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EX-32.2 - EXHIBIT 32.2 - GTT Communications, Inc.q32018ex-322.htm
EX-32.1 - EXHIBIT 32.1 - GTT Communications, Inc.q32018ex-321.htm
EX-31.2 - EXHIBIT 31.2 - GTT Communications, Inc.q32018ex-312.htm
EX-31.1 - EXHIBIT 31.1 - GTT Communications, Inc.q32018ex-311.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
þ
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2018
 
or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from ____ to ____
 

Commission File Number 001-35965 
GTT Communications, Inc.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
20-2096338
(State or Other Jurisdiction of
 
(I.R.S. Employer Identification No.)
Incorporation or Organization)
 
 
 
7900 Tysons One Place
Suite 1450
McLean, Virginia 22102
(Address including zip code of principal executive offices)

(703) 442-5500
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): 
Large Accelerated Filer
þ
 
Accelerated Filer
¨
Non-Accelerated Filer
¨
 
Smaller reporting company
¨
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
 
As of November 6, 2018, 54,701,256 shares of common stock, par value $.0001 per share, of the registrant were outstanding.
 
 




 
Page
 
   

2



PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
GTT Communications, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in millions, except for share and per share data) 
 
September 30, 2018
 
December 31, 2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
47.7

 
$
101.2

Accounts receivable, net of allowances of $4.2 and $5.1, respectively
254.1

 
102.8

Prepaid expenses and other current assets
68.8

 
24.1

Total current assets
370.6

 
228.1

Property and equipment, net
1,904.6

 
499.3

Intangible assets, net
564.6

 
417.1

Goodwill
1,666.8

  
644.5

Other long-term assets
86.6

 
9.2

Total assets
$
4,593.2

 
$
1,798.2

LIABILITIES AND STOCKHOLDERS EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
125.7

 
$
22.5

Accrued expenses and other current liabilities
168.7

 
89.0

Acquisition holdbacks
8.9

 
14.0

Current portion of capital lease obligations
6.8

 
1.5

Current portion of long-term debt
40.9

 
7.0

Deferred revenue
191.5

 
53.7

Total current liabilities
542.5

 
187.7

Capital lease obligations, long-term portion
36.2

 
0.3

Long-term debt
3,115.5

 
1,236.5

Deferred revenue, long-term portion
268.6

 
108.0

Deferred tax liabilities
122.7

 
26.3

Other long-term liabilities
31.7

 
8.0

Total liabilities
4,117.2

 
1,566.8

Commitments and contingencies


 


Stockholders equity:
 

 
 

Common stock, par value $.0001 per share, 80,000,000 shares authorized, 54,671,841 and 44,531,905 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

Additional paid-in capital
799.0

 
360.2

Accumulated deficit
(315.3
)
 
(124.9
)
Accumulated other comprehensive loss
(7.7
)
 
(3.9
)
Total stockholders equity
476.0

 
231.4

Total liabilities and stockholders equity
$
4,593.2

 
$
1,798.2


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

3



GTT Communications, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(Amounts in millions, except for share and per share data)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
Telecommunications services
$
448.6

 
$
202.6

 
$
1,036.0

 
$
578.6


 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Cost of telecommunications services
247.4

 
103.8

 
568.2

 
296.1

Selling, general and administrative expenses
112.7

 
52.0

 
270.7

 
151.6

Severance, restructuring and other exit costs
15.5

 
11.1

 
22.7

 
21.8

Depreciation and amortization
58.5

 
32.8

 
146.5

 
94.7


 
 
 
 
 
 
 
Total operating expenses
434.1

 
199.7

 
1,008.1

 
564.2


 
 
 
 
 
 
 
Operating income
14.5

 
2.9

 
27.9

 
14.4


 
 
 
 
 
 
 
Other expense:
 
 
 
 
 
 
 
Interest expense, net
(47.6
)
 
(18.3
)
 
(98.7
)
 
(50.7
)
Loss on debt extinguishment

 
(3.0
)
 
(13.8
)
 
(8.6
)
Other expense, net
8.1

 
0.2

 
(106.9
)
 
0.2


 
 
 
 
 
 
 
Total other expense
(39.5
)
 
(21.1
)
 
(219.4
)
 
(59.1
)

 
 
 
 
  

 
  

Loss before income taxes
(25.0
)
 
(18.2
)
 
(191.5
)

(44.7
)

 
 
 
 
 
 
 
Benefit from income taxes
(1.6
)
 
(8.7
)
 
(1.1
)
 
(22.7
)

 
 
 
 
  

 
  

Net loss
$
(23.4
)
 
$
(9.5
)
 
$
(190.4
)
 
$
(22.0
)

 
 
 
 
  

 
  

Loss per share:
 
 
 
 
 
 
 
Basic
$
(0.43
)
 
$
(0.23
)
 
$
(3.87
)
 
$
(0.53
)
Diluted
$
(0.43
)
 
$
(0.23
)
 
$
(3.87
)
 
$
(0.53
)

 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
54,671,787

 
41,762,693

 
49,210,929

 
41,160,317

Diluted
54,671,787

 
41,762,693

 
49,210,929

 
41,160,317


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements


4




GTT Communications, Inc.
Condensed Consolidated Statements of Comprehensive Loss
(Unaudited)
(Amounts in millions)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(23.4
)
 
$
(9.5
)
 
$
(190.4
)
 
$
(22.0
)
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 

 
 

 
 
 
 
Foreign currency translation adjustment
(6.9
)
 
0.5

 
(3.8
)
 
1.0

Comprehensive loss
$
(30.3
)
 
$
(9.0
)
 
$
(194.2
)
 
$
(21.0
)
 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 

5




GTT Communications, Inc.
Condensed Consolidated Statement of Stockholders’ Equity
(Unaudited)
(Amounts in millions, except for share data)
 
 
 
Common Stock
 
Additional Paid-In Capital
 
Accumulated Deficit
 
Accumulated Other Comprehensive Loss
 
Total
 
 
 
Shares
 
Amount
 
Balance, December 31, 2017
44,531,905

 
$

 
$
360.2

 
$
(124.9
)
 
$
(3.9
)
 
$
231.4

 
Share-based compensation for options issued

 

 
0.9

 

 

 
0.9

 
Share-based compensation for restricted stock issued
631,603

 

 
23.0

 

 

 
23.0

 
Tax withholding related to the vesting of restricted stock
(342,807
)
 

 
(16.1
)
 

 

 
(16.1
)
 
