Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
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 001-12593
ATN INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware(State or other jurisdiction ofincorporation or organization)
47-0728886(I.R.S. EmployerIdentification No.)
500 Cummings Center, Suite 2450Beverly, Massachusetts(Address of principal executive offices)
01915(Zip Code)
(978) 619-1300
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.01 per share
ATNI
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻
Accelerated filer ⌧
Non-accelerated filer ◻
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ☐ No ⌧
As of November 8, 2023, the registrant had outstanding 15,421,481 shares of its common stock ($.01 par value).
FORM 10-Q
Quarter Ended September 30, 2023
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
3
PART I—FINANCIAL INFORMATION
4
Item 1
Unaudited Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at September 30, 2023 and December 31, 2022
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2023 and 2022
5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2023 and 2022
6
Condensed Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2023 and 2022
7
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2023 and 2022
9
Notes to Unaudited Condensed Consolidated Financial Statements
10
Item 2
Management’s Discussion and Analysis of Financial Condition and Results of Operations
39-69
Item 3
Quantitative and Qualitative Disclosures About Market Risk
69
Item 4
Controls and Procedures
70
PART II—OTHER INFORMATION
Legal Proceedings
Item 1A
Risk Factors
Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Item 5
Other Information
71
Item 6
Exhibits
72
SIGNATURES
73
CERTIFICATIONS
2
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (or the “Report”) contains forward-looking statements relating to, among other matters, our future financial performance and results of operations, including our the impact of federal support program revenues; expectations regarding future revenue, operating income, EBITDA and capital expenditures; the competitive environment in our key markets, demand for our services and industry trends; our expectations regarding construction progress under our carrier managed services agreements and the effect such progress will have on our financial results; expectations regarding litigation; our liquidity; and management’s plans and strategy for the future. These forward-looking statements are based on estimates, projections, beliefs, and assumptions and are not guarantees of future events or results. Actual future events and results could differ materially from the events and results indicated in these statements as a result of many factors, including, among others, (1) our ability to timely and cost effectively completed our Replace and Remove program; (2) the general performance of our operations, including operating margins, revenues, capital expenditures, and the retention of and future growth of our subscriber base and average revenue per user; (3) our ability to realize cost synergies and expansion plans for our newly acquired businesses; (4) our ability to satisfy the needs and demands of our major carrier customers; (5) our ability to efficiently and cost-effectively upgrade our networks and IT platforms to address rapid and significant technological changes in the telecommunications industry; (6) the impact of geopolitical conditions, including the Israel-Hamas war and the ongoing war in Ukraine and related sanctions; (7) government funding and subsidy program availability and regulation of our businesses, which may impact our revenue, expansion plans and operating costs; (8) our reliance on a limited number of key suppliers and vendors for timely supply of equipment and services relating to our network infrastructure; (9) economic, political and other risks and opportunities facing our operations; (10) the loss of or an inability to recruit skilled personnel in our various jurisdictions, including key members of management; (11) our ability to find investment or acquisition or disposition opportunities that fit our strategic goals and at a reasonable cost of capital; (12) the occurrence of weather events and natural catastrophes and our ability to secure the appropriate level of insurance coverage for our assets; (13) increased competition; (14) the adequacy and expansion capabilities of our network capacity and customer service system to support our customer growth; and (15) our continued access to capital and credit markets. These and other additional factors that may cause actual future events and results to differ materially from the events and results indicated in the forward-looking statements above are set forth more fully under Item 1A “Risk Factors” in each of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 15, 2023, and the other reports we file from time to time with the SEC. The Company undertakes no obligation and have no intention to update these forward-looking statements to reflect actual results, changes in assumptions or changes in other factors that may affect such forward-looking statements, except as required by law.
In this Report, the words “the Company,” “we,” “our,” “ours,” “us” and “ATN” refer to ATN International, Inc. and its subsidiaries. This Report contains trademarks, service marks and trade names that are the property of, or licensed by, ATN and its subsidiaries.
References to dollars ($) refer to US dollars unless otherwise specifically indicated.
Item 1. Unaudited Condensed Consolidated Financial Statements
ATN INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In Thousands, Except Share Data)
September 30,
December 31,
2023
2022
ASSETS
Current Assets:
Cash and cash equivalents
$
62,063
54,660
Restricted cash
11,024
5,068
Short-term investments
300
Accounts receivable, net of allowances for credit losses of $16.6 million and $15.2 million, respectively
112,731
86,816
Customer receivable
6,702
5,803
Inventory, materials and supplies
18,139
17,902
Prepayments and other current assets
56,406
59,139
Total current assets
267,365
229,688
Fixed Assets:
Property, plant and equipment
2,078,886
1,977,978
Less accumulated depreciation
(1,009,453)
(922,024)
Net fixed assets
1,069,433
1,055,954
Telecommunication licenses, net
113,698
Goodwill
40,104
Intangible assets, net
22,641
31,992
Operating lease right-of-use assets
103,002
108,702
Customer receivable - long term
44,623
46,706
Other assets
90,360
81,025
Total assets
1,751,226
1,707,869
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY
Current Liabilities:
Current portion of long-term debt
21,278
6,173
Current portion of customer receivable credit facility
6,727
6,073
Accounts payable and accrued liabilities
155,170
155,224
Dividends payable
3,260
3,310
Accrued taxes
9,463
7,335
Current portion of lease liabilities
16,331
15,457
Advance payments and deposits
50,428
39,608
Total current liabilities
262,657
233,180
Deferred income taxes
19,198
28,650
Lease liabilities, excluding current portion
80,260
83,319
Other liabilities
133,102
138,420
Customer receivable credit facility, net of current portion
38,010
39,275
Long-term debt, excluding current portion
477,099
415,727
Total liabilities
1,010,326
938,571
Redeemable noncontrolling interests:
Preferred redeemable noncontrolling interests
58,761
55,152
Common redeemable noncontrolling interests
37,026
37,317
Total redeemable noncontrolling interests
95,787
92,469
ATN International, Inc. Stockholders’ Equity:
Preferred stock, $0.01 par value per share; 10,000,000 shares authorized, none issued and outstanding
—
Common stock, $0.01 par value per share; 50,000,000 shares authorized; 17,702,476 and 17,584,057 shares issued, respectively, 15,522,140 and 15,763,341 shares outstanding, respectively
173
Treasury stock, at cost; 2,180,336 and 1,820,716 shares, respectively
(86,977)
(73,825)
Additional paid-in capital
204,425
198,449
Retained earnings
420,150
449,806
Accumulated other comprehensive income
7,983
6,210
Total ATN International, Inc. stockholders’ equity
545,754
580,813
Noncontrolling interests
99,359
96,016
Total equity
645,113
676,829
Total liabilities, redeemable noncontrolling interests and equity
The accompanying condensed notes are an integral part of these condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
(In Thousands, Except Per Share Data)
Three months ended September 30,
Nine months ended September 30,
REVENUE:
Communication services
184,601
173,977
547,484
512,315
Construction
2,038
3,332
3,648
8,615
Other
4,397
4,904
12,118
12,800
Total revenue
191,036
182,213
563,250
533,730
OPERATING EXPENSES (excluding depreciation and amortization unless otherwise indicated):
Cost of communication services and other
80,367
78,949
237,125
229,821
Cost of construction revenue
2,031
3,321
3,635
8,640
Selling, general and administrative
60,792
56,387
184,055
167,879
Stock-based compensation
1,956
1,669
6,473
5,696
Transaction-related charges
45
3,416
496
4,381
Restructuring expenses
1,383
4,640
Depreciation and amortization
34,370
33,312
106,991
100,421
Amortization of intangibles from acquisitions
3,124
3,236
9,514
9,744
Loss on disposition of long-lived assets
132
484
410
3,876
Total operating expenses
184,200
180,774
553,339
530,458
Income from operations
6,836
1,439
9,911
3,272
OTHER INCOME (EXPENSE)
Interest income
136
38
362
41
Interest expense
(11,445)
(5,513)
(30,700)
(13,107)
Other income
213
1,904
2,623
3,379
Other income (expense)
(11,096)
(3,571)
(27,715)
(9,687)
LOSS BEFORE INCOME TAXES
(4,260)
(2,132)
(17,804)
(6,415)
Income tax benefit
(542)
(360)
(6,369)
(1,378)
NET LOSS
(3,718)
(1,772)
(11,435)
(5,037)
Net (income) loss attributable to noncontrolling interests, net of tax (benefit) expense of $(0.6) million, $(0.8) million, $(1.8) million and $(1.3) million respectively
134
(1,011)
2,733
782
NET LOSS ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS
(3,584)
(2,783)
(8,702)
(4,255)
NET LOSS PER WEIGHTED AVERAGE SHARE ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS:
Basic
(0.31)
(0.25)
(0.80)
(0.49)
Diluted
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
15,601
15,763
15,666
15,746
DIVIDENDS PER SHARE APPLICABLE TO COMMON STOCK
0.21
0.17
0.63
0.51
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In Thousands)
Net loss
Other comprehensive income:
Foreign currency translation adjustment
(391)
229
(1,814)
Reclassification of foreign currency losses on investment
1,349
Reclassification of loss on pension settlement, net of $(0.2) and $(0.8) million of tax
195
915
Unrealized gain on derivatives
(34)
Other comprehensive income (loss), net of tax
1,773
(933)
Comprehensive loss
(2,369)
(2,163)
(9,662)
(5,970)
Less: Comprehensive (income) loss attributable to noncontrolling interests
Comprehensive loss attributable to ATN International, Inc.
(2,235)
(3,174)
(6,929)
(5,188)
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
Total Equity
Treasury
Additional
Non-
Common
Stock,
Paid In
Retained
Comprehensive
Stockholders’
Controlling
Total
Stock
at cost
Capital
Earnings
Income/(Loss)
Equity
Interests
Balance, June 30, 2023
(82,086)
202,623
429,909
6,634
557,253
97,723
654,976
Purchase of 141,923 shares of common stock
(4,891)
1,802
154
Dividends declared on common stock ($0.21 per common share)
(3,260)
Repurchase of noncontrolling interests
Accrued dividend - redeemable preferred units
(1,303)
Deemed dividend - redeemable common units
(1,612)
1,612
Comprehensive income:
(134)
Other comprehensive income
Total comprehensive income (loss)
Balance, September 30, 2023
Balance, June 30, 2022
172
(73,828)
195,432
465,112
4,231
591,119
95,752
686,871
1,481
186
1,667
Dividends declared on common stock ($0.17 per common share)
(2,681)
Investments made by minority shareholders in consolidated affiliates
11
(10)
(120)
(130)
(1,192)
(1,083)
1,083
Net income (loss)
1,011
Other comprehensive income (loss)
Balance, September 30, 2022
196,903
457,373
3,840
584,460
97,923
682,383
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022
Balance, December 31, 2022
Purchase of 359,620 shares of common stock
(13,152)
6,057
416
Dividends declared on common stock ($0.63 per common share)
(9,864)
(1,447)
(11,311)
(81)
(681)
(762)
(3,593)
(7,497)
7,788
291
(2,733)
Total comprehensive income
Balance, December 31, 2021
(71,714)
192,132
475,887
4,773
601,250
101,003
702,253
Purchase of 57,115 shares of common stock
(2,114)
5,225
471
Dividends declared on common stock ($0.51 per common share)
(8,035)
(1,375)
(9,410)
22
(454)
(4,178)
(4,632)
(3,462)
(2,762)
2,762
(782)
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash flows provided by operating activities:
Provision for doubtful accounts
4,014
4,969
Amortization of debt discount and debt issuance costs
1,806
1,512
(9,452)
(6,619)
Loss on pension settlement
369
1,725
Gain on investments
(2,752)
(5,617)
Changes in operating assets and liabilities, excluding the effects of acquisitions and dispositions:
Accounts receivable
(2,881)
(1,401)
1,185
(4,399)
Prepaid income taxes
739
6,206
2,863
2,163
Materials and supplies, prepayments, and other current assets
424
(16,358)
Accounts payable and accrued liabilities, advance payments and deposits and other current liabilities
(6,769)
(4,724)
(4,683)
(4,016)
(7,332)
(9,166)
Net cash provided by operating activities
89,484
78,975
Cash flows from investing activities:
Capital expenditures
(126,640)
(109,944)
Government capital programs
Amounts disbursed
(14,261)
(4,015)
Amounts received
16,065
2,668
Purchases of strategic investments
(1,055)
(2,750)
Sale of businesses, net of transferred cash of $0
1,835
Spectrum deposit refund
1,136
Proceeds from strategic investments
15,745
Acquisition of businesses
1,314
Proceeds from sale of assets
683
Net cash used in investing activities
(124,577)
(94,642)
Cash flows from financing activities:
Dividends paid on common stock
(9,918)
(8,028)
Distributions to noncontrolling interests
Payment of debt issuance costs
(3,708)
Finance lease payments
(932)
(820)
Term loan - repayments
(3,532)
(953)
Term loan - borrowings
130,000
711
Revolving credit facility – borrowings
126,893
68,000
Revolving credit facility – repayments
(174,292)
(45,000)
Proceeds from customer receivable credit facility
4,300
12,225
Repayment of customer receivable credit facility
(4,998)
(3,543)
Purchases of common stock – stock- based compensation
(1,473)
(1,169)
Purchases of common stock – share repurchase plan
(11,679)
(942)
Repurchases of noncontrolling interests
(4,631)
Contingent consideration paid for business acquisition
(1,718)
Net cash provided by financing activities
48,452
12,779
Net change in cash, cash equivalents, and restricted cash
13,359
(2,888)
Total cash, cash equivalents, and restricted cash, beginning of period
59,728
80,697
Total cash, cash equivalents, and restricted cash, end of period
73,087
77,809
Noncash investing activity:
Purchases of property, plant and equipment included in accounts payable and accrued expenses
Amounts accrued for reimbursable capital expenditures from government capital programs
25,244
Amounts accrued for non-reimbursable capital expenditures
19,107
21,491
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION AND BUSINESS OPERATIONS
The Company provides digital infrastructure and communications services in the United States and internationally, including in the Caribbean region, with a focus on smaller markets, many of which are rural or remote, with a growing demand for infrastructure investments. Through its operating subsidiaries, the Company primarily provides: (i) carrier and enterprise communications services, such as terrestrial and submarine fiber optic transport, and communications tower facilities; and (ii) fixed and mobile telecommunications connectivity to residential, business and government customers, including a range of high-speed internet and data services, fixed and mobile wireless solutions, and video and voice services.
At the holding company level, the Company oversees the allocation of capital within and among its subsidiaries, affiliates, new investments, and stockholders. The Company has developed significant operational expertise and resources that it uses to augment the capabilities of its individual operating subsidiaries in its local markets. The Company has built a platform of resources and expertise to support its operating subsidiaries and to improve their quality of service with greater economies of scale and expertise than would typically be available at the operating subsidiary level. The Company provides management, technical, financial, regulatory, and marketing services to its operating subsidiaries and typically receives a management fee calculated as a percentage of their revenues, which is eliminated in consolidation. The Company also actively evaluates potential acquisitions, investment opportunities and other strategic transactions, both domestic and international, and generally looks for those that it believes fit the Company’s profile of telecommunications businesses and have the potential to complement its “glass and steel” and “first to fiber” approach in markets while generating steady excess cash flows over extended periods of time. The Company uses the cash generated from its operations to re-invest in organic growth in its existing businesses, to make strategic investments in additional businesses, and to return cash to its investors through dividends or stock repurchases.
For further information about the Company’s financial segments and geographical information about its operating revenues and assets, see Notes 1 and 13 to the Consolidated Financial Statements included in this Report.
