ALTICE USA, INC. All dollar amounts and customer metrics, except per customer and per share data, included in the following discussion, are presented in thousands. The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses. For a complete discussion of the accounting judgments and estimates that we have identified as critical in the preparation of our consolidated financial statements, please refer to our Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Overview Our Business We principally provide broadband communications and video services inthe United States and market our services primarily under two brands: Optimum, in theNew York metropolitan area, andSuddenlink , principally in markets in the south-centralUnited States . We deliver broadband, video, and telephony services to approximately 5.0 million residential and business customers. Our footprint extends across 21 states through a fiber-rich broadband network with approximately 9.0 million homes passed as ofSeptember 30, 2020 . Additionally, we offer news programming and content, and advertising services. InSeptember 2019 , the Company launched Altice Mobile, a full service mobile offering, to consumers across its footprint. Key Factors Impacting Operating Results and Financial Condition Our future performance is dependent, to a large extent, on the impact of direct competition, general economic conditions (including capital and credit market conditions), our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers. For more information, see "Risk Factors" and "Business-Competition" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . InMarch 2020 ,the United States declared a national emergency concerning the outbreak of the coronavirus ("COVID-19"). There have also been extraordinary and wide-ranging actions taken by federal, state and local governmental authorities to contain and combat the outbreak and spread of the virus. We have continued to provide our telecommunications services to our customers during this pandemic. We expect that our future results may be impacted, including if residential or business customers discontinue their service or are unable to pay for our products and services, or if advertising revenue continues to decline. Additionally, in order to prioritize the demands of the business, we may continue to delay certain capital investments. Due to the uncertainty surrounding the magnitude and duration of business and economic impacts relating to COVID-19, including the effort to contain and combat the spread of the virus, and business impacts of government actions, we currently cannot reasonably estimate the ultimate impact of COVID-19 on our business. See "Risk Factors - Our business, financial condition and results of operations may be adversely affected by the recent COVID-19 pandemic." We derive revenue principally through monthly charges to residential customers of our broadband, video, and telephony services. We also derive revenue from digital video recorder ("DVR"), video-on-demand ("VOD"), pay-per-view, installation and home shopping commissions. Our residential broadband, video, and telephony services accounted for approximately 37%, 38%, and 5%, respectively, of our consolidated revenue for the nine months endedSeptember 30, 2020 . We also derive revenue from the sale of a wide and growing variety of products and services to both large enterprise and SMB customers, including broadband, telephony, networking and video services. For the nine months endedSeptember 30, 2020 , 15% of our consolidated revenue was derived from these business services. In addition, we derive revenues from the sale of advertising time available on the programming carried on our cable television systems, digital advertising and data analytics, and affiliation fees for news programming, which accounted for approximately 4% of our consolidated revenue for the nine months endedSeptember 30, 2020 . Our mobile and other revenue for the nine months endedSeptember 30, 2020 accounted for approximately 1% of our consolidated revenue. Revenue is impacted by rate increases, changes in the number of customers to our services, including additional services sold to our existing customers, programming package changes by our video customers, speed tier changes by our broadband customers, and acquisitions and construction of cable systems that result in the addition of new customers. Our ability to increase the number of customers to our services is significantly related to our penetration rates. 