Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
This Form 10-K contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act and Section 21E of the Securities Act of 1934, as amended. In this Form 10-K there are statements concerning our future operating results and future financial performance. Words such as "expects", "anticipates", "believes", "estimates", "may", "will", "should", "could", "potential", "continue", "intends", "plans" and similar words and terms used in the discussion of future operating results, future financial performance and future events identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors.
We operate in a highly competitive, consumer and technology driven and rapidly changing business that is affected by government regulation and economic, strategic, technological, political and social conditions. Various factors could adversely affect our operations, business or financial results in the future and cause our actual results to differ materially from those contained in the forward-looking statements. In addition, important factors that could cause our actual results to differ materially from those in our forward-looking statements include:
•competition for broadband, video and telephony customers from existing competitors (such as broadband communications companies, direct broadcast satellite ("DBS") providers, wireless data and telephony providers, and Internet-based providers) and new competitors entering our footprint;
•changes in consumer preferences, laws and regulations or technology that may cause us to change our operational strategies;
•increased difficulty negotiating programming agreements on favorable terms, if at all, resulting in increased costs to us and/or the loss of popular programming;
•increasing programming costs and delivery expenses related to our products and services;
•our ability to achieve anticipated customer and revenue growth, to successfully introduce new products and services and to implement our growth strategy;
•our ability to complete our capital investment plans on time and on budget, including our plan to build a fiber-to-the-home ("FTTH") network, and deploy Altice One, our home communications hub;
•our ability to develop mobile voice and data services and our ability to attract customers to these services;
•the effects of economic conditions or other factors which may negatively affect our customers’ demand for our current and future products and services;
•the effects of industry conditions;
•demand for digital and linear advertising products and services;
•our substantial indebtedness and debt service obligations;
•adverse changes in the credit market;
•changes as a result of any tax reforms that may affect our business;
•financial community and rating agency perceptions of our business, operations, financial condition and the industries in which we operate;
•the restrictions contained in our financing agreements;
•our ability to generate sufficient cash flow to meet our debt service obligations;
•fluctuations in interest rates which may cause our interest expense to vary from quarter to quarter;
•technical failures, equipment defects, physical or electronic break-ins to our services, computer viruses and similar problems;
•the disruption or failure of our network, information systems or technologies as a result of computer hacking, computer viruses, "cyber-attacks," misappropriation of data, outages, natural disasters, and other material events;
•the impact from the coronavirus ("COVID-19") pandemic;
•our ability to obtain necessary hardware, software, communications equipment and services and other items from our vendors at reasonable costs;
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•our ability to effectively integrate acquisitions and to maximize expected operating efficiencies from our acquisitions or as a result of the transactions, if any;
•significant unanticipated increases in the use of bandwidth-intensive Internet-based services;
•the outcome of litigation, government investigations and other proceedings; and
•other risks and uncertainties inherent in our cable and other broadband communications businesses and our other businesses, including those listed under the caption "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained herein.
These factors are not necessarily all of the important factors that could cause our actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could cause our actual results to differ materially from those expressed in any of our forward-looking statements.
Given these uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements are made only as of the date of this Annual Report. Except to the extent required by law, we do not undertake, and specifically decline any obligation, to update any forward-looking statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
You should read this Annual Report with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect. We qualify all forward-looking statements by these cautionary statements.
Certain numerical figures included in this Annual Report have been subject to rounding adjustments. Accordingly, such numerical figures shown as totals in various tables may not be arithmetic aggregations of the figures that precede them.
Overview
All dollar amounts, except per customer and per share data, included in the following discussion, are presented in thousands.
Our Business
We principally provide broadband communications and video services in the United States and market our services primarily under two brands: Optimum, in the New York metropolitan area, and Suddenlink, principally in markets in the south-central United States. We deliver broadband, video, telephony, and mobile services to more than five million residential and business customers. Our footprint extends across 21 states through a fiber-rich hybrid-fiber coaxial ("HFC") broadband network and a fiber-to-the-home ("FTTH") network with more than nine million homes passed as of December 31, 2020. Additionally, we offer news programming and content, and advertising services. The Company launched Altice Mobile, our full service mobile offering, to consumers across our footprint in September 2019.
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 herein.
In March 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 declines. 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
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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 DVR, VOD, pay-per-view, installation and home shopping commissions. Our residential broadband, video, and telephony services accounted for approximately 37%, 37%, and 5%, respectively, of our consolidated revenue for the year ended December 31, 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 year ended December 31, 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 5% of our consolidated revenue for the year ended December 31, 2020. Our mobile and other revenue for the year ended December 31, 2020 accounted for less than 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.
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 herein.
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 we may continue to do so in the future. Our FTTH network build, which would enable us to deliver more than 10 Gbps broadband speeds to meet the growing data needs of residential and business customers, is underway. In addition, we launched Altice Mobile to consumers across our footprint in September 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-Capital Expenditures" 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:
In December 2020, the Company completed the sale of a 49.99% interest in its Lightpath fiber enterprise business (the "Lightpath Transaction") based on an implied enterprise value of $3.2 billion. The Company retained a 50.01% interest in the Lightpath business and maintained control of Cablevision Lightpath LLC, the entity holding the interest in the Lightpath business. Accordingly, the Company continues to consolidate the operating results of the Lightpath business.
On July 14, 2020, the Company completed its acquisition of certain cable assets in New Jersey and the operating results of the acquired business were consolidated as of the acquisition date.
In June 2019, the Company completed the acquisition of Cheddar Inc., a digital-first news company and the operating results of Cheddar were consolidated as of June 1, 2019.
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As discussed in Note 1 of the Company's consolidated financial statements, the Company completed the ATS Acquisition in January 2018. ATS was previously owned by Altice Europe and a member of ATS's former management through a holding company. As the acquisition is a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of ATS for all periods since the formation of ATS.
In April 2018, Altice Europe transferred its ownership of i24NEWS, a 24/7 international news and current affairs channels, to the Company for minimal consideration. As the acquisition was a combination of businesses under common control, the Company combined the results of operations and related assets and liabilities of i24NEWS as of April 1, 2018. Operating results for periods prior to April 1, 2018 have not been revised to reflect the combination of i24NEWS as the impact was deemed immaterial.
In April 2018, the Company redeemed a 24% interest in Newsday.
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.
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Results of Operations - Altice USA
Altice USA
Years Ended December 31,
Revenue:
Residential:
Operating expenses:
Other income (expense):
Net income attributable to noncontrolling interests (7,296) (1,003) (1,761)
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The following is a reconciliation of net income to Adjusted EBITDA and Operating Free Cash Flow:
Altice USA
Years Ended December 31,
The following is a reconciliation of net cash flow from operating activities to Free Cash Flow:
Years Ended December 31,
The following table sets forth certain customer metrics for the Company (unaudited):
Residential customers:
Penetration of homes passed (d) 55.6 % 55.7 % 56.3 %
(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.
(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. Free accounts
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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 do not include Altice Mobile customers.
(g)Pursuant to the Keep Americans Connected pledge ("Pledge") that the Company made in response to the COVID-19 pandemic and pursuant to the New Jersey Executive Order No. 126 ("NJ Order") enacted in April 2020, the Company did not disconnect certain internet and voice services to customers for non-payment. Customer metrics include the retention of certain of these previously non-paying customers who had current account balances as of December 31, 2020 due to the Company forgiving their past due balances or placing them on a payment plan. Customer metrics as of December 31, 2020 also include approximately 10 thousand customer relationships impacted by storms in Louisiana that have not been disconnected for non-payment (see table below).
Total customer relationships 10.3
Residential 9.2
Residential customers:
Broadband 8.7
Telephony 2.0
(h) ARPU for the December 31, 2020 period reflects a reduction of $1.26 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.
Comparison of Results for the Year Ended December 31, 2020 compared to the Year Ended December 31, 2019 and for the Year Ended December 31, 2019 compared to the Year Ended December 31, 2018
Broadband Revenue
Broadband revenue for the years ended December 31, 2020, 2019 and 2018 was $3,689,159, $3,222,605, and $2,887,455, 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 $466,554 (14%) for the year ended December 31, 2020 compared to the year ended December 31, 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.
Broadband revenue increased $335,150 (12%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. 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.
Video Revenue
Video revenue for the years ended December 31, 2020, 2019 and 2018 was $3,670,859, $3,997,873 and $4,156,428, 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.