As of September 30, 2023, the Company offered the following types of services to its customers:
The Company has two operating segments to manage and review its operations and to facilitate investor presentations of its results. These two operating segments are as follows:
The following chart summarizes the operating activities of the Company’s principal subsidiaries, the segments in which it reports its revenue and the markets it served during the three months ended September 30, 2023:
Segment
Services
Markets
Tradenames
International Telecom
Mobility Services
Bermuda, Guyana, US Virgin Islands
One, GTT, Viya
Fixed Services
Bermuda, Cayman Islands, Guyana, US Virgin Islands
One, Logic, GTT, Viya
Carrier Services
One, GTT, Viya, Logic
Managed Services
Bermuda, Cayman Islands, US Virgin Islands, Guyana
Fireminds, One, Logic, GTT, Viya
US Telecom
United States (rural markets)
Choice NTUA Wireless
United States
Alaska Communications, Commnet Broadband, Choice NTUA Wireless, Sacred Wind Communications, Ethos
Alaska Communications, Commnet, Essextel, Sacred Wind Communications
Alaska Communications, Fireminds
For further information about the Company’s financial segments and geographical information about its operating revenues and assets, see Note 13 to the Unaudited Condensed Consolidated Financial Statements included in this Report.
Restructuring Expense
In order to reduce the Company’s US Telecom cost structure to an optimal level needed to support the segment’s operations going forward, the Company incurred certain network termination and reduction in force costs totaling $1.4 million and $4.6 million in the three and nine months ended September 30, 2023, respectively. The charge is recorded in Restructuring Expense on the Company’s statements of operations. During the nine months ended September 30, 2023, the Company paid $2.6 million, recorded a gain of $0.3 million on lease termination, and accrued $2.3 million of the restructuring expenses. In conjunction with the restructuring, the Company terminated $5.6 million of lease right of use assets and $5.9 million of lease liabilities from its balance sheet.
2. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial information included
herein is unaudited; however, the Company believes such information and the disclosures herein are adequate to make the information presented not misleading and reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair statement of the Company’s financial position and results of operations for the periods described therein. The year-end condensed balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Results of interim periods may not be indicative of results for the full year. These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 15, 2023.
The condensed consolidated financial statements include the accounts of the Company, its subsidiaries in which the Company holds controlling interests and certain entities which are consolidated in accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) authoritative guidance on the consolidation of variable interest entities, since it is determined that the Company is the primary beneficiary of these entities.
3. REVENUE RECOGNITION AND RECEIVABLES
Revenue Accounted for in Accordance with Other Guidance
The Company records revenue in accordance with ASC 606 from contracts with customers and ASC 842 from lease agreements, as well as government grants. Lease revenue recognized under ASC 842 is disclosed in Note 4 and government grant revenue is disclosed in Note 9.
Timing of Revenue Recognition
Revenue accounted for in accordance with ASC 606 consisted of the following for the periods presented below.
Three months ended
Nine months ended
September 30, 2023
September 30, 2022
Services transferred over time
81,459
76,542
242,862
221,033
87,657
84,770
260,066
248,552
169,116
161,312
502,928
469,585
Goods and services transferred at a point in time
4,111
5,839
9,255
18,140
4,752
4,294
11,792
10,181
8,863
10,133
21,047
28,321
Total revenue accounted for under ASC 606
177,979
171,445
523,975
497,906
Contract Assets and Liabilities
The Company recognizes contract assets and liabilities on its balance sheet. Contract assets represent unbilled amounts typically resulting from consumer Mobility contracts with both a multiyear service period and a promotional discount. In these contracts, the revenue recognized exceeds the amount billed to the customer. The current portion of the contract asset is recorded in prepayments and other current assets and the noncurrent portion is included in other assets on the Company’s balance sheets.
Contract liabilities consist of advance payments and billings in excess of revenue recognized. Mobility and Fixed revenue for postpaid customers is generally billed one month in advance and recognized over the period that the corresponding service is rendered to customers. To the extent the service is not provided by the reporting date the
12
amount is recognized as a contract liability. Prepaid service, including Mobility services, sold to customers is recorded as deferred revenue prior to the commencement of services. Contract liabilities also include certain long term fixed business and carrier service customer contracts. Contract liabilities are recorded in advanced payments and deposits and other liabilities on the Company’s balance sheets.
In July 2019, the Company entered into a Network Build and Maintenance Agreement with AT&T Mobility, LLC (“AT&T”) and subsequently entered into amendments in August 2020, May 2021 and August 2022 (the “FirstNet Agreement”). In connection with the FirstNet Agreement, the Company is building a portion of AT&T’s network for the First Responder Network Authority in or near the Company’s current operating areas in the western United States (the “FirstNet Transaction”). The FirstNet Transaction includes construction and service performance obligations. The current portion of receivables under this agreement is recorded in customer receivable and the long-term portion is recorded in customer receivable long-term on the Company’s balance sheet. In May 2023, the Company amended its current roaming agreement and entered into a carrier management services agreement with Verizon Wireless (“Verizon CMS Agreement”). The transaction includes service performance obligations under which revenue is recognized over time. The Company allocates the transaction price of these agreements to each performance obligation based on the relative standalone selling price of each performance obligation in the contracts. The standalone selling price is the estimated price the Company would charge for the good or service in a separate transaction with similar customers in similar circumstances.
Contract assets and liabilities consisted of the following (amounts in thousands):
December 31, 2022
$ Change
% Change
Contract asset – current
3,241
2,932
309
10.5
%
Contract asset – noncurrent
4,050
3,775
275
7.3
Contract liability – current
(29,872)
(27,284)
(2,588)
9.5
Contract liability – noncurrent
(65,848)
(72,543)
6,695
(9.2)
Net contract liability
(88,429)
(93,120)
4,691
(5.0)
The contract asset – current is included in prepayments and other current assets and the contract asset – noncurrent is included in other assets on the Company’s balance sheet. The contract liability – current is included in advance payments and deposits and the contract liability – noncurrent is included in other liabilities on the Company’s balance sheet. The decrease in the Company’s net contract liability was due to the timing of customer prepayments, contract billings, and recognition of deferred revenue. During the nine months ended September 30, 2023, the Company recognized revenue of $24.3 million related to its December 31, 2022 contract liability and amortized $2.2 million of the December 31, 2022 contract asset to revenue.
Contract Acquisition Costs
The September 30, 2023 balance sheet includes contract acquisition costs of $10.7 million in other assets. During the three and nine months ended September 30, 2023, the Company amortized $1.4 million and $4.1 million, respectively, of contract acquisition costs. During the three and nine months ended September 30, 2022, the Company amortized $0.9 million and $2.5 million, respectively, of contract acquisition costs.
Remaining Performance Obligations
Remaining performance obligations represent the transaction price allocated to unsatisfied performance obligations of certain multiyear Mobility contracts, which include a promotional discount, Managed Services contracts, and the Company’s Carrier Services construction and service contracts. The transaction price allocated to unsatisfied performance obligations was $474 million and $312 million at September 30, 2023 and December 31, 2022, respectively. The increase during 2023 was related to the Verizon agreement discussed above. The Company expects to satisfy approximately 37% of the remaining performance obligations and recognize the transaction price within 24 months and the remainder thereafter.
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The Company has certain Mobility, Fixed, and Carrier Services contracts where the transaction price is allocated to remaining performance obligations. However, the Company omits these contracts from its disclosure by applying the right to invoice, one year or less, and wholly unsatisfied performance obligation practical expedients.
Disaggregation
The Company's revenue is presented on a disaggregated basis in Note 13 based on an evaluation of disclosures outside the financial statements, information regularly reviewed by the chief operating decision makers for evaluating the financial performance of operating segments and other information that is used for performance evaluation and resource allocations. This includes revenue from Communication Services, Construction, and Other revenue. Communication Services revenue is further disaggregated into business and consumer Mobility, business and consumer Fixed, Carrier Services, and Other services. Other revenue is further disaggregated into Managed Services revenue.
Receivables
The Company records an estimate of future credit losses in conjunction with the revenue transaction based on the information available including historical experience and management’s expectations of future conditions. Those estimates will be updated as additional information becomes available. The Company’s allowance for uncollectible accounts receivable is based on management’s assessment of the collectability of assets pooled together with similar risk characteristics.
The Company had gross accounts receivable of $180.2 million, including a receivable under the FirstNet Agreement totaling $51.3 million, of which $44.6 million was long-term, and an allowance for credit losses of $16.6 million as of September 30, 2023. The Company had gross accounts receivable of $154.5 million and a receivable under the FirstNet Agreement totaling $52.5 million, of which $46.7 million was long-term, and an allowance for credit losses of $15.2 million as of December 31, 2022. The Company monitors receivables through the use of historical operating data adjusted for the expectation of future performance as appropriate. Activity in the allowance for credit losses is below:
Balance at beginning of period
15,171
13,885
Current period provision for expected losses
Write-offs charged against the allowance
(3,017)
(3,083)
Recoveries collected
414
326
Balance at end of period
16,582
16,097
4. LEASES
Lessee Disclosure
The Company has operating and financing leases for towers, land, corporate offices, retail facilities, and data transport capacity. The lease terms are generally between three and 10 years, some of which include additional renewal options.
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Supplemental lease information
The components of lease expense were as follows (in thousands):
Operating lease cost:
Operating lease cost
5,975
6,061
17,719
18,398
Short-term lease cost
655
714
1,958
1,869
Variable lease cost
1,266
1,010
3,311
2,456
Total operating lease cost
7,896
7,785
22,988
22,723
Finance lease cost:
Amortization of right-of-use asset
735
742
2,239
2,321
Variable costs
211
209
641
667
Interest costs
103
93
265
290
Total finance lease cost
1,049
1,044
3,145
3,278
During the nine months ended September 30, 2023 and 2022, the Company paid $14.6 million and $16.0 million, respectively, for operating lease liabilities. During the nine months ended September 30, 2023 and 2022, the Company recorded $15.8 million and $6.1 million, respectively, of operating lease liabilities arising from ROU assets. During the nine months ended September 30, 2023, in conjunction with the restructuring activities the Company terminated $5.6 million of lease right of use assets, $5.9 million of lease liabilities from its balance sheet, and recorded a gain of $0.3 million in the restructuring expense line of its statement of operations.
At September 30, 2023, finance leases with a cost of $31.6 million and accumulated amortization of $15.7 million were included in property, plant and equipment. During the nine months ended September 30, 2023, the Company paid $0.9 million of financing cash flows, $3.5 million of investing cash flows and $0.3 million of operating cash flows for finance lease liabilities. During the nine months ended September 30, 2022, the Company paid $0.8 million of financing cash flows and $0.3 million of operating cash flows for finance lease liabilities. Additionally, during the nine months ended September 30, 2022, the Company disposed of a finance lease with a net book value of $2.3 million recording a loss for $1.0 million. At September 30, 2023, finance leases had a lease liability of $6.0 million, of which $1.8 million was current.
At December 31, 2022, finance leases with a cost of $26.6 million and accumulated amortization of $13.5 million were included in property, plant and equipment.
The weighted average remaining lease terms and discount rates as of September 30, 2023 and December 31, 2022 are noted in the table below:
Weighted-average remaining lease term
Operating leases
13.0 years
12.4 years
Financing leases
9.3 years
Weighted-average discount rate
6.3%
6.0%
7.1%
6.7%
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Maturities of lease liabilities as of September 30, 2023 were as follows (in thousands):
Operating Leases
Financing Leases
2023 (excluding the nine months ended September 30, 2023)
4,896
535
2024
19,349
2,153
2025
15,811
1,341
2026
11,498
542
2027
9,129
511
Thereafter
88,052
2,651
Total lease payments
148,735
7,733
Less imputed interest
(58,122)
(1,755)
90,613
5,978
Maturities of lease liabilities as of December 31, 2022 were as follows (in thousands):
19,417
1,403
17,836
1,342
14,805
978
10,505
504
8,096
495
76,452
147,111
7,373
(53,794)
(1,914)
93,317
5,459
As of September 30, 2023, the Company did not have any material operating or finance leases that have not yet commenced.
Lessor Disclosure
The Company is the lessor in agreements to lease the use of its network assets including its wireless cell sites and buildings. For the nine months ended September 30, 2023 and 2022, the Company recorded $5.8 million and $4.4 million, respectively, of lease income from agreements in which the Company is the lessor. For the three months ended September 30, 2023 and 2022, the Company recorded $1.9 million and $1.5 million, respectively, of lease income. Lease income is classified as Carrier Services revenue in the statement of operations.
The following table presents the maturities of future undiscounted lease payments for the periods indicated:
1,891
6,587
6,394
6,062
4,874
15,641
Total future lease payments
41,449
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5. USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. The most significant estimates relate to the allowance for credit losses on trade receivables, useful lives of the Company’s fixed and finite-lived intangible assets, allocation of purchase price to assets acquired and liabilities assumed in business combinations, fair value of indefinite-lived intangible assets, goodwill and income taxes. Actual results could differ significantly from those estimates.
6. ACQUISITIONS AND DISPOSITIONS
Acquisition of Sacred Wind Enterprises
On November 7, 2022, the Company’s newly formed wholly owned subsidiary Alloy, Inc. (Alloy”) acquired all of the issued and outstanding stock of Sacred Wind Enterprises, Inc. (“Sacred Wind”), a rural telecommunications provider in New Mexico for $44.6 million of consideration (“Sacred Wind Transaction”). The purchase price allocation was finalized during the nine months ended September 30, 2023. As part of the Sacred Wind Transaction, the Company transferred consideration of $16.7 million of cash, net of $9.4 million of cash acquired, $14.8 million of redeemable noncontrolling interests, and $3.7 million of contingent consideration. During the nine months ended September 30, 2023, the Company received $1.3 million as final settlement of working capital amounts. Upon completion of the Sacred Wind Transaction, the former Sacred Wind shareholders own 6% of the Alloy equity. This equity is classified as redeemable noncontrolling interests in the Company’s financial statements because the holders have an option, beginning in 2026, to put the equity interest to a subsidiary of the Company at the then fair market value. The redeemable noncontrolling interests do not have preference relative to other equity units and participate in gains and losses in Alloy. The contingent consideration is earned based on certain operating metrics of Sacred Wind beginning in 2025 through 2027. The fair value of the contingent consideration was calculated using discounted cash flow analysis based on a range of probability weighted outcomes. The Company funded the acquisition with borrowings under its CoBank Credit Facility and assumed $31.6 million of Sacred Wind debt, to the United States of America administered through the Rural Utilities Service.
The table below represents the purchase price allocation of the total consideration transferred to the acquired assets and assumed liabilities based on management’s estimate of their acquisition date fair values (amounts in thousands):
Consideration Transferred
44,560
Purchase price allocation:
2,619
6,747
Current assets
4,888
Operating lease right of use assets
989
Fixed assets
85,255
Intangible assets
1,232
Current liabilities
(10,176)
Lease liabilities
(967)
Deferred taxes
(14,388)
Debt
(31,639)
Net assets acquired
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The acquired fixed assets are comprised of telecommunication equipment located in the Southwest United States. The fixed assets were valued using the income and cost approaches. Cash flows were discounted between 7% and 12% based on the risk associated with the cash flows to determine fair value under the income approach. The fixed assets have useful lives ranging from 1 to 25 years. The intangible assets include a $0.6 million trade name. The estimated fair value of the trade name was determined using the relief from royalty method. The useful life of the trade name is 5 years. The acquired receivables consist of trade receivables incurred in the ordinary course of business. The Company expects to collect the full amount of the receivables. Current liabilities includes $6.5 million of deposits received under government grant programs that will be used to construct fixed assets.
The Company incurred $0.8 million of transaction-related charges pertaining to legal, accounting, consulting services, and employee related costs associated with the transaction during the year ended December 31, 2022.
7. FAIR VALUE MEASUREMENTS AND INVESTMENTS
In accordance with the provisions of fair value accounting, a fair value measurement assumes that a transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability, and defines fair value based upon an exit price model.
The fair value measurement guidance establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance describes three levels of inputs that may be used to measure fair value:
Level 1
Quoted prices in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset and liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 assets and liabilities include money market funds, debt and equity securities and derivative contracts that are traded in an active exchange market.
Level 2
Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes corporate obligations and non-exchange traded derivative contracts.
