so did not reassess the classification of existing leases or any initial direct costs associated with those leases. The Company did not utilize the hindsight practical expedient in its adoption of the new standard. The Company has made an accounting policy election not to recognize right of use assets and
lease liabilities for leases with a lease term of 12 months or less. Instead, lease payments for these leases are recognized as lease cost on a straight-line basis over the lease term.
Upon adoption, the Company recognized right of use assets and lease liabilities for operating leases, where we are the lessee, in the amount of $437.6 million and $434.6 million, respectively. The right of use assets included adjustments for prepayments, deferred rent, and above/below market lease intangibles. The adoption of this standard did not impact opening retained earnings. There was no material impact upon adoption to the accounting for leases for which the Company is the lessor.
In March 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by eliminating the requirement to calculate the implied fair value of goodwill (Step 2) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit's carrying amount over its fair value (as determined in Step 1). The guidance is effective prospectively for public business entities for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company elected to early adopt the standard effective June 30, 2019. Any future goodwill impairment, should it occur, will be determined in accordance with this ASU.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows for reclassification of stranded tax effects on items resulting from the Tax Act from accumulated other comprehensive income (loss) to retained earnings. The guidance is effective for the Company for interim and annual reporting periods beginning after December 31, 2018. The Company adopted the guidance as of January 1, 2019, and the provisions of the new guidance did not have a material impact on its condensed consolidated financial statements.
In August 2018, the SEC issued several final rules, including but not limited to SEC Final Rule Release No. 33-10532 Disclosure Update and Simplification (“Final Rule”), which amends certain redundant, duplicative, outdated, superseded or overlapping disclosure requirements. This Final Rule is intended to facilitate disclosure information provided to investors and simplify compliance without significantly impacting the mix of information provided to investors. The amendments also expand the disclosure requirements regarding the analysis of stockholders' equity for interim financial statements, in which entities will be required to present a reconciliation for each period for which a statement of comprehensive income is required to be filed. The Final Rule was effective on November 5, 2018, however, the SEC staff announced that it would not object if the filer's first presentation of the changes in stockholders' equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company used the new presentation of a condensed consolidated statement of stockholders' equity within its interim financial statements beginning in its Form 10-Q for the quarter ended March 31, 2019.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendment to the initial guidance, ASU 2018-19, in November 2018. The updated guidance introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables. The updated guidance is to be applied using a modified retrospective transition approach and is effective for annual and interim reporting periods beginning after December 15, 2021, and early adoption is permitted. The Company is currently assessing the impact the updated guidance will have on its condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The guidance will be effective for the Company interim and annual reporting periods beginning after December 15, 2019, and early adoption is permitted. The removed and modified disclosures will be adopted on a retrospective basis and the new disclosures will be adopted on a prospective basis. The Company does not anticipate the updated guidance will have a material impact on its condensed consolidated financial statements.
Other recent accounting pronouncements issued by the FASB during 2019 and through the filing date did not and are not believed by management to have a material impact on the Company's present or historical consolidated financial statements.
NOTE 2 — BUSINESS ACQUISITIONS
Since its formation, the Company has consummated a number of transactions accounted for as business combinations as part of its growth strategy. The acquisitions of these businesses, which are in addition to periodic purchases of customer contracts, have allowed the Company to increase the scale at which it operates, which in turn affords the Company the ability to increase its operating leverage, extend its network, and broaden its customer base.
The accompanying condensed consolidated financial statements include the operations of the acquired entities from their respective acquisition dates. All of the acquisitions have been accounted for as a business combination. Accordingly, consideration paid by the Company to complete the acquisitions is initially allocated to the acquired assets and liabilities based upon their estimated acquisition date fair values. The recorded amounts for assets acquired and liabilities assumed are provisional and subject to change during the measurement period, which is up to 12 months from the acquisition date.
There were no acquisitions completed during the nine months ended September 30, 2019. During the nine months ended September 30, 2019, the Company paid $0.5 million of additional cash consideration for Access Point, Inc. ("API"), which is included within Acquisitions of business, net of cash acquired within our condensed consolidated statement of cash flows.
For material acquisitions completed during 2018, 2017, and 2016, refer to Note 3 - Business Acquisitions to the consolidated financial statements contained in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. During the nine months ended September 30, 2019, certain measurement period adjustments were recorded to adjust provisional amounts for acquisitions completed during 2018.
Acquisition Method Accounting Estimates
The Company initially recognizes the assets and liabilities acquired from the acquisitions based on its preliminary estimates of their acquisition date fair values. As additional information becomes known concerning the acquired assets and assumed liabilities, management may make adjustments to the opening balance sheet of the acquired company up to the end of the measurement period, which is no longer than a one year period following the acquisition date. The determination of the fair values of the acquired assets and liabilities assumed (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment.
Transaction Costs
Transaction costs describe the broad category of costs the Company incurs in connection with signed and/or closed acquisitions. There are two types of costs that the Company accounts for:
•Severance, restructuring and other exit costs
•Transaction and integration costs
Severance, restructuring and other exit costs include severance and other one-time benefits for terminated employees, termination charges for leases and supplier contracts, and other costs incurred associated with an exit activity. These costs are reported separately in the condensed consolidated statements of operations during the three and nine months ended September 30, 2019 and 2018. Refer to Note 10 - Severance, Restructuring, and Other Exit Costs of these condensed consolidated financial statements for further information.