45 -------------------------------------------------------------------------------- We operate in a highly competitive consumer-driven industry and we compete against a variety of broadband, video and telephony providers and delivery systems, including broadband communications companies, wireless data and telephony providers, satellite-delivered video signals, Internet-delivered video content and broadcast television signals available to residential and business customers in our service areas. Our competitors include AT&T and its DirecTV subsidiary, CenturyLink, DISH, Frontier and Verizon. Consumers' selection of an alternate source of service, whether due to economic constraints, technological advances or preference, negatively impacts the demand for our services. For more information on our competitive landscape, see "Risk Factors" and "Business-Competition" included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Our programming costs, which are the most significant component of our operating expenses, have increased and are expected to continue to increase primarily as a result of contractual rate increases. See "Results of Operations" below for more information regarding our key factors impacting our revenues and operating expenses. Historically, we have made substantial investments in our network and the development of new and innovative products and other service offerings for our customers as a way of differentiating ourselves from our competitors and may continue to do so in the future. We are constructing a FTTH network, which will ultimately enable us to deliver more than 10 Gbps symmetric broadband speeds in areas where FTTH is deployed. In addition, we launched Altice Mobile to consumers across our footprint inSeptember 2019 . We may incur greater than anticipated capital expenditures in connection with these initiatives, fail to realize anticipated benefits, experience delays and business disruptions or encounter other challenges to executing them as planned. See "Liquidity and Capital Resources" for additional information regarding our capital expenditures. Certain Transactions The following transactions occurred during the periods covered by this Management's Discussion and Analysis of Financial Condition and Results of Operations: OnJuly 14, 2020 , the Company completed its acquisition of certain cable assets inNew Jersey and the operating results of the acquired business were consolidated as of the acquisition date. InJune 2019 , the Company completed the acquisition ofCheddar Inc. , a digital-first news company and the operating results of Cheddar were consolidated as ofJune 1, 2019 . Non-GAAP Financial Measures We define Adjusted EBITDA, which is a non-GAAP financial measure, as net income (loss) excluding income taxes, non-operating income or expenses, loss on extinguishment of debt and write-off of deferred financing costs, gain (loss) on interest rate swap contracts, gain (loss) on derivative contracts, gain (loss) on investments and sale of affiliate interests, interest expense, interest income, depreciation and amortization (including impairments), share-based compensation expense or benefit, restructuring expense or credits and transaction expenses. We believe Adjusted EBITDA is an appropriate measure for evaluating the operating performance of the Company. Adjusted EBITDA and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in our industry. Internally, we use revenue and Adjusted EBITDA measures as important indicators of our business performance and evaluate management's effectiveness with specific reference to these indicators. We believe Adjusted EBITDA provides management and investors a useful measure for period-to-period comparisons of our core business and operating results by excluding items that are not comparable across reporting periods or that do not otherwise relate to the Company's ongoing operating results. Adjusted EBITDA should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), and other measures of performance presented in accordance with GAAP. Since Adjusted EBITDA is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies. We also use Operating Free Cash Flow (defined as Adjusted EBITDA less cash capital expenditures), and Free Cash Flow (defined as net cash flows from operating activities less cash capital expenditures) as indicators of the Company's financial performance. We believe these measures are two of several benchmarks used by investors, analysts and peers for comparison of performance in the Company's industry, although they may not be directly comparable to similar measures reported by other companies. 46 --------------------------------------------------------------------------------
Results of Operations -
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Revenue:
Residential:
Broadband $ 941,237 $ 814,328 $ 2,747,129 $ 2,396,151
Video 867,021 993,158 2,766,608 3,028,914
Telephony 115,995 148,231 358,347 452,927
Business services and wholesale 362,215 357,628 1,092,309 1,066,123
News and advertising 124,177 118,067 326,348 327,255
Mobile 19,722 3,174 57,944 3,174
Other 3,619 4,076 10,536 11,766
Total revenue 2,433,986 2,438,662 7,359,221 7,286,310
Operating expenses:
Programming and other direct costs 783,934 820,896 2,509,323 2,452,875
Other operating expenses 558,092 568,233 1,683,038 1,702,124
Restructuring and other expense 40,419 12,381 88,679 39,090
Depreciation and amortization (including
impairments) 502,248 565,637 1,571,611 1,695,685
Operating income 549,293 471,515 1,506,570 1,396,536
Other income (expense):
Interest expense, net (322,454) (387,276) (1,036,880) (1,154,353)
Gain on investments and sale of
affiliate interests, net 314,177 120,253 56,301 478,124
Gain (loss) on derivative contracts, net (261,597) (77,333) 26,203 (303,986)