Level 3
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments and intangible assets that have been impaired whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
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Assets and liabilities of the Company measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022 are summarized as follows (in thousands):
Significant Other
Quoted Prices in
Unobservable
Active Markets
Inputs
Description
(Level 1)
(Level 3)
Short term investments
Other investments
1,278
Alaska Communications redeemable common units
(22,266)
Alloy redeemable common units
(14,760)
Warrants on Alaska Communications redeemable common units
(654)
Total assets and liabilities measured at fair value
(36,402)
(36,102)
1,616
(22,557)
(36,355)
(36,055)
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Other Investments
The Company holds investments in equity securities consisting of noncontrolling investments in privately held companies. The investments are accounted for using equity method accounting, the measurement alternative for investments without a readily determinable fair value, or fair value. The fair value investments are valued using level 3 inputs and the Company used the income approach to fair value the investment. The inputs consisted of a discount rate and future cash flows calculated based on the investment attributes. A roll forward of the investments is below:
Investments without a readily determinable fair value
Fair value investments
Equity method investments
22,590
13,963
38,169
Income recognized
2,430
2,752
Contributions
425
(567)
630
488
Foreign currency gain
Reclassification of foreign currency losses
Transfers
16,264
(16,264)
41,709
42,987
17,820
1,925
28,699
48,444
Sale of Investments
(13,212)
Income (loss) recognized
(1,837)
Contributions / (distributions)
(389)
2,750
2,361
Foreign currency loss
(1,815)
Gain recognized
4,770
1,862
14,259
38,711
During the nine months ended September 30, 2023, the Company lost the ability to exert significant influence over its India solar investment. As a result, the Company transferred $16.3 million from equity method investments to investments without a readily determinable fair value and the accounting for the investment changed to the cost method from the equity method of accounting. Before transitioning to the cost method, the Company recorded income of $0.1 million and reclassified $1.3 million from accumulated other comprehensive income into income.
These investments are included with other assets on the consolidated balance sheets.
Redeemable Common Units and Warrants
The Company has issued redeemable common units, and warrants to purchase additional common units, in consolidated subsidiaries of the Company. The instruments are redeemable at the option of the holder. Both the common units and warrants to purchase common units are recorded at fair value in the Company’s financial statements. The common units are recorded in redeemable noncontrolling interest and the warrants are recorded in other liabilities on the Company’s balance sheets. The put options for the Alloy redeemable common units begin in 2026. The put options for the Alaska Communications redeemable common units begin the earlier of a public offering or 2028. The Company calculates the fair value of the instruments using a combination of market and discounted cash flows approaches with Level 3 inputs.
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Other Fair Value Disclosures
The carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable and accrued expenses approximate their fair values because of the relatively short-term maturities of these financial instruments.
The fair value of long-term debt is estimated using Level 2 inputs. At September 30, 2023, the fair value of long-term debt, including the current portion, was $552.2 million and its book value was $543.1 million. At December 31, 2022, the fair value of long-term debt, including the current portion, was $473.7 million and its book value was $467.2 million.
8. LONG-TERM DEBT
2023 CoBank Credit Facility
On July 13, 2023, the Company, along with certain of its subsidiaries as guarantors, entered into a new Credit Agreement with CoBank, ACB and a syndicate of other lenders (as may be amended from time to time, the “2023 CoBank Credit Facility”).
The 2023 CoBank Credit Facility provides for a five-year $170 million revolving credit facility (the “2023 CoBank Revolving Loan”) and a six-year $130 million term loan facility (the “2023 CoBank Term Loan”). The Company may use (i) up to $25 million under the 2023 CoBank Credit Facility for letters of credit, and (ii) up to $20 million under a swingline sub-facility. Upon the closing of the 2023 CoBank Credit Facility, the Company drew all of the 2023 CoBank Term Loan and approximately $13.6 million of the 2023 CoBank Revolving Loan. These borrowings were used to repay $139.5 million of debt outstanding under the 2019 CoBank Credit Facility at close.
The 2023 CoBank Term Loan must be repaid in quarterly principal payments in the amounts set forth below, with the outstanding principal balance maturing on July 13, 2029. The 2023 CoBank Revolving Loan may be repaid at any time on or prior to its maturity on July 13, 2028. All amounts outstanding under the 2023 CoBank Credit Facility will be due and payable upon the earlier of the maturity date or the acceleration of the loans and commitments upon an event of default.
2023 CoBank Term Loan Quarterly Payment Dates
2023 CoBank Term Loan Quarterly Repayments
December 31, 2023 – June 30, 2025
$812,500 (2.5% per annum)
September 30, 2025 – June 30, 2026
$1,625,000 (5% per annum)
September 30, 2026 – June 30, 2029
$2,437,500 (7.5% per annum)
Amounts borrowed under the 2023 CoBank Credit Facility bear interest at a rate equal to, at the Company’s option, either (i) the secured overnight financing rate as administered by the Federal Reserve Bank of New York (SOFR) plus an applicable margin ranging between 2.00% to 3.75% for the 2023 CoBank Term Loan or 1.75% to 3.50% for Revolving Loans or (ii) a base rate plus an applicable margin ranging from 1.00% to 2.75% for the Term Loan or 0.75% to 2.50% for the 2023 CoBank Revolving Loans. Swingline loans will bear interest at the base rate plus the applicable margin for base rate loans. The base rate is equal to the higher of (i) 1.00% plus the one-month SOFR rate (ii) the federal funds effective rate (as defined in the 2023 CoBank Credit Agreement) plus 0.50% per annum; and (iii) the prime rate (as defined in the 2023 CoBank Credit Agreement). The applicable margin is determined based on the ratio (as further defined in the 2023 CoBank Credit Agreement) of the Company’s indebtedness to EBITDA. Under the terms of the 2023 CoBank Credit Agreement, the Company must also pay a fee ranging from 0.25% to 0.50% on the average daily unused portion of the 2023 CoBank Credit Facility over each calendar quarter.
The 2023 CoBank Credit Agreement contains a financial covenant (as further defined in the 2023 CoBank Credit Agreement) that imposes a maximum ratio of indebtedness to EBITDA, as well as customary representations,
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warranties and covenants, including covenants limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes. The Total Net Leverage Ratio is measured each fiscal quarter and is required to be less than or equal to 3.25 to 1.0. The 2023 CoBank Credit Agreement provides for events of default customary for credit facilities of this type, including but not limited to non-payment, defaults on other debt, misrepresentation, breach of covenants, representations and warranties, insolvency and bankruptcy.
The Company capitalized $4.0 million of fees associated with the 2023 CoBank Credit Facility which are being amortized over the life of the debt and $3.8 million were unamortized as of September 30, 2023.
The Company had $130.0 million outstanding under the 2023 CoBank Term Loan as of September 30, 2023. Under the 2023 CoBank Revolving Loan, the Company had $23.1 million outstanding and $146.9 million of availability as of September 30, 2023. There were no outstanding interest rate hedge agreements under the 2023 CoBank Credit Facility as of September 30, 2023 and the Company was in compliance with all financial covenants as of that date.
In October 2023, the Company entered a two year, forward starting 1-month floating to fixed SOFR interest rate swap agreement. The swap becomes effective November 13, 2023 in a notional amount of $50.0 million, has a fixed SOFR rate of 4.896% and matures on November 13, 2025.
2019 CoBank Credit Facility
On April 10, 2019, the Company entered into a credit facility, with CoBank, ACB and a syndicate of other lenders (as amended, the “2019 CoBank Credit Facility”). The 2019 CoBank Credit Facility provided for a $200 million revolving credit facility that included (i) up to $75 million for standby or trade letters of credit and (ii) up to $10 million under a swingline sub-facility. In connection with the execution of the 2023 CoBank Credit Facility, as defined above, outstanding borrowings under the 2019 CoBank Credit Facility were repaid in full.
Amounts borrowed under the 2019 CoBank Credit Facility bore interest at a rate equal to, at the Company’s option, either (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin ranging between 1.25% to 2.25% or (ii) a base rate plus an applicable margin ranging from 0.25% to 1.25%. Swingline loans bore interest at the base rate plus the applicable margin for base rate loans. The base rate was equal to the higher of (i) 1.00% plus the higher of (x) LIBOR for an interest period of one month and (y) LIBOR for an interest period of one week; (ii) the Federal Funds Effective Rate (as defined in the 2019 CoBank Credit Facility) plus 0.50% per annum; and (iii) the Prime Rate (as defined in the 2019 CoBank Credit Facility). The applicable margin was determined based on the Total Net Leverage Ratio (as defined in the 2019 CoBank Credit Facility). Under the terms of the 2019 CoBank Credit Facility, the Company also paid a commitment fee ranging from 0.150% to 0.375% of the average daily unused portion of the 2019 CoBank Credit Facility over each calendar quarter.
Letter of Credit Facility
On November 14, 2022, the Company entered into a General Agreement of Indemnity to issue performance Standby Letters of Credit on behalf of the Company and its subsidiaries. As of September 30, 2023, $31.6 million of Standby Letters of Credit had been issued under this agreement.
Alaska Credit Facility
On July 22, 2021, Alaska Communications entered into a Credit Agreement (the “Alaska Credit Facility”) with Fifth Third Bank, National Association, as Administrative Agent, and a syndicate of lenders to provide a $35.0 million revolving facility (the “Alaska Revolving Facility”) and a $210.0 million initial term loan facility (the “Alaska Term Loan”).
On December 23, 2022, Alaska Communications entered into a First Amendment Agreement (the “ACS Amendment”). The ACS Amendment amends the Alaska Credit Facility to increase its Revolving Credit Commitment from $35.0 million to $75.0 million and Term Loan Commitment from $210.0 million to $230.0 million. As a part of the transaction, the Term Loan commitment was fully funded as the outstanding Revolving Credit Commitment balance was transferred.
As of September 30, 2023, Alaska Communications had drawn $25.0 million on its Revolving Credit Commitment and had $50.0 million available to draw. The Term Loan balance was $230.0 million and principal payments commence in the fourth quarter of 2023. Both facilities mature on July 22, 2026.
In addition to the above changes, the ACS Amendment replaced the calculation of interest from an applicable margin applied to LIBOR with the same applicable margin applied to the Secured Overnight Financing Rate (“SOFR”) plus a 10-basis point adjustment.
The Company capitalized $7.3 million of fees associated with the Alaska Credit Facility which are being amortized over the life of the debt and $4.2 million were unamortized as of September 30, 2023.
The Alaska Credit Facility also provides for incremental facilities up to an aggregate principal amount of the greater of $70.0 million and Alaska Communications’ trailing twelve-month Consolidated EBITDA (as defined in the Alaska Credit Facility).
The key terms and conditions of the Alaska Credit Facility include the following:
Alaska Communication’s interest rate swap, which had been designated as a cash flow hedge with an interest rate of 1.6735%, expired on June 30, 2022. As of September 30, 2023, there are no outstanding interest rate hedge agreements associated with the Alaska Credit Facility. In November 2023, Alaska Communications entered two forward starting 1-month floating to fixed SOFR interest rate swap agreements. The total notional amount of the agreements is $200.0 million, with fixed SOFR rates of 4.8695% and 4.8980% and both agreements mature on November 7, 2025.
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Alaska Term Facility
On June 15, 2022, Alaska Communications Systems Holdings, the parent company of Alaska Communications, entered into a secured lending arrangement with Bristol Bay Industrial, LLC (the “Alaska Term Facility”).
The Alaska Term Facility provides for a secured delayed draw term loan in an aggregate principal amount of up to $7.5 million and the proceeds may be used to pay certain invoices from a contractor for work performed in connection with a fiber build. Interest on the Alaska Term Facility accrues at a fixed rate of 4.0% and is payable commencing on March 31, 2023. Scheduled quarterly payments of principal commenced on March 31, 2023. The Alaska Term Facility matures on June 30, 2024.
The Alaska Term Facility contains events of default customary for facilities of this type.
As of September 30, 2023, the Company had $6.4 million outstanding and no available borrowings under the Alaska Term Facility.
FirstNet Receivables Credit Facility
On March 26, 2020, Commnet Finance, a wholly owned subsidiary of Commnet Wireless, entered into a receivables credit facility with the Company, Commnet Wireless, and CoBank, ACB (the “Receivables Credit Facility”).
The Receivables Credit Facility provides for a senior secured delayed draw term loan in an aggregate principal amount of up to $75.0 million and the proceeds may be used to acquire certain receivables from Commnet Wireless. The receivables to be financed and sold under the Receivables Credit Facility, which provide the loan security, relate to the obligations of AT&T under the FirstNet Agreement.
On December 23, 2022, CoBank amended the Receivables Credit Facility and extended the delayed draw period to December 31, 2023.
The maturity date for each loan will be set by CoBank and will match the weighted average maturity of the certain receivables financed.
Interest on the loans accrue at a fixed annual interest rate to be quoted by CoBank.
The Receivables Credit Facility contains customary events of termination, representations and warranties, affirmative and negative covenants and events of default customary for facilities of this type.
As of September 30, 2023, the Company had $45.3 million outstanding, of which $6.7 million was current, and $18.0 million of availability under the Receivables Credit Facility. The Company capitalized $0.8 million in fees associated with the Receivables Credit Facility which are being amortized over the life of the debt and $0.5 million were unamortized as of September 30, 2023.
GTT Credit Facilities
On October 12, 2022, GTT received approval from Republic Bank (Guyana) Limited for a $2.9 million term facility and a $5.7 million overdraft facility (the “GTT Credit Facilities”) subject to the approval from the Minister of Finance at the Bank of Guyana that was received on March 31, 2023.
The GTT Credit Facilities are secured by real estate assets and carry a fixed interest rate of 7.5% which will be reviewed by the bank from time to time and subject to change at the bank’s discretion. The term facility is repayable
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over five years in equal monthly installments of principal and interest, commencing one month after funds are advanced. The overdraft facility will expire on October 31, 2024.
As of September 30, 2023, $3.5 million was outstanding under the overdraft facility and there were no outstanding amounts under the term facility.
Sacred Wind Term Debt
In connection with the Sacred Wind acquisition completed on November 7, 2022, the Company assumed $31.6 million of term debt (the “Sacred Wind Term Debt”) with the United States of America acting through the Administrator of the Rural Utilities Service (“RUS”). The loan agreements are dated as of October 23, 2006 and March 17, 2016. RUS provides financial assistance in the form of loans under the Rural Electrification Act of 1936 to furnish or improve telecommunications and/or broadband services in rural areas.
The Sacred Wind Term Debt is secured by substantially all assets of Sacred Wind and an underlying mortgage to the United States of America. These mortgage notes are to be repaid in equal monthly installments covering principal and interest beginning after date of issue and expiring by 2035.
The Sacred Wind Term Debt contains certain restrictions on the declaration or payment of dividends, redemption of capital stock or investment in affiliated companies without the consent by the RUS noteholders. The agreements also contain a financial covenant which Sacred Wind was not in compliance with as of December 31, 2021. Sacred Wind submitted a corrective action plan to comply with the financial covenant as of December 31, 2025. On May 5, 2022, Sacred Wind’s corrective action plan was accepted by the RUS. As of September 30, 2023, the Company was in compliance with that corrective action plan.
As of September 30, 2023, $29.0 million was outstanding under the Sacred Wind Term Debt. Of that amount, $3.2 million was current and $25.8 million was long term.
The mortgage notes carry fixed interest rates ranging from 0.88% to 5.0%.
Viya Debt
The Company, and certain of its subsidiaries, have entered into a $60.0 million loan agreement (the “Viya Debt”) with Rural Telephone Finance Cooperative (“RTFC”). The Viya Debt agreement contains customary representations, warranties, and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and a financial covenant that limits the maximum ratio of indebtedness to annual operating cash flow to 3.5 to 1.0 (the “Net Leverage Ratio”). This covenant is tested on an annual basis at the end of each fiscal year. Interest is paid quarterly at a fixed rate of 4.0% per annum and principal repayment is not required until maturity on July 1, 2026. Prepayment of the Viya Debt may be subject to a fee under certain circumstances. The debt is secured by certain assets of the Viya subsidiaries and is guaranteed by us.