Transaction and integration costs include expenses associated with legal, accounting, regulatory, and other transition services rendered in connection with acquisition, travel expense, and other non-recurring direct expenses associated with acquisitions. Transaction and integration costs are expensed as incurred in support of the integration. The Company incurred transaction and integration costs of $1.9 million and $10.7 million during the three months ended September 30, 2019 and 2018, respectively, and $16.8 million and $25.1 million during the nine months ended September 30, 2019 and 2018, respectively. Transaction and integration costs have been included in selling, general and administrative expenses in the condensed consolidated statements of operations and in cash flows from operating activities in the condensed consolidated statements of cash flows.
Pro forma Financial Information (Unaudited)
The pro forma results presented below include the effects of the Company’s material acquisitions during 2018 as if the acquisitions occurred on January 1, 2018. The pro forma net loss for the three and nine months ended September 30, 2018 includes adjustments to revenue and cost of telecommunications services to eliminate inter-company activity, adjustments to deferred revenue and deferred cost from the acquired companies, and IFRS to US GAAP adjustments for Interoute. The pro forma adjustments are based on historically reported transactions by the acquired companies. The pro forma results do not include any anticipated synergies or other
expected benefits of the acquisitions. The unaudited pro forma financial information below is not necessarily indicative of either future results of operations or results that might have been achieved had the acquisitions been consummated as of January 1, 2018.
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Nine Months Ended September 30, 2018
|
(Amounts in millions, except per share and share data)
|
|
|
|
Revenue
|
$
|
448.6
|
|
|
$
|
1,381.2
|
|
Net loss
|
$
|
(23.4
|
)
|
|
$
|
(75.0
|
)
|
|
|
|
|
Loss per share:
|
|
|
|
Basic
|
$
|
(0.43
|
)
|
|
$
|
(1.52
|
)
|
Diluted
|
$
|
(0.43
|
)
|
|
$
|
(1.52
|
)
|
|
|
|
|
Denominator for basic EPS – weighted average shares
|
54,671,787
|
|
|
49,210,929
|
|
Denominator for diluted EPS – weighted average shares
|
54,671,787
|
|
|
49,210,929
|
|
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
The goodwill balance was $1,729.6 million and $1,738.0 million as of September 30, 2019 and December 31, 2018, respectively. Additionally, the Company's intangible asset balance was $479.1 million and $552.4 million as of September 30, 2019 and December 31, 2018, respectively. The additions to goodwill during the nine months ended September 30, 2019 relate primarily to measurement period adjustments for the acquisitions of Interoute and Access Point, Inc.
The change in the carrying amount of goodwill for the nine months ended September 30, 2019 was as follows (amounts in millions):
|
|
|
|
|
Goodwill - December 31, 2018
|
$
|
1,738.0
|
|
Adjustments to prior year business combinations
|
47.8
|
|
Foreign currency translation adjustments
|
(56.2
|
)
|
Goodwill - September 30, 2019
|
$
|
1,729.6
|
|
The following table summarizes the Company’s intangible assets as of September 30, 2019 and December 31, 2018 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
Amortization
Period
|
|
Gross Asset Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
|
Gross Asset Cost
|
|
Accumulated Amortization
|
|
Net Book Value
|
Customer lists
|
3-20 years
|
|
$
|
747.6
|
|
|
$
|
292.3
|
|
|
$
|
455.3
|
|
|
$
|
757.7
|
|
|
$
|
233.7
|
|
|
$
|
524.0
|
|
Non-compete agreements
|
3-5 years
|
|
4.7
|
|
|
4.6
|
|
|
0.1
|
|
|
4.7
|
|
|
4.6
|
|
|
0.1
|
|
Intellectual property
|
10 years
|
|
37.9
|
|
|
14.3
|
|
|
23.6
|
|
|
38.6
|
|
|
11.3
|
|
|
27.3
|
|
Tradename
|
1-3 years
|
|
6.0
|
|
|
5.9
|
|
|
0.1
|
|
|
6.0
|
|
|
5.0
|
|
|
1.0
|
|
|
|
|
$
|
796.2
|
|
|
$
|
317.1
|
|
|
$
|
479.1
|
|
|
$
|
807.0
|
|
|
$
|
254.6
|
|
|
$
|
552.4
|
|
Amortization expense was $20.9 million and $22.9 million for the three months ended September 30, 2019 and 2018, respectively, and $64.9 million and $64.0 million for the nine months ended September 30, 2019 and 2018, respectively.