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Video revenue decreased $327,014 (8%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. Video revenue for the year ended December 31, 2020 includes estimated credits of approximately $94,300 that we currently anticipate will be issued to customers as a result of $90,100 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.
Video revenue decreased $158,555 (4%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was due primarily to a decline in video customers and lower average revenue per video customer.
Telephony Revenue
Telephony revenue for the years ended December 31, 2020, 2019 and 2018 was $468,777, $598,694 and $652,895, respectively. Telephony revenue is derived principally through monthly charges to residential customers for 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 $129,917 (22%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. 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.
Telephony revenue decreased $54,201 (8%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was due to lower average revenue per telephony customer and a decline in telephony customers.
Business Services and Wholesale Revenue
Business services and wholesale revenue for the years ended December 31, 2020, 2019 and 2018 was $1,454,532, $1,428,532, and $1,362,758, 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 $26,000 (2%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. 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, customer credits issued for service outages following certain storms and customer credits of approximately $2,900 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.
Business services and wholesale revenue increased $65,774 (5%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase was primarily due to higher average recurring broadband revenue per SMB customer, primarily driven by certain rate increases and service level changes, an increase in revenue from the backhaul of carrier data and an increase in installation revenue.
News and Advertising Revenue
News and advertising revenue for the years ended December 31, 2020, 2019 and 2018, was $519,205, $475,904, and $487,264, 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 $43,301 (9%) for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase was primarily due to higher political revenue and affiliate fees.
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News and advertising revenue decreased $11,360 (2%) for the year ended December 31, 2019 compared to the year ended December 31, 2018. The decrease was primarily due to lower political revenue, partially offset by an increase in digital advertising, and strong national sales.
Mobile Revenue
Mobile revenue for the year ended December 31, 2020 and 2019 was $78,127 and $21,264, respectively, and relates to sales of devices and mobile services that were launched to consumers in September 2019. As of December 31, 2020, we had approximately 169 thousand mobile lines.
Other Revenue
Other revenue for the years ended December 31, 2020, 2019 and 2018 was $13,983, $15,987, and $19,808, respectively. Other revenue includes revenue from other miscellaneous revenue streams.
Programming and Other Direct Costs
Programming and other direct costs for the years ended December 31, 2020, 2019 and 2018 amounted to $3,340,442, $3,300,528 and $3,173,076, 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 increase of $39,914 (1%) for the year ended December 31, 2020, as compared to the prior year was primarily attributable to the following:
Costs of mobile devices 24,359
Decrease in costs due to certain tax refunds (11,033)
Other net decreases (2,187)
The increase of $127,452 (4%) for the year ended December 31, 2019, as compared to December 31, 2018 was primarily attributable to the following:
Costs of mobile devices 22,379
Increase in costs of digital media and linear advertising spots for resale 9,488
Other net increases 3,489
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Programming costs
Programming costs aggregated $2,701,145, $2,722,656, and $2,620,585 for the years ended December 31, 2020, 2019 and 2018, respectively. Programming costs for the year ended December 31, 2020 include estimated credits of approximately $93,000 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 2021 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 years ended December 31, 2020, 2019 and 2018 amounted to $2,264,473, $2,300,398, and $2,290,266, 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.
The decrease in other operating expenses of $35,925, net of an increase of $35,318 relating to our mobile service, for the year ended December 31, 2020 as compared to the prior year was attributable to the following:
Decrease in bad debt expense (25,555)
Increase in share-based compensation 19,550
Increase in rent and property taxes 13,506
Increase in legal costs 9,008
The increase in other operating expenses of $10,132, including an increase of $32,458 relating to our mobile service, for the year ended December 31, 2019 as compared to the prior year was attributable to the following:
Increase in bad debt 20,095
Net decrease in marketing costs (7,457)
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Restructuring and Other Expense
Restructuring and other expense for the year ended December 31, 2020 amounted to $91,073, as compared to $72,978 for the year ended December 31, 2019 and $38,548 for the year ended December 31, 2018. These amounts primarily related to severance and other employee related costs resulting from headcount reductions, facility realignment costs and impairments of certain ROU assets, related to initiatives which commenced in 2016 and 2019 that are intended to simplify the Company's organizational structure. The expense for the year ended December 31, 2020 also included $47,631 related to contractual payments for terminated employees and $4,068 related to the facility realignment costs. We may incur additional restructuring expenses in the future as we continue to analyze our organizational structure.
Depreciation and Amortization
Depreciation and amortization for the years ended December 31, 2020, 2019 and 2018 amounted to $2,083,365, $2,263,144 and $2,382,339, respectively.
The decrease in depreciation and amortization of $179,779 (8%) for the year ended December 31, 2020 as compared to the prior year is 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.
The decrease in depreciation and amortization of $119,195 (5%) for the year ended December 31, 2019 as compared to the prior year is due to certain fixed assets and intangible assets becoming fully depreciated or amortized, partially offset by an increase in depreciation as a result of asset additions.
Adjusted EBITDA
Adjusted EBITDA amounted to $4,414,814, $4,265,471, and $4,163,078 for the years ended December 31, 2020, 2019 and 2018, 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.
The increases in adjusted EBITDA for the year ended December 31, 2020 as compared to the prior year was due to the increases in revenue and a decrease in operating expenses for 2020 (excluding depreciation and amortization, restructuring and other expense and share-based compensation), as discussed above.
The increases in adjusted EBITDA for the year ended December 31, 2019 as compared to the prior year was due to the increases in revenue, partially offset by an increase 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 $3,340,859, $2,910,121 and $3,009,489 for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in operating free cash flow for 2020 as compared to 2019 is due to a decrease in cash capital expenditures and an increase in adjusted EBITDA. The decrease in operating free cash flow in 2019 as compared to 2018 was due to an increase in cash capital expenditures, partially offset by an increase in adjusted EBITDA.
Free Cash Flow
Free cash flow was $1,906,209, $1,198,819 and $1,354,728 for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in free cash flow in 2020 as compared to 2019 is primarily due to an increase in cash from operating activities and a decrease in cash capital expenditures. The decrease in free cash flow in 2019 as compared to 2018 is primarily due to an increase in cash capital expenditures.
Interest expense
Interest expense, net was $1,350,341, $1,530,850, and $1,545,426 for the years ended December 31, 2020, 2019 and 2018, respectively. The decrease of $180,509 for the year ended December 31, 2020 as compared to the year ended December 31, 2019 and the decrease of $14,576 for the year ended December 31, 2019 as compared to the year
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ended December 31, 2018 were attributable to the following:
Gain (Loss) on Investments and Sale of Affiliate Interests, net
Gain (loss) on investments, net for the years ended December 31, 2020, 2019 and 2018, of $320,061, $473,406 and $(250,877) consists primarily of the increase (decrease) in the fair value of the Comcast common stock owned by the Company. The effects of these gains (losses) are partially offset by the losses and gains on the related equity derivative contracts, net described below.
Gain (Loss) on Derivative Contracts, net
Gain (loss) on derivative contracts, net amounted to $(178,264), $(282,713) and $218,848 for the years ended December 31, 2020, 2019 and 2018, 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 offset by losses (gains) on investment securities pledged as collateral, which are included in gain (loss) on investments and sale of affiliate interest, net discussed above.
Loss on Interest Rate Swap Contracts
Loss on interest rate swap contracts amounted to $78,606, $53,902 and $61,697 for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts represent the decrease in the fair value of interest rate swap contracts. These swap contracts are not designated as hedges for accounting purposes.
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, $243,806 and $48,804 for the years ended December 31, 2020, 2019 and 2018, respectively.
The following table provides 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 guaranteed, senior secured and senior notes and the refinancing of credit facilities:
Years ended December 31,
CSC Holdings 5.375% Senior Guaranteed Notes due 2023 $ 26,721 $ — $ —
Refinancing and subsequent amendment to CSC Holdings credit facility — 8,313 —
Cequel senior and senior secured notes pursuant to an exchange offer — — (545)
Cequel Term Loan Facility — — 7,733
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Other Income (Expense), Net
Other income (expense), net amounted to $5,577, $1,183, and $(12,484), for the years ended December 31, 2020, 2019 and 2018, respectively. These amounts include the non-service cost components of the Company's pension expense of $1,012, $8,274 and $9,529, net of dividends received on Comcast common stock owned by the Company. The 2018 amounts also include the equity in the net losses of Newsday through April 2018 and i24NEWS through March 31, 2018.