Loss on interest rate swap contracts,
net (158) (11,163) (88,725) (61,735)
Loss on extinguishment of debt and
write-off of deferred financing costs (250,489) (503) (250,489) (159,599)
Other income (expense), net 1,685 (226) 3,277 66
Income before income taxes 30,457 115,267 216,257 195,053
Income tax expense (33,186) (37,871) (109,047) (56,445)
Net income (loss) (2,729) 77,396 107,210 138,608
Net income attributable to
noncontrolling interests (1,966) (157) (1,499) (1)
Net income (loss) attributable to Altice
USA, Inc. stockholders $ (4,695) $ 77,239 $ 105,711 $ 138,607
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The following is a reconciliation of net income (loss) to Adjusted EBITDA and Operating Free Cash Flow:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net income (loss) $ (2,729) $ 77,396 $ 107,210 $ 138,608
Income tax expense 33,186 37,871 109,047 56,445
Other expense (income), net (1,685) 226 (3,277) (66)
Loss on interest rate swap contracts,
net 158 11,163 88,725 61,735
Loss (gain) on derivative contracts, net 261,597 77,333 (26,203) 303,986
Gain on investments and sales of
affiliate interests, net (314,177) (120,253) (56,301) (478,124)
Loss on extinguishment of debt and
write-off of deferred financing costs 250,489 503 250,489 159,599
Interest expense, net 322,454 387,276 1,036,880 1,154,353
Depreciation and amortization 502,248 565,637 1,571,611 1,695,685
Restructuring and other expense 40,419 12,381 88,679 39,090
Share-based compensation 34,710 18,835 96,974 49,160
Adjusted EBITDA 1,126,670 1,068,368 3,263,834 3,180,471
Capital expenditures (cash) 201,572 375,302 729,377 1,032,555
Operating Free Cash Flow $ 925,098 $ 693,066 $ 2,534,457 $ 2,147,916
The following is a reconciliation of net cash flows from operating activities to
Free Cash Flow:
Three Months Ended Nine Months Ended
September 30, September 30,
2020 2019 2020 2019
Net cash flows from operating
$ 2,188,661 $ 1,833,987 activities Capital expenditures (cash) 201,572 375,302 729,377 1,032,555 Free Cash Flow$ 457,548 $ 165,721 $ 1,459,284 $ 801,432
The following table sets forth certain customer metrics, excluding Altice Mobile customers, for the Company:
September 30, June 30, September 30,
2020 (f) 2020 (f) 2019
Homes passed (a) 8,987.9 8,880.1 8,769.1Total customer relationships (b)(c) 5,040.9 4,997.1
4,922.9
Residential 4,663.5 4,621.4 4,538.6
SMB 377.5 375.7 384.4
Residential customers:
Broadband 4,363.5 4,307.8 4,180.3
Video 3,035.1 3,102.9 3,223.4
Telephony 2,279.5 2,337.1 2,446.6
Penetration of homes passed (d) 56.1 % 56.3 % 56.1 %
ARPU(e) (g) $ 138.16 $ 144.38 $ 143.63
(a)Represents the estimated number of single residence homes, apartments and
condominium units passed by the broadband network in areas serviceable without
further extending the transmission lines. In addition, it includes commercial
establishments that have connected to our broadband network. Broadband services
were not available to approximately 30 thousand homes passed and telephony
services were not available to approximately 500 thousand homes passed.
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(b)Represents number of households/businesses that receive at least one of the
Company's fixed-line services.
(c)Customers represent each customer account (set up and segregated by customer
name and address), weighted equally and counted as one customer, regardless of
size, revenue generated, or number of boxes, units, or outlets. In calculating
the number of customers, we count all customers other than inactive/disconnected
customers. With the exception of free Altice Advantage customers, free accounts
are included in the customer counts along with all active accounts, but they are
limited to a prescribed group. Most of these accounts are also not entirely
free, as they typically generate revenue through pay-per-view or other pay
services and certain equipment fees. Free status is not granted to regular
customers as a promotion. In counting bulk residential customers, such as an
apartment building, we count each subscribing family unit within the building as
one customer, but do not count the master account for the entire building as a
customer. We count a bulk commercial customer, such as a hotel, as one customer,
and do not count individual room units at that hotel.
(d)Represents the number of total customer relationships divided by homes
passed.
(e)Calculated by dividing the average monthly revenue for the respective quarter
(fourth quarter for annual periods) derived from the sale of broadband, video
and telephony services to residential customers for the quarter by the average
number of total residential customers for the same period.
(f)Customer metrics for the 2020 periods include customers that were not
disconnected pursuant to the Keep Americans Connected pledge ("Pledge") through
June 30, 2020 that the Company made in response to the COVID-19 pandemic and
customers that have not been disconnected pursuant to the New Jersey Executive
Order No. 126 ("NJ Order") enacted in April 2020 that protects New Jersey
residents from disconnection of internet and voice services for non-payment.