Stock issued in connection with employee stock purchase plan
22,866

 

 
0.7

 

 

 
0.7

 
Stock issued in connection with acquisition
79,930

 

 
4.2

 

 

 
4.2

 
Equity offerings, net of issuance costs
9,589,094

 

 
424.5

 

 

 
424.5

 
Stock options exercised
159,250

 

 
1.6

 

 

 
1.6

 
Net loss

 

 

 
(190.4
)
 

 
(190.4
)
 
Foreign currency translation

 

 

 

 
(3.8
)
 
(3.8
)
 
Balance, September 30, 2018
54,671,841

 
$

 
$
799.0

 
$
(315.3
)
 
$
(7.7
)
 
$
476.0

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements

6



GTT Communications, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in millions)

 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net loss
$
(190.4
)
 
$
(22.0
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
146.5

 
94.7

Share-based compensation
23.9

 
16.0

Debt discount amortization
1.9

 
0.5

Loss on debt extinguishment
13.8

 
8.6

Amortization of debt issuance costs
3.4

 
2.6

Change in fair value of derivative financial liability
106.9

 

Excess tax benefit from stock-based compensation
(6.6
)
 
(5.4
)
Deferred income taxes
8.0

 
(18.3
)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable, net
0.4

 
(7.4
)
Prepaid expenses and other current assets
12.9

 
4.3

Other long-term assets
(12.5
)
 
3.3

Accounts payable
15.5

 
(15.7
)
Accrued expenses and other current liabilities
(54.4
)
 
24.1

Deferred revenue
(11.2
)
 
(28.1
)
Other long-term liabilities
(8.1
)
 
(10.1
)
Net cash provided by operating activities
50.0

 
47.1

 
 
 
 
Cash flows from investing activities:
 

 
 
Acquisition of businesses, net of cash acquired
(2,206.7
)
 
(652.8
)
Purchase of customer contracts

 
(14.9
)
Settlement of deal-contingent foreign currency hedge
(105.8
)
 

Purchases of property and equipment
(61.4
)
 
(26.9
)
Net cash used in investing activities
(2,373.9
)
 
(694.6
)
 
 
 
 
Cash flows from financing activities:
 

 
 
Proceeds from revolving line of credit
7.5

 

Repayment of revolving line of credit

 
(20.0
)
Proceeds from term loans
2,633.7

 
696.5

Repayment of term loan
(699.6
)
 
(431.0
)
Proceeds from senior note

 
159.0

Repayment of other secured borrowings
(5.9
)
 

Payment of holdbacks
(11.2
)
 
(22.7
)
Debt issuance costs paid to third parties and lenders
(62.8
)
 
(29.9
)
Proceeds from equity issuance, net of issuance costs
424.5

 

Repayment of capital leases
(2.1
)
 
(1.0
)
Proceeds from issuance of common stock under employee stock purchase plan
0.7

 
0.5

Tax withholding related to the vesting of restricted stock
(16.1
)
 
(3.2
)
Exercise of stock options
1.6

 
1.0

Net cash provided by financing activities
2,270.3

 
349.2

 
 
 
 
Effect of exchange rate changes on cash
0.1

 
(0.9
)
 
 
 
 
Net decrease in cash, cash equivalents, and restricted cash
(53.5
)
 
(299.2
)
 
 
 
 
Cash, cash equivalents, and restricted cash at beginning of period
101.2

 
334.0

 
 
 
 
Cash, cash equivalents, and restricted cash at end of period
$
47.7

 
$
34.8

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest
$
102.4

 
$
39.0

Cash paid for income taxes, net of refunds
$
1.9

 
$
0.6

 
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements
 

7



GTT Communications, Inc. 
Notes to Condensed Consolidated Financial Statements
(Unaudited)

NOTE 1 — ORGANIZATION AND BUSINESS
 
Organization and Business
 
GTT Communications, Inc. ("GTT" or the "Company") is a provider of cloud networking services to large national and multinational enterprise and carrier clients. The Company's comprehensive portfolio of cloud networking services includes: SD-WAN; wide area networking; managed services; internet; infrastructure services; voice; and video transport.

GTT's global network connects people across organizations and around the world. The Company's global network includes over 550 points of presence (PoPs), spans six continents, and provides services to clients in more than 100 countries. GTT differentiates itself from its competition by delivering services to its clients with simplicity, speed, and agility.

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, 2017, included in the Company’s Annual Report on Form 10-K filed on March 1, 2018. 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, 2018 are not necessarily indicative of the results to be expected for the full fiscal year 2018 or for any other interim period. The December 31, 2017 consolidated balance sheet is condensed from the audited financial statements as of that date.

Reclassification Within Condensed Consolidated Statement of Cash Flows

Certain prior period amounts in the condensed consolidated statement of cash flows have been reclassified to conform with the current period presentation to reflect the total change in deferred revenue into a single line item as well as changes in operating assets and liabilities to more closely align with the related balance sheet caption.

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 and accruals for billing disputes, determining useful lives for depreciation and amortization, estimating accruals for exit activities, 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, 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 and acquired companies are

8



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. Additionally, integration efforts related to Interoute are currently underway, but have not currently changed the manner in which the chief operating decision maker has managed the consolidated business. These integration efforts are designed to establish scale and align Interoute's network assets and product offerings within the existing business.

Revenue Recognition

The Company's revenue is derived primarily from telecommunications services. Revenues are recognized when control of these services is transferred to the customer, in an amount that reflects the consideration the Company expects to receive in exchange for those services.

The Company delivers seven primary services to its customers — SD-WAN; wide area networking; managed services; internet; voice; infrastructure services; and video transport.
 
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. Its 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 as defined by Accounting Standards Codification ("ASC") 606, 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 as defined by ASC 606. The Company estimates the amount of variable consideration it expects to be entitled to receive for such arrangements using the expected value method.

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 revenues disaggregated by primary geographic market based on legal entities (in millions, unaudited):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
Primary geographic market
 
 
 
US
$
192.7

 
$
577.6

UK
92.0

 
165.9

Ireland
20.6

 
75.9

Other
117.4

 
181.4

Total revenue from contracts with customers
422.7

 
1,000.8

Lease revenue
25.9

 
35.2

Total telecommunications services revenue
$
448.6

 
$
1,036.0


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 in accordance with the guidance of ASC 606 the Company does not recognize these immaterial promised services as a separate performance obligation. Certain contracts with customers may include multiple performance

9



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 the practical expedient in paragraph ASC 606-10-32-18 and 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 $5.3 million and $3.7 million for the three months ended September 30, 2018 and 2017, respectively, and $17.5 million and $11.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Contract balances. Accounts receivable represent amounts billed to customers where the Company has an enforceable right to payment for performance completed to date. 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.