Income Tax Benefit (Expense)
The Company recorded income tax expense of $139,748 for the year ended December 31, 2020, resulting in an effective tax rate of 24% which is higher than the U.S. federal statutory tax rate of 21%.The primary difference between the effective tax rate and the statutory tax rate is due to nondeductible officer’s and share-based compensation expense, state income taxes, net of the federal benefit, 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, a tax benefit associated with claiming additional current year and prior year research and development tax credits, and certain other non-deductible expenses. Due to the taxable gain resulting from the Lightpath Transaction discussed in Note 1 to the consolidated financial statements, the Company recognized the benefit of fully utilizing its federal NOLs, capital loss carryover, research and development tax credits, and general business credits in 2020.
The Company recorded income tax expense of $47,190 for the year ended December 31, 2019, resulting in an effective tax rate of 25% which was higher than the U.S. federal statutory tax rate of 21%. The primary difference between the effective tax rate and the statutory tax rate was due to nondeductible share-based compensation expense, 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 other non-deductible expenses.
The Company recorded income tax benefit of $38,655 for the year ended December 31, 2018. During 2018, the Company determined that it met the definition of a Qualified Technology Company for New York State tax purposes and thereby was eligible for the reduced tax rate. Additionally, during 2018, the state of New Jersey enacted significant tax law changes imposing a 2.5% surtax for tax years beginning January 1, 2018 and mandating combined return filing requirements for unitary corporations for tax years beginning January 1, 2019. Accordingly, the Company recorded a net deferred tax benefit of $52,915 based on a remeasurement of the net deferred tax liability.
CSC HOLDINGS, LLC
The consolidated statements of operations of CSC Holdings are essentially identical to the consolidated statements of operations of Altice USA, except for the following:
CSC Holdings
Years ended December 31,
(in thousands)
Less: items included in Altice USA's consolidated statements of operations:
Interest expense relating to Cablevision senior notes — 81,257 303,106
Loss on investments and sale of affiliate interests, net (546) — (10,659)
Interest income related to cash held by Cablevision and Altice USA — — 2,372
Other expense (income) — (2) 210
Refer to Altice USA's Management's Discussion and Analysis of Financial Condition and Results of Operations herein.
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The following is a reconciliation of CSC Holdings' net income to Adjusted EBITDA and Operating Free Cash Flow:
CSC Holdings
Years ended December 31,
The following is a reconciliation of net cash flow from operating activities to Free Cash Flow:
CSC Holdings
Years ended December 31,
LIQUIDITY AND CAPITAL RESOURCES
Altice USA has no operations independent of its subsidiaries. Funding for our subsidiaries has generally been provided by cash flow from their respective operations, cash on hand and borrowings under the revolving credit facility and the proceeds from the issuance of securities and borrowings under syndicated term loans in the capital markets. Our decision as to the use of cash generated from operating activities, cash on hand, borrowings under the revolving credit facility or accessing the capital markets has been based upon an ongoing review of the funding needs of the business, the optimal allocation of cash resources, the timing of cash flow generation and the cost of borrowing under the revolving credit facility, debt securities and syndicated term loans. We target a year-end leverage ratio of 4.5x to 5.0x for our CSC Holdings debt silo. We calculate our consolidated net leverage ratio as net debt to L2QA EBITDA (Adjusted EBITDA for the two most recent consecutive fiscal quarters multiplied by 2.0).
We expect to utilize free cash flow and availability under the CSC Holdings revolving credit facility, as well as future refinancing transactions, to further extend the maturities of, or reduce the principal on, our debt obligations. The timing and terms of any refinancing transactions will be subject to, among other factors, market conditions. Additionally, we may, from time to time, depending on market conditions and other factors, use cash on hand and the proceeds from other borrowings to repay the outstanding debt securities through open market purchases, privately negotiated purchases, tender offers, or redemptions.
We believe existing cash balances, operating cash flows and availability under the CSC Holdings revolving credit facility will provide adequate funds to support our current operating plan, make planned capital expenditures and fulfill our debt service requirements for the next twelve months. However, our ability to fund our operations, make planned capital expenditures, make scheduled payments on our indebtedness and repay our indebtedness depends on our future operating performance and cash flows and our ability to access the capital markets, which, in turn, are subject to prevailing economic conditions and to financial, business and other factors, some of which are beyond our control. Competition, market disruptions or a deterioration in economic conditions could lead to lower demand for our products, as well as lower levels of advertising, and increased incidence of customers' inability to pay for the
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services we provide. These events would adversely impact our results of operations, cash flows and financial position. Although we currently believe amounts available under the CSC Holdings revolving credit facility will be available when, and if, needed, we can provide no assurance that access to such funds will not be impacted by adverse conditions in the financial markets or other conditions. The obligations of the financial institutions under the revolving credit facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
In the longer term, we may not be able to generate sufficient cash from operations to fund anticipated capital expenditures, meet all existing future contractual payment obligations and repay our debt at maturity. As a result, we could be dependent upon our continued access to the capital and credit markets to issue additional debt or equity or refinance existing debt obligations. We intend to raise significant amounts of funding over the next several years to fund capital expenditures, repay existing obligations and meet other obligations, and the failure to do so successfully could adversely affect our business. If we are unable to do so, we will need to take other actions including deferring capital expenditures, selling assets, seeking strategic investments from third parties or reducing or eliminating stock repurchases and discretionary uses of cash.
Lightpath Transaction
In December 2020, the Company completed the sale of a 49.99% interest in its Lightpath fiber enterprise business (the "Lightpath Transaction") based on an implied enterprise value of $3,200,000. The Company received total gross cash proceeds of approximately $2,355,000 ($890,000 from the sale and $1,465,000 from the related financing activity, excluding the discount on the term loan of $3,000). The excess of the cash received from the sale, net of related expenses, over the book value of the interest sold of $741,471, net of taxes of $228,489, was recorded in stockholders' equity (deficiency) by Altice USA. The Company retained a 50.01% interest in the Lightpath business and maintained control of Cablevision Lightpath LLC, the entity holding the interest in the Lightpath business. Accordingly, the Company will continue to consolidate the operating results of the Lightpath business.
Cablevision Lightpath LLC was financed independently outside of the CSC Holdings restricted group. Cablevision Lightpath LLC issued $450,000 in aggregate principal amount of senior secured notes and $415,000 in aggregate principal amount of senior notes. Also, Cablevision Lightpath LLC entered into a credit agreement which provides a term loan in an aggregate principal amount of $600,000 and revolving loan commitments in an aggregate principal amount of $100,000. As of December 31, 2020, there were no borrowings outstanding under the Lightpath Revolving Credit Facility. Net proceeds from this transaction were used to fund the Tender Offer discussed below. See Note 11 and discussion below for additional information regarding the debt financing related to the Lightpath Transaction.
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Debt Outstanding
The following table summarizes the carrying value of our outstanding debt, net of unamortized deferred financing costs, discounts and premiums as of December 31, 2020, as well as interest expense for the year ended December 31, 2020.
Debt outstanding:
Interest expense:
(a)This indebtedness is collateralized by shares of Comcast common stock. We intend to settle this debt by (i) delivering shares of Comcast common stock and the related equity contracts, or (ii) delivering cash from the net proceeds from new monetization contracts.
(b)Lightpath interest expense excludes interest on intercompany debt that was eliminated in consolidation.
The following table provides details of our outstanding credit facility debt, net of unamortized discounts and deferred financing costs as of December 31, 2020:
Maturity Date Interest Rate Principal Carrying Value
CSC Holdings
Lightpath
Revolving Credit Facility (c) November 30, 2025 —% — —
(a)At December 31, 2020, $137,920 of the revolving credit facility was restricted for certain letters of credit issued on behalf of the Company and $1,712,080 of the facility was undrawn and available, subject to covenant limitations.
(b)The revolving credit facility of an aggregate principal amount of $2,275,000 matures in January 2024 and is priced at LIBOR plus 2.25%. The remaining revolving credit facility of an aggregate principal amount of $200,000 matures in November 2021 and is priced at LIBOR plus 3.25%.
(c)There were no borrowings outstanding under the Lightpath Revolving Credit Facility which provides for commitments in an aggregate principal amount of $100,000.
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Payment Obligations Related to Debt
As of December 31, 2020, total amounts payable by us in connection with our outstanding obligations, including related interest, as well as notes payable and supply chain financing, and the value deliverable at maturity under monetization contracts, but excluding finance lease obligations (see Note 9 to our consolidated financial statements) are as follows:
(a)Relates to the Company's collateralized indebtedness and related interest. This indebtedness is collateralized by shares of Comcast common stock. We intend to settle this debt by (i) delivering shares of Comcast common stock and the related equity contracts or (ii) delivering cash from the net proceeds on new monetization contracts.