However, the metrics exclude new customers with students in the household that
were receiving broadband services for free ("Altice Advantage"). The following
table provides details of these COVID-19 related offers and programs:
September 30, 2020 June 30, 2020
Altice Advantage Pledge and NJ Order Altice Advantage
Pledge and NJ Order (i) Customers (ii) Customers
Included (Excluded) Included (Excluded)
Total customer relationships 22.4 (1.4) 18.7 (17.8)
Residential 22.4 (1.4) 18.1 (17.8)
SMB - - 0.6 -
Residential customers:
Broadband 22.1 (1.4) 17.9 (17.8)
Video 2.4 - 8.0 -
Telephony 9.5 - 8.9 -
(i)Represent customers who would have been disconnected as a result of
non-payment under our normal policies, but were not disconnected pursuant to the
NJ Order and customers who were previously protected by the Pledge who were not
disconnected. As of September 30, 2020 , an aggregate of 49.5 thousand customers
(48.7 thousand residential and 0.7 thousand SMB) with past-due account balances
are protected pursuant to the NJ Order or had requested protection pursuant to
the Pledge prior to June 30, 2020 .
(ii)Represent customers who would have been disconnected as a result of
non-payment under our normal policies, but were not disconnected pursuant to the
Pledge and the NJ Order. As of June 30, 2020 , an aggregate of 56.1 thousand
customers (54.8 thousand residential and 1.3 thousand SMB) with past-due account
balances requested protection pursuant to the Pledge or are protected pursuant
to the NJ Order.
(g) ARPU for the September 30, 2020 period reflects a reduction of $5.51 due to
credits that we currently anticipate will be issued to video customers as a
result of credits the Company expects to receive from certain sports programming
networks whereby the minimum number of events were not delivered pursuant to the
contractual agreements with the networks and related franchise fees.
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Altice USA - Comparison of Results for the Three and Nine Months Ended
September 30, 2020 compared to the Three and Nine Months Ended September 30,
2019
Broadband Revenue
Broadband revenue for the three and nine months ended September 30, 2020 was
$941,237 and $2,747,129 , respectively, while broadband revenue for the three and
nine months ended September 30, 2019 was $814,328 and $2,396,151 , respectively.
Broadband revenue is derived principally through monthly charges to residential
subscribers of our broadband services. Revenue is impacted by rate increases,
changes in the number of customers, including additional services sold to our
existing subscribers, and changes in speed tiers. Additionally, revenue is
impacted by changes in the standalone selling price of each performance
obligation within our promotional bundled offers.
Broadband revenue increased $126,909 (16%) and $350,978 (15%) for the three and
nine months ended September 30, 2020 compared to the three and nine months ended
September 30, 2019 . The increase was due primarily to higher average recurring
broadband revenue per broadband customer, primarily driven by certain rate
increases and service level changes, and an increase in broadband customers,
partially offset by customer credits issued for service outages following
certain storms.
Video Revenue
Video revenue for the three and nine months ended September 30, 2020 was
$867,021 and $2,766,608 , respectively. Video revenue for the three and nine
months ended September 30, 2019 was $993,158 and $3,028,914 , respectively. Video
revenue is derived principally through monthly charges to residential customers
of our video services. Revenue is impacted by rate increases, changes in the
number of customers, including additional services sold to our existing
customers, and changes in programming packages. Additionally, revenue is
impacted by changes in the standalone selling price of each performance
obligation within our promotional bundled offers.
Video revenue decreased $126,137 (13%) and $262,306 (9%) for the three and nine
months ended September 30, 2020 compared to the three and nine months ended
September 30, 2019 . Video revenue for the three and nine months ended September
30, 2020 includes estimated credits of approximately $76,700 that we currently
anticipate will be issued to customers as a result of $73,300 of credits the
Company expects to receive from certain sports programming networks whereby the
minimum number of events were not delivered pursuant to the contractual
agreements with the networks and related franchise fees. These credits did not
impact Adjusted EBITDA for the periods. The remaining decrease was due primarily
to a decline in video customers, as well as customer credits issued for service
outages following certain storms.
Telephony Revenue
Telephony revenue for the three and nine months ended September 30, 2020 was
$115,995 and $358,347 , respectively. Telephony revenue for the three and nine
months ended September 30, 2019 was $148,231 and $452,927 , respectively.