In accordance with ASC 606, the Company is required to disclose its accounts receivable balances, contract assets, and contract liabilities related to revenue from contracts with customers, which excludes lease revenue, at September 30, 2018. The Company’s accounts receivable balance at September 30, 2018 includes $225.2 million in amounts billed for contracts with customers. There were no contract assets as of January 1, 2018 or September 30, 2018. Refer to Note 6 - Deferred Revenue for significant changes in the contract liabilities balances during the period as well as the estimated revenue expected to be recognized for each of the years subsequent to September 30, 2018 related to performance obligations that are unsatisfied (or partially unsatisfied) at September 30, 2018.

The Company applies the practical expedient in paragraph ASC 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

Contract Costs

The Company capitalizes 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 our customer contacts, technology and other factors. Amortization of sales commissions expense is included in selling, general and administrative expenses. There were no significant amounts of assets recorded related to contract costs as of September 30, 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.


10



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; 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 for income taxes, 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 they have a dilutive effect, the effect of common shares issuable upon exercise of stock options.

11




The table below details the calculations of loss per share (in millions, except for share and per share amounts):  
  
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Numerator for basic and diluted EPS – net loss available to common stockholders
$
(23.4
)
 
$
(9.5
)
 
$
(190.4
)
 
$
(22.0
)
Denominator for basic EPS – weighted average shares
54,671,787

 
41,762,693

 
49,210,929

 
41,160,317

Effect of dilutive securities

 

 

 

Denominator for diluted EPS – weighted average shares
54,671,787

 
41,762,693

 
49,210,929

 
41,160,317

 
 
 
 
 
 
 
 
Loss per share:
 
 
 
 
 
 
 
Basic
$
(0.43
)
 
$
(0.23
)
 
$
(3.87
)
 
$
(0.53
)
Diluted
$
(0.43
)
 
$
(0.23
)
 
$
(3.87
)
 
$
(0.53
)
 
All outstanding stock options were anti-dilutive as of September 30, 2018 and 2017 due to the net loss incurred during the periods. There were approximately 526,000 and 767,000 outstanding stock options as of September 30, 2018 and 2017, 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, 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, 2018, 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. In December 2016, the Company completed a private offering of $300.0 million aggregate principal amount of 7.875% senior unsecured notes due in 2024. The proceeds of the private offering plus 60 days of prepaid interest, were deposited into escrow, where the funds remained until the closing of the acquisition of Hibernia Networks ("Hibernia") that occurred in January 2017. The proceeds were released from escrow at closing to fund the Hibernia acquisition.

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

12



of pursuing collection outweigh the likelihood of recovery. The allowance for doubtful accounts was $4.2 million and $5.1 million as of September 30, 2018 and December 31, 2017, respectively.

Deferred Costs

Installation costs related to provisioning of recurring communications services that the Company incurs from independent third party suppliers, directly attributable and necessary to fulfill a particular service contract, and which would not have been incurred but for the occurrence of that service contract, are recorded as deferred 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. If any installation costs exceed the amount of corresponding deferred revenue, the excess cost is recognized in the current period.

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 $3.0 million and $1.4 million for the three months ended September 30, 2018 and 2017, respectively, and $9.2 million and $4.1 million for the nine months ended September 30, 2018 and 2017, respectively. Assets and liabilities under capital 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 capital 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:
 
Freehold Buildings
30 years
Furniture and Fixtures
7 years
Fiber Optic Cable
20 years
Fiber Optic Network Equipment
3 - 15 years
Leasehold Improvements
up to 10 years
Computer Hardware and Software
3-5 years

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 $1.4 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, and $3.6 million and $1.2 million for the nine months ended September 30, 2018 and 2017, respectively.


13



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. There were no triggering events or goodwill impairments identified for the nine months ended September 30, 2018 and 2017.

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 three to ten 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, 2018 and 2017.

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.

Asset Purchases
 
Periodically the Company acquires customer contracts that it accounts for as an asset purchase and records a corresponding intangible asset that is amortized over its estimated useful life. No goodwill is recorded in an asset purchase.

During the nine months ended September 30, 2018, the Company did not acquire any such customer contracts.

During the nine months ended September 30, 2017, the Company acquired customer contracts for an aggregate purchase price of $37.3 million.

Accrued Supplier Expenses
 
The Company accrues estimated charges owed to its suppliers for services. The Company bases this accrual on the supplier contract, the individual service order executed with the supplier for that service, and the length of time the service has been active.
 
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, 2018 and December 31, 2017, the Company had open disputes not accrued for of $9.2 million and $5.3 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.

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 $32.1 million and $33.8 million as of September 30, 2018 and December 31, 2017, respectively.

Original Issuance Discounts and Premiums

14




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 $49.4 million net discount and a $9.3 million net premium as of September 30, 2018 and December 31, 2017, 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, 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. There were no derivative financial instruments outstanding as of December 31, 2017. Additionally, during the nine months ended September 30, 2018 the Company settled a derivative financial instrument to hedge foreign currency rates. Refer to Note 2 - Business Acquisitions for further information on the terms of the arrangement.

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. During the three and nine months ended September 30, 2018, the Company recognized a gain of $8.3 million and a loss of $107.0 million in other expense, net, 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.


15



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, 2018. There were no financial assets or liabilities that were required to be measured and recognized at fair value on a recurring basis as of December 31, 2017. There were no transfers between Level 1 and Level 2 during the three and nine months ended September 30, 2018.

 
September 30, 2018
 
 
 
Quoted Prices in Active Markets
 
Significant Other Observable Inputs
 
Significant Unobservable Inputs
(amounts in millions)
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Interest rate swap agreements
$
5.8

 
$

 
$
5.8

 
$

 
 
 
 
 
 
 
 
Liabilities:

 
 
 
 
 
 
Interest rate swap agreements
$
(6.5
)
 
$

 
$
(6.5
)
 
$


Non-recurring Fair Value Measurements

In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company records assets and liabilities at fair value on a non-recurring basis as required by GAAP.

Assets measured at fair value on a non-recurring basis include goodwill, tangible assets, and intangible assets. Such assets are reviewed quarterly for impairment indicators. If a triggering event has occurred, the assets are re-measured when the estimated fair value of the corresponding asset group is less than the carrying value. The fair value measurements, in such instances, are based on significant unobservable inputs (Level 3).