Estimated amortization expense related to intangible assets subject to amortization at September 30, 2019 in each of the years subsequent to September 30, 2019 is as follows (amounts in millions):
|
|
|
|
|
2019 remaining
|
$
|
20.2
|
|
2020
|
80.9
|
|
2021
|
79.3
|
|
2022
|
66.4
|
|
2023
|
53.9
|
|
2024 and beyond
|
178.4
|
|
Total
|
$
|
479.1
|
|
NOTE 4 — PREPAID EXPENSES AND OTHER CURRENT ASSETS
The following table summarizes the Company’s prepaid expenses and other current assets as of September 30, 2019 and December 31, 2018 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Prepaid carrier costs
|
$
|
21.1
|
|
|
$
|
18.9
|
|
Prepaid selling, general and administrative
|
14.5
|
|
|
14.7
|
|
Short-term deposits
|
0.3
|
|
|
1.3
|
|
Taxes receivable
|
1.4
|
|
|
2.5
|
|
Deferred commissions
|
8.0
|
|
|
3.4
|
|
Other
|
5.4
|
|
|
8.4
|
|
|
$
|
50.7
|
|
|
$
|
49.2
|
|
NOTE 5 — ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the Company’s accrued expenses and other current liabilities as of September 30, 2019 and December 31, 2018 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
Compensation and benefits
|
$
|
25.2
|
|
|
$
|
36.9
|
|
Carrier costs
|
55.5
|
|
|
101.1
|
|
Restructuring
|
8.7
|
|
|
25.8
|
|
Interest rate swaps
|
63.5
|
|
|
22.4
|
|
Interest
|
11.4
|
|
|
3.2
|
|
Acquisition holdbacks
|
—
|
|
|
6.7
|
|
Accrued taxes
|
15.6
|
|
|
2.8
|
|
Selling, general and administrative
|
14.6
|
|
|
8.3
|
|
Accrued capital expenditures
|
4.2
|
|
|
7.7
|
|
Other
|
10.0
|
|
|
11.9
|
|
|
$
|
208.7
|
|
|
$
|
226.8
|
|
NOTE 6 — DEFERRED REVENUE
Total deferred revenue as of September 30, 2019 and December 31, 2018 was $337.0 million and $371.2 million, respectively, consisting of unamortized prepaid services, IRUs, and deferred non-recurring revenue. Deferred revenue is recognized as current and noncurrent deferred revenue on the condensed consolidated balance sheets.
Significant changes in deferred revenue balances during the period are as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
|
Contract Term
|
|
|
|
Less than 1 Year
|
|
Greater than 1 Year
|
|
Total
|
Balance, December 31, 2018
|
$
|
28.7
|
|
|
$
|
342.5
|
|
|
$
|
371.2
|
|
Revenue recognized from beginning balance
|
(27.0
|
)
|
|
(42.7
|
)
|
|
(69.7
|
)
|
Increase in deferred revenue (gross)
|
191.4
|
|
|
19.5
|
|
|
210.9
|
|
Revenue recognized on increase in deferred revenue
|
(162.5
|
)
|
|
(1.4
|
)
|
|
(163.9
|
)
|
Foreign currency translation adjustments
|
(0.3
|
)
|
|
(11.2
|
)
|
|
(11.5
|
)
|
Balance, September 30, 2019
|
$
|
30.3
|
|
|
$
|
306.7
|
|
|
$
|
337.0
|
|
Remaining amortization at September 30, 2019 and in each of the years subsequent to September 30, 2019 is as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Term
|
|
|
|
Less than 1 Year
|
|
Greater than 1 Year
|
|
Total
|
2019 remaining
|
$
|
25.6
|
|
|
$
|
13.0
|
|
|
$
|
38.6
|
|
2020
|
4.7
|
|
|
39.8
|
|
|
44.5
|
|
2021
|
—
|
|
|
37.0
|
|
|
37.0
|
|
2022
|
—
|
|
|
34.9
|
|
|
34.9
|
|
2023
|
—
|
|
|
33.2
|
|
|
33.2
|
|
2024 and beyond
|
—
|
|
|
148.8
|
|
|
148.8
|
|
|
$
|
30.3
|
|
|
$
|
306.7
|
|
|
$
|
337.0
|
|
NOTE 7 — DEBT
As of September 30, 2019 and December 31, 2018, long-term debt was as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
|
|
US Term loan
|
$
|
1,747.9
|
|
|
$
|
1,761.2
|
|
EMEA Term loan
|
807.2
|
|
|
857.6
|
|
7.875% Senior unsecured notes
|
575.0
|
|
|
575.0
|
|
Revolving line of credit
|
85.0
|
|
|
59.0
|
|
Other secured loans
|
6.5
|
|
|
18.1
|
|
Total debt obligations
|
3,221.6
|
|
|
3,270.9
|
|
Unamortized debt issuance costs
|
(29.2
|
)
|
|
(31.6
|
)
|
Unamortized original issuance discount, net
|
(42.4
|
)
|
|
(47.8
|
)
|
Carrying value of debt
|
3,150.0
|
|
|
3,191.5
|
|
Less current portion
|
(31.8
|
)
|
|
(39.9
|
)
|
Long-term debt less current portion
|
$
|
3,118.2
|
|
|
$
|
3,151.6
|
|
2018 Credit Agreement
On May 31, 2018, the Company entered into a credit agreement (the "2018 Credit Agreement") that provides for (1) a $1,770.0 million term loan B facility (the "US Term Loan Facility"), (2) a €750.0 million term loan B facility (the "EMEA Term Loan Facility"), and (3) a $200.0 million revolving credit facility (the "Revolving Line of Credit Facility") (which includes a $50.0 million letter of credit facility). The US Term Loan Facility was issued at an original issuance discount of $8.9 million and the EMEA Term
Loan Facility was issued at an original issuance discount of €3.8 million. The Company is the borrower under the U.S. Term Loan Facility and the Revolving Line of Credit Facility. The Company's wholly-owned subsidiary GTT Communications B.V. is the borrower under the EMEA Term Loan Facility (the "EMEA Borrower").
The maturity date of the US Term Loan Facility and the EMEA Term Loan Facility (collectively the "Term Loan Facilities") is May 31, 2025 and the maturity date of the Revolving Line of Credit Facility is May 31, 2023. Each maturity date may be extended per the terms of the 2018 Credit Agreement.
The principal amounts of the US Term Loan Facility and EMEA Term Loan Facility are payable in equal quarterly installments of $4.425 million and €1.875 million, respectively, commencing on September 30, 2018 and continuing thereafter until the maturity date when the remaining balances of outstanding principal amount is payable in full.