Telephony revenue is derived principally through monthly charges to residential
customers of our telephony services. Revenue is impacted by changes in rates for
services, changes in the number of customers, and additional services sold to
our existing customers. Additionally, revenue is impacted by changes in the
standalone selling price of each performance obligation within our promotional
bundled offers.
Telephony revenue decreased $32,236 (22%) and $94,580 (21%) for the three and
nine months ended September 30, 2020 compared to the three and nine months ended
September 30, 2019 , respectively. The decrease was due to lower average revenue
per telephony customer and a decline in telephony customers, as well as customer
credits issued for service outages following certain storms.
Business Services and Wholesale Revenue
Business services and wholesale revenue for the three and nine months ended
September 30, 2020 was $362,215 and $1,092,309 , respectively. Business services
and wholesale revenue for the three and nine months ended September 30, 2019 was
$357,628 and $1,066,123 , respectively. Business services and wholesale revenue
is derived primarily from the sale of fiber based telecommunications services to
the business market, and the sale of broadband, video and telephony services to
SMB customers.
Business services and wholesale revenue increased $4,587 (1%) and $26,186 (2%)
for the three and nine months ended September 30, 2020 compared to the three and
nine months ended September 30, 2019 , respectively. The increase was primarily
due to higher average recurring broadband revenue per SMB customer, primarily
driven by certain rate increases and service level changes and an increase in
revenue related to an indefeasible right of use contract recorded in the second
quarter of 2020, partially offset by a decrease in SMB customers for the nine
month
50
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period, customer credits issued for service outages following certain storms and
customer credits of approximately $2,000 that we currently anticipate will be
issued to SMB customers as a result of credits the Company expects to receive
from certain sports programming networks whereby the minimum number of events
were not delivered pursuant to the contractual agreements with the networks and
related franchise fees. These credits did not impact Adjusted EBITDA for the
periods.
News and Advertising Revenue
News and advertising revenue for the three and nine months ended September 30,
2020 was $124,177 and $326,348 , respectively. News and advertising revenue for
the three and nine months ended September 30, 2019 was $118,067 and $327,255 ,
respectively. News and advertising revenue is primarily derived from the sale of
(i) advertising inventory available on the programming carried on our cable
television systems, (ii) advertising on over the top ("OTT") platforms, (iii)
digital advertising, and (iv) data analytics. News and advertising revenue also
includes affiliation fees for news programming.
News and advertising revenue increased $6,110 (5%) and decreased $907 for the
three and nine months ended September 30, 2020 , respectively, compared to the
three and nine months ended September 30, 2019 . The increase for the three
months ended September 30, 2020 was primarily due to growth in political
advertising and higher affiliate revenue for News 12, partially offset by a
decline in other advertising revenue. The decrease for the nine month period was
primarily due to a net decline in advertising revenue, other than political
advertising which increased, partially offset by higher affiliate revenue for
News 12.
Mobile Revenue
Mobile revenue for the three and nine months ended September 30, 2020 was
$19,722 and $57,944 , respectively, and for the three and nine months ended
September 30, 2019 was $3,174 and relates to sales of devices and mobile
services, which was launched to consumers in September 2019 . As of September 30,
2020 , we had approximately 162,000 mobile lines.
Other Revenue
Other revenue for the three and nine months ended September 30, 2020 was $3,619
and $10,536 , respectively. Other revenue for the three and nine months ended
September 30, 2019 was $4,076 and $11,766 , respectively. Other revenue includes
revenue from other miscellaneous revenue streams.
Programming and Other Direct Costs
Programming and other direct costs for the three and nine months ended
September 30, 2020 amounted to $783,934 and $2,509,323 , respectively.
Programming and other direct costs for the three and nine months ended September
30, 2019 amounted to $820,896 and $2,452,875 , respectively. Programming and
other direct costs include cable programming costs, which are costs paid to
programmers (net of amortization of any incentives received from programmers for
carriage) for cable content (including costs of VOD and pay-per-view) and are
generally paid on a per-customer basis. These costs typically rise due to
increases in contractual rates and new channel launches and are also impacted by
changes in the number of customers receiving certain programming services. These
costs also include interconnection, call completion, circuit and transport fees
paid to other telecommunication companies for the transport and termination of
voice and data services, which typically vary based on rate changes and the
level of usage by our customers. These costs also include franchise fees which
are payable to the state governments and local municipalities where we operate
and are primarily based on a percentage of certain categories of revenue derived
from the provision of video service over our cable systems, which vary by state
and municipality. These costs change in relation to changes in such categories
of revenues or rate changes. Additionally, these costs include the costs of
mobile devices sold to our customers and direct costs of providing mobile
services.