CSC Holdings Restricted Group
For financing purposes, the Company is structured as a restricted group (the "Restricted Group") and an unrestricted group, which includes certain designated subsidiaries and investments (the "Unrestricted Group"). The Restricted Group is comprised of CSC Holdings and substantially all of its wholly-owned operating subsidiaries. These subsidiaries are subject to the covenants and restrictions of the credit facility and indentures governing the notes issued by CSC Holdings. Cablevision Lightpath LLC became an unrestricted subsidiary prior to the issuance of its senior notes and senior secured notes in September 2020. See discussion below regarding the Lightpath debt financing.
Sources of cash for the Restricted Group include primarily cash flow from the operations of the businesses in the Restricted Group, borrowings under its credit facility and issuance of securities in the capital markets, contributions from its parent, and, from time to time, distributions or loans from its subsidiaries. The Restricted Group's principal uses of cash include: capital spending, in particular, the capital requirements associated with the upgrade of its digital broadband, video and telephony services, including costs to build our FTTH network; debt service; distributions made to its parent to fund share repurchases; other corporate expenses and changes in working capital; and investments that it may fund from time to time.
CSC Holdings Credit Facility
In October 2015, a wholly-owned subsidiary of Altice USA, which merged with and into CSC Holdings on June 21, 2016, entered into a senior secured credit facility, which currently provides U.S. dollar term loans currently in an aggregate principal amount of $3,000,000 ($2,895,000 outstanding at December 31, 2020) (the "CSC Term Loan Facility", and the term loans extended under the CSC Term Loan Facility, the "CSC Term Loans") and U.S. dollar revolving loan commitments in an aggregate principal amount of $2,475,000 ($625,000 outstanding at December 31, 2020) (the "CSC Revolving Credit Facility" and, together with the CSC Term Loan Facility, the "CSC Credit Facilities"), which are governed by a credit facilities agreement entered into by, inter alios, CSC Holdings certain lenders party thereto and JPMorgan Chase Bank, N.A. as administrative agent and security agent (as amended, restated, supplemented or otherwise modified on June 20, 2016, June 21, 2016, July 21, 2016, September 9, 2016, December 9, 2016, March 15, 2017, January 12, 2018, October 15, 2018, January 24, 2019, February 7, 2019, May 14, 2019, and October 3, 2019, respectively, and as further amended, restated, supplemented or otherwise modified from time to time, the "CSC Credit Facilities Agreement").
In January 2018, CSC Holdings entered into a $1,500,000 incremental term loan facility (the "Incremental Term Loan B-2") under its existing credit facilities agreement. The Incremental Term Loan B-2 was priced at 99.5% and was due to mature on January 25, 2026. The Incremental Term Loan B-2 was comprised of eurodollar borrowings or alternate base rate borrowings, and bore interest at a rate per annum equal to the adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin was (i) with respect to any alternate base
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rate loan, 1.50% per annum and (ii) with respect to any eurodollar loan, 2.50% per annum. The Incremental Term Loan B-2 was repaid in full in October 2019 with proceeds from the Incremental Term Loan B-5 discussed below.
In October 2018, CSC Holdings entered into a $1,275,000 ($1,252,688 outstanding at December 31, 2020) incremental term loan facility (the “Incremental Term Loan B-3”) under its existing credit facilities agreement. The proceeds from the Incremental Term Loan B-3 were used to repay the entire principal amount of loans under Cequel’s then existing Term Loan Facility and certain transaction costs. The Incremental Term Loan B-3 is comprised of eurodollar borrowings or alternative base rate borrowings, and will bear interest at a rate per annum equal to the Adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 1.25% per annum and (ii) with respect to any eurodollar loan, 2.25% per annum. The Company is required to make scheduled quarterly payments equal to 0.25% (or $3,188) of the principal amount of the Incremental Term Loan B-3, beginning with the fiscal quarter ended June 30, 2019, with the remaining balance scheduled to be paid on January 15, 2026.
In February 2019, CSC Holdings entered into a $1,000,000 incremental term loan facility ("Incremental Term Loan B-4") under its existing credit facilities agreement. The proceeds from the Incremental Term Loan B-4 were used to redeem $894,700 in aggregate principal amount of CSC Holdings’ 10.125% senior notes due 2023, representing the entire aggregate principal amount outstanding, and paying related fees, costs and expenses. The Incremental Term Loan B-4 was due to mature on April 15, 2027 and was issued with an original issue discount of 1.0%. The Incremental Term Loan B-4 bore interest at a rate per annum equal to the adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin was (i) with respect to any alternate base rate loan, 2.00% per annum and (ii) with respect to any eurodollar loan, 3.0%. The Incremental Term Loan B-4 was repaid in full in October 2019 with proceeds from the Incremental Term Loan B-5 discussed below.
In October 2019, CSC Holdings entered into a $3,000,000 ($2,977,500 outstanding at December 31, 2020), incremental term loan facility ("Incremental Term Loan B-5") under its existing credit facilities agreement, out of which $500,000 was available on a delayed draw basis. The Incremental Term Loan B-5 matures on April 15, 2027 and was issued at par. The Incremental Term Loan B-5 may be comprised of eurodollar borrowings or alternative base rate borrowings, and will bear interest at a rate per annum equal to the Adjusted LIBOR or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 1.50% per annum and (ii) with respect to any eurodollar loan, 2.50% per annum. The Company is required to make scheduled quarterly payments equal to 0.25% (or $7,500) of the principal amount of the Incremental Term Loan B-5, beginning with the fiscal quarter ended June 30, 2020.
The initial proceeds of the Incremental Term Loan B-5 were used to repay approximately $2,500,000 of the outstanding term loans (Incremental Term Loan B-2 and Incremental Term Loan B-4) under the credit agreement, and the proceeds of the delayed draw tranche of the Incremental Term Loan B-5 were used to distribute $500,000 in cash to Cablevision, the proceeds of which were used to redeem Cablevision’s 8.00% senior notes due 2020, representing the entire aggregate principal amount outstanding, and in each case, paying related fees, costs and expenses in connection with such transactions, with the remainder being used to fund cash on the balance sheet.
During the year ended December 31, 2020, CSC Holdings borrowed $2,075,000 under its revolving credit facility and repaid $1,450,000 of amounts outstanding under the revolving credit facility.
The Company was in compliance with all of its financial covenants under the CSC Credit Facilities Agreement as of December 31, 2020.
See Note 11 to our consolidated financial statements for further information regarding the CSC Credit Facilities Agreement.
Senior Guaranteed Notes and Senior Notes
In June 2020, CSC Holdings issued $1,100,000 in aggregate principal amount of senior guaranteed notes that bear interest at a rate of 4.125% and mature on December 1, 2030, and $625,000 in aggregate principal amount of senior notes that bear interest at a rate of 4.625% and mature on December 1, 2030. The net proceeds from the sale of the these notes was used in July 2020 to early redeem the $1,095,825 aggregate principal amount of CSC Holdings' 5.375% senior notes due July 15, 2023, the $617,881 and the $1,740 aggregate principal amount of CSC Holdings' 7.750% senior notes due July 15, 2025, plus pay accrued interest and the associated premiums related to the early redemption of these notes. In connection with the early redemptions, the Company recognized a loss on the extinguishment of debt aggregating $62,096, reflecting the early redemption premiums and the write-off of outstanding deferred financing costs on these notes.
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In August 2020, CSC Holdings issued $1,000,000 in aggregate principal amount of new senior guaranteed notes that bear interest at a rate of 3.375% and mature on February 15, 2031 and an additional $1,700,000 in aggregate principal amount of its 4.625% senior notes that mature on December 1, 2030 at a price of 103.25% of the aggregate principal amount. The net proceeds from the sale of the notes was used to early redeem the $1,684,221 aggregate principal amount of CSC Holdings' 10.875% senior notes due October 15, 2025, the $1,000,000 aggregate principal amount of CSC Holdings' 6.625% senior guaranteed notes due October 15, 2025, plus pay accrued interest and the associated premiums related to the early redemption of these notes. In connection with the early redemptions, the Company recognized a loss on the extinguishment of debt aggregating $188,393, reflecting the early redemption premiums and the write-off of outstanding deferred financing costs on these notes.
See Note 11 of our consolidated financial statements for further details of the Company’s outstanding senior guaranteed notes and senior notes.