The Company paid a fee of $0.9 million in 2016 to lock the interest rate at 4% per annum over the term of the Viya Debt. The fee was recorded as a reduction to the Viya Debt carrying amount and is being amortized over the life of the loan.
As of September 30, 2023, $60.0 million of the Viya Debt remained outstanding and $0.3 million of the rate lock fee was unamortized.
On May 5, 2022, RTFC agreed to amend the Net Leverage Ratio to 7.0 to 1.0 through the maturity date of July 1, 2026. The Ratio is tested annually, and the Company was in compliance with the Net Leverage Ratio as of December 31, 2022.
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One Communications Debt
The Company had an outstanding loan from HSBC Bank Bermuda Limited (the “One Communications Debt”) which matured and was repaid in full on December 22, 2022. This loan bore interest at the one-month LIBOR plus a margin ranging between 2.5% to 2.75% per annum paid quarterly.
Debt Maturity
The table below summarizes the annual maturities of the Company’s debt instruments (amounts in thousands).
Customer
US
International
Corporate and
Receivable
Telecom
Credit Facility
2,637
3,481
813
6,931
1,476
16,536
3,250
19,786
6,787
14,969
4,875
19,844
7,083
238,469
60,000
8,125
306,594
7,393
3,723
9,750
13,473
7,718
14,028
126,307
140,335
14,794
290,362
63,481
153,120
506,963
45,251
Debt Discounts
(4,521)
(271)
(3,794)
(8,586)
(514)
Book Value
285,841
63,210
149,326
498,377
44,737
9. GOVERNMENT SUPPORT AND SPECTRUM MATTERS
Universal Service Fund and Connect America Fund Phase II Programs
The Company recognizes revenue from several government funded programs including the Universal Service Fund (“USF”), a subsidy program managed by the Federal Communications Commission (“FCC”), the Alaska Universal Service Fund (“AUSF”), a similar program managed by the Regulatory Commission of Alaska (the “RCA”), and the Emergency Connectivity Fund (“ECF”), a program to help schools and libraries support remote learning in underserved communities. USF funds are disbursed to telecommunication providers through four programs: the High Cost Program; the Low Income Program (“Lifeline Program”); the Schools and Libraries Program (“E-Rate Program”); and the Rural Health Care Support Program.
The Company also recognizes revenue from the Connect America Fund Phase II program (“CAF II”) which offers subsidies to carriers to expand broadband coverage in designated areas. Under CAF II, the Company’s US Telecom segment will receive an aggregate of $27.7 million annually through December 2025 and an aggregate of $8.0 million annually from January 2026 through July 2028.
All of the programs are subject to certain operational and reporting compliance requirements. The Company believes it is in compliance with these requirements as of September 30, 2023. Revenue recognized from the USF and CAF II programs is recognized as revenue from government grants. Revenue from other programs is recognized in accordance with ASC 606.
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RDOF (“Rural Digital Opportunities Fund”)
The Company expects to receive approximately $22.7 million over 10 years to provide broadband and voice coverage to over 10,000 households in the United States (not including Alaska) under the 2020 Rural Digital Opportunity Fund Phase I Auction (“RDOF”). Revenue recognized from the RDOF program is recognized as revenue from government grants.
The Company recorded the amounts below as communication services revenue for the reported periods:
High cost support
2,288
1,397
3,685
991
943
1,934
CAF II
6,815
6,822
RDOF
608
478
Other Programs
14,817
14,822
8,795
24,528
1,402
25,930
17,086
18,029
7,004
4,192
11,196
3,036
6,465
9,501
20,445
20,466
1,824
1,434
44,845
44,859
20,023
37
20,060
74,118
4,206
78,324
44,959
6,502
51,461
In 2018, the FCC initiated a proceeding to replace the High Cost Program support received by Viya in the US Virgin Islands with a new Connect USVI Fund. On November 16, 2020, the FCC announced that Viya was not the recipient of the Connect USVI Fund award and authorized funding to be issued to the new awardee in June 2021. Pursuant to the terms of the program and effective in July 2021, Viya’s annual USF support was reduced from $16.4 million to $10.9 million. In July 2022, this support was reduced to $5.5 million for the annual period through June 2023. In April of 2023, the FCC issued an order extending the high cost support in the US Virgin Islands at the current $5.5 million per year received from July 2023 through December 31, 2025. In connection with this order, the FCC requires that the Company maintain its current footprint for voice and broadband services in the US Virgin Islands.
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Construction Grants
The Company has also been awarded construction grants to build network connectivity for eligible communities. The funding of these grants, used to reimburse the Company for its construction costs, is distributed upon completion of a project. Completion deadlines begin in September 2023 and once these projects are constructed, the Company is obligated to provide service to the participants. The Company expects to meet all requirements associated with these grants, with the exception of grants the Company has transferred to third parties, as described below. A roll forward of the Company’s grant awards is below (in thousands).
Amount
Grants awarded, December 31, 2022
80,197
New grants
34,821
Construction complete
(7,725)
Transferred grants
(6,269)
Grants awarded, September 30, 2023
101,024
During the nine months ended September 30, 2023, the Company disbursed capital expenditures of $12.4 million under these programs and received reimbursement of $14.6 million. These cash flows are classified as investing activities in the Company’s statement of cash flows.
In addition, the Company partners with tribal governments to obtain grants under various government programs including the Tribal Broadband Connectivity Program ("TBCP") and the Rural Development Broadband ReConnect Program (“ReConnect”). The TBCP and ReConnect programs are administered by United States government agencies to deploy broadband connectivity in certain underserved areas. The Company was identified as a sub recipient of grants under these programs totaling $188.6 million as of September 30, 2023, but has not yet received any funding as of September 30, 2023.
Replace and Remove Program
On July 15, 2022, the Company was notified that it was an approved participant in the Federal Communication Commission’s Secure and Trusted Communications Networks Reimbursement Program (the “Replace and Remove Program”), designed to reimburse providers of communications services for reasonable costs incurred in the required removal, replacement, and disposal of covered communications equipment or services, that have been deemed to pose a national security risk, from their networks. Pursuant to the Replace and Remove Program, the Company was allocated up to approximately $207 million in reimbursement amounts to cover documented and approved costs to remove and securely destroy all ZTE communications equipment and services in its U.S. networks and replace such equipment. The Replace and Remove Program requires that the Company complete the project no later than one year from submitting its initial reimbursement request, or July 2024. At this time, the Company anticipates that it will be able to meet the deadlines and requirements of the program. During the nine months ended September 30, 2023 and 2022, the Company incurred capital expenditures related to this project of $27.1 million and $1.6 million, respectively. At September 30, 2023, $25.3 million was accrued. The Company has a receivable of $36.6 million, including operation costs and capital expenditures, at September 30, 2023, which is expected to be reimbursed within the next twelve months. For the nine months ended September 30, 2023 the Company received $2.6 million of reimbursement under the program, of which $1.1 million was classified as operating cash inflows and $1.5 million was classified as investing cash inflows in the Company’s statement of cash flows.
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10. RETIREMENT PLANS
Multi-employer Defined Benefit Plan
Pension benefits for substantially all of the Company’s Alaska-based employees are provided through the Alaska Electrical Pension Fund (“AEPF”). The Company pays a contractual hourly amount based on employee classification or base compensation to the AEPF. As a multi-employer defined benefit plan, the accumulated benefits and plan assets are not determined for, or allocated separately to, the individual employer. This plan was not in endangered or critical status during the plan year.
Defined Benefit Plan
The Company has noncontributory defined benefit pension and noncontributory defined medical, dental, vision, and life benefit plans for eligible employees who meet certain eligibility criteria. The majority of benefits under the plans are frozen and the plans no longer allow new participants to join.
The Company recorded the net periodic benefit cost identified below (in thousands):
Pension benefits
Postretirement benefits
Operating expense
Service cost
31
57
36
113
62
171
108
Non-operating expense
Interest cost
593
35
565
33
1,780
1,695
99
Expected return on plan assets
(925)
(2,858)
(2,775)
Settlements
Net periodic pension expense (benefit)
(322)
66
(303)
(596)
816
207
The Company was not required to make contributions to its pension plans during the nine months ended September 30, 2023 and 2022. However, the Company periodically evaluates whether to make discretionary contributions. The Company funds its postretirement benefit plans as claims are made and did not make contributions to its pension plans during the nine months ended September 30, 2023 and 2022.
11. INCOME TAXES
The Company’s effective tax rate for the three months ended September 30, 2023 and 2022 was 12.7% and 16.9%, respectively.
The Company recorded an income tax benefit of $0.5 million in relation to a pretax loss of $4.3 million for the three months ended September 30, 2023. The effective tax rate for the three months ended September 30, 2023 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which the Company operates, (ii) net expense related to valuation allowances placed on certain deferred tax assets that are not expected to be realizable based on the weight of positive and negative evidence and (iii) discrete items including $0.7 million of expense for interest on unrecognized tax positions.
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The Company recorded an income tax benefit of $0.4 million in relation to a pretax loss of $2.1 million for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2022 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which the Company operates and (ii) discrete items including $0.9 million of expense for interest on unrecognized tax positions.
The Company’s effective tax rate for the nine months ended September 30, 2023 and 2022 was 35.8% and 21.5%, respectively.
The Company recorded an income tax benefit of $6.4 million in relation to a pretax loss of $17.8 million for the nine months ended September 30, 2023. The effective tax rate for the nine months ended September 30, 2023 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which the Company operates, (ii) net expense related to valuation allowances placed on certain deferred tax assets that are not expected to be realizable based on the weight of positive and negative evidence and (iii) discrete items including a $4.0 million benefit from the reversal of an unrecognized tax position due to a statute of limitations expiration, and $2.0 million expense for interest on unrecognized tax positions.
The Company recorded an income tax benefit of $1.4 million in relation to a pretax loss of $6.4 million for the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2022 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which the Company operates, (ii) a $2.1 million net expense recognized discretely to record a valuation allowance on certain deferred tax assets that are not expected to be realizable based on the weight of positive and negative evidence and(iii) discrete items including a $3.3 million benefit from the reversal of an unrecognized tax position due to a statute of limitations expiration, and a $1.7 million expense for interest on unrecognized tax positions.
The Company’s effective tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax contingencies. The Company’s consolidated tax rate will continue to be impacted by any transactional or one-time items in the future and the mix of income in any given year generated among the jurisdictions in which the Company operates. While the Company believes it has adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from the Company’s accrued positions as a result of uncertain and complex applications of tax law and regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgments by management. Accordingly, the Company could record additional provisions or benefits for US federal, state, and foreign tax matters in future periods as new information becomes available.
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12. EARNINGS PER SHARE AND REDEEMABLE NONCONTROLLING INTERESTS
Earnings Per Share
The following table reconciles the numerator and denominator in the computations of basic and diluted earnings per share (in thousands):
Numerator:
Net loss attributable to ATN International, Inc. stockholders- Basic
Less: Preferred dividends
Net Loss attributable to ATN International, Inc. common stockholders- Diluted
(4,887)
(3,975)
(12,295)
(7,717)
Denominator:
Weighted-average shares outstanding- Basic
Weighted-average shares outstanding- Diluted
Redeemable Noncontrolling Interests
In connection with certain acquisitions, the Company accounts for third-party non-controlling minority investments as redeemable noncontrolling interests, which consist of both redeemable common and, in some instances, preferred units, in its consolidated financial statements.
The common units contain put options allowing the holder to sell at a future date, the common units to a subsidiary of the Company at the then fair market value. The common units participate in the earnings and losses of the subsidiaries and are allocated their applicable share of earnings and losses. After the allocation of earnings and losses, the Company estimates the fair value of the common units and adjusts the book value of the common units to that estimated fair value.
The preferred units contain put options allowing the holder to sell at a future date, the preferred units to a subsidiary of the Company at a fixed price equal to face value of the units plus unpaid dividends. The preferred units hold a distribution preference over common units and carry a fixed dividend rate.
The put options for both the common and preferred units, if any, are nonrecourse to the Company and exercisable at the earlier of a future initial public offering of the subsidiary or certain dates beginning in 2026.
For the three months ended September 30, 2023 and 2022, the Company allocated losses of $1.6 million and $1.1 million, respectively, to the redeemable common units representing their proportionate share of operating losses. For the nine months ended September 30, 2023 and 2022, the Company allocated losses of $7.8 million and $2.8 million, respectively, to the redeemable common units representing their proportionate share of operating losses. The Company then compared the book value of the common units to the fair value and the fair value exceeded the book value. As a result, the book value was increased by $7.5 million and $2.8 million during the nine months ended September 30, 2023 and 2022, respectively.
The following table provides a roll forward of the activity related to the Company’s redeemable noncontrolling interests for the nine months ended September 30, 2023 and 2022:
Redeemable Preferred Units
Redeemable Common Units
Total Redeemable Noncontrolling Interests
Accrued preferred dividend
3,609
Allocated net loss
(7,788)
Change in fair value
7,497
50,296
22,640
72,936
3,462
53,758
76,398
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13. SEGMENT REPORTING
The Company has the following two reportable and operating segments: i) International Telecom and ii) US Telecom.
The following tables provide information for each operating segment (in thousands):
For the Three Months Ended September 30, 2023
Other (1)
Consolidated
Revenue
Communication Services
Mobility - Business
3,818
128
3,946
Mobility - Consumer
23,973
817
24,790
Total Mobility
27,791
945
28,736
Fixed - Business
18,016
35,680
53,696
Fixed - Consumer
41,967
22,662
64,629
Total Fixed
59,983
58,342
118,325
3,441
32,319
35,760
1,236
544
Total Communication Services Revenue
92,451
92,150
1,427
2,970
Total other revenue
Total Revenue
93,878
97,158
14,354
19,398
618
240
2,884
Non-cash stock-based compensation
130
1,803
Operating income (loss)
3,017
(8,981)
For the Three Months Ended September 30, 2022
3,706
298
4,004
22,776
2,058
24,834
26,482
2,356
28,838
18,578
32,509
51,087
39,989
19,143
59,132
58,567
51,652
110,219
3,220
31,360
34,580
340
88,609
85,368
1,398
3,506
Total Other Revenue
90,007
92,206
Depreciation
14,126
18,341
845
380
2,856
54
1,483
13,360
716
(12,637)
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For the Nine Months Ended September 30, 2023
11,484
415
11,899
69,270
2,666
71,936
80,754
3,081
83,835
52,602
107,494
160,096
125,944
67,852
193,796
178,546
175,346
353,892
11,011
95,978
106,989
2,084
684
2,768
272,395
275,089
3,872
8,246
276,267
286,983
42,646
62,315
2,030
984
8,530
307
109
41,177
(3,719)
(27,547)
For the Nine Months Ended September 30, 2022
10,997
973
11,970
64,025
5,063
69,088
75,022
6,036
81,058
52,827
91,521
144,348
122,435
57,279
179,714
175,262
148,800
324,062
10,042
96,102
106,144
1,051
261,377
250,938
3,820
8,980
265,197
268,533
43,109
54,546
2,766
1,192
8,552
170
301
36,889
(4,199)
(29,418)
Selected balance sheet data for each of the Company’s segments as of September 30, 2023 and December 31, 2022 consists of the following (in thousands):
Cash, cash equivalents, and restricted cash
35,588
31,678
5,821
115,888
143,280
8,197
Fixed assets, net
476,355
587,623
5,455
4,835
35,269
671,285
996,413
83,528
82,178
148,352
32,127
Total debt, including current portion
63,209
285,842
26,418
26,375
6,935
105,324
116,038
8,326
462,447
585,969
7,538
643,664
980,543
83,662
86,738
119,755
26,687
59,659
263,241
99,000
421,900
For the nine months ended September 30, 2023 and 2022, the Company spent $140.9 million and $114.0 million, respectively, on capital expenditures relating to its telecommunications networks and business support systems of which $14.3 million and $4.0 million, respectively, are reimbursable under various government programs. The following notes the Company’s capital expenditures, by operating segment, for these periods (in thousands).