The Company may prepay loans under the 2018 Credit Agreement at any time, subject to certain notice requirements, LIBOR breakage costs, and prepayment fees noted above.
At the Company’s election, the US Term Loan Facility may be made as either Base Rate Loans or Eurocurrency Loans. The EMEA Term Loan Facility will bear interest at the European Money Markets Institute EURIBOR plus the applicable margin. The applicable margin for the US Term Loan Facility is 1.75% for Base Rate Loans and 2.75% for Eurocurrency Loans, subject to a “LIBOR floor” of 0.00%. The applicable margin for the EMEA Term Loan Facility is 3.25%, subject to a “EURIBOR floor” of 0.00%. The applicable margin for revolving loans under the Revolving Line of Credit Facility is 1.75% for Base Rate Loans, 2.75% for Eurocurrency Loans denominated in U.S. Dollars and certain other approved currencies other than Euros, and 3.25% for revolving loans denominated in Euros.
The proceeds from the US Term Loan Facility and EMEA Term Loan Facility were used to finance the Interoute acquisition, 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.
The unused and available amount of the Revolving Line of Credit Facility at September 30, 2019 was as follows (amounts in millions):
|
|
|
|
|
Committed capacity
|
$
|
250.0
|
|
Borrowings outstanding
|
(85.0
|
)
|
Letters of credit issued
|
(10.8
|
)
|
Unused and available
|
$
|
154.2
|
|
The obligations of the Company under the 2018 Credit Agreement are secured by the substantial majority of the tangible and intangible assets of the Company. The obligations of the Company under the U.S. Term Loan Facility and the Revolving Line of Credit Facility are guaranteed by certain of its domestic subsidiaries, but not by any of the Company’s foreign subsidiaries. The obligations of the EMEA Borrower under the EMEA Term Loan Facility are guaranteed by the Company and certain of its domestic and foreign subsidiaries. None of the foreign subsidiary guarantors of the EMEA Term Loan Facility provide cross-guarantees of the guarantees of the EMEA Term Loan Facility provided by the Company and its domestic subsidiaries.
The 2018 Credit Agreement does not contain a financial covenant for the US Term Loan Facility or the EMEA Term Loan Facility, but it does include a maximum Consolidated Net Secured Leverage Ratio applicable to the Revolving Line of Credit Facility in the event that utilization exceeds 30% of the revolving loan facility commitment. On August 8, 2019, the Company entered into Amendment No. 1 to the 2018 Credit Agreement, which amends the Consolidated Net Secured Leverage Ratio applicable to the Revolving Line of Credit Facility for each fiscal quarter ending September 30, 2019 through December 31, 2020. If triggered, the covenant, as amended, requires the Company to maintain a Consolidated Net Secured Leverage Ratio, on a Pro Forma Basis, below the maximum ratio specified as follows:
|
|
|
|
Fiscal Quarter Ending
|
|
Maximum Ratio
|
September 30, 2019
|
|
6.50:1
|
December 31, 2019
|
|
6.50:1
|
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
|
As of September 30, 2019, the Company's Consolidated Net Secured Leverage Ratio, as defined in the 2018 Credit Agreement, was approximately 5.4:1, which is below the maximum permitted ratio of 6.50:1.
In addition, Amendment No. 1 to the 2018 Credit Agreement added the certain restrictions, which remain in place from the effective date of the Amendment No. 1 until the delivery of the compliance certificate for the quarter ending March 31, 2021, demonstrating compliance with the Consolidated Net Secured Leverage Ratio for that quarter, including without limitation the following: the Company and its restricted subsidiaries (as defined in the 2018 Credit Agreement) may not make certain dividends, distributions and other restricted payments (as defined in the 2018 Credit Agreement), including that the Company may not pay dividends; the Company and its restricted subsidiaries may not designate any subsidiary an “Unrestricted Subsidiary” (which would effectively remove such subsidiary from the restrictions of the 2018 Credit Agreement); the Company and its restricted subsidiaries may not make “permitted acquisitions” (as defined in the 2018 Credit Agreement) or certain other investments, unless the Company and its restricted subsidiaries have liquidity (i.e., unrestricted cash and cash equivalents and availability under the revolving credit facility under the 2018 Credit Agreement) of at least $250 million (other than the acquisition of KPN Eurorings B.V., a private limited liability company (besloten vennootschap met beperkte aansprakelijkheid) incorporated under the laws of the Netherlands with respect to which this liquidity requirement is not applicable); and the amount of incremental borrowings under the 2018 Credit Agreement that the Company and its subsidiaries may request when the Consolidated Net Secured Leverage Ratio is above 4.40 to 1.00 the Company and its subsidiaries was reduced to $300 million minus amounts previously requested (which amount is $50 million requested under the Incremental Agreement described above).