As of December 31, 2020, the Company was in compliance with all of its financial covenants under the indentures under which our senior guaranteed notes and senior notes were issued.
Lightpath Debt Financing
On September 29, 2020, in connection with the Lightpath Transaction, Cablevision Lightpath LLC ("Lightpath") issued $450,000 in aggregate principal amount of senior secured notes that bear interest at a rate of 3.875% and mature on September 15, 2027 and $415,000 in aggregate principal amount of senior notes that bear interest at a rate of 5.625% and mature on September 15, 2028. Prior to the issuance of these notes, Lightpath became an unrestricted subsidiary under the terms of CSC Holdings' debt.
In addition, on September 29, 2020, Lightpath entered into a credit agreement between, inter alios, certain lenders party thereto and Goldman Sachs Bank USA, as administrative agent, and Deutsche Bank Trust Company Americas, as collateral agent, (the "Lightpath Credit Agreement") which provides for, among other things, (i) a term loan in an aggregate principal amount of $600,000 (the “Lightpath Term Loan Facility”) at a price of 99.5% of the aggregate principal amount, which was drawn on November 30, 2020, and (ii) revolving loan commitments in an aggregate principal amount of $100,000 (the “Lightpath Revolving Credit Facility"). As of December 31, 2020, there were no borrowings outstanding under the Lightpath Revolving Credit Facility. The Company is required to make scheduled quarterly payments equal to 0.25% (or $1,500) of the principal amount of the Lightpath Term Loan Facility, beginning with the fiscal quarter ended March 31, 2021.
The loans made pursuant to the Lightpath Credit Agreement are comprised of eurodollar borrowings or alternative base rate borrowings, and bear interest at a rate per annum equal to the adjusted LIBOR rate or the alternate base rate, as applicable, plus the applicable margin, where the applicable margin is (i) with respect to any alternate base rate loan, 2.25% per annum and (ii) with respect to any eurodollar loan, 3.25% per annum. The maturity date of the (i) Lightpath Term Loan Facility is November 30, 2027 and (ii) Lightpath Revolving Credit Facility is November 30, 2025.
As of December 31, 2020, Lightpath was in compliance with all of its financial covenants under its credit agreement and the indentures under which the Lightpath senior secured notes and senior notes were issued.
Interest Rate Swap Contracts
In March 2020, the Company terminated two swap agreements whereby the Company was paying a floating rate of interest and receiving a fixed rate of interest on an aggregate notional value of $1,500,000. These contracts were due to mature in May 2026. In connection with the early termination, the Company received cash of $74,835 which has been recorded in gain (loss) on interest swap contracts in our consolidated statement of operations and presented in operating activities in our consolidated statement of cash flows.
In addition, in March 2020, the Company executed amendments to two interest swap contracts that reduced the fixed rate of interest that the Company was paying on an aggregate notional value of $1,000,000 and extended the maturity date of the contracts to January 15, 2025 from January 15, 2022. The difference in the fair value of the amended contracts and the original contracts on the date of the transaction of $5,689 (an increase in the liability) is being amortized to loss on derivative contracts over the remaining term of the contracts.
During the year ended December 31,2020, the Company entered into new interest rate swap contracts on an aggregate notional value of $3,850,000.
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Capital Expenditures
The following table presents the Company's capital expenditures:
Years Ended December 31,
Customer premise equipment includes expenditures for set-top boxes, cable modems, routers and other equipment that is placed in a customer's home, as well as installation costs for placing assets into service. Network infrastructure includes: (i) scalable infrastructure, such as headend equipment, (ii) line extensions, such as FTTH and fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering, and (iii) upgrade and rebuild, including costs to modify or replace existing fiber/coaxial cable networks, including enhancements. Support and other capital expenditures includes costs associated with the replacement or enhancement of non-network assets, such as software systems, vehicles, facilities and office equipment. Business services capital expenditures include primarily equipment, installation, support, and other costs related to our fiber based telecommunications business serving, primary enterprise customers.
For the year ended December 31, 2020, network infrastructure includes the costs of rebuilding certain systems damaged by storms aggregating $160,975 on a cash basis and $163,142, including accrued and unpaid capital.
Other Transactions
On July 14, 2020, the Company completed its acquisition of certain cable assets in New Jersey for approximately $150,000.
Cash Flow Discussion
Altice USA
Operating Activities
Net cash provided by operating activities amounted to $2,980,164, $2,554,169 and $2,508,317 for the years ended December 31, 2020, 2019 and 2018, respectively.
The 2020 cash provided by operating activities resulted from $3,073,301 of income before depreciation and amortization and non-cash items, increases in liabilities related to interest rate swap contracts of $104,051, a decrease in prepaid expenses and other current assets of $8,330, and a net decrease in amounts due from affiliates of $3,594, partially offset by a decrease in accounts payable and accrued liabilities of $118,388, an increase in accounts receivable of $50,747, and a decrease in deferred revenue of $39,977.
The 2019 cash provided by operating activities resulted from $2,839,538 of income before depreciation and amortization and non-cash items, an increase in liabilities related to interest rate swap contracts of $30,338, partially offset by decreases in accounts payable and accrued liabilities of $144,894, an increase in accounts receivable of $91,718, an increase in prepaid expenses and other assets of $60,854, a decrease in deferred revenue of $10,384, and a net decrease in amounts due to affiliates of $7,857.
The 2018 cash provided by operating activities resulted from $2,644,639 of income before depreciation and amortization and non-cash items, an increase in deferred revenue of $72,426, an increase in liabilities related to interest rate swap contracts of $53,101, and a net increase in amounts due to affiliates of $11,049, partially offset by an increase in accounts receivable of $144,079, a decrease in accounts payable and accrued expenses of $118,176, and an increase in prepaid expenses and other assets of $10,643.
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Investing Activities
Net cash used in investing activities for the years ended December 31, 2020, 2019 and 2018 was $1,220,426, $1,525,469 and $1,148,357, respectively.
The 2020 investing activities consisted primarily of capital expenditures of $1,073,955, and payment for acquisitions, net of cash acquired of $149,973.
The 2019 investing activities consisted primarily of primarily of capital expenditures of $1,355,350 and payments for acquisitions, net of cash acquired of $172,269.
The 2018 investing activities consisted primarily of capital expenditures of $1,153,589, partially offset by other net cash receipts of $5,232.
Financing Activities
Net cash used in financing activities amounted to $2,181,045, $624,412, and $1,390,996 for the years ended December 31, 2020, 2019 and 2018.
In 2020, the Company's financing activities consisted primarily of the repayment of long-term debt of $6,194,804, the purchase of common stock pursuant to a share repurchase program and Tender Offer of $4,816,379, additions to deferred financing costs of $48,523, principal payments on finance lease obligations of $43,083, and other net cash payments of $4,947, partially offset by net proceeds from long-term debt of $8,019,648, proceeds from the sale of a minority interest in Lightpath, net of expenses, of $880,197, proceeds from stock option exercises of $14,348, and contributions from noncontrolling interests, net of $12,498.
In 2019, the Company's financing activities consisted primarily of the repayment of long-term debt of $8,159,914, the purchase of common stock pursuant to a share repurchase program of $1,686,873, additions to deferred financing costs of $23,583, principal payments on finance lease obligations of $8,980, and other net cash payments of $1,500, partially offset by net proceeds from long-term debt of $9,160,229, proceeds from collateralized indebtedness of $93,000, and proceeds from stock option exercises of $3,209.
In 2018, the Company's financing activities consisted primarily of the repayment of long-term debt of $4,882,769, dividend to stockholders of $1,499,935, proceeds from collateralized indebtedness and related derivatives of $516,513, the purchase of common stock pursuant to a share repurchase program of $500,000, additions to deferred financing costs of $28,468, principal payments on finance lease obligations of $10,228, and other net cash payments of $30,859, partially offset by net proceeds from long-term debt of $5,555,268, proceeds from collateralized indebtedness and related derivatives of $516,513, and contributions from noncontrolling interests, net of $5,995.
CSC Holdings
Operating Activities
Net cash provided by operating activities amounted to $2,980,422, $2,623,742 and $2,766,075 for the years ended December 31, 2020, 2019 and 2018, respectively.
The 2020 cash provided by operating activities resulted from $3,111,911 of income before depreciation and amortization and non-cash items, a net decrease in amounts due from affiliates of $180,911, an increase in liabilities related to interest rate swaps of $104,051, and a decrease in prepaid and other current assets of $8,328, partially offset by a decrease in accrued liabilities and accounts payable of $334,055, an increase in accounts receivable of $50,747, and a decrease in deferred revenue of $39,977.