Other Fair Value Measurements

As of September 30, 2018 and December 31, 2017, the carrying amounts reflected in the accompanying condensed consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, and other current liabilities, and acquisition earn-outs and holdbacks 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, 2018 and December 31, 2017. The carrying amounts exclude any debt issuance costs or original issuance discount:


16



 
 
 
 
 
 
Fair Value Measurement Using
 
 
Total Carrying Value in Consolidated Balance Sheet
 
Unadjusted Quoted Prices in Active Markets for Identical Assets or Liabilities (1)
(Level 1)
(amounts in millions)
 
September 30, 2018
 
December 31, 2017
 
September 30, 2018
 
December 31, 2017
Liabilities not recorded at fair value in the Financial Statements:
 
 
 
 
 
 
 
 
Long-term debt, including the current portion:
 
 
 
 
 
 
 
 
US Term loan
 
$
1,765.6

 
$
693.0

 
$
1,750.1

 
$
697.3

EMEA Term loan
 
868.2

 

 
865.0

 

7.875% Senior unsecured notes
 
575.0

 
575.0

 
543.4

 
608.1

Revolving line of credit
 
7.5

 

 
7.4

 

Other secured loans
 
21.6

 

 
21.6

 

Total long-term debt, including current portion
 
$
3,237.9

 
$
1,268.0

 
$
3,187.5

 
$
1,305.4

(1) Fair value based on the bid quoted price, except for 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, 2018 or December 31, 2017 exceeded 10% of the Company's consolidated accounts receivable, net. No single customer accounted for more than 10% of revenue for the three or nine months ended September 30, 2018 or 2017.

Newly Adopted Accounting Principles

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) as modified by subsequently issued ASUs 2015-14, 2016-08, 2016-10, 2016-12, and 2016-20 (collectively ASU 2014-09). The revenue recognition principle in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company has adopted this new standard as of January 1, 2018 using the modified retrospective method. The adoption of the new standard did not have a material impact on the Company's condensed consolidated balance sheets, statements of operations, comprehensive (loss) income, stockholders' equity, or cash flows as of the adoption date or for the nine months ended September 30, 2018, and therefore no tabular reconciliation has been provided as there was no material effect on any financial statement line item. As part of the adoption, the Company has not retrospectively restated the contract revenue for those modifications in accordance with the contract modification guidance in paragraphs ASC 606-10-25-12 and 25-13. Instead, the Company reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. The impact of this practical expedient had no significant impact on the Company's final conclusions. The Company has included the disclosures required by ASU No. 2014-09 above.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice of how certain transactions are classified and presented in the statement of cash flows in accordance with ASC 230. The ASU amends or clarifies guidance on eight specific cash flow issues, some of which include classification on debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, and separately identifiable cash flows and application of the predominance principle. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those periods. The guidance requires application using a retrospective transition method. The Company adopted the guidance as of January 1, 2018, and the provisions of the new guidance did not have a material impact on its condensed consolidated financial statements.

17




In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that restricted cash and restricted cash equivalents during the period should be included in the beginning and ending cash and cash equivalents balance reconciliation on the statement of cash flows. When cash, cash equivalents, restricted cash, or restricted cash equivalents are presented in more than one line item within the statement of financial position, an entity shall calculate a total cash amount in a narrative or tabular format that agrees to the amount shown on the statement of cash flows. Details on the nature and amounts of restricted cash should also be disclosed. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, including interim periods within that reporting period and should be applied using a retrospective transition method to each period presented. The Company adopted the guidance as of January 1, 2018. The impact of the implementation is as follows:

 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
 
Net cash used in investing activities (prior to the adoption of ASU 2016-18)
$
(2,373.9
)
 
$
(390.3
)
Impact of including restricted cash within cash and cash equivalents

 
(304.3
)
Net cash used in investing activities (after adoption of ASU 2016-18)
$
(2,373.9
)
 
$
(694.6
)

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies when changes to the terms or conditions of share-based equity awards must be accounted for as modifications. Entities will apply the modification accounting guidance if the value, vesting conditions, or classification of the award are not the same immediately before and after the modification. The guidance is effective prospectively for public business entities for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted the guidance as of January 1, 2018, and the provisions of the new guidance did not have a material impact on its condensed consolidated financial statements.

In December 2017, the SEC issued Staff Accounting Bulletin ("SAB") No. 118 (as further clarified by FASB ASU 2018- 05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118), which provides guidance for companies that may not have completed their accounting for the income tax effects of the Tax Cut and Jobs Act ("Tax Act") in the period of enactment, which is the period that includes December 22, 2017. SAB No. 118 provides for a provisional one year measurement period for entities to finalize their accounting for certain income tax effects related to the Tax Act. The Company expects to finalize its provisional amounts within the one year measurement period. Refer to Note 9 - Income Taxes for additional disclosure.

Recent Accounting Pronouncements
  
In February 2016, the FASB issued ASU 2016-02, Leases, which 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. Leases will be classified as an operating lease or a financing lease. Operating leases are expensed using the straight-line method, whereas financing leases will be treated similarly to a capital lease under the current standard. The guidance is effective for interim and annual reporting periods beginning after December 15, 2018, and early adoption is permitted. The new standard must be presented using the modified retrospective method. However, in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional (and optional) transition method to adopt the new leases standard. The modified retrospective method is applied to all prior reporting periods presented with a cumulative-effect adjustment recorded in the earliest comparative period while the optional transition relief method is applied beginning in the period of adoption with a cumulative-effect adjustment recorded to the opening balance of retained earnings in the period of adoption without adjustment to the financial statements for periods prior to adoption. The Company is still evaluating the method of adoption. The Company anticipates the new standard will have a material impact to its consolidated balance sheets. However, the Company does not believe adoption will have a material impact on its consolidated statements of operations. While the Company is continuing to assess all potential impacts of the new standard, the Company currently believes the most significant impact relates to its accounting for office space, colocation operating leases, and embedded leases within its dark fiber and duct supplier contracts. The Company expects its accounting for capital leases to remain substantially unchanged under the new standard.

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

18



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 does not expect the new guidance to have a material impact on its consolidated financial statements.

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 will be effective for the Company for interim and annual reporting periods beginning after December 31, 2018, and early adoption is permitted. The Company is currently evaluating the effect of the new guidance on its consolidated financial statements and related disclosures.