Interest Rate Swaps
In April and May 2018, the Company entered into the following interest rate swap arrangements to partially mitigate the variability of cash flows due to changes in the Eurodollar rate, specifically related to interest payments on our term loans under the 2018 Credit Agreement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade date
|
April 6, 2018
|
|
|
May 17, 2018
|
|
|
May 17, 2018
|
|
|
May 17, 2018
|
|
Notional amount (in millions)
|
$
|
500.0
|
|
|
$
|
200.0
|
|
|
$
|
300.0
|
|
|
€
|
317.0
|
|
Term (years)
|
5
|
|
|
7
|
|
|
3
|
|
|
7
|
|
Effective date
|
4/30/2018
|
|
|
6/29/2018
|
|
|
6/29/2018
|
|
|
6/29/2018
|
|
Termination date
|
4/30/2023
|
|
|
5/31/2025
|
|
|
6/30/2021
|
|
|
5/31/2025
|
|
Fixed rate
|
2.6430
|
%
|
|
3.0370
|
%
|
|
2.8235
|
%
|
|
0.8900
|
%
|
Floating rate
|
1-month LIBOR
|
|
|
1-month LIBOR
|
|
|
1-month LIBOR
|
|
|
1-month EURIBOR
|
|
The interest rate swaps do not qualify for hedge accounting.
The fair value of the interest rate swaps at September 30, 2019 and December 31, 2018 was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
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
|
|
$
|
—
|
|
|
$
|
(22.1
|
)
|
|
$
|
—
|
|
|
$
|
(4.4
|
)
|
Interest rate swap
|
$
|
200.0
|
|
6/29/2018
|
5/31/2025
|
|
—
|
|
|
(18.4
|
)
|
|
—
|
|
|
(6.9
|
)
|
Interest rate swap
|
$
|
300.0
|
|
6/29/2018
|
6/30/2021
|
|
—
|
|
|
(6.9
|
)
|
|
—
|
|
|
(2.8
|
)
|
Interest rate swap
|
€
|
317.0
|
|
6/29/2018
|
5/31/2025
|
|
—
|
|
|
(16.1
|
)
|
|
—
|
|
|
(8.3
|
)
|
|
|
|
|
|
$
|
—
|
|
|
$
|
(63.5
|
)
|
|
$
|
—
|
|
|
$
|
(22.4
|
)
|
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 $6.6 million in other expense, net and a gain of $8.6 million for the three months ended September 30, 2019 and 2018, respectively, and a loss of $41.8 million and $0.7 million for the nine months ended September 30, 2019 and 2018, respectively.
7.875% Senior Unsecured Notes
During 2016 and 2017, the Company completed three private offerings for $575.0 million aggregate principal amount of its 7.875% senior unsecured notes due in 2024 (collectively the “7.875% Senior Unsecured Notes”). Each offering was treated as a single series of debt securities. The 7.875% Senior Unsecured Notes have identical terms other than the issuance date and offering price. The 7.875% Senior Unsecured Notes were issued at a combined premium of $16.5 million.
The 7.875% Senior Unsecured Notes are guaranteed by the Company’s domestic subsidiaries that guarantee the Company’s obligations under the U.S. Term Loan Facility and the Revolving Line of Credit Facility, but not by any of the Company’s foreign subsidiaries. We are in compliance with the subsidiary guarantee requirements for the 7.875% Senior Unsecured Notes.
Other Secured Loans
In connection with the Interoute acquisition in May 2018, the Company acquired other loans secured by certain network assets. The balance of other secured loans at September 30, 2019 and December 31, 2018 was $6.5 million and $18.1 million, respectively.
Effective Interest Rate
The effective interest rate on the long-term debt at September 30, 2019 and December 31, 2018 was 5.3% and 5.3%, respectively. The effective interest rate considers the impact of the interest rate swaps.
Long-term Debt Contractual Maturities
The aggregate contractual maturities of long-term debt (excluding unamortized debt issuance costs and unamortized original issuance discounts and premiums) were as follows as of September 30, 2019 (amounts in millions):
|
|
|
|
|
|
Total Debt
|
2019 remaining
|
$
|
9.1
|
|
2020
|
29.4
|
|
2021
|
26.2
|
|
2022
|
25.9
|
|
2023
|
110.9
|
|
2024 and beyond
|
3,020.1
|
|
|
$
|
3,221.6
|
|
Debt Issuance Costs and Original Issuance Discounts and Premiums
The following table summarizes the debt issuance costs activity for the nine months ended September 30, 2019 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Term Loan
|
|
EMEA Term Loan
|
|
7.875% Senior Unsecured Notes
|
|
Revolving Line of Credit
|
|
Total
|
Balance, December 31, 2018
|
$
|
(11.5
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(14.3
|
)
|
|
$
|
(2.6
|
)
|
|
$
|
(31.6
|
)
|
Debt issuance costs incurred
|
—
|
|
|
—
|
|
|
—
|
|
|
(1.1
|
)
|
|
(1.1
|
)
|
Amortization
|
1.2
|
|
|
0.3
|
|
|
1.5
|
|
|
0.5
|
|
|
3.5
|
|
Balance, September 30, 2019
|
$
|
(10.3
|
)
|
|
$
|
(2.9
|
)
|
|
$
|
(12.8
|
)
|
|
$
|
(3.2
|
)
|
|
$
|
(29.2
|
)
|
Debt issuance costs are presented in the condensed consolidated balance sheets as a reduction to long-term debt. Interest expense associated with the amortization of debt issuance costs was $1.2 million and $1.1 million for the three months ended September 30, 2019 and 2018, respectively, and $3.5 million and $3.4 million for the nine months ended September 30, 2019 and 2018, respectively.