The decrease of $36,962 (5%) and increase of $56,448 (2%) for the three and nine
months ended September 30, 2020 , as compared to the three and nine months ended
September 30, 2019 are primarily attributable to the following:
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Three Months Nine Months
Costs of mobile devices $
5,829
11,608 25,332
Increase primarily relating to costs of digital media and linear advertising spots for resale
1,727 8,486
Net increase (decrease) in programming costs which includes estimated credits expected to be received (see discussion below), a decrease in costs due to lower video customers, and an increase in costs due to net contractual rate increases
(47,272) 627
Decrease in costs due to certain tax refunds (11,033) (11,033)
Other net increases 2,179 1,561
$ (36,962) $ 56,448
Programming costs
Programming costs aggregated $631,211 and $2,044,475 for the three and nine
months ended September 30, 2020 and $678,483 and $2,043,848 for the three and
nine months ended September 30, 2019 , respectively. The programming costs for
the three and nine months ended September 30, 2020 include estimated credits of
$75,300 that the Company expects to receive from certain sports programming
networks whereby the minimum number of events were not delivered pursuant to the
contractual agreements with the networks. These credits did not impact Adjusted
EBITDA for the periods as we reduced video revenue for a corresponding amount as
it is currently anticipated that these credits will be issued to customers. Our
programming costs in 2020 will continue to be impacted by changes in programming
rates, which we expect to increase, and by changes in the number of video
customers.
Other Operating Expenses
Other operating expenses for the three and nine months ended September 30, 2020
amounted to $558,092 and $1,683,038 , respectively. Other operating expenses for
the three and nine months ended September 30, 2019 amounted to $568,233 and
$1,702,124 , respectively. Other operating expenses include staff costs and
employee benefits including salaries of company employees and related taxes,
benefits and other employee related expenses, as well as third-party labor
costs. Other operating expenses also include network management and field
service costs, which represent costs associated with the maintenance of our
broadband network, including costs of certain customer connections and other
costs associated with providing and maintaining services to our customers.
Customer installation and network repair and maintenance costs may fluctuate as
a result of changes in the level of activities and the utilization of
contractors as compared to employees. Also, customer installation costs
fluctuate as the portion of our expenses that we are able to capitalize changes.
Costs associated with the initial deployment of new customer premise equipment
necessary to provide broadband, video and telephony services are capitalized
(asset-based). The redeployment of customer premise equipment is expensed as
incurred.
Other operating expenses also include costs related to the operation and
maintenance of our call center facilities that handle customer inquiries and
billing and collection activities and sales and marketing costs, which include
advertising production and placement costs associated with acquiring and
retaining customers. These costs vary period to period and certain of these
costs, such as sales and marketing, may increase with intense competition.
Additionally, other operating expenses include various other administrative
costs, including legal fees, and product development costs.
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The decreases in other operating expenses of $10,141 and $19,086 , offset by an
increase of $9,559 and $34,659 relating to our mobile service, for the three and
nine months ended September 30, 2020 , respectively, as compared to the three and
nine months ended September 30, 2019 was attributable to the following:
Three Months Nine Months
Net decrease in labor costs and benefits (offset by an increase in
costs related to Cheddar of
$ (15,017) $ (57,303) Decrease in sales and marketing (1,174) (14,322) Decrease in billing costs, primarily due to systems integration (1,398) (7,414) Decrease in bad debt expense (17,714) (10,671) Increase in share-based compensation 15,874 47,813 Increase in rent and property taxes 3,872 11,392 Increase in repairs and maintenance 3,373 4,058
Other net increases (including a decrease of
2,043 7,361
$ (10,141) $ (19,086)
Restructuring and Other Expense
Restructuring and other expense for the three and nine months ended
September 30, 2020 amounted to $40,419 and $88,679 , as compared to $12,381 and
$39,090 for the three and nine months ended September 30, 2019 . Restructuring
and other expense for the three and nine months ended September 30, 2020
primarily includes $5,428 and $45,556 , respectively, related to contractual
payments for terminated employees. In addition, the Company recorded
restructuring charges of $26,621 and $28,937 for the three and nine months ended
September 30, 2020 . respectively, related primarily to the impairment of
right-of-use operating ("ROU") lease assets, included in the Company's
restructuring initiatives, as their carrying amount was not recoverable and
exceeded their fair value. The remaining balance includes severance and other
employee related costs resulting from headcount reductions and facility
realignment costs related to initiatives which commenced in 2016 and 2019 and
certain transaction costs.