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 is 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 plans to use 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 ending March 31, 2019. Other than the new presentation, the Company does not anticipate any material impact to its consolidated financial statements and related disclosures upon adoption.

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.

2018 Acquisitions

Accelerated Connections, Inc.

In March 2018, the Company acquired Accelerated Connections, Inc. ("ACI"). The Company paid $35.0 million cash consideration, of which $0.8 million was net cash acquired, and 79,930 unregistered shares of the Company's common stock valued at $4.2 million at closing. $3.9 million of the initial cash consideration is held in escrow for one year, subject to reduction for any indemnification claims made by the Company prior to such date. Substantially all of the consideration was allocated to goodwill and identifiable intangible assets. The results of ACI have been included from March 1, 2018. Pro forma results of operations for this acquisition have not been presented as it is not material to the condensed consolidated results of operations. The acquisition was considered a stock purchase for tax purposes.

Interoute

In May 2018, the Company acquired Interoute Communications Holdings S.A. ("Interoute"), a Luxembourg public limited liability company. The Company paid $2,239.3 million in cash consideration at closing, of which $66.1 million was net cash acquired, and assumed $27.7 million in debt. The results of Interoute have been included from June 1, 2018. The acquisition was considered a stock purchase for tax purposes.


19



The Company partially funded the purchase price through the issuance of 9,589,094 shares of common stock to a group of institutional investors for proceeds of $425.0 million concurrently with the closing of the Interoute acquisition. The Company also entered into a credit agreement to fund the remainder of the purchase price. Refer to Note 7 - Debt for further information.

In February 2018, the Company also entered into a deal-contingent foreign currency hedge arrangement with a total notional amount of €1.260 billion at a spot rate of $1.23459 to €1.00. Fees associated with this arrangement were payable upon closing of the acquisition based on a pre-defined schedule in the hedge agreement. The Company recognized a loss of $105.8 million upon settlement of the deal-contingent foreign currency hedge arrangement, of which $17.2 million had been recognized during the three months ended March 31, 2018.

For material acquisitions completed during 2017, 2016, and 2015, 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, 2017. During the nine months ended September 30, 2018, certain measurement period adjustments were recorded to adjust provisional amounts for acquisitions completed during 2017 and 2018.

Purchase Price Allocation

The table below reflects the Company's preliminary estimates of the acquisition date fair values of the purchase consideration, assets acquired, and liabilities assumed for the Interoute acquisition (amounts in millions):
 

20



 
Interoute
Purchase Price
 
Cash paid at closing
$
2,239.3

Purchase consideration
$
2,239.3

 
 
Purchase Price Allocation
 
Assets acquired:
 
Cash
$
66.1

Accounts receivable
155.2

Prepaid expenses and other current assets
51.3

Property and equipment
1,435.9

Other assets
19.7

Intangible assets - customer lists
171.5

Intangible assets - tradename
2.1

Intangible assets - other
15.4

Deferred tax assets
36.9

Goodwill
980.1

Total assets acquired
2,934.2

 
 
Liabilities assumed:
 
Accounts payable
(75.5
)
Accrued expenses and other current liabilities
(112.9
)
Capital leases (1)
(42.3
)
Debt
(27.7
)
Deferred revenue
(311.3
)
Deferred tax liabilities
(87.1
)
Other long-term liabilities
(38.1
)
Total liabilities assumed
(694.9
)
Net assets acquired
$
2,239.3

(1) Includes $38.8 million of assumed long-term building leases.

The table below reflects the weighted average amortization period for intangible assets acquired in the Interoute acquisition (amounts in years):

 
Interoute
Intangible assets - customer lists
14.7
Intangible assets - tradename
1.0
Intangible assets - other
7.0
Weighted average
13.9

Amortization expense related to intangible assets created as a result of the Interoute acquisition of $4.3 million and $5.8 million has been recorded for the three and nine months ended September 30, 2018, respectively. Estimated amortization expense related to intangible assets created as a result of the Interoute acquisition for each of the years subsequent to September 30, 2018 is as follows (amounts in millions):


21



2018
$
4.4

2019
16.3

2020
15.5

2021
15.5

2022
15.5

2023 and beyond
116.0

Total
$
183.2


Goodwill is calculated as the excess of the consideration transferred over the net assets recognized and represents the estimated future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Goodwill is not expected to be deductible for tax purposes. Goodwill will not be amortized but instead will be tested for impairment at least annually and more frequently if certain indicators of impairment are present.

Acquisition Method Accounting Estimates

The Company initially recognizes the assets and liabilities acquired from the aforementioned 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, 2018 and 2017. 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 $10.7 million and $3.3 million during the three months ended September 30, 2018 and 2017, respectively, and $25.1 million and $13.8 million during the nine months ended September 30, 2018 and 2017, 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 and 2017 as if the acquisitions occurred on January 1, 2017. The pro forma net loss for the three and nine months ended September 30, 2018 and 2017 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, 2017.


22



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
(Amounts in millions, except per share and share data)
 
 
 
 
 
 
 
Revenue
$
448.6

 
$
444.7

 
$
1,381.2

 
$
1,301.4

Net loss
$
(23.4
)
 
$
(9.3
)
 
$
(75.0
)
 
$
(137.3
)
 
 
 
 
 
 
 
 
Loss per share:
 
 
 
 
 
 
 
Basic
$
(0.43
)
 
$
(0.18
)
 
$
(1.52
)
 
$
(2.71
)
Diluted
$
(0.43
)
 
$
(0.18
)
 
$
(1.52
)
 
$
(2.71
)
 
 
 
 
 
 
 
 
Denominator for basic EPS – weighted average shares
54,671,787

 
51,351,787

 
49,210,929

 
50,749,411

Denominator for diluted EPS – weighted average shares
54,671,787

 
51,351,787

 
49,210,929

 
50,749,411

    
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
 
The goodwill balance was $1,666.8 million and $644.5 million as of September 30, 2018 and December 31, 2017, respectively. Additionally, the Company's intangible asset balance was $564.6 million and $417.1 million as of September 30, 2018 and December 31, 2017, respectively. The additions to both goodwill and intangible assets during the nine months ended September 30, 2018 relate primarily to the acquisition of ACI and Interoute (refer to Note 2 - Business Acquisitions).