The following table summarizes the original issuance (discount) and premium activity for the nine months ended September 30, 2019 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
US Term Loan
|
|
EMEA Term Loan
|
|
7.875% Senior Unsecured Notes
|
|
Total
|
Balance, December 31, 2018
|
$
|
(39.8
|
)
|
|
$
|
(22.0
|
)
|
|
$
|
14.0
|
|
|
$
|
(47.8
|
)
|
Amortization
|
4.2
|
|
|
2.5
|
|
|
(1.5
|
)
|
|
5.2
|
|
Foreign currency translation adjustments
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
Balance, September 30, 2019
|
$
|
(35.6
|
)
|
|
$
|
(19.3
|
)
|
|
$
|
12.5
|
|
|
$
|
(42.4
|
)
|
Original issuance discounts and premiums are presented in the condensed consolidated balance sheets as a reduction to long-term debt. Amortization of original issuance discounts and premiums was $1.7 million and $1.7 million for the three months ended September 30, 2019 and 2018, respectively, and $5.2 million and $1.9 million for the nine months ended September 30, 2019 and 2018, respectively, and is included in interest expense, net.
NOTE 8 — SHARE-BASED COMPENSATION
Share-Based Compensation Plan
The Company grants share-based equity awards, including stock options and restricted stock, under the GTT Communications, Inc. 2018 Stock Option and Incentive Plan (the "GTT Stock Plan"). The GTT Stock Plan is limited to an aggregate 14,250,000 shares of which 10,744,199 have been issued and are outstanding as of September 30, 2019.
The GTT Stock Plan permits the granting of time-based stock options, time-based restricted stock, and performance-based restricted stock to employees and consultants of the Company, and non-employee directors of the Company.
Time-based options granted under the GTT Stock Plan have an exercise price of at least 100% of the fair market value of the underlying stock on the grant date and expire no later than 10 years from the grant date. The Company uses the Black-Scholes option-pricing model to determine the fair value of its stock option awards at the time of grant. The stock options generally vest over four years with 25% of the options becoming exercisable one year from the date of grant and the remaining vesting annually or quarterly over the following three years.
Time-based restricted stock granted under the GTT Stock Plan is valued at the share price of our common stock as reported on the NYSE on the date of grant. Time-based restricted stock generally vests over four years with 25% of the shares becoming unrestricted one year from the date of grant and the remaining vesting annually or quarterly over the following three years.
Performance-based restricted stock is granted under the GTT Stock Plan subject to the achievement of certain performance measures. Once achievement of these performance measures is considered probable, the Company starts to expense the fair value of the grant
over the vesting period. The performance-based restricted stock is valued at the share price of our common stock as reported on the NYSE on the date of grant. The performance grant vests quarterly over the vesting period once achievement of the performance measure has been met and approved by the Compensation Committee, typically one to two years.
The Compensation Committee of the Board of Directors, as administrator of the GTT Stock Plan, has the discretion to authorize a different vesting schedule for any awards.
In 2019, the Company implemented a sell-to-cover program for employees who elect to sell shares to cover any withholding taxes due upon vesting. Previously the Company netted shares upon vesting and paid the withholding taxes directly.
Share-Based Compensation Expense
The following tables summarize the share-based compensation expense recognized as a component of selling, general and administrative expenses in the condensed consolidated statements of operations (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Stock options
|
$
|
0.1
|
|
|
$
|
0.2
|
|
|
$
|
0.4
|
|
|
$
|
0.9
|
|
Restricted stock
|
6.8
|
|
|
8.9
|
|
|
22.5
|
|
|
22.8
|
|
ESPP
|
0.1
|
|
|
0.1
|
|
|
0.3
|
|
|
0.2
|
|
Total
|
$
|
7.0
|
|
|
$
|
9.2
|
|
|
$
|
23.2
|
|
|
$
|
23.9
|
|
As of September 30, 2019, there was $61.2 million of total unrecognized compensation cost related to unvested share-based compensation awards. The following table summarizes the unrecognized compensation cost and the weighted average period over which the cost is expected to be amortized (amounts in millions):
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Unrecognized Compensation Cost
|
|
Weighted Average Remaining Period to be Recognized (Years)
|
Time-based stock options
|
$
|
0.1
|
|
|
0.37
|
Time-based restricted stock
|
56.5
|
|
|
2.30
|
Performance-based restricted stock (1)
|
4.6
|
|
|
0.75
|
Total
|
$
|
61.2
|
|
|
2.16
|
(1) Excludes $26.3 million and $12.9 million of unrecognized compensation cost related to the 2018 Performance Awards and 2017 Performance Awards, respectively, where achievement of the performance criteria was not probable as of September 30, 2019.
The following table summarizes the restricted stock granted during the three and nine months ended September 30, 2019 and 2018 (amounts in millions, except shares data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Time-based restricted stock granted
|
108,000
|
|
|
196,468
|
|
|
790,731
|
|
|
815,019
|
|
Fair value of time-based restricted stock granted
|
$
|
1.1
|
|
|
$
|
8.8
|
|
|
$
|
22.7
|
|
|
$
|
38.4
|
|
|
|
|
|
|
|
|
|
Performance-based restricted stock granted
|
—
|
|
|
—
|
|
|
44,000
|
|
|
8,000
|
|
Fair value of performance-based restricted stock granted
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1.2
|
|
|
$
|
0.4
|
|
No stock options were issued in any period presented.