The amounts for the three and nine months ended September 30, 2019 primarily
related to severance and other employee related costs resulting from headcount
reductions, facility realignment costs and impairments of certain ROU lease
assets, related to initiatives which commenced in 2016 and 2019 that are
intended to simplify the Company's organizational structure.
We currently anticipate that additional restructuring expenses will be
recognized as we continue to analyze and make modifications to our
organizational structure.
Depreciation and Amortization
Depreciation and amortization for the three and nine months ended September 30,
2020 amounted to $502,248 and $1,571,611 , respectively. Depreciation and
amortization for the three and nine months ended September 30, 2019 amounted to
$565,637 and $1,695,685 , respectively.
The decreases in depreciation and amortization of $63,389 (11%) and $124,074
(7%) for the three and nine months ended September 30, 2020 , respectively, as
compared to the three and nine months ended September 30, 2019 are due to
certain fixed assets and intangible assets becoming fully depreciated or
amortized, partially offset by the acceleration of amortization expense related
to certain customer relationship intangible assets and an increase in
depreciation as a result of asset additions.
Adjusted EBITDA
Adjusted EBITDA amounted to $1,126,670 and $3,263,834 for the three and nine
months ended September 30, 2020 , respectively as compared to $1,068,368 and
$3,180,471 for the three and nine months ended September 30, 2019 , respectively.
Adjusted EBITDA is a non-GAAP measure that is defined as net income (loss)
excluding income taxes, non-operating income or expenses, loss on extinguishment
of debt and write-off of deferred financing costs, gain (loss) on interest rate
swap contracts, gain (loss) on derivative contracts, gain (loss) on investments
and sale of affiliate interests, interest expense, interest income, depreciation
and amortization (including impairments), share-based compensation expense or
benefit, restructuring expense or credits and transaction expenses. See
reconciliation of net income (loss) to adjusted EBITDA above.
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The increase in adjusted EBITDA for the three and nine months ended
September 30, 2020 as compared to the three and nine months ended September 30,
2019 was due to an increase in revenue and a net decrease in operating expenses
(excluding depreciation and amortization, restructuring and other expense and
share-based compensation), as discussed above.
Operating Free Cash Flow
Operating free cash flow was $925,098 and $2,534,457 for the three and nine
months ended September 30, 2020 , respectively, and $693,066 and $2,147,916 for
the three and nine months ended September 30, 2019 , respectively. The increase
in operating free cash flow for the 2020 periods as compared to 2019 is due to a
decrease in capital expenditures and an increase in adjusted EBITDA.
Operating Free Cash Flow is a non-GAAP measure that is defined as Adjusted
EBITDA less cash capital expenditures. See discussion above under "Non-GAAP
Financial Measures" for further information.
Free Cash Flow
Free cash flow was $457,548 and $1,459,284 for the three and nine months ended
September 30, 2020 , respectively, and $165,721 and $801,432 for the three and
nine months ended September 30, 2019 , respectively. The increase in free cash
flow in the 2020 periods as compared to the 2019 periods is due to an increase
in cash flows from operating activities and a decrease in capital expenditures.
Free Cash Flow is a non-GAAP measure that is defined as net cash flows from
operating activities less cash capital expenditures. See discussion above under
"Non-GAAP Financial Measures" for further information.
Interest expense
Interest expense, net was $322,454 and $1,036,880 for the three and nine months
ended September 30, 2020 , respectively, and $387,276 and $1,154,353 for the
three and nine months ended September 30, 2019 , respectively. The decreases of
$64,822 and $117,473 for the three and nine months ended September 30, 2020 ,
respectively, as compared to the three and nine months ended September 30, 2019
are attributable to the following:
Three Months Nine Months Decrease due to changes in average debt balances and interest rates on our indebtedness, including our collateralized debt
$ (61,238) $ (109,371) Lower interest income 1,360 1,974
Other net decreases, primarily amortization of deferred financing costs and original issue discounts
(4,944) (10,076)
$ (64,822) $ (117,473)
Gain on Investments and Sale of Affiliate Interests, net
Gain on investments, net for the three and nine months ended September 30, 2020 ,
of $314,177 and $56,301 , respectively and $120,253 and $478,124 , respectively,
consists primarily of the increase in the fair value of Comcast common stock
owned by the Company for the periods. The effects of these gains are partially
offset by the losses (gains) on the related equity derivative contracts, net
described below.