The change in the carrying amount of goodwill for the nine months ended September 30, 2018 was as follows (amounts in millions):
 
Goodwill - December 31, 2017
$
644.5

Initial goodwill associated with 2018 business combinations
1,107.3

Adjustments to 2018 business combinations
(100.0
)
Adjustments to prior year business combinations
23.5

Foreign currency translation adjustments
(8.5
)
Goodwill - September 30, 2018
$
1,666.8


The following table summarizes the Company’s intangible assets as of September 30, 2018 and December 31, 2017 (amounts in millions):
 
 
 
September 30, 2018
 
December 31, 2017
 
Amortization
Period
 
Gross Asset Cost
 
Accumulated Amortization
 
Net Book Value
 
Gross Asset Cost
 
Accumulated Amortization
 
Net Book Value
Customer lists
3-20 years
 
$
746.8

 
$
212.7

 
$
534.1

 
$
552.8

 
$
155.1

 
$
397.7

Non-compete agreements
3-5 years
 
4.7

 
4.6

 
0.1

 
4.6

 
4.5

 
0.1

Other intangible assets
3-7 years
 
1.7

 
1.7

 

 
1.7

 
1.7

 

Intellectual property
10 years
 
38.9

 
10.3

 
28.6

 
23.7

 
5.2

 
18.5

Tradename
1-3 years
 
6.1

 
4.3

 
1.8

 
3.9

 
3.1

 
0.8

 
 
 
$
798.2

 
$
233.6

 
$
564.6

 
$
586.7

 
$
169.6

 
$
417.1

  
Amortization expense was $22.9 million and $17.0 million for the three months ended September 30, 2018 and 2017, respectively, and $64.0 million and $49.6 million for the nine months ended September 30, 2018 and 2017, respectively.


23



Estimated amortization expense related to intangible assets subject to amortization at September 30, 2018 in each of the years subsequent to September 30, 2018 is as follows (amounts in millions):

2018 remaining
$
22.0

2019
84.2

2020
80.4

2021
78.7

2022
65.7

2023 and beyond
233.6

Total
$
564.6

 
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, 2018 and December 31, 2017 (amounts in millions):

 
September 30, 2018
 
December 31, 2017
Prepaid carrier costs
$
24.7

 
$
2.1

Prepaid selling, general and administrative
14.0

 
10.0

Interest rate swaps
5.8

 

Short term deposits
2.6

 
0.4

Taxes receivable
2.8

 
1.5

Capitalized commissions
3.2

 

Other
15.7

 
10.1

 
$
68.8

 
$
24.1


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, 2018 and December 31, 2017 (amounts in millions):

 
September 30, 2018
 
December 31, 2017
Compensation and benefits
$
35.1

 
$
13.3

Carrier costs
61.9

 
13.8

Restructuring
23.7

 
9.7

Interest
13.2

 
22.9

Fiber pair repurchase

 
10.0

Accrued taxes
6.8

 
9.6

Interest rate swaps
6.5

 

Selling, general and administrative
3.4

 
2.1

Other
18.1

 
7.6

 
$
168.7

 
$
89.0


NOTE 6 — DEFERRED REVENUE

Total deferred revenue as of September 30, 2018 and December 31, 2017 was $460.1 million and $161.7 million, respectively, consisting of unamortized prepaid capacity sales, IRUs, deferred non-recurring revenue, and unearned revenue for amounts billed in advance to customers. Deferred revenue is recognized as current and noncurrent deferred revenue on the condensed consolidated balance sheets.


24



Significant changes in deferred revenue balances during the period are as follows (amounts in millions):

 
Nine Months Ended September 30, 2018
 
Contract Term
 
 
 
ASC 606 Revenue as a % of Greater than 1 Year (1)
 
Less than 1 Year
 
Greater than 1 Year
 
Total
 
Balance, December 31, 2017
$
31.4

 
$
130.3

 
$
161.7

 
45.7
%
Revenue recognized from beginning balance
(28.8
)
 
(16.8
)
 
(45.6
)
 
82.1
%
Increase in deferred revenue (gross)
472.5

 
13.7

 
486.2

 
32.4
%
Revenue recognized on increase in deferred revenue
(383.3
)
 
(4.3
)
 
(387.6
)
 
41.9
%
Business combinations (gross)
69.0

 
242.3

 
311.3

 
22.1
%
Revenue recognized from business combinations
(57.6
)
 
(8.3
)
 
(65.9
)
 
33.7
%
Balance, September 30, 2018
$
103.2

 
$
356.9

 
$
460.1

 
27.7
%
(1) Refer to Footnote 1 - Organization and Business for a discussion of the required disclosures in accordance with ASC 606.

The change in deferred revenue per the table above includes the non-cash impact of foreign currency translation adjustments of $1.7 million for the nine months ended September 30, 2018.
 
Three Months Ended September 30, 2018
 
Contract Term
 
 
 
ASC 606 Revenue as a % of Greater than 1 Year (1)
 
Less than 1 Year
 
Greater than 1 Year
 
Total
 
Balance, June 30, 2018
$
112.2

 
$
357.5

 
$
469.7

 
28.5
%
Revenue recognized from beginning balance
(97.4
)
 
(9.5
)
 
(106.9
)
 
57.9
%
Increase in deferred revenue (gross)
226.2

 
12.1

 
238.3

 
32.2
%
Revenue recognized on increase in deferred revenue
(137.8
)
 
(3.2
)
 
(141.0
)
 
43.8
%
Balance, September 30, 2018
$
103.2

 
$
356.9

 
$
460.1

 
27.7
%
(1) Refer to Footnote 1 - Organization and Business for a discussion of the required disclosures in accordance with ASC 606.

Remaining amortization at September 30, 2018 and in each of the years subsequent to September 30, 2018 is as follows (amounts in millions):
 
Contract Term
 
 
 
ASC 606 Revenue as a % of Greater than 1 Year (1)
 
Less than 1 Year
 
Greater than 1 Year
 
Total
 
2018 remaining
$
95.4

 
$
14.0

 
$
109.4

 
51.4
%
2019
7.8

 
56.5

 
64.3

 
50.8
%
2020

 
39.3

 
39.3

 
35.4
%
2021

 
35.0

 
35.0

 
33.7
%
2022

 
33.0

 
33.0

 
33.6
%
2023 and beyond

 
179.1

 
179.1

 
14.7
%
 
$
103.2

 
$
356.9

 
$
460.1

 
27.7
%
(1) Refer to Footnote 1 - Organization and Business for a discussion of the required disclosures in accordance with ASC 606.