Performance-based Restricted Stock
The Company granted $17.4 million of restricted stock during 2015 and 2017 contingent upon the achievement of certain performance criteria (the "2015 Performance Awards"). The fair value of the 2015 Performance Awards was calculated using the value of GTT common stock on the respective grant dates. Upon announcement of the Hibernia acquisition in November 2016, the achievement of two of the four performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition concluded during the first quarter of 2019. Additionally, upon announcement of the Global Capacity acquisition in June 2017, the achievement of the final two performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. The Company did not recognize share-based compensation expense related to the 2015 Performance awards during the three months ended September 30, 2019 as the awards were fully vested. The Company recognized share-based compensation expense related to the 2015 Performance Awards of $1.9 million for the three months ended September 30, 2018, and $1.3 million and $5.9 million for the nine months ended September 30, 2019 and 2018, respectively.
The Company granted $32.6 million of restricted stock during 2017 and 2018 contingent upon the achievement of certain performance criteria (the "2017 Performance Awards"). The fair value of the 2017 Performance Awards was calculated using the value of GTT common stock on the grant date. Upon the closing of the Interoute acquisition in May 2018, the achievement of two of the four performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition is expected to continue through the second quarter of 2020. The Company recognized share-based compensation expense related to the 2017 Performance Awards of $1.7 million and $1.8 million for the three months ended September 30, 2019 and 2018, respectively, and $5.5 million and $3.6 million for the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, $4.3 million of unvested 2017 Performance Awards had been forfeited due to departures and remaining unrecognized compensation cost related to the unvested 2017 Performance Awards was $17.5 million, inclusive of unrecognized compensation cost where achievement of the performance criteria was not probable as of September 30, 2019.
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 September 30, 2019, achievement of the performance criteria was not probable. Accordingly, the Company recognized no share-based compensation expense for the three or nine months ended September 30, 2019. As of September 30, 2019, $4.9 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 $26.3 million.
Employee Stock Purchase Plan
The Company has an Employee Stock Purchase Plan ("ESPP") that permits eligible employees to purchase common stock through payroll deductions at the lesser of the opening stock price or 85% of the closing stock price of the common stock during each of the three-month offering periods. The Company expenses the discount offered as additional share-based compensation expense. The offering periods generally commence on the first day and the last day of each quarter. At September 30, 2019, 316,516 shares were available for issuance under the ESPP.
NOTE 9 — INCOME TAXES
The Company’s provision for income taxes is determined using an estimate of its annual effective tax rate, adjusted for the effect of discrete items arising in the quarter. Each quarter the Company updates its estimate of the annual effective tax rate.
The quarterly tax provision and the quarterly estimate of the Company's annual effective tax rate is subject to significant variation due to several factors, including variability in accurately predicting pre-tax and taxable income (loss) and the mix of jurisdictions to which they relate, effects of acquisitions and integrations, audit-related developments, changes in the Company's stock price, foreign currency gains (losses), and tax law developments. Additionally, the Company's effective tax rate may be more or less volatile based on the amount of pre-tax income or loss and impact of discrete items.
The Company recorded a (benefit from) provision for income taxes of $(0.5) million and $(1.6) million for the three months ended September 30, 2019 and 2018, respectively, and $1.5 million and $(1.1) million for the nine months ended September 30, 2019 and 2018, respectively.
The Company assesses the available positive and negative evidence to estimate whether sufficient future taxable income will be generated to permit use of the Company's existing deferred tax assets. A significant piece of objective negative evidence identified during the Company's evaluation was the cumulative loss incurred over the three year period ended December 31, 2018. 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 September 30, 2019 and December 31, 2018, the Company recognized a valuation allowance against its net U.S. deferred tax assets under the criteria of ASC 740 of $73.3 million and $73.3 million, respectively, and the Company recognized a valuation allowance against its net foreign deferred tax assets under the criteria of ASC 740 of $110.9 million and $89.6 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.
NOTE 10 — SEVERANCE, RESTRUCTURING, AND OTHER EXIT COSTS
The Company incurred severance, restructuring and other exit costs associated with 2018 acquisitions. These costs include employee severance costs, termination costs associated with facility leases and network agreements, and other exit costs related to the transactions. The Company records the current portion of severance, restructuring and other exit costs as a component of accrued expenses and other current liabilities and the long-term portion of severance, restructuring and other exit costs as a component of other long-term liabilities.
The exit costs recorded and paid are summarized as follows for the nine months ended September 30, 2019 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
|
Charges
|
|
Payments
|
|
Other Adjustments(1)
|
|
Balance,
September 30, 2019
|
Employee termination benefits
|
$
|
7.4
|
|
|
$
|
6.0
|
|
|
$
|
(10.9
|
)
|
|
$
|
1.3
|
|
|
$
|
3.8
|
|
Lease terminations
|
9.3
|
|
|
3.9
|
|
|
(4.3
|
)
|
|
(1.0
|
)
|
|
7.9
|
|
Other contract terminations
|
9.1
|
|
|
1.7
|
|
|
(6.8
|
)
|
|
0.2
|
|
|
4.2
|
|
|
$
|
25.8
|
|
|
$
|
11.6
|
|
|
$
|
(22.0
|
)
|
|
$
|
0.5
|
|
|
$
|
15.9
|
|
(1) Other Adjustments includes certain reclassifications between categories as well as Foreign Currency Translation adjustments
|
During the nine months ended September 30, 2018, the Company incurred severance, restructuring and other exit costs of $22.7 million and made payments of $22.3 million relating to acquisitions.
NOTE 11 — LEASES
The Company enters into contracts to lease real estate, equipment, and vehicles, and has identified embedded leases within its colocation, dark fiber, and duct supplier contracts. The lease contracts have remaining lease terms up to 31 years and certain leases include options to extend the lease term. The Company is not party to any lease contracts with related parties. The Company’s lease agreements do not contain any residual value guarantees or restrictive covenants.