The 2019 cash provided by operating activities resulted from $2,627,592 of income before depreciation and amortization and non-cash items, a net increase in amounts due to affiliates of $247,917 and an increase in liabilities related to interest rate swap contracts of $30,338, partially offset by increases in prepaid expenses and other current assets of $51,611, increases in accounts receivable of $91,718, and decreases in accounts payable and accrued liabilities of $128,392, and deferred revenue of $10,384.
The 2018 cash provided by operating activities resulted from $2,628,133 of income before depreciation and amortization and non-cash items, an increase in deferred revenue of $72,426, an increase in liabilities related to interest rate swap contracts of $53,101, a net increase in amounts due from affiliates of $175,159, and an increase in accounts payable and accrued liabilities of $5,273, partially offset by an increase in accounts receivable of $144,079 and an increase in current and other assets of $23,938.
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Investing Activities
Net cash used in investing activities for the years ended December 31, 2020, 2019 and 2018 was $1,224,634, $1,525,469, and $1,160,184, respectively.
The 2020 investing activities consisted primarily of capital expenditures of $1,073,955 and payments for acquisitions, net of cash acquired of $149,973.
The 2019 investing activities consisted primarily of capital expenditures of $1,355,350 and payments for acquisitions, net of cash acquired of $172,269.
The 2018 investing activities consisted primarily of capital expenditures of $1,153,589 and other net cash receipts of $6,595.
Financing Activities
Net cash used in financing activities amounted to $2,173,422, $697,888 and $1,625,199 for the years ended December 31, 2020, 2019 and 2018, respectively.
In 2020, the Company's financing activities consisted primarily of the repayment of long-term debt of $6,194,804, distribution to parent of $4,794,408, additions to deferred financing costs of $48,523, principal payments on finance lease obligations of $43,083, and other net cash payments of $4,947, partially offset by net proceeds from long-term debt of $8,019,648, proceeds from the sale of a minority interest in Lightpath, net of expenses, of $880,197, and contributions from noncontrolling interests of $12,498.
In 2019, the Company's financing activities consisted primarily of the repayment of long-term debt of $7,637,582, distributions to parent of $2,279,472, additions to deferred financing costs of $23,583, principal payments on finance lease obligations of $8,980, and other net cash payments of $1,500, partially offset by net proceeds from long-term debt of $9,160,229, and proceeds from collateralized indebtedness and related derivatives of $93,000.
In 2018, the Company's financing activities consisted primarily of the repayment of long-term debt of $3,059,013, distribution to parent of $3,058,750, proceeds from collateralized indebtedness and related derivatives of $516,513, additions to deferred financing costs of $28,471, principal payments on finance lease obligations of $10,228, and other net cash payments of $30,000, partially offset by net proceeds from long-term debt of $4,505,268, proceeds from collateralized indebtedness and related derivatives of $516,513, contribution from parent of $50,000, and contributions from noncontrolling interests, net of $5,995.
Contractual Obligations and Off Balance Sheet Commitments
Our contractual obligations as of December 31, 2020, which consist primarily of our debt obligations and the effect such obligations are expected to have on our liquidity and cash flow in future periods, are summarized in the following table:
Payments Due by Period
Total Year1 Years2-3 Years4-5 More than5 years Other
Off balance sheet arrangements:
Contractual obligations reflected on the balance sheet:
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(a)Purchase obligations primarily include contractual commitments with various programming vendors to provide video services to our customers and minimum purchase obligations to purchase goods or services, including contracts to acquire handsets and other equipment. Future fees payable under contracts with programming vendors are based on numerous factors, including the number of customers receiving the programming. Amounts reflected above related to programming agreements are based on the number of customers receiving the programming as of December 31, 2020 multiplied by the per customer rates or the stated annual fee, as applicable, contained in the executed agreements in effect as of December 31, 2020. See Note 17 to our consolidated financial statements for a discussion of our program rights obligations.
(b)Includes franchise and performance surety bonds primarily for our cable television systems. Also includes outstanding guarantees primarily by CSC Holdings in favor of certain financial institutions in respect of ongoing interest expense obligations in connection with the monetization of our holdings of shares of Comcast common stock. Payments due by period for these arrangements represent the year in which the commitment expires.
(c)Consists primarily of letters of credit issued by the Company in favor of insurance providers and certain governmental authorities. Payments due by period for these arrangements represent the year in which the commitment expires.
(d)Includes interest and principal payments due on our (i) credit facility debt, (ii) senior guaranteed notes, senior secured notes, and senior notes, (iii) notes payable and supply chain financing and (iv) collateralized indebtedness. See Notes 11 and 12 to our consolidated financial statements for a discussion of our long-term debt.
(e)Reflects the principal amount of operating and finance lease obligations, including related interest. Lease obligations presented in the table above do not include rent related to utility poles used in our operations. The Company's pole rental agreements are for varying terms, and management anticipates renewals as they expire. Rent expense incurred for pole rental attachments for the years ended December 31, 2020, 2019 and 2018 was $36,364, $31,903 and $33,082, respectively. See Note 9 to our consolidated financial statements for a discussion of our operating and finance leases.
(f)Represents tax liabilities, including accrued interest, relating to uncertain tax positions. See Note 14 to our consolidated financial statements for a discussion of our income taxes.
The table above does not include obligations for payments required to be made under multi-year franchise agreements based on a percentage of revenues generated from video services per year. For the years ended December 31, 2020, 2019 and 2018, the amount of franchise fees and certain other taxes and fees included as a component of revenue aggregated $257,405, $254,227 and $257,467, respectively.
Dividends and Distributions
Prior to Altice Europe's announcement of the Distribution, the Board of Directors of Altice USA, acting through its independent directors, approved the payment of a $2.035 per share dividend to all shareholders of record on May 22, 2018. The payment of the dividend, aggregating $1,499,935, was made on June 6, 2018, and wasfunded with cash at CSC Holdings from financings completed in January 2018, and cash generated from operations.
Share Repurchase Program
In June 2018, the Board of Directors of Altice USA authorized a share repurchase program of $2,000,000, and on July 30, 2019, the Board of Directors authorized a new incremental three-year share repurchase program of $5,000,000 that took effect following the completion in August 2019 of the $2,000,000 repurchase program. Under these repurchase programs, shares of Altice USA Class A common stock may be purchased from time to time in the open market and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Size and timing of these purchases will be determined based on market conditions and other factors.
In November 2020, the Company's Board of Directors authorized the repurchase of up to an additional $2.0 billion of Altice USA Class A common stock pursuant to a tender offer. On November 23, 2020, the Company commenced a modified "Dutch auction" tender offer (the "Tender Offer") to purchase up to $2,500,000 in value of shares of its Class A Common Stock, at a price not greater than $36.00 per share nor less than $32.25 per share . The Tender Offer expired on December 21, 2020. On December 21, 2020, the Company accepted for purchase 64,613,479 shares of its Class A Common Stock, at a price of $36.00 per share, plus related fees, for an aggregate purchase price of $2,326,949. The aggregate purchase price of these shares (including the fees relating to the Tender Offer), is reflected in stockholders' equity (deficiency) in the consolidated balance sheet of Altice USA as of December 31, 2020.
For the year ended December 31, 2020, 2019 and 2018, Altice USA repurchased an aggregate of 161,216,653, 72,668,712, and 28,028,680 shares, respectively, for a total purchase price of approximately $4,816,895, $1,686,873 and $500,000, respectively. These acquired shares were retired and the cost of these shares was recorded in stockholders' equity (deficiency) in the consolidated balance sheet of Altice USA. As of December 31, 2020, Altice
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USA had approximately $1,996,230 of availability remaining under the incremental share repurchase program and had 476,469,575 combined Class A and Class B shares outstanding.
Managing our Interest Rate and Equity Price Risk
Interest Rate Risk
Interest rate risk is primarily a result of exposures to changes in the level, slope and curvature of the yield curve, the volatility of interest rates and credit spreads. Our exposure to interest rate risk results from changes in short-term interest rates. Interest rate risk exists primarily with respect to our credit facility debt, which bears interest at variable rates.
To manage interest rate risk, we have from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or effectively convert fixed rate borrowings to variable rates to permit the Company to realize lower interest expense in a declining interest rate environment. We monitor the financial institutions that are counterparties to our interest rate swap contracts and we only enter into interest rate swap contracts with financial institutions that are rated investment grade. All such contracts are carried at their fair market values on our consolidated balance sheets, with changes in fair value reflected in the consolidated statements of operations.