Capital Expenditures
57,610
83,291
140,901
53,270
60,056
633
113,959
14. COMMITMENTS AND CONTINGENCIES
Regulatory and Litigation Matters
The Company and its subsidiaries are subject to certain regulatory and legal proceedings and other claims arising in the ordinary course of business, some of which involve claims for damages and taxes that are substantial in amount. Historically, the Company’s subsidiary, GTT, has been subject to other long-standing litigation proceedings and disputes in Guyana that have not yet been resolved. The Company believes that, except for the items discussed below, for which the Company is currently unable to predict the final outcome, the disposition of matters currently pending will not have a material adverse effect on the Company’s financial position or results of operations.
Beginning in 2006, the National Frequency Management Unit (now the Telecommunications Agency, or the “NFMU/TA”) and GTT have been engaged in discussions regarding the amount of and methodology for calculation of
spectrum fees payable by GTT in Guyana. Since that time, GTT has made payments of, undisputed spectrum fees as amounts invoiced by the NFMU, and to its successor, the Telecommunications Authority (“TA”). There have been limited further discussions on the subject of a revised spectrum fee methodology with the TA.
GTT has filed several lawsuits in the High Court of Guyana asserting that, despite its denials, Digicel is engaged in international bypass in violation of GTT’s exclusive license rights, the interconnection agreement between the parties, and the laws of Guyana. Digicel filed counterclaims alleging that GTT has violated the terms of the interconnection agreement and Guyana laws. These suits, filed in 2010 and 2012, are currently pending in the Court of Appeals in Guyana, however, the Company cannot accurately predict at this time when the consolidated suit will reach a court of final determination.
GTT is also involved in several legal claims regarding its tax filings with the Guyana Revenue Authority (the “GRA”) dating back to 1991 regarding the deductibility of intercompany advisory fees as well as other tax assessments. GTT has maintained that it has no unpaid corporation tax due to the GRA and that any liability GTT might be found to have with respect to the disputed tax assessments would be offset in part by the amounts claimed with respect to rights ATN has pursuant to its agreement with the government of Guyana. GTT’s position has been upheld by various High Court rulings made in its favor including most recently in December 2021, and while some matters have been appealed by the GRA, other matters remain pending for determination by the High Court.
In February 2020, the Company’s Alaska Communications subsidiary received a draft audit report from USAC in connection with USAC’s inquiry into Alaska Communications’ funding requests under the Rural Health Care Support Program for certain customers for the time period of July 2012 through June 2017. The draft audit report alleges violations of the FCC’s rules for establishing rural rates and urban rates, the provisioning and billing of ineligible services and products, and violations of the FCC’s competitive bidding rules. Alaska Communications has provided USAC with extensive comments in response to its draft audit report seeking correction of numerous factual and legal errors that it believed it had identified. As a result of these conversations and comments being submitted by Alaska Communications, USAC’s auditors may revise their findings, including the amounts they recommend USAC seek to recover. USAC’s auditors are expected to issue a final audit report incorporating Alaska Communications’ responses that will be sent to USAC’s Rural Health Care Division to review and determine if corrective action would be appropriate. In the event that the Company disagrees with USAC’s final audit report, the Company can appeal that decision to USAC’s Rural Health Care Division and/or the FCC. At this time, the Company cannot predict the contents or timing of the final USAC audit report, the outcome of the audit or the impact on the Company’s business, financial condition, results of operations, or liquidity and may require certain undertakings in addition to any proposed financial settlement.
Alaska Communications also received a Letter of Inquiry on March 18, 2018, and subsequent follow up information requests, from the FCC Enforcement Bureau requesting historical information regarding Alaska Communications’ participation in the FCC’s Rural Health Care Support Program. The Company is engaged in discussions with the FCC’s Enforcement Bureau and will continue to work constructively to provide it the information it is seeking. Any adverse outcome with respect to the FCC Enforcement Bureau’s inquiry may have an adverse impact on the Company’s business, financial condition, results of operations, or liquidity and may require certain undertakings in addition to any proposed financial settlement.
With respect to all of the foregoing matters, the Company believes that some adverse outcome is probable and has accordingly accrued $15.8 million as of September 30, 2023 for these and other potential liabilities arising in various claims, legal actions and regulatory proceedings arising in the ordinary course of business. The Company also faces contingencies that are reasonably possible to occur that cannot currently be estimated. It is the Company’s policy to expense costs associated with loss contingencies, including any related legal fees, as they are incurred.
15. SUBSEQUENT EVENTS
In October 2023, the Company entered a two-year, forward starting 1-month floating fixed SOFR interest rate swap agreement. The swap becomes effective on November 13, 2023 in a notional amount of $50.0 million, has a fixed SOFR rate of 4.896% and matures on November 13, 2025.
In November 2023, Alaska Communications entered two forward starting 1-month floating to fixed SOFR interest rate swap agreements. The total notional amount of the agreements is $200.0 million, with fixed SOFR rates of 4.8695% and 4.8980% and both agreements mature on November 7, 2025.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We provide digital infrastructure and communications services in the United States and internationally, including in the Caribbean region, with a focus on smaller markets, many of which are rural or remote, with a growing demand for infrastructure investments. Through our operating subsidiaries, we primarily provide: (i) carrier and enterprise communications services, such as terrestrial and submarine fiber optic transport, and communications tower facilities; and (ii) fixed and mobile telecommunications connectivity to residential, business and government customers, including a range of high-speed internet and data services, fixed and mobile wireless solutions, and video and voice services.
At the holding company level, we oversee the allocation of capital within and among our subsidiaries, affiliates, new investments, and stockholders. We have developed significant operational expertise and resources that we use to augment the capabilities of our individual operating subsidiaries in our local markets. We have built a platform of resources and expertise to support our operating subsidiaries and to improve their quality of service with greater economies of scale and expertise than would typically be available at the operating subsidiary level. We provide management, technical, financial, regulatory, and marketing services to our operating subsidiaries and typically receive a management fee calculated as a percentage of their revenues, which is eliminated in consolidation. We also actively evaluate potential acquisitions, investment opportunities and other strategic transactions, both domestic and international, and generally look for those that we believe fit our profile of telecommunications businesses and have the potential to complement our “glass and steel” and “first to fiber” approach in markets while generating steady excess cash flows over extended periods of time. We use the cash generated from our operations to re-invest in organic growth in our existing businesses, to make strategic investments in additional businesses, and to return cash to our investors through dividends or stock repurchases.
For further information about our financial segments and geographical information about our operating revenues and assets, see Notes 1 and 13 to the Consolidated Financial Statements included in this Report.
As of September 30, 2023, we offer the following types of services to our customers:
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We have two operating segments to manage and review our operations and to facilitate investor presentations of our results. These two operating segments are as follows:
The following chart summarizes the operating activities of our principal subsidiaries, the segments in which we report our revenue and the markets we served as of September 30, 2023:
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On November 7, 2022, we, via our newly formed wholly owned subsidiary Alloy, Inc. (“Alloy”), acquired all of the issued and outstanding stock of Sacred Wind Enterprises, Inc. (“Sacred Wind”), a rural telecommunications provider in New Mexico (the “Sacred Wind Transaction”) for $44.6 million of consideration. The purchase price allocation was finalized during the nine months ended September 30, 2023. As part of the Sacred Wind Transaction, we transferred consideration of $16.7 million of cash, net of $9.4 million of cash acquired, $14.8 million of redeemable noncontrolling interests, and $3.7 million of contingent consideration. During the nine months ended September 30, 2023, we received $1.3 million as final settlement of working capital amounts. Upon completion of the Sacred Wind Transaction, the former Sacred Wind shareholders own 6% of the Alloy equity. This equity is classified as redeemable noncontrolling interests in our financial statements because the holders have an option, beginning in 2026, to put the equity interest to a subsidiary of the Company at the then fair market value. The redeemable noncontrolling interests do not have preference relative to other equity units and participate in gains and losses in Alloy. The contingent consideration is earned based on certain operating metrics of Sacred Wind beginning in 2025 through 2027. The fair value of the contingent consideration was calculated using discounted cash flow analysis based on a range of probability weighted outcomes. We funded the acquisition with borrowing under our CoBank Credit Facility and assumed $31.6 million of Sacred Wind debt, to the United States of America administered through the Rural Utilities Service.
We believe that the acquisition of Sacred Wind will expand our infrastructure reach and broadband services in the rural Southwest and increase our wholesale carrier, residential and business broadband services.
FirstNet Agreement
In July 2019, we entered into a Network Build and Maintenance Agreement with AT&T Mobility, LLC (“AT&T”) that we amended in August 2020, May 2021 and August 2022 (the “FirstNet Agreement”). In connection with the FirstNet Agreement, we are building a portion of AT&T’s network for the First Responder Network Authority (“FirstNet”) in or near our current operating areas in the Western United States. Pursuant to the FirstNet Agreement and subject to certain limitations contained therein, all cell sites must be completed and accepted within a specified period of time. We expect that total construction revenue related to FirstNet will approximate $80 million to $85 million. During the three months ended September 30, 2023 and 2022, we recorded $2.0 million and $3.3 million in construction revenue, respectively. During the nine months ended September 30, 2023 and 2022, we recorded $3.6 million and $8.6 million in construction revenue, respectively. Revenues from construction are expected to have minimal impact on operating income. We expect to substantially complete the build by the end of 2024 with the remainder to be completed in early 2025.
Following acceptance of a cell site, AT&T will own the cell site and we will assign to AT&T any third-party tower lease applicable to such cell site. If the cell site is located on a communications tower we own, AT&T will pay us pursuant to a separate lease agreement for an initial term of eight years. In addition to building the network, we will provide ongoing equipment and site maintenance and high-capacity transport to and from these cell sites for an initial term ending in 2029.
AT&T will continue to use our wholesale domestic mobility network for roaming services at a fixed rate per site during the construction period until such time as the cell site is transferred to AT&T. Thereafter, revenue from the maintenance, leasing and transport services provided to AT&T is expected to generally offset revenue from wholesale mobility roaming services. We are currently receiving revenue from the FirstNet Transaction and expect overall operating income contributions from the FirstNet Transaction to have a relatively steady impact going forward.
Verizon Carrier Managed Services Agreement
On May 10, 2023, our subsidiary, Commnet, entered into a Carrier Managed Services Master Agreement (the “Agreement”) with Cellco Partnership d/b/a Verizon Wireless (“Verizon”), pursuant to which Commnet will provide a variety of network, infrastructure and technical services that will help deliver next generation wireless services to Verizon’s subscribers in Commnet’s current operating area in the southwestern United States.
Pursuant to the Agreement and subject to certain limitations contained therein, Commnet will upgrade its wireless service in specific areas and provide services to Verizon for an initial seven year term (the “Commitment Period”). The Commitment Period will automatically renew for up to two additional three year periods, unless Verizon provides no less than twelve months’ notice on non-renewal prior to the expiration of the then-current term.
In connection with the Agreement, Commnet has also agreed to provide Verizon with high capacity transport in its coverage area. Verizon will continue to use Commnet’s wireless communications network for roaming services at a fixed rate per site during the build period until such time as upgrades to the network to meet certain performance service level agreements for both RAN operations and transport are met. Verizon will pay Commnet an aggregate of approximately $200 million for services over the term of the Agreement.
The Agreement may be terminated at any time upon the mutual written consent of Commnet and Verizon. In addition, Verizon may terminate the Agreement upon the occurrence of certain events, including failure to meet certain milestones or completion dates with respect to network coverage, failure to meet certain SLAs with respect to the ongoing services, the declaration of a bankruptcy event by Commnet and breach of any other material terms of the Agreement.
We recognize revenue from several government funded programs including the USF, a subsidy program managed by the Federal Communications Commission (“FCC”), the Alaska Universal Service Fund (“AUSF”), a similar program managed by the Regulatory Commission of Alaska (the “RCA”), and the Emergency Connectivity Fund (“ECF”), a program to help schools and libraries support remote learning in underserved communities. USF funds are disbursed to telecommunication providers through four programs: the High Cost Program; the Low Income Program (“Lifeline Program”); the Schools and Libraries Program (“E-Rate Program”); and the Rural Health Care Support Program.
We also recognize revenue from the Connect America Fund Phase II program (“CAF II”) which offers subsidies to carriers to expand broadband coverage in designated areas. Under CAF II, our US Telecom segment will receive an aggregate of $27.7 million annually through December 2025 and an aggregate of $8.0 million annually from January 2026 through July 2028.
All of the programs are subject to certain operational and reporting compliance requirements. We believe we are in compliance with these requirements as of September 30, 2023.
In 2018, the FCC initiated a proceeding to replace the High Cost Program support received by Viya in the US Virgin Islands with a new Connect USVI Fund. On November 16, 2020, the FCC announced that Viya was not the recipient of the Connect USVI Fund award and authorized funding to be issued to the new awardee in September 2021. Pursuant to the terms of the program and effective in July 2021, Viya’s annual USF support was reduced from $16.4 million to $10.9 million. In July 2022, this support was reduced again to $5.5 million for the annual period through September 2023. In April of 2023, the FCC issued an order extending the high cost support in the US Virgin Islands at the current $5.5 million per year received from July 2023 through December 31, 2025. In connection with this order, the FCC requires that we maintain our current footprint for voice and broadband services in the US Virgin Islands.
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We expect to receive approximately $22.7 million over 10 years to provide broadband and voice coverage to over 10,000 households in the United States (not including Alaska) under the 2020 Rural Digital Opportunity Fund Phase I Auction (“RDOF”). During the three months ended September 30, 2023 and 2022, we recorded $0.6 million and $0.5 million of revenue from the RDOF program, respectively. During the nine months ended September 30, 2023 and 2022, we recorded $1.8 million and $1.4 million, of revenue from the RDOF program, respectively.
We have also been awarded construction grants to build network connectivity for eligible communities. The funding of these grants, used to reimburse us for our construction costs, is generally distributed upon completion of a project. Completion deadlines begin in September 2023 and once these projects are constructed, we are obligated to provide service to the participants. We expect to meet all requirements associated with these grants, with the exception of grants we have transferred to third parties, as described below. A roll forward of our grant awards is below (in thousands).
During the nine months ended September 30, 2023, we disbursed capital expenditures of $12.4 million under these programs and received reimbursement of $14.6 million. These cash flows are classified as investing activities in our statement of cash flows.
In addition, we partner with tribal governments to obtain grants under various government programs including the Tribal Broadband Connectivity Program ("TBCP") and the Rural Development Broadband ReConnect Program (“ReConnect”). The TBCP and ReConnect programs are administered by United States government agencies to deploy broadband connectivity in certain underserved areas. We were identified as a sub recipient of TBCP grants totaling $188.6 million, but have not yet received any funding as of September 30, 2023.
On July 15, 2022, we were notified that we were an approved participant in the Federal Communication Commission’s Secure and Trusted Communications Networks Reimbursement Program (the “Replace and Remove Program”), designed to reimburse providers of communications services for reasonable costs incurred in the required removal, replacement, and disposal of covered communications equipment or services, that have been deemed to pose a national security risk, from their networks. Pursuant to the Replace and Remove Program, we were allocated up to approximately $207 million in reimbursement amounts to cover documented and approved costs to remove and securely destroy all prohibited communications equipment and services in our U.S. networks and replace such equipment. The Replace and Remove Program requires that we complete the project no later than one year from submitting our initial reimbursement request, or by July 2024. At this time, we anticipate that we will be able to meet the deadlines and requirements of the program. During the nine months ended September 30, 2023 and 2022, we incurred capital expenditures related to this project of $27.1 million and $1.6 million, respectively. At September 30, 2023, $25.3 million was accrued. We have a receivable of $36.6 million, including operation costs and capital expenditures, at September 30, 2023, which is expected to be reimbursed within the next twelve months. For the nine months ended September 30, 2023 we received $2.6 million of reimbursement under the program, of which $1.1 million was classified as operating cash inflows and $1.5 million was classified as investing cash inflows in our statement of cash flows.