The Company's lease expense is split between cost of telecommunications services and selling, general and administrative expenses in the condensed consolidated statement of operations based on the use of the asset for which lease expense is being paid. The components of lease expense for the period were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Nine Months Ended September 30, 2019
|
Operating lease expense
|
$
|
25.6
|
|
|
$
|
79.2
|
|
Finance lease expense:
|
|
|
|
Amortization of right of use assets
|
0.6
|
|
|
1.6
|
|
Interest on lease liabilities
|
1.7
|
|
|
3.8
|
|
Total finance lease expense
|
2.3
|
|
|
5.4
|
|
Short-term lease expense
|
5.1
|
|
|
15.8
|
|
Variable lease expense
|
7.6
|
|
|
22.6
|
|
Total lease expense
|
$
|
40.6
|
|
|
$
|
123.0
|
|
Supplemental cash flow information related to leases for the period was as follows (amounts in millions):
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
Operating cash flows from operating leases
|
$
|
84.0
|
|
Operating cash flows from finance leases
|
3.8
|
|
Financing cash flows from finance leases
|
1.1
|
|
|
|
Right of use assets obtained in exchange for new operating lease liabilities
|
15.4
|
|
Right of use assets obtained in exchange for new finance lease liabilities
|
1.3
|
|
Supplemental balance sheet information related to leases for the period was as follows:
|
|
|
|
|
September 30, 2019
|
Weighted average remaining lease term (amounts in years)
|
|
Operating leases
|
6.41
|
|
Finance leases
|
23.17
|
|
|
|
Weighted average discount rate
|
|
Operating leases
|
5.5
|
%
|
Finance leases
|
13.0
|
%
|
Maturities of lease liabilities were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
2019 remaining
|
$
|
25.4
|
|
|
$
|
1.4
|
|
2020
|
87.9
|
|
|
5.4
|
|
2021
|
79.1
|
|
|
5.0
|
|
2022
|
61.4
|
|
|
5.0
|
|
2023
|
46.4
|
|
|
5.1
|
|
2024 and beyond
|
122.7
|
|
|
112.8
|
|
Total lease payments
|
422.9
|
|
|
134.7
|
|
Less: Present value discount
|
(70.5
|
)
|
|
(93.7
|
)
|
Present value of lease obligations
|
$
|
352.4
|
|
|
$
|
41.0
|
|
NOTE 12 — 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, 2019 (amounts in millions):
|
|
|
|
|
|
|
|
|
|
Network Supply
|
|
Other
|
2019 remaining
|
$
|
119.2
|
|
|
$
|
2.2
|
|
2020
|
$
|
432.6
|
|
|
$
|
8.2
|
|
2021
|
$
|
292.7
|
|
|
$
|
6.3
|
|
2022
|
$
|
190.1
|
|
|
$
|
3.9
|
|
2023
|
$
|
55.8
|
|
|
$
|
2.9
|
|
2024 and beyond
|
$
|
111.1
|
|
|
$
|
9.6
|
|
|
1,201.5
|
|
|
33.1
|
|
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 September 30, 2019 and refer to Note 11 - Leases for the aggregate contractual maturities of operating leases and finance leases at September 30, 2019.
Network Supply Agreements
As of September 30, 2019, the Company had purchase obligations of $1,201.5 million associated with the telecommunications services that the Company has contracted to purchase from its suppliers that are not accounted for as operating leases. The Company’s supplier agreements fall into two key categories, the Company's core IP backbone and customer specific locations (also referred to as "last mile" locations). Supplier agreements associated with the Company's core IP backbone are typically contracted on a one year term and do not relate to any specific underlying customer commitments. The short-term duration allows the Company to take advantage of favorable pricing trends.
Supplier agreements associated with the Company's customer specific locations, which represent the substantial majority of the Company's network spending, are typically contracted so the terms and conditions in both the vendor and customer 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' commitments to purchase the services associated with those obligations.
Legal Proceedings
From time to time, the Company is a party to legal proceedings arising in the normal course of its business. Except as disclosed below, the Company does not believe that it is a party to any current or pending legal action that could reasonably be expected to have a material adverse effect on its financial condition or results of operations and cash flow.
On July 30, 2019, a purported class action complaint was filed against the Company and certain of its current and former officers and directors in the U.S District Court for the Eastern District of Virginia (Case No. 1:19-cv-00982) on behalf of certain GTT stockholders. The complaint alleges that defendants made false or misleading statements and omissions of purportedly material fact, in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, in connection with disclosures relating to GTT's acquisition and integration of Interoute Communications Holdings S.A. The complaint seeks unspecified damages. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is in the early stages and, at this time, no assessment can be made as to its likely outcome or whether the outcome will be material to the Company.
On October 16, 2019, a purported shareholder derivative complaint was filed by a GTT stockholder against certain of the Company's present and former directors and officers in the U.S. District Court for the District of Delaware (Case No. 19-cv-1961). The Company was named as a nominal defendant. The complaint asserts various causes of action against the individual defendants related to the alleged false or misleading statements and omissions at issue in the securities litigation described above. The complaint seeks damages, costs and fees, including attorney's fees, and equitable relief. Defendants intend to file a motion to dismiss the complaint. The Company believes that the claims in this lawsuit are without merit and intends to defend against them vigorously. The lawsuit is in the early stages and, at this time, no assessment can be made as to its likely outcome or whether the outcome will be material to the Company.