See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for a summary of interest rate swap contracts outstanding at December 31, 2020. As of December 31, 2020, our outstanding interest rate swap contracts in a liability position had an aggregate fair value and carrying value of $275,297 reflected in “Liabilities under derivative contracts, long term” on our consolidated balance sheet. These outstanding swap contracts are not designated as hedges for accounting purposes. Accordingly, the changes in the fair value of these interest rate swap contracts are recorded through the statement of operations. For the year ended December 31, 2020, the Company recorded a loss on interest rate swap contracts of $78,606. As of December 31, 2020, we did not hold and have not issued derivative instruments for trading or speculative purposes.
See discussion above for further details of our credit facility debt and See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" below for a discussion regarding the fair value of our debt.
Equity Price Risk
We have entered into derivative contracts to hedge our equity price risk and monetize the value of our shares of common stock of Comcast. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share while allowing us to retain upside appreciation from the hedge price per share to the relevant cap price. If any one of these contracts is terminated prior to its scheduled maturity date due to the occurrence of an event specified in the contract, we would be obligated to repay the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and equity collar, calculated at the termination date. As of December 31, 2020 we did not have an early termination shortfall relating to any of these contracts. The underlying stock and the equity collars are carried at fair value in our consolidated balance sheets and the collateralized indebtedness is carried at its principal value, net of discounts and the unamortized fair value adjustment for contracts that existed at the date of the Cablevision Acquisition. See "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for information on how we participate in changes in the market price of the stocks underlying these derivative contracts.
All of our monetization transactions are obligations of our wholly-owned subsidiaries that are not part of the Restricted Group; however, CSC Holdings provides guarantees of the subsidiaries' ongoing contract payment expense obligations and potential payments that could be due as a result of an early termination event (as defined in the agreements). The guarantee exposure approximates the net sum of the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and the equity collar. All of our equity derivative contracts are carried at their current fair value in our consolidated balance sheets with changes in value reflected in our consolidated statements of operations, and all of the counterparties to such transactions currently carry investment grade credit ratings.
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Critical Accounting Policies
In preparing its financial statements, the Company is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented.
The significant accounting policy, which we believe is the most critical to aid in fully understanding and evaluating our reported financial results, is the following:
Plant and Equipment
Costs incurred in the construction of the Company's cable systems, including line extensions to, and upgrade of, the Company's HFC infrastructure and construction of the parallel FTTH infrastructure, are capitalized. This includes headend facilities and initial placement of the feeder cable to connect a customer that had not been previously connected. These costs consist of materials, subcontractor labor, direct consulting fees, and internal labor and related costs associated with the construction activities. The internal costs that are capitalized consist of salaries and benefits of the Company's employees and the portion of facility costs, including rent, taxes, insurance and utilities, that supports the construction activities. These costs are depreciated over the estimated life of the plant (10 to 25 years) and headend facilities (5 to 25 years). Costs of operating the plant and the technical facilities, including repairs and maintenance, are expensed as incurred.
Costs associated with the initial deployment of new customer premise equipment ("CPE") necessary to provide broadband, video and telephony services are also capitalized. These costs include materials, subcontractor labor, internal labor, and other related costs associated with the connection activities. The departmental activities supporting the connection process are tracked through specific metrics, and the portion of departmental costs that is capitalized is determined through a time weighted activity allocation of costs incurred based on time studies used to estimate the average time spent on each activity. These installation costs are amortized over the estimated useful lives of the CPE necessary to provide broadband, video and telephony services. The portion of departmental costs related to disconnecting services and removing CPE from a customer, costs related to connecting CPE that has been previously connected to the network, and repair and maintenance are expensed as incurred.
Refer to Note 2 to our consolidated financial statements for a discussion of our accounting policies.
Recently Issued But Not Yet Adopted Accounting Pronouncements
See Note 3 to the accompanying consolidated financial statements contained in “Part II. Item 8. Financial Statements and Supplementary Data” for a discussion of recently issued accounting standards.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
All dollar amounts, except per share data, included in the following discussion are presented in thousands.
Equity Price Risk
We are exposed to market risks from changes in certain equity security prices. Our exposure to changes in equity security prices stems primarily from the shares of Comcast common stock we hold. We have entered into equity derivative contracts consisting of a collateralized loan and an equity collar to hedge our equity price risk and to monetize the value of these securities. These contracts, at maturity, are expected to offset declines in the fair value of these securities below the hedge price per share while allowing us to retain upside appreciation from the hedge price per share to the relevant cap price. The contracts' actual hedge prices per share vary depending on average stock prices in effect at the time the contracts were executed. The contracts' actual cap prices vary depending on the maturity and terms of each contract, among other factors. If any one of these contracts is terminated prior to its scheduled maturity date due to the occurrence of an event specified in the contract, we would be obligated to repay the fair value of the collateralized indebtedness less the sum of the fair values of the underlying stock and equity collar, calculated at the termination date. As of December 31, 2020, we did not have an early termination shortfall relating to any of these contracts.
The underlying stock and the equity collars are carried at fair value in our consolidated balance sheets and the collateralized indebtedness is carried at its principal value, net of discounts and the unamortized fair value adjustment for contracts that existed at the date of the Cablevision Acquisition. The fair value adjustment is being amortized over the term of the related indebtedness. The carrying value of our collateralized indebtedness amounted to $1,617,506 at December 31, 2020. At maturity, the contracts provide for the option to deliver cash or shares of Comcast common stock, with a value determined by reference to the applicable stock price at maturity.
As of December 31, 2020, the fair value and the carrying value of our holdings of Comcast common stock aggregated $2,250,854. Assuming a 10% change in price, the potential change in the fair value of these investments would be approximately $225,085. As of December 31, 2020, the net fair value and the carrying value of the equity collar component of the equity derivative contracts entered into to partially hedge the equity price risk of our holdings of Comcast common stock aggregated $247,853, a net liability position. For the year ended December 31, 2020, we recorded a net loss of $178,264 related to our outstanding equity derivative contracts and recorded an unrealized gain of $319,157 related to the Comcast common stock that we held.
Fair Value of Equity Derivative Contracts
Fair value as of December 31, 2019, net liability position $ (69,588)
Change in fair value, net (178,265)
Fair value as of December 31, 2020, net liability position $ (247,853)
The maturity, number of shares deliverable at the relevant maturity, hedge price per share, and the lowest and highest cap prices received for the Comcast common stock monetized via an equity derivative prepaid forward contract are summarized in the following table:
# of Shares Deliverable Maturity Hedge Price per Share (a) Cap Price (b)
(a)Represents the price below which we are provided with downside protection and above which we retain upside appreciation. Also represents the price used in determining the cash proceeds payable to us at inception of the contracts.
(b)Represents the price up to which we receive the benefit of stock price appreciation.
Interest Rate Risk
To manage interest rate risk, we have from time to time entered into interest rate swap contracts to adjust the proportion of total debt that is subject to variable and fixed interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to provide an economic hedge against the risk of rising rates and/or effectively convert fixed rate borrowings to variable rates to permit the Company to realize lower interest expense in a declining interest rate environment. We monitor the financial institutions that are counterparties to our interest rate swap contracts and we only enter into interest rate swap contracts with financial institutions that are rated investment grade. All such
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contracts are carried at their fair market values on our consolidated balance sheets, with changes in fair values reflected in the consolidated statements of operations.
The following is a summary of interest rate swap contracts outstanding at December 31, 2020:
Trade Date Maturity Date Notional Amount Company Pays Company Receives
These swap contracts are not designated as hedges for accounting purposes. Accordingly, the changes in the fair value of these interest rate swap contracts are recorded in the consolidated statements of operations. For the year ended December 31, 2020, the Company recorded a loss on interest rate swap contracts of $78,606.
The following represents the location of the assets and liabilities associated with the Company's equity derivative contracts and interest rate swap contracts within the consolidated balance sheets:
Asset Derivatives:
Interest rate swap contracts Derivative contracts, short-term $ 5,132
Prepaid forward contracts Derivative contracts, short-term 45,653
Interest rate swap contracts Derivative contracts, long-term 4,774
Liability Derivatives:
Interest rate swap contracts Other current liabilities —
Prepaid forward contracts Other current liabilities (45,653)
As of December 31, 2020, we did not hold and have not issued derivative instruments for trading or speculative purposes.