25



NOTE 7     — DEBT
  
As of September 30, 2018 and December 31, 2017, long-term debt was as follows (amounts in millions):

 
September 30, 2018
 
December 31, 2017
 
 
 
 
US Term loan
$
1,765.6

 
$
693.0

EMEA Term loan
868.2

 

7.875% Senior unsecured notes
575.0

 
575.0

Revolving line of credit
7.5

 

Other secured loans
21.6

 

Total debt obligations
3,237.9

 
1,268.0

Unamortized debt issuance costs
(32.1
)
 
(33.8
)
Unamortized original issuance premium (discount), net
(49.4
)
 
9.3

Carrying value of debt
3,156.4

 
1,243.5

Less current portion
(40.9
)
 
(7.0
)
Long-term debt less current portion
$
3,115.5

 
$
1,236.5


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). In addition, the Company may request incremental term loan commitments and/or incremental revolving loan commitments in an aggregate amount not to exceed the sum of $575.0 million and an unlimited amount that is subject to pro forma compliance with a net secured leverage ratio test. The US Term Loan Facility was issued at an original issuance discount of $8.9 million and the EMEA Term Loan Facility was issued at an original issuance discount of €3.8 million.

The maturity date of the 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. If within six months after entering into the 2018 Credit Agreement certain prepayments are made or any amendment reduces the “effective yield” applicable to all or a portion of such term loans, such prepayment or repriced portions of the term loans will be subject to a penalty equal to 1.00% of the outstanding term loans being prepaid or repriced. No such prepayments or amendments were made through September 30, 2018.

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 EURIBO Rate 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.
 
The unused and available amount of the Revolving Line of Credit Facility at September 30, 2018 was as follows (amounts in millions):

26




Committed capacity
$
200.0

Borrowings outstanding
(7.5
)
Letters of credit issued
(13.9
)
Unused and available
$
178.6


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 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. If triggered, the covenant 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, 2018
 
6.50:1.00
December 31, 2018
 
6.50:1.00
March 31, 2019
 
6.50:1.00
June 30, 2019
 
6.50:1.00
September 30, 2019
 
6.25:1.00
December 31, 2019
 
6.25:1.00
March 31, 2020
 
6.00:1.00
June 30, 2020
 
6.00:1.00
September 30, 2020
 
5.50:1.00
December 31, 2020
 
5.50:1.00
March 31, 2021
 
5.50:1.00
June 30, 2021
 
5.00:1.00
September 30, 2021
 
5.00:1.00
December 31, 2021
 
4.50:1.00
March 31, 2022
 
4.50:1.00
June 30, 2022 and thereafter
 
4.25:1.00

Interest Rate Swaps

During 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, 2018 was as follows (in millions):

27




 
 
 
 
 
Fair Value
 
 
 
 
 
September 30, 2018
Derivative Instrument
Aggregate Notional Amount
Effective Date
Maturity Date
 
Asset Derivatives
 
Liability Derivatives
Interest rate swap
$
500.0

4/30/2018
4/30/2023
 
$
5.5

 
$

Interest rate swap
$
200.0

6/29/2018
5/31/2025
 

 
(1.5
)
Interest rate swap
$
300.0

6/29/2018
6/30/2021
 
0.3

 

Interest rate swap
317.0

6/29/2018
5/31/2025
 

 
(5.0
)
 
 
 
 
 
$
5.8

 
$
(6.5
)

The Company records the fair value of interest rate swaps in its 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. During the three and nine months ended September 30, 2018, the Company recognized a gain of $8.6 million and a loss of $0.7 million in other expense, net due to the change in fair value of its interest rate swaps.

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. In connection with the offerings, the Company incurred debt issuance costs of $17.3 million, of which $0.5 million was incurred in 2016 and the remainder was incurred in 2017.

Other Secured Loans

In connection with the Interoute acquisition in May 2018 the Company acquired other loans related to loans secured by certain network assets. The balance of other secured loans at September 30, 2018 was $21.6 million.

Effective Interest Rate

The effective interest rate on the long-term debt at September 30, 2018 and December 31, 2017 was 5.3% and 4.5%, respectively. The effective interest rate at September 30, 2018 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, 2018 (amounts in millions):

 
Total debt
2018 remaining
$
10.4

2019
39.3

2020
30.9

2021
26.8

2022
26.4

2023 and beyond
3,104.1

 
$
3,237.9



Debt Issuance Costs and Original Issuance Discounts and Premiums


28



The following table summarizes the debt issuance costs activity for the nine months ended September 30, 2018 (amounts in millions):

 
US Term Loan
 
EMEA Term Loan
 
7.875% Senior Unsecured Notes
 
Revolving Line of Credit
 
Total
Balance, December 31, 2017
$
(14.7
)
 
$

 
$
(16.1
)
 
$
(3.0
)
 
$
(33.8
)
Debt issuance costs incurred
(4.7
)
 
(2.9
)
 

 
(0.6
)
 
(8.2
)
Amortization
1.5

 
0.1

 
1.4

 
0.4

 
3.4

Loss on debt extinguishment
6.1

 

 

 
0.4

 
6.5

Balance, September 30, 2018
$
(11.8
)
 
$
(2.8
)
 
$
(14.7
)
 
$
(2.8
)
 
$
(32.1
)

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 $1.1 million and $1.0 million for the three months ended September 30, 2018 and 2017, respectively, and $3.4 million and $2.6 million for the nine months ended September 30, 2018 and 2017, respectively.

The following table summarizes the original issuance (discount) and premium activity for the nine months ended September 30, 2018 (amounts in millions):

 
US Term Loan
 
EMEA Term Loan
 
7.875% Senior Unsecured Notes
 
Total
Balance, December 31, 2017
$
(6.5
)
 
$

 
$
15.8

 
$
9.3

New Original Issuance Discount
(8.9
)
 
(4.4
)
 

 
(13.3
)
Fees paid to lenders
(35.2
)
 
(19.4
)
 

 
(54.6
)
Amortization
2.2

 
1.1

 
(1.4
)
 
1.9

Loss on debt extinguishment
7.3

 

 

 
7.3

Balance, September 30, 2018
$
(41.1
)
 
$
(22.7
)
 
$
14.4

 
$
(49.4
)

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 netted to zero for the three months ended September 30, 2018 and 2017, respectively, and $1.9 million and $0.5 million for the nine months ended September 30, 2018 and 2017, respectively and is included in Interest expense, net.