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Selected Segment Financial Information
The following represents selected segment information for the three months ended September 30, 2023 and 2022 (in thousands):
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(1) Reconciling items refer to corporate overhead costs and consolidating adjustments.
A comparison of our segment results for the three months ended September 30, 2023, and 2022 is as follows:
International Telecom. Revenues within our International Telecom segment increased $3.9 million, or 4.3%, to $93.9 million from $90.0 million for the three months ended September 30, 2023 and 2022, respectively, as a result of growth in Mobility, Fixed, Carrier Services, and other communications services revenues. Network upgrades and expansions, increased marketing activities and improved customer care led to an increase in mobile subscribers and revenues. Fixed subscriber and revenue growth resulted from an increase in the number of homes passed by high-speed data solutions which allowed us to migrate legacy copper customers to more high-speed data services. In addition, our Carrier Services revenue increased slightly in some of our markets as a result of increased roaming revenues due to increased international travel in those markets and other communications services revenues increased as a result of certain project related revenue being recognized during the three months ended September 30, 2023.
Operating expenses within our International Telecom segment increased by $4.5 million, or 5.9%, to $81.1 million from $76.6 million for the three months ended September 30, 2023 and 2022, respectively. The increase was primarily the result of increases in retail and marketing personnel and program costs to support the expansion of our mobile and broadband customer bases and an increase in certain regulatory fees.
As a result, our International Telecom segment’s operating income decreased $0.6 million, or 4.5%, to $12.8 million from $13.4 million for the three months ended September 30, 2023 and 2022, respectively.
US Telecom. Revenue within our US Telecom segment increased by $5.0 million, or 5.4%, to $97.2 million from $92.2 million for the three months ended September 30, 2023 and 2022, respectively. Increases in revenues from business customers within our Alaska subsidiary and the impact of the Sacred Wind Transaction were partially offset by a reduction in construction revenue related to the FirstNet Transaction, a reduction in roaming revenue due to the
restructuring of certain carrier contracts in our western United States operations, and a reduction in our wholesale long-distance service revenues.
Operating expenses within our US Telecom segment increased $2.6 million, or 2.8%, to $94.1 million from $91.5 million for the three months ended September 30, 2023 and 2022, respectively, as a result of increases in expenses being incurred to support the increased revenues within our Alaska operations and the impact of the Sacred Wind Transaction partially offset by the decreases in FirstNet construction costs and in costs related to our wholesale long-distance business as a result of its decrease in revenues.
As a result of the above, our US Telecom segment’s operating income increased by $2.3 million to $3.0 million from income of $0.7 million for the three months ended September 30, 2023 and 2022, respectively.
The following represents a year over year discussion and analysis of our results of operations for the three months ended September 30, 2023 and 2022 (in thousands):
Three Months Ended
Amount of
Percent
Increase
(Decrease)
10,624
6.1
(1,294)
(38.8)
(507)
(10.3)
8,823
4.8
Cost of communications services and other
1,418
1.8
(1,290)
4,405
7.8
287
17.2
(3,371)
(98.7)
Restructuring charges
100.0
1,058
3.2
(112)
(3.5)
(Gain) Loss on disposition of long-lived assets
(352)
(72.7)
3,426
1.9
5,397
375.1
OTHER INCOME (EXPENSE):
98
257.9
(5,932)
107.6
(1,691)
(88.8)
Other income (expense), net
(7,525)
210.7
(2,128)
99.8
(182)
50.6
(1,946)
109.8
Net (income) loss attributable to noncontrolling interests, net of tax:
1,145
(113.3)
(801)
28.8
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Communications Services Revenue
Mobility Revenue. Our Mobility revenue consists of retail revenue generated within both our International Telecom and US Telecom segments by providing retail mobile voice and data services over our wireless networks as well as through the sale and repair services of related equipment, such as handsets and other accessories, to our retail subscribers.
Mobility revenue decreased by $0.1 million, or 0.3%, to $28.7 million for the three months ended September 30, 2023 from $28.8 million for the three months ended September 30, 2022. Mobility revenue from both business and consumer customers for the three months ended September 30, 2023 declined slightly as compared to the three months ended September 30, 2022.
The decrease in Mobility revenue, within our segments, consisted of the following:
Mobility revenue within our International Telecom segment may increase as a result of our marketing efforts to increase the number of our subscribers. However, increased competition may limit revenue growth from mobility services. We expect that Mobility revenue within our US Telecom segment will decrease over time as we put more emphasis on other revenue sources within that segment.
Fixed Revenue. Fixed revenue is primarily generated by broadband, voice, and video service revenues provided to retail and business customers over our wireline networks. Fixed revenue within our US Telecom segment also includes awards from the Connect America Fund Phase II program in the western United States and Alaska, as well as revenue from the Alaska Universal Service Fund. Within our International Telecom segment, Fixed revenue also includes funding under the FCC’s High Cost Program in the US Virgin Islands.
Fixed revenue increased by $8.1 million, or 7.4%, to $118.3 million from $110.2 million for the three months ended September 30, 2023 and 2022, respectively. Of this increase, $2.6 million and $5.5 million relate to increases in revenue from business and consumer customers, respectively. The increase in Fixed revenue, within our segments, consisted of the following:
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Fixed revenue within our International Telecom segment may continue to increase as a result of an increase in demand for broadband and other data services from consumers, businesses and government, driven by such trends as the popularity of video and audio streaming, demand for cloud services and smart home, business and city solutions as well as macro-economic and population growth in places like the Cayman Islands and Guyana. However, such increases may be offset by a decrease in demand for our video services due to subscribers using alternative methods to receive video content.
Within our US Telecom segment, Fixed revenue is expected to decrease as the Covid-19 related Emergency Connectivity Fund programs cease in Alaska. These decreases are expected to be partially offset by increases in other enterprise revenue in Alaska and our western United States operations, including the impact of the Sacred Wind Transaction, as we further deploy broadband access to both consumers and businesses.
Carrier Services Revenue. Carrier Services revenue is generated by both our International Telecom and US Telecom segments. Within our International Telecom segment, Carrier Services revenue includes international long-distance services, roaming revenues generated by other carriers’ customers roaming into our retail markets, transport services and access services provided to other telecommunications carriers. Within our US Telecom segment, Carrier Services revenue includes services provided under the FirstNet Transaction, wholesale roaming revenues, the provision of network switching services, tower lease revenue and other services provided to other carriers.
Carrier Services revenue increased by $1.2 million, or 3.5%, to $35.8 million from $34.6 million for the three months ended September 30, 2023 and 2022, respectively. The increase, within our segments, consisted of the following:
Within our International Telecom segment, Carrier Services revenue may continue to increase if international travel continues to increase. However, within our International Telecom segment, Carrier Services revenue from our international long distance business in Guyana may decrease as consumers seek to use alternative technology services to place long-distance calls.
Within our US Telecom segment, Carrier Services revenue may increase as a result of recent carrier service management contracts and expected growth in offered services.
Other Communications Services Revenue. Other Communications Services revenue includes miscellaneous services that the operations within our International Telecom segment provide to retail subscribers. Other Communications Services revenue increased to $1.8 million from $0.3 million for the three months ended September 30, 2023 and 2022, respectively, as a result of certain project-related revenue being recognized during the three months ended September 30, 2023.
We expect that other communications services revenue will decline to previously reported levels as the project-related revenue, reported during the three months ended September 30, 2023, is not expected to continue.
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Construction Revenue
Construction revenue represents revenue generated within our US Telecom segment for the construction of network cell sites related to the FirstNet Agreement. During the three months ended September 30, 2023 and 2022, Construction revenue decreased to $2.0 million from $3.3 million, respectively, as a result of a decrease in the number of sites completed during 2023 as compared to 2022. We expect to substantially complete the build by the end of 2024 with the remainder to be completed in early 2025.
Other Revenue
Managed Services Revenue. Managed Services revenue is generated within both our International and US Telecom segments and includes network, application, infrastructure, and hosting services. Managed Services revenue decreased by $0.5 million, or 10.2%, to $4.4 million from $4.9 million for the three months ended September 30, 2023 and 2022, respectively.
International Telecom. Managed Services revenue in our International Telecom segment remained consistent at $1.4 million for the three months ended September 30, 2023 and 2022.
US Telecom. Within our US Telecom segment, Managed Services revenue decreased $0.5 million, or 14.3%, to $3.0 million from $3.5 million for the three months ended September 30, 2023 and 2022, respectively.
Managed Services revenue may increase in both our US and International Telecom segments as a result of our continued effort to sell certain Managed Services solutions to both our consumer and business customers in all of our markets.
Operating Expenses
Cost of communication services and other. Cost of communication services and other are charges that we incur for voice and data transport circuits (in particular, the circuits between our Mobility sites and our switches), internet capacity, video programming costs, access fees we pay to terminate our calls, telecommunication spectrum fees and direct costs associated within our managed services businesses. These costs also include expenses associated with developing, operating, upgrading and supporting our telecommunications networks, including the salaries and benefits paid to employees directly involved in the development and operation of those businesses, as well as credit loss allowances and the cost of handsets and customer resale equipment incurred by our retail businesses.
Cost of communication services and other increased by $1.5 million, or 1.9%, to $80.4 million from $78.9 million for the three months ended September 30, 2023 and 2022, respectively. The increase in cost of communication services and other, within our segments, consisted of the following:
Cost of communication services in both our International and US Telecom segments may increase in connection with our expected increase in fixed revenue and as a result of continued inflationary pressure.
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Cost of construction revenue. Cost of construction revenue includes the expenses incurred in connection with the construction of and the delivery to AT&T of cell sites in accordance with our FirstNet Agreement. During the three months ended September 30, 2023 and 2022, cost of construction revenue decreased to $2.0 million from $3.3 million as a result of a decrease in the number of sites completed during 2023 as compared to 2022. We expect to substantially complete the build by the end of 2024 with the remainder to be completed in early 2025.
Selling, general and administrative expenses. Selling, general and administrative expenses include salaries and benefits we pay to sales personnel, customer service expenses and the costs associated with the development and implementation of our promotional and marketing campaigns. Selling, general and administrative expenses also include salaries, benefits and related costs for general corporate functions including executive management, finance and administration, legal and regulatory, facilities, information technology and human resources as well as internal costs associated with our performance of due-diligence and integration related costs associated with acquisition activities.
Selling, general and administrative expenses increased by $4.4 million, or 7.8%, to $60.8 million from $56.4 million for the three months ended September 30, 2023 and 2022, respectively. The net increase in selling, general and administrative expenses, within our segments, consisted of the following:
Selling, general and administrative expenses may increase in our international telecom segment to support our expanded operations. Within the US Telecom segment, we expect an increase in these costs as a result of the Sacred Wind Transaction, our commitments under the Cares Act funding and other network expansions in Alaska and the southwest US. Our Corporate Overhead segment may also experience an increase in these expenses to support our recent acquisitions and expanding operations. In addition, selling, general, and administrative expenses may increase as a result of continued inflationary pressure, issues facing the global supply chain and geopolitical uncertainty.
Stock-based compensation. Stock-based compensation represents a non-cash expense related to the amortization of grants of equity awards to employees and directors.
Stock-based compensation for the three months ended September 30, 2023 and 2022 was $2.0 million and $1.7 million, respectively.
Transaction-related charges. Transaction-related charges include the external costs, such as legal, tax, accounting and consulting fees directly associated with acquisition and disposition-related activities, which are expensed as incurred. Transaction-related charges also include certain internal personnel costs incurred as a result of the completion of an acquisition or disposition. Transaction-related charges do not include employee salary and travel-related expenses, incurred in connection with acquisitions or dispositions or any integration-related costs.
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We incurred a nominal amount and $3.4 million of transaction-related charges during the three months ended September 30, 2023 and 2022, respectively.
Restructuring expenses. In order to reduce our US Telecom’s cost structure to an optimal level needed to support the segment’s operations going forward, we incurred certain network termination and reduction in force costs totaling $1.4 million during the three months ended September 30, 2023.
We expect to incur additional restructuring expenses within our US Telecom segment during the fourth quarter of 2023 but do not anticipate any further restructuring costs in subsequent periods.
Depreciation and amortization expenses. Depreciation and amortization expenses represent the depreciation and amortization charges we record on our property and equipment.
Depreciation and amortization expenses increased by $1.1 million, or 3.3%, to $34.4 million from $33.3 million for the three months ended September 30, 2023 and 2022, respectively. The net increase in depreciation and amortization expenses, within our segments, consisted primarily of the following:
We expect depreciation and amortization expense to increase within our International Telecom and US Telecom segments as we acquire tangible assets to expand or upgrade our telecommunications networks.
Amortization of intangibles from acquisitions. Amortization of intangibles from acquisitions include the amortization of customer relationships and trade names related to our completed acquisitions.
Amortization of intangibles from acquisitions decreased by $0.1 million to $3.1 million from $3.2 million for the three months ended September 30, 2023 and 2022, respectively.
We expect that amortization of intangibles from acquisitions will decrease as such costs continue to amortize.
Loss on disposition of long-lived assets. During the three months ended September 30, 2023, we recorded a loss on the disposition of long-lived assets of $0.2 million within our US Telecom segment.
During the three months ended September 30, 2022, we recorded a $0.5 million loss on the disposal of certain assets, primarily within our Renewable Energy segment, related to the final settlement of the Vibrant Transaction.
Interest income. Interest income represents interest earned on our cash, cash equivalents, restricted cash and short-term investment balances. Interest income was a nominal amount for both the three months ended September 30, 2023 and 2022.
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Interest expense. We incur interest expense on the 2023 CoBank Credit Facility, the Alaska Credit and Term Facilities, the Viya Debt, the One Communications Debt and the Receivables Credit Facility. Interest expense for the three months ended September 30, 2023 also includes interest expense on the Sacred Wind Term Debt and the GTT Credit Facilities (each as defined below). Previously, we also incurred interest expense on the One Communications Debt, which matured on December 22, 2022. In addition, interest expense includes commitment fees, letter of credit fees and the amortization of debt issuance costs.
Interest expense increased to $11.4 million from $5.5 million for the three months ended September 30, 2023 and 2022, respectively, as additional interest expense was incurred as a result an increase in borrowings under our credit facilities, the inclusion of Sacred Wind Term Debt and the GTT Credit Facilities in 2023, and an increase in interest rates on all floating-rate borrowings.
Interest expense may increase in future periods as a result of increased interest rates and borrowings.
Other income (expenses). For the three months ended September 30, 2023, other income (expenses) was $0.2 million of income primarily related to gains from our noncontrolling investments.
For the three months ended September 30, 2022, other income (expenses) was $1.9 million of income primarily related to gains from our noncontrolling investments partially offset by losses on foreign currency transactions.
Income taxes. Our effective tax rate for the three months ended September 30, 2023 and 2022 was 12.7% and 16.9 % respectively.
We recorded an income tax benefit of $0.5 million in relation to a pre-tax loss of $4.3 million for the three months ended September 30, 2023. The effective tax rate for the three months ended September 30, 2023 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which we operate, (ii) net expense related to valuation allowances placed on certain deferred tax assets that are not expected to be realizable based on the weight of positive and negative evidence and (iii) discrete items including $0.7 million expense for interest on unrecognized tax positions.
We recorded an income tax benefit of $0.4 million in relation to a pretax loss of $2.1 million for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2022 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which we operate and (ii) discrete items including $0.9 million of expense for interest on unrecognized tax positions.
Our effective tax rate is based upon estimated income before provision for income taxes for the year, composition of the income in different countries, and adjustments, if any, in the applicable quarterly periods for potential tax consequences, benefits and/or resolutions of tax contingencies. Our consolidated tax rate will continue to be impacted by any transactional or one-time items in the future and the mix of income in any given year generated among the jurisdictions in which we operate. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex applications of tax law and regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgments by management. Accordingly, we could record additional provisions or benefits for US federal, state, and foreign tax matters in future periods as new information becomes available.