Gain (Loss) on Derivative Contracts, net
Gain (loss) on derivative contracts, net for the three and nine months ended
September 30, 2020 amounted to $(261,597) and $26,203 , respectively, and
$(77,333) and $(303,986) for the three and nine months ended September 30, 2019 ,
respectively, and includes realized and unrealized gains or losses due to the
change in fair value of equity derivative contracts relating to the Comcast
common stock owned by the Company. The effects of these gains (losses) are
generally offset by losses (gains) on investment securities pledged as
collateral, which are included in gain (loss) on investments, net discussed
above.
Loss on Interest Rate Swap Contracts, net
Loss on interest rate swap contracts, net was $158 and $88,725 for the three and
nine months ended September 30, 2020 , respectively, and $11,163 and $61,735 for
the three and nine months ended September 30, 2019 , respectively. These amounts
represent the increase or decrease in the fair value of interest rate swap
contracts. For the nine months ended September 30, 2020 , the loss is net of a
gain recognized in connection with the early termination of two interest rate
swap contracts. These swap contracts are not designated as hedges for accounting
purposes.
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Loss on Extinguishment of Debt and Write-off of Deferred Financing Costs
Loss on extinguishment of debt and write-off of deferred financing costs
amounted to $250,489 for the three and nine months ended September 30, 2020 and
$503 and $159,599 for the three and nine months ended September 30, 2019 .
The following tables provide a summary of the loss on extinguishment of debt and
the write-off of deferred financing costs recorded by the Company upon the
redemption of senior notes and the refinancing of credit facilities:
Three and Nine Months
Ended September 30,
2020
CSC Holdings 5.375% Senior Guaranteed Notes due 2023 $ 26,721
CSC Holdings 10.875% Senior Notes due 2025 35,375
CSC Holdings 7.75% Senior Notes due 2025 136,249
CSC Holdings 6.625% Senior Guaranteed Notes due 2025 52,144
$ 250,489
Three months
ended September Nine months ended
30, 2019 September 30, 2019
CSC Holdings 10.125% Senior Notes due 2023 $ - $ 154,666
Cablevision 5.125% Senior Notes due 2021 503 503
Refinancing and subsequent amendment to CSC Holdings
credit facility - 4,430
$ 503 $ 159,599
Other Income (Expense), Net
Other income (expense), net amounted to $1,685 and $3,277 for the three and nine
months ended September 30, 2020 , respectively, compared to $(226) and $66 for
the three and nine months ended September 30, 2019 , respectively.
Income Tax Expense
For the three and nine months ended September 30, 2020 , Altice USA recorded a
tax expense of $33,186 and $109,047 on pre-tax income of $30,457 and $216,257 ,
respectively, resulting in an effective tax rate that was higher than the U.S.
statutory tax rate. The higher tax rate was due to the impact of certain
non-deductible expenses and certain state tax expense adjustments, partially
offset by a benefit resulting from the recently enacted Coronavirus Aid, Relief
and Economic Security ("CARES Act"). See further details related to the CARES
Act in Note 13 of the consolidated financial statements. In addition, income tax
expense of $16,878 was recognized in the three months ended September 30, 2020
as a result of the reevaluation of the Company's deferred tax liability in
connection with the tax rate increase in New Jersey for 2020 through 2023,
enacted in September 2020 .
For the three and nine months ended September 30, 2019 , Altice USA recorded a
tax expense of $37,871 and $56,445 on pre-tax income of $115,267 and $195,053 ,
respectively, resulting in an effective tax rate that was higher than the U.S.
federal statutory tax rate. The primary differences between the effective tax
rate and the statutory tax rate are due to a revaluation of state deferred taxes
primarily due to certain changes to the state tax rates used to measure the
Company's deferred tax liabilities and certain non-deductible expenses.
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