Previous Debt Agreement - 2017 Credit Agreement

On January 9, 2017, the Company entered into a credit agreement (the "2017 Credit Agreement") that provided a $700.0 million term loan facility and a $75.0 million revolving line of credit facility (which included a $25.0 million letter of credit facility). Amounts outstanding under the 2017 Credit Agreement were paid in full at the closing of the 2018 Credit Agreement. The previous term loan facility was issued at an original issuance discount of $3.5 million.

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 Stock Plan. The GTT Stock Plan is limited to an aggregate 14,250,000 shares of which 9,398,923 have been issued and are outstanding as of September 30, 2018.

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.

Share-Based Compensation Expense

The following tables summarize the share-based compensation expense recognized as a component of selling, general and administrative expense in the condensed consolidated statements of operations (amounts in millions):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Stock options
$
0.2

 
$
0.4

 
$
0.9

 
$
1.1

Restricted stock
8.9

 
5.7

 
22.8

 
14.8

ESPP
0.1

 

 
0.2

 
0.1

Total
$
9.2

 
$
6.1

 
$
23.9

 
$
16.0

    
As of September 30, 2018, there was $73.5 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, 2018
 
Unrecognized Compensation Cost
 
Weighted Average Remaining Period to be Recognized (Years)
Time-based stock options
$
0.8

 
1.01
Time-based restricted stock
56.7

 
2.30
Performance-based restricted stock (1)
16.0

 
1.48
Total
$
73.5

 
2.11
(1) Excludes $16.3 million of unrecognized compensation cost related to 2017 Performance Awards where achievement of the performance criteria was not probable as of September 30, 2018.

The following table summarizes the restricted stock granted during the three and nine months ended September 30, 2018 and 2017, respectively (amounts in millions, except shares data):


29



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Time-based restricted stock granted
196,468

 
238,088

 
815,019

 
929,896

Fair value of time-based restricted stock granted
$
8.8

 
$
7.6

 
$
38.4

 
$
27.5

 
 
 
 
 
 
 
 
Performance-based restricted stock granted

 
20,000

 
8,000

 
20,000

Fair value of performance-based restricted stock granted
$

 
$
0.5

 
$
0.4

 
$
0.5


No stock options were issued in any period presented.

Performance-based Restricted Stock

The Company granted $8.5 million of restricted stock during 2014 and early 2015 contingent upon the achievement of certain performance criteria (the "2014 Performance Awards"). The fair value of the 2014 Performance Awards was calculated using the value of GTT common stock on date of grant. The Company started recognizing share-based compensation expense for these grants when the achievement of the performance criteria became probable, which was in the third quarter of 2015. The 2014 Performance Awards started vesting in the fourth quarter of 2015 when the performance criteria were met and they continued to vest ratably through the third quarter of 2017. As of September 30, 2018, the 2014 Performance Awards were fully vested.

The Company granted $17.4 million of restricted stock during 2015 and 2017 contingent upon the achievement of certain performance criteria (the "2015 Performance Awards"). The fair value of the 2015 Performance Awards was calculated using the value of GTT common stock on the respective grant dates. Upon announcement of the Hibernia acquisition in November 2016, the achievement of two of the four performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition will continue through the first quarter of 2019. Additionally, upon announcement of the Global Capacity acquisition in June 2017, the achievement of the final two performance criteria became probable and the Company started recognizing share-based compensation expense for these grants. Expense recognition will continue through the fourth quarter of 2019. The Company recognized share-based compensation expense related to the 2015 Performance Awards of $1.9 million and $1.5 million for the three months ended September 30, 2018 and 2017, respectively, and $5.9 million and $4.2 million for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, unrecognized compensation cost related to the unvested 2015 Performance Awards was $3.4 million.

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 $1.8 million and $3.6 million for the three and nine months ended September 30, 2018, respectively. No share-based compensation expense was recognized related to the 2017 Performance Awards during the 2017 period. As of September 30, 2018, unrecognized compensation cost related to the unvested 2017 Performance Awards was $28.9 million, inclusive of unrecognized compensation cost where achievement of the performance criteria was not probable as of September 30, 2018.

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, 2018, 410,378 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 tax benefit of $1.6 million and $8.7 million for the three months ended September 30, 2018 and 2017, respectively, and $1.1 million and $22.7 million for the nine months ended September 30, 2018 and 2017, respectively.


30



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, 2017. 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, 2018 and December 31, 2017, a valuation allowance of $134.6 million and $39.2 million, respectively, has been recorded to recognize only the portion of the deferred tax asset that is more likely than not to be realized. During the three months ended September 30, 2018, the Company recorded a measurement period adjustment of $158.8 million related to the recognized portion of deferred tax assets for Interoute. 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 Tax Act was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering U.S. corporate income tax rates, implementing a territorial tax system, and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. In accordance with SAB No. 118, the Company recorded the provisional income tax effects of the Tax Act as of December 31, 2017. The Company is still in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may differ from the provisional income tax effect due to, among other things, additional analyses, changes in interpretations and assumptions made, additional regulatory guidance from various federal and state tax jurisdictions that may be issued, and actions the Company may take as a result of the Tax Act. The Company expects to complete its analysis within the one year measurement period in accordance with SAB No. 118. As of September 30, 2018, the Company has not recorded any adjustments to provisional recordings from 2017.

While the Tax Act provides for a modified territorial tax system, beginning in 2018, global intangible low-taxed income ("GILTI") provisions will be applied providing an incremental tax on low taxed foreign income. The GILTI provisions require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary's tangible assets. Under U.S. GAAP, the Company is required to make an accounting policy election to either (1) treat taxes due related to GILTI as a current-period expense when incurred (the "period cost method") or (2) factor such amounts into our measurement of our deferred taxes (the "deferred method"). During the first quarter 2018, the Company made an accounting policy election to treat the impact of GILTI as a period cost, however the impact is offset by a full valuation allowance in the U.S.

NOTE 10 — SEVERANCE, RESTRUCTURING, AND OTHER EXIT COSTS

The Company incurred severance, restructuring and other exit costs associated with 2017 and 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 total exit costs recorded and paid relating to the acquisitions mentioned above are summarized as follows for the three months ended September 30, 2018 (amounts in millions):

<
 
Balance, June 30, 2018
 
Charges
 
Payments
 
Foreign Currency Translation Adjustments
 
Balance, September 30, 2018
Employee Termination Benefits
$
9.1

 
$
9.8

 
$
(7.6
)
 
$
(0.2
)
 
$
11.1

Lease terminations
9.3

 
0.6

 
(1.1
)
 

 
8.8