Net (income) loss attributable to noncontrolling interests, net of tax. Net loss attributable to noncontrolling interests, net of tax reflected an allocation of $0.1 million of losses and $1.0 million of income generated by our less than wholly owned subsidiaries for the three months ended September 30, 2023 and 2022, respectively. Changes in net income attributable to noncontrolling interests, net of tax, within our segments, consisted of the following:
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Net loss attributable to ATN International, Inc. stockholders. Net loss attributable to ATN International, Inc. stockholders was $3.6 million for the three months ended September 30, 2023 as compared to $2.8 million for the three months ended September 30, 2022.
On a per share basis, net loss was $0.31 per share for the three months ended September 30, 2023 as compared to $0.25 per share for the three months ended September 30, 2022. Such per share amounts were negatively impacted by accrued preferred dividends of $1.3 million and $1.2 million for the three months ended September 30, 2023 and 2022, respectively.
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The following represents selected segment information for the nine months ended September 30, 2023 and 2022 (in thousands):
A comparison of our segment results for the nine months ended September 30, 2023, and 2022 is as follows:
International Telecom. Revenues within our International Telecom segment increased $11.1 million, or 4.2%, to $276.3 million from $265.2 million for the nine months ended September 30, 2023 and 2022, respectively, as a result of improved customer care, marketing strategies and network upgrades and expansions which led to an increase in mobile subscribers and equipment sales as well as fixed subscriber growth including an increase in the number of homes passed by high-speed data solutions which allowed us to migrate many legacy copper customers to more durable fiber services. In addition, we recognized growth in Carrier Services revenue as a result of increased roaming revenues due to an increase in international travel in some of our markets.
Operating expenses within our International Telecom segment increased by $6.8 million, or 3.0%, to $235.1 million from $228.3 million for the nine months ended September 30, 2023 and 2022, respectively. The increase was primarily the result of increases in retail and marketing personnel and program costs to support the expansion of our mobile and broadband customer bases and in certain regulatory fees.
As a result, our International Telecom segment’s operating income increased $4.3 million, or 11.7%, to $41.2 million from $36.9 million for the nine months ended September 30, 2023 and 2022, respectively.
US Telecom. Revenue within our US Telecom segment increased by $18.5 million, or 6.9%, to $287.0 million from $268.5 million for the nine months ended September 30, 2023 and 2022, respectively. Increases in revenue from business customers within our Alaska subsidiary and the impact of the Sacred Wind Transaction were partially offset by a reduction in construction revenue related to the FirstNet Transaction, reduction in roaming revenue due to the restructuring of certain carrier contracts in our western United States operations, and a reduction in our international long-distance service revenues.
Operating expenses within our US Telecom segment increased $18.0 million, or 6.6%, to $290.7 million from $272.7 million for the nine months ended September 30, 2023 and 2022, respectively, as a result of increases in expenses
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being incurred to support the increased revenues within our Alaska operations and the impact of the Sacred Wind Transaction partially offset by the decrease in FirstNet construction costs as fewer sites were completed in 2023 as compared to 2022 and a reduction in costs related to our wholesale long-distance business as a result of its decrease in revenues.
As a result of the above, our US Telecom segment’s operating loss decreased by $0.5 million, or 11.9%, to a loss of $3.7 million from a loss of $4.2 million for the nine months ended September 30, 2023 and 2022, respectively.
The following represents a year over year discussion and analysis of our results of operations for the nine months ended September 30, 2023 and 2022 (in thousands):
Nine Months Ended
35,169
6.9
(4,967)
(57.7)
(682)
(5.3)
29,520
5.5
7,304
(5,005)
(57.9)
16,176
9.6
777
13.6
(3,885)
(88.7)
6,570
6.5
(230)
(2.4)
(3,466)
(89.4)
22,881
4.3
Income (loss) from operations
6,639
202.9
321
782.9
(17,593)
134.2
(756)
(22.4)
Other expense, net
(18,028)
186.1
INCOME (LOSS) BEFORE INCOME TAXES
(11,389)
177.5
(4,991)
362.2
NET INCOME (LOSS)
(6,398)
127.0
1,951
249.5
NET INCOME (LOSS) ATTRIBUTABLE TO ATN INTERNATIONAL, INC. STOCKHOLDERS
(4,447)
104.5
Mobility Revenue. Mobility revenue increased by $2.7 million, or 3.3%, to $83.8 million for the nine months ended September 30, 2023 from $81.1 million for the nine months ended September 30, 2022. Of this increase, Mobility revenue from consumer customers increased by $2.8 million, partially offset by a reduction in Mobility revenue from business customers of $0.1million.
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The increase in Mobility revenue, within our segments, consisted of the following:
Fixed Revenue. Fixed revenue increased by $29.8 million, or 9.2%, to $353.9 million from $324.1 million for the nine months ended September 30, 2023 and 2022, respectively. Of this increase, $15.7 million and $14.1 million relate to increases in revenue from business and consumer customers, respectively. The increase in Fixed revenue, within our segments, consisted of the following:
Carrier Services Revenue. Carrier Services revenue increased by $0.9 million, or 0.8%, to $107.0 million from $106.1 million for the nine months ended September 30, 2023 and 2022, respectively. The increase, within our segments, consisted of the following:
Other Communications Services Revenue. Other Communications Services revenue includes miscellaneous services that the operations within our International Telecom segment provide to retail subscribers. Other Communications Services revenue increased to $2.1 million from $1.1 million for the nine months ended September 30, 2023 and 2022, respectively, as a result of certain project-related revenue being recognized during the three months ended September 30, 2023.
During the nine months ended September 30, 2023 and 2022, Construction revenue decreased to $3.6 million from $8.6 million, respectively, as a result of a decrease in the number of sites completed during 2023 as compared to 2022.
Managed Services Revenue. Managed Services revenue decreased by $0.7 million, or 5.5%, to $12.1 million from $12.8 million for the nine months ended September 30, 2023 and 2022, respectively.
International Telecom. Managed Services revenue in our International Telecom segment increased by $0.1, or 2.6%, to $3.9 million from $3.8 million for the nine months ended September 30, 2023 and 2022, respectively.
US Telecom. Within our US Telecom segment, Managed Services revenue decreased $0.8 million, or 8.9%, to $8.2 million from $9.0 million for the nine months ended September 30, 2023 and 2022, respectively.
Cost of communication services and other. Cost of communication services and other increased by $7.3 million, or 3.2%, to $237.1 million from $229.8 million for the nine months ended September 30, 2023 and 2022, respectively. The net increase in cost of communication services and other, within our segments, consisted of the following:
Cost of construction revenue. During the nine months ended September 30, 2023 and 2022, cost of construction revenue decreased to $3.6 million from $8.6 million as a result of a decrease in the number of sites completed during 2023 as compared to 2022.
Selling, general and administrative expenses. Selling, general and administrative expenses increased by $16.2 million, or 9.6%, to $184.1 million from $167.9 million for the nine months ended September 30, 2023 and 2022, respectively. The net increase in selling, general and administrative expenses, within our segments, consisted of the following:
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Stock-based compensation. Stock-based compensation for the nine months ended September 30, 2023 and 2022 was $6.5 million and $5.7 million, respectively.
Transaction-related charges. We incurred $0.5 million and $4.4 million of transaction-related charges during the nine months ended September 30, 2023 and 2022, respectively.
Restructuring expenses. In order to reduce our US Telecom’s cost structure to an optimal level needed to support the segment’s operations going forward, we incurred certain network termination and reduction in force costs totaling $4.6 million during the nine months ended September 30, 2023.
Depreciation and amortization expenses. Depreciation and amortization expenses increased by $6.6 million, or 6.6%, to $107.0 million from $100.4 million for the nine months ended September 30, 2023 and 2022, respectively. The net increase in depreciation and amortization expenses, within our segments, consisted primarily of the following:
Amortization of intangibles from acquisitions. Amortization of intangibles from acquisitions decreased by $0.2 million to $9.5 million from $9.7 million for the nine months ended September 30, 2023 and 2022, respectively.
Loss on disposition of long-lived assets. During the nine months ended September 30, 2023, we recorded a loss on the disposition of long-lived assets of $0.4 million within our US Telecom segment.
During the nine months ended September 30, 2022, we recorded a loss on the disposition of long-lived assets of $3.9 million. Of this amount, $2.1 million was incurred in our US Telecom segment relating to the disposal of certain assets while $1.0 million was incurred in our International Telecom segment as a result of the modification of agreements for the use of other certain assets while the remaining amount pertains to the final settlement of the Vibrant Transaction within our Renewable Energy segment.
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Interest income. Interest income was a nominal amount for both the nine months ended September 30, 2023 and 2022.
Interest expense. Interest expense increased to $30.7 million from $13.1 million for the nine months ended September 30, 2023 and 2022, respectively, as additional interest expense was incurred as a result an increase in borrowings under our credit facilities, the inclusion of Sacred Wind Term Debt and the GTT Credit Facilities in 2023, as well as an increase in interest rates on all floating-rate borrowings.
Other income. For the nine months ended September 30, 2023, other income was $2.6 million of income primarily related to gains from our noncontrolling investments.
For the nine months ended September 30, 2022, other income was $3.4 million of income primarily related to gains from our noncontrolling investments partially offset by increased expense associated with certain employee benefit plans and losses on foreign currency transactions.
Income taxes. Our effective tax rate for the nine months ended September 30, 2023 and 2022 was 35.8% and 21.5%, respectively.
We recorded an income tax benefit of $6.4 million in relation to a pretax loss of $17.8 million for the nine months ended September 30, 2023. The effective tax rate for the nine months ended September 30, 2023 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which we operate, (ii) net expense related to valuation allowances placed on certain deferred tax assets that are not expected to be realizable based on the weight of positive and negative evidence and (iii) discrete items including a $4.0 million benefit from the reversal of an unrecognized tax position due to a statute of limitations expiration, and a $2.0 million expense for interest on unrecognized tax positions.
We recorded an income tax benefit of $1.4 million in relation to a pretax loss of $6.4 million for the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2022 was primarily impacted by the following items (i) the mix of income generated among the jurisdictions in which we operate, (ii) a $2.1 million net expense recognized discretely to record a valuation allowance on certain deferred tax assets that are not expected to be realizable based on the weight of positive and negative evidence and (iii) discrete items including a $3.3 million benefit from the reversal of an unrecognized tax position due to a statute of limitations expiration, and a $1.7 million expense for interest on unrecognized tax positions.
Net loss (income) attributable to noncontrolling interests, net of tax. Net loss attributable to noncontrolling interests, net of tax reflected an allocation of losses of $2.7 million and $0.8 million generated by our less than wholly owned subsidiaries for the nine months ended September 30, 2023 and 2022, respectively. Changes in net loss attributable to noncontrolling interests, net of tax, within our segments, consisted of the following:
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Net loss attributable to ATN International, Inc. stockholders. Net loss attributable to ATN International, Inc. stockholders was $8.7 million for the nine months ended September 30, 2023 as compared to $4.3 million for the nine months ended September 30, 2022.
On a per diluted share basis, net loss was a loss of $0.80 per diluted share for the nine months ended September 30, 2023 as compared to a loss of $0.49 per diluted share for the nine months ended September 30, 2022. Such per share amounts were negatively impacted by accrued preferred dividends of $3.6 million and $3.5 million for the nine months ended September 30, 2023 and 2022, respectively.
Regulatory and Tax Issues
We are involved in several regulatory and tax proceedings. A material and adverse outcome in one or more of these proceedings could have a material adverse impact on our financial condition and future operations. For a discussion of ongoing proceedings, see Note 14 of the Consolidated Financial Statements in this Report.
Liquidity and Capital Resources
Historically, we have met our operational liquidity needs and have funded our capital expenditures and acquisitions through a combination of cash-on-hand, internally generated funds, proceeds from dispositions, borrowings under our credit facilities and seller financings. We believe our current cash, cash equivalents, short term investments and availability under our current credit facilities will be sufficient to meet our cash needs for at least the next twelve months for working capital needs and capital expenditures.
Total liquidity. As of September 30, 2023, we had approximately $73.1 million in cash, cash equivalents, and restricted cash as well as $146.9 million available under our 2023 CoBank Revolving Loan. Of the $73.1 million in cash, cash equivalents and restricted cash, $32.4 million was held by our foreign subsidiaries and is indefinitely invested outside the United States. In addition, we had approximately $498.4 million of debt, net of unamortized deferred financing costs, as of September 30, 2023. How and when we deploy our balance sheet capacity will figure prominently in our longer-term growth prospects and stockholder returns.
Uses of Cash
Acquisitions and investments. We have historically funded our acquisitions with a combination of cash-on-hand, borrowings under our credit facilities as well as equity investor and seller financings.
Sacred Wind Transaction. On November 7, 2022, we assumed $31.6 million of debt in connection with the Sacred Wind Transaction. See Acquisition of Sacred Wind Enterprises.
We continue to explore opportunities to expand our telecommunications business or acquire new businesses in the United States, the Caribbean and elsewhere. Such acquisitions may require external financing. While there can be no assurance as to whether, when or on what terms we will be able to acquire any such businesses or make such investments, such acquisitions may be completed through the issuance of shares of our capital stock, payment of cash or incurrence of additional debt. From time to time, we may raise capital ahead of any definitive use of proceeds to allow us to move more quickly and opportunistically if an attractive investment materializes.
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Cash used in investing activities. Cash used in investing activities was $124.6 million and $94.6 million for the nine months ended September 30, 2023 and 2022, respectively. The net increase in cash used for investing activities of $30.0 million was primarily the result of an increase in capital expenditures of $26.9 million, which includes an increase in reimbursable capital expenditures under certain government programs of $10.2 million. Partially offsetting these cash usages was an increase of $13.4 million in government grants received for capital projects. In addition, cash used in investing activities for the nine months ended September 30, 2022 includes $15.7 million in proceeds from the sale of a strategic investment.
Cash provided by financing activities. Cash provided by financing activities increased by $35.7 million to $48.5 million from $12.8 million for the three months ended September 30, 2023 and 2022, respectively. This increase was primarily related to an increase in borrowings, net of repayments, under our credit facilities of $56.3 million and a $3.8 million reduction in cash used to repurchase non-controlling interests in certain less than wholly-owned subsidiaries. These increases in cash provided by financing activities were partially offset by an increase in share repurchases of $10.7 million, a reduction in borrowings, net of repayments, under our customer receivable credit facility of $9.4 million, cash paid for debt issuance costs of $3.7 million and a $1.9 million increase in dividends paid on our common stock.
Working Capital. Historically, we have internally funded our working capital needs. Pursuant to the FirstNet Agreement, AT&T has the option to repay construction costs, with interest, over an eight-year period. To fund the working capital needs created by AT&T’s option to extend its payment terms, we completed the Receivables Credit Facility, as discussed below, on March 26, 2020.
Capital expenditures. Historically, a significant use of our cash has been for capital expenditures to expand and upgrade our telecommunications networks and business support systems.
For the nine months ended September 30, 2023 and 2022, we spent approximately $140.9 million and $114.0 million, respectively, on capital expenditures relating to our telecommunications networks and business support systems of which $14.3 million and $4.0 million, respectively, are reimbursable under various government programs. The following notes our capital expenditures, by operating segment, for these periods (in thousands):
We are continuing to invest in our telecommunication networks along with our operating and business support systems in many of our markets. For the year ended December 31, 2023, such investments are expected to total approximately $160 million to $170 million, net of reimbursable amounts, and will primarily relate to network expansion and upgrades which are expected to further drive subscriber and revenue growth in future periods.
Income taxes. We have historically used cash-on-hand to make payments for income taxes. Our policy is to allocate capital where we believe we will get the best returns and to date has been to indefinitely reinvest the undistributed earnings of our foreign subsidiaries. As we continue to reinvest our remaining foreign earnings, no additional provision for income taxes has been made on the accumulated earnings of foreign subsidiaries.
Dividends. For the nine months ended September 30, 2023, our Board of Directors declared $9.9 million of dividends to our stockholders which includes a $0.21 per share dividend declared on September 14, 2023 and paid on October 6, 2023. We have declared quarterly dividends since the fourth quarter of 1998.
Stock Repurchase Plan. On September 19, 2016, our Board of Directors authorized the repurchase of up to $50.0 million of our common stock from time to time on the open market or in privately negotiated transactions (the “2016 Repurchase Plan”). We repurchased $11.7 million and $0.9 million of our common stock under the 2016 Repurchase Plan during the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had $7.8 million authorized and available for share repurchases under the 2016 Repurchase Plan.
Sources of Cash
Cash provided by operations. Cash provided by operating activities was $89.5 million for the nine months ended September 30, 2023 as compared to $79.0 million for the nine months ended September 30, 2022. The increase of $10.5 million was primarily related to an increase in cash provided by operating assets and liabilities, primarily prepayments of expenses and other current assets of $16.8 million partially offset by a decrease in net income of $6.4 million.
On July 13, 2023, we, along with certain of our subsidiaries as guarantors, entered into a new Credit Agreement with CoBank, ACB and a syndicate of other lenders (as may be amended from time to time, the “2023 CoBank Credit Facility”).
The 2023 CoBank Credit Facility provides for a five-year $170 million revolving credit facility (the “2023 CoBank Revolving Loan”) and a six-year $130 million term loan facility (the “2023 CoBank Term Loan”). The Company may use (i) up to $25 million under the 2023 CoBank Credit Facility for letters of credit, and (ii) up to $20 million under a swingline sub-facility. Upon the closing of the 2023 CoBank Credit Facility, we drew all of the 2023 CoBank Term Loan and approximately $13.6 million of the 2023 CoBank Revolving Loan. These borrowings were used to repay $139.5 million of debt outstanding under the 2019 CoBank Credit Facility at close.
Amounts borrowed under the 2023 CoBank Credit Facility bear interest at a rate equal to, at our option, either (i) the secured overnight financing rate as administered by the Federal Reserve Bank of New York (SOFR) plus an applicable margin ranging between 2.00% to 3.75% for the 2023 CoBank Term Loan or 1.75% to 3.50% for Revolving Loans or (ii) a base rate plus an applicable margin ranging from 1.00% to 2.75% for the Term Loan or 0.75% to 2.50% for the 2023 CoBank Revolving Loans. Swingline loans will bear interest at the base rate plus the applicable margin for base rate loans. The base rate is equal to the higher of (i) 1.00% plus the one-month SOFR rate (ii) the federal funds effective rate (as defined in the 2023 CoBank Credit Agreement) plus 0.50% per annum; and (iii) the prime rate (as defined in the 2023 CoBank Credit Agreement). The applicable margin is determined based on the ratio (as further defined in the 2023 CoBank Credit Agreement) of our indebtedness to EBITDA. Under the terms of the 2023 CoBank Credit Agreement, the Company must also pay a fee ranging from 0.25% to 0.50% on the average daily unused portion of the 2023 CoBank Credit Facility over each calendar quarter.
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We capitalized $4.0 million of fees associated with the 2023 CoBank Credit Facility which are being amortized over the life of the debt and $3.8 million were unamortized as of September 30, 2023.
We had $130.0 million outstanding under the 2023 CoBank Term Loan as of September 30, 2023. Under the 2023 CoBank Revolving Loan, we had $23.1 million outstanding and $146.9 million of availability as of September 30, 2023. There were no outstanding interest rate hedge agreements under the 2023 CoBank Credit Facility as of September 30, 2023 and we were in compliance with all financial covenants as of that date.
In October 2023, we entered a two year, forward starting 1-month floating to fixed SOFR interest rate swap agreement. The swap becomes effective on November 13, 2023 in a notional amount of $50.0 million, has a fixed SOFR rate of 4.896% and matures on November 13, 2025.
On April 10, 2019, we entered into a credit facility, with CoBank, ACB and a syndicate of other lenders (as amended, the “2019 CoBank Credit Facility”). The 2019 CoBank Credit Facility provided for a $200 million revolving credit facility that included (i) up to $75 million for standby or trade letters of credit and (ii) up to $10 million under a swingline sub-facility. In connection with the execution of the 2023 CoBank Credit Facility, as defined below, outstanding borrowings under the 2019 CoBank Credit Facility were repaid in full.
Amounts borrowed under the 2019 CoBank Credit Facility bore interest at a rate equal to, at our option, either (i) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin ranging between 1.25% to 2.25% or (ii) a base rate plus an applicable margin ranging from 0.25% to 1.25%. Swingline loans bore interest at the base rate plus the applicable margin for base rate loans. The base rate was equal to the higher of (i) 1.00% plus the higher of (x) LIBOR for an interest period of one month and (y) LIBOR for an interest period of one week; (ii) the Federal Funds Effective Rate (as defined in the 2019 CoBank Credit Facility) plus 0.50% per annum; and (iii) the Prime Rate (as defined in the 2019 CoBank Credit Facility). The applicable margin was determined based on the Total Net Leverage Ratio (as defined in the 2019 CoBank Credit Facility). Under the terms of the 2019 CoBank Credit Facility, we also paid a commitment fee ranging from 0.150% to 0.375% of the average daily unused portion of the 2019 CoBank Credit Facility over each calendar quarter.
On November 14, 2022, we entered into a General Agreement of Indemnity to issue performance Standby Letters of Credit on behalf of us and our subsidiaries. As of September 30, 2023, $31.6 million of Standby Letters of Credit had been issued under this agreement.
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On December 23, 2022, Alaska Communications entered into a First Amendment Agreement (the “ACS Amendment’). The ACS Amendment amends the Alaska Credit Facility to increase its Revolving Credit Commitment from $35.0 million to $75.0 million and Term Loan Commitment from $210.0 million to $230.0 million. As a part of the transaction, the Term Loan commitment was fully funded as the outstanding Revolving Credit Commitment balance was transferred.
We capitalized $7.3 million of fees associated with the Alaska Credit Facility which are being amortized over the life of the debt and $4.2 million were unamortized as of September 30, 2023.
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As of September 30, 2023, we had $6.4 million outstanding and no available borrowings under the Alaska Term Facility.
On March 26, 2020, Commnet Finance, a wholly owned subsidiary of Commnet Wireless, entered into a receivables credit facility with us, Commnet Wireless, and CoBank, ACB (the “Receivables Credit Facility”).
Interest on the loans accrues at a fixed annual interest rate to be quoted by CoBank.
As of September 30, 2023, we had $45.3 million outstanding, of which $6.7 million was current, and $18.0 million of availability under the Receivables Credit Facility. We capitalized $0.8 million in fees associated with the Receivables Credit Facility which are being amortized over the life of the debt and $0.5 million were unamortized as of September 30, 2023.
In connection with the Sacred Wind acquisition completed on November 7, 2022, we assumed $31.6 million of term debt (the “Sacred Wind Term Debt”) with the United States of America acting through the Administrator of the Rural Utilities Service (“RUS”). The loan agreements are dated as of October 23, 2006 and March 17, 2016. RUS provides financial assistance in the form of loans under the Rural Electrification Act of 1936 to furnish or improve telecommunications and/or broadband services in rural areas.
The Sacred Wind Term Debt contains certain restrictions on the declaration or payment of dividends, redemption of capital stock or investment in affiliated companies without the consent by the RUS noteholders. The agreements also contain a financial covenant which Sacred Wind was not in compliance with as of December 31, 2021. Sacred Wind submitted a corrective action plan to comply with the financial covenant as of December 31, 2025. On May 5, 2022, Sacred Wind’s corrective action plan was accepted by the RUS. As of September 30, 2023, we were in compliance with that corrective action plan.
The mortgage notes carry fixed interest rates ranging from 0.88% to 5.0%
We, and certain of our subsidiaries, have entered into a $60.0 million loan agreement (the “Viya Debt”) with Rural Telephone Finance Cooperative (“RTFC”). The Viya Debt agreement contains customary representations, warranties, and affirmative and negative covenants (including limitations on additional debt, guaranties, sale of assets and liens) and a financial covenant that limits the maximum ratio of indebtedness to annual operating cash flow to 3.5 to 1.0 (the “Net Leverage Ratio”). This covenant is tested on an annual basis at the end of each fiscal year. Interest is paid quarterly at a fixed rate of 4.0% per annum and principal repayment is not required until maturity on July 1, 2026. Prepayment of the Viya Debt may be subject to a fee under certain circumstances. The debt is secured by certain assets of our Viya subsidiaries and is guaranteed by us.
We paid a fee of $0.9 million in 2016 to lock the interest rate at 4% per annum over the term of the Viya Debt. The fee was recorded as a reduction to the Viya Debt carrying amount and is being amortized over the life of the loan.
On May 5, 2022, RTFC agreed to amend the Net Leverage Ratio to 7.0 to 1.0 through the maturity date of July 1, 2026. The Ratio is tested annually, and we were in compliance with the Net Leverage Ratio as of December 31, 2022.
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We had an outstanding loan from HSBC Bank Bermuda Limited (the “One Communications Debt”) which matured and was repaid in full on December 22, 2022. This loan bore interest at the one-month LIBOR plus a margin ranging between 2.5% to 2.75% per annum paid quarterly.
Debt Maturities
The table below summarizes the annual maturities of all of our debt facilities:
Factors Affecting Sources of Liquidity
Internally generated funds. The key factors affecting our internally generated funds are demand for our services, competition, regulatory developments, economic conditions in the markets where we operate our businesses and industry trends within the telecommunications industry.
Restrictions under Credit Facility. Our 2023 CoBank Credit Facility contains customary representations, warranties and covenants, including covenants limiting additional indebtedness, liens, guaranties, mergers and consolidations, substantial asset sales, investments and loans, sale and leasebacks, transactions with affiliates and fundamental changes.
Capital markets. Our ability to raise funds in the capital markets depends on, among other things, general economic conditions, the conditions of the telecommunications industry, our financial performance, the state of the capital markets and our compliance with SEC requirements for the offering of securities. On August 9, 2022 we filed a new “universal” shelf registration statement with the SEC, to register potential future offerings of our securities.
Foreign Currency
We translate the assets and liabilities of our foreign subsidiaries from their respective functional currencies, primarily the Guyana Dollar, to US Dollars at the appropriate rates as of the balance sheet date. Changes in the carrying value of these assets and liabilities attributable to fluctuations in rates are recognized in foreign currency translation adjustment, a component of accumulated other comprehensive income on our balance sheet. Income statement accounts are translated using the monthly average exchange rates during the year. Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s functional currency must first be remeasured from the applicable currency to the legal entity’s functional currency. The effect of this remeasurement process is reported in other income within our income statement. During the three months ended September 30, 2023 and 2022, we recorded $0.3 million
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and $0.2 million, respectively, of losses on foreign currency transactions. During the nine months ended September 30, 2023 and 2022, we recorded $0.9 million and $0.7 million, respectively, of losses on foreign currency transactions. We will continue to assess the impact of our exposure to the Guyana Dollar.
Inflation
Several of our markets have experienced an increase in operating costs, some of which we believe, is attributable to inflation. If inflation continues or worsens, it could negatively impact our Company by increasing our operating expenses. Inflation may lead to cost increases in multiple areas across our business, for example, rises in the prices of raw materials and manufactured goods, increased energy rates, as well as increased wage pressures and other expenses related to our employees. In particular, where we have agreed to undertake infrastructure build outs on a fixed budget for our carrier customers or by accepting government grants, inflation may result in build costs that exceed our original budget given the ongoing challenges experienced in procuring equipment and material due to global supply chain uncertainties. To the extent that we are unable to pass on these costs through increased prices, revised budget estimates, or offset them in other ways, they may impact our financial condition and cash flows.
Recent Accounting Pronouncements
None.
Critical Accounting Estimates
There were no changes to critical accounting estimates from those disclosed in “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” of our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Translation and Remeasurement. We translate the assets and liabilities of our foreign subsidiaries from their respective functional currencies, primarily the Guyana Dollar, to US Dollars at the appropriate rates as of the balance sheet date. Changes in the carrying value of these assets and liabilities attributable to fluctuations in rates are recognized in foreign currency translation adjustment, a component of accumulated other comprehensive income on our balance sheet. Income statement accounts are translated using the monthly average exchange rates during the year.
Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s functional currency must first be remeasured from the applicable currency to the legal entity’s functional currency. The effect of this remeasurement process is reported in other income on our income statement.
Employee Benefit Plans. We sponsor pension and other postretirement benefit plans for employees of certain subsidiaries. Net periodic pension expense is recognized in our income statement. We recognize a pension or other postretirement plan’s funded status as either an asset or liability in our consolidated balance sheet. Actuarial gains and losses are reported as a component of other comprehensive income and amortized through other income in subsequent periods.
Interest Rate Sensitivity. As of September 30, 2023, we had $281.6 million of variable rate debt outstanding, which is subject to fluctuations in interest rates. Our interest expense may be affected by changes in interest rates. We believe that a 100-basis-point change in the interest rates on our variable rate debt would result in a $2.8 million change in our annual interest expense. We may have additional exposure to fluctuations in interest rates if we again borrow amounts under our revolver loans within our credit facilities.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
See Note 14 to the Unaudited Condensed Consolidated Financial Statements included in this Report.
Item 1A. Risk Factors
In addition to the other information set forth in this Report, you should carefully consider the factors discussed under Part I, Item 1A “Risk Factors” of our 2022 Annual Report on Form 10-K. The risks described herein and in our 2022 Annual Report on Form 10-K, as amended, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities
Purchases of Equity Securities by the Issuer
On September 19, 2016, our Board of Directors authorized the repurchase of up to $50.0 million of our common stock from time to time on the open market or in privately negotiated transactions (the “2016 Repurchase Plan”). We have $7.8 million available to be repurchased under that plan as of September 30, 2023.
The following table reflects the repurchases by us of our common stock during the quarter ended September 30, 2023:
(d)
Maximum
Number (or
(c)
Approximate
(b)
Total Number of
Dollar Value) of
(a)
Average
Shares Purchased
Shares that May
Total Number
Price
as Part of Publicly
be Purchased
of Shares
Paid per
Announced Plans
Under the Plans or
Period
Purchased
Share
or Programs
Programs
July 1, 2023 — July 31, 2023
56,962
35.58
10,596,728
August 1, 2023 — August 31, 2023
9,256
35.98
8,212
10,303,756
September 1, 2023 — September 30, 2023
75,705
33.45
7,771,292
Item 5. Other Information
Rule 10b5-1 Trading Arrangements
While the Company does allow for its officers and directors to enter into trading arrangements intended to satisfy the affirmative defense conditions of Rule 10b5-1 with the Company’s prior approval, during the quarter ended September 30, 2023, none of the Company's directors or officers informed the Company of the adoption or termination of a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as those terms are defined in Regulation S-K, Item 408.
Item 6. Exhibits:
10.1
Credit Agreement, dated as of July 13, 2023 , among, ATN International, Inc., as Borrower, CoBank, ACB, as Administrative Agent, Fifth Third Bank, N.A., MUFG Bank, Ltd. and the Guarantors party thereto, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K (file No. 001-12593) filed on July 17, 2023.
31.1*
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certification of Chief Executive Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**
Certification of Chief Financial Officer pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data file (formatted as Inline XBRL and embedded within Exhibit 101).
* Filed herewith.
** The certifications furnished in Exhibit 32.1 and Exhibit 32.2 hereto are deemed to accompany this Report and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates them by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ATN International, Inc.
Date: November 8, 2023
/s/ Michael T. Prior
Michael T. Prior
President and Chief Executive Officer
/s/ Justin D. Benincasa
Justin D. Benincasa
Chief Financial Officer