Fair Value of Debt
At December 31, 2020, the fair value of our fixed rate debt of $19,460,823 was higher than its carrying value of $18,274,705 by $1,186,118. The fair value of these financial instruments is estimated based on reference to quoted market prices for these or comparable securities. Our floating rate borrowings bear interest in reference to current LIBOR-based market rates and thus their principal values approximate fair value. The effect of a hypothetical 100 basis point decrease in interest rates prevailing at December 31, 2020 would increase the estimated fair value of our fixed rate debt by $677,783 to $20,138,606. This estimate is based on the assumption of an immediate and parallel shift in interest rates across all maturities.
Item 8. Financial Statements and Supplementary Data
For information required by Item 8, refer to the Index to Financial Statements on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
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Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of Altice USA's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined under SEC rules). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective as of December 31, 2020.
Management's Annual Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rules 13a-15(f) under the Securities Exchange Act of 1934, as amended. The Company's internal control over financial reporting is a process designed under the supervision of the Company's Chief Executive Officer and Chief Financial Officer to provide reasonable assurance to the Company's management and Board of Directors regarding the reliability of financial reporting and the preparation of the Company's external financial statements, including estimates and judgments, in accordance with accounting principles generally accepted in the United States of America.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those internal controls determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies and procedures may decline.
The Company's management conducted an assessment of the effectiveness of the Company's internal control over financial reporting based on the framework established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2013 framework). Based on this assessment, management concluded that the Company's internal control over financial reporting was effective as of December 31, 2020.
Audit Report of the Independent Registered Public Accounting Firm
The effectiveness of the Company's internal control over financial reporting as of December 31, 2020 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their audit report on the Company’s internal control over financial reporting appearing on page F-2.
Changes in Internal Control
During the year ended December 31, 2020, there were no changes in the Company's internal control over financial reporting that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
Item 9B. Other Information
None.
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PART III
Information required under Item 10, Directors, Executive Officers and Corporate Governance, Item 11, Executive Compensation, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, Item 13, Certain Relationships and Related Transactions, and Director Independence and Item 14, Principal Accountant Fees and Services, is hereby incorporated by reference from the Company's definitive proxy statement for its Annual Meeting of Stockholders or, if such definitive proxy statement is not filed with the Securities and Exchange Commission within 120 days after the close of the Company’s fiscal year, an amendment to this Annual Report on Form 10-K filed under cover of Form 10-K/A.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)The following documents are filed as part of this report:
i.The financial statements as indicated in the index set forth on page F-1.
ii.Financial statement schedules have been omitted, since they are either not applicable, not required or the information is included elsewhere herein.
iii.The Index to Exhibits is on page 77.
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EXHIBIT INDEX
Exhibit No. Exhibit Description
4.1 + Specimen Class A Common Stock Certificate
4.2 + Specimen Class B Common Stock Certificate
77
Exhibit No. Exhibit Description
78
Exhibit No. Exhibit Description
79
Exhibit No. Exhibit Description
21* List of subsidiaries of the Registrant
23.1* Consent of Independent Registered Public Accounting Firm.
31.1* Section 302 Certification of the CEO.
31.2* Section 302 Certification of the CFO.
32* Section 906 Certifications of the CEO and CFO.
+ Shares of Class A common stock and Class B common stock of the Company are issued in uncertificated form. Therefore, the Company has not filed specimen Class A common stock or Class B common stock certificates. Reference is made to Exhibits 3.1 and 3.2 hereto.
* Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 11th day of February, 2021.
Altice USA, Inc.
By: /s/ Michael J. Grau
Name: Michael J. Grau
Title: Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael J. Grau and Michael E. Olsen, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities, to sign this report, and file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons in the capacities and on the dates indicated on behalf of the Registrant.
Signature Title Date
/s/ Dexter Goei Chief Executive Officer and Director February 11, 2021
Dexter Goei (Principal Executive Officer)
/s/ Michael J. Grau Chief Financial Officer February 11, 2021
Michael J. Grau
Layth Taki (Principal Accounting Officer)
/s/ Patrick Drahi Chairman and Director February 11, 2021
Patrick Drahi
/s/ Gerrit Jan Bakker Director February 11, 2021
Gerrit Jan Bakker
/s/ Manon Brouillette Director February 11, 2021
Manon Brouillette
/s/ David Drahi Director February 11, 2021
David Drahi
/s/ Mark Mullen Director February 11, 2021
Mark Mullen
/s/ Dennis Okhuijsen Director February 11, 2021
Dennis Okhuijsen
/s/ Charles Stewart Director February 11, 2021
Charles Stewart
/s/ Raymond Svider Director February 11, 2021
Raymond Svider
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INDEX TO FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm F-2
ALTICE USA, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2020 and 2019 F-7
Combined Notes to Consolidated Financial Statements F-25
Supplemental Financial Statements Furnished:
CSC HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
Consolidated Balance Sheets - December 31, 2020 and 2019 F-16
Combined Notes to Consolidated Financial Statements F-25
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Altice USA, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Altice USA, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, based on our audit, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, stockholders’ equity (deficiency), and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated February 11, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
New York, NY
February 11, 2021
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Altice USA, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Altice USA, Inc. and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity (deficiency), and cash flows for each of the years in the three‐year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‐year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 11, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
•As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of residential and SMB revenue
As discussed in Note 2 to the consolidated financial statements, the Company earns revenue from both residential and small and medium-sized business (“SMB”) customers. This revenue is derived primarily from monthly charges of its broadband, video, and telephony services. Revenue is recognized as the services are provided to a customer on a monthly basis.
We identified the evaluation of residential and SMB revenue as a critical audit matter. Evaluating the processes and the related internal controls over residential and SMB revenue, including the number of related IT applications, required a high degree of auditor judgment. Specifically, obtaining an understanding of the systems,
F-3
databases, and processes used in the Company’s recognition of residential and SMB revenue and evaluating the related internal controls required especially challenging auditor judgment and required significant auditor effort, including specialized knowledge related to IT.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s residential and SMB revenue recognition processes, including general and application IT controls. We involved IT professionals with specialized skills and knowledge, who assisted in testing certain IT applications that are used by the Company in its recognition of residential and SMB revenue. We evaluated the Company’s residential and SMB revenue recognition policies by examining the Company’s published terms and conditions and by analyzing customer invoices to understand the contractual terms and conditions. We assessed recorded residential and SMB revenue by comparing the total cash received related to residential and SMB revenue transactions during the year to the revenue recorded in the consolidated financial statements. We assessed customer credits, including those issued subsequent to December 31, 2020, and evaluated the impact to revenue recognition.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
New York, NY
February 11, 2021
F-4
Report of Independent Registered Public Accounting Firm
The Board of Directors
CSC Holdings, LLC:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of CSC Holdings, LLC and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, changes in total member’s equity (deficiency), and cash flows for each of the years in the three‐year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‐year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Change in Accounting Principle
•As discussed in Note 9 to the consolidated financial statements, the Company changed its method of accounting for leases as of January 1, 2019 due to the adoption of Accounting Standard Codification Topic 842, Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of residential and SMB revenue
As discussed in Note 2 to the consolidated financial statements, the Company earns revenue from both residential and small and medium-sized business (“SMB”) customers. This revenue is derived primarily from monthly charges of its broadband, video, and telephony services. Revenue is recognized as the services are provided to a customer on a monthly basis.
We identified the evaluation of residential and SMB revenue as a critical audit matter. Evaluating the processes and the related internal controls over residential and SMB revenue, including the number of related IT applications, required a high degree of auditor judgment. Specifically, obtaining an understanding of the systems, databases, and processes used in the Company’s recognition of residential and SMB revenue and evaluating the related internal controls required especially challenging auditor judgment and required significant auditor effort, including specialized knowledge related to IT.
F-5
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s residential and SMB revenue recognition processes, including general and application IT controls. We involved IT professionals with specialized skills and knowledge, who assisted in testing certain IT applications that are used by the Company in its recognition of residential and SMB revenue. We evaluated the Company’s residential and SMB revenue recognition policies by examining the Company’s published terms and conditions and by analyzing customer invoices to understand the contractual terms and conditions. We assessed recorded residential and SMB revenue by comparing the total cash received related to residential and SMB revenue transactions during the year to the revenue recorded in the consolidated financial statements. We assessed customer credits, including those issued subsequent to December 31, 2020, and evaluated the impact to revenue recognition.
/s/ KPMG LLP
We have served as the Company’s auditor since 2016.
New York, NY
February 11, 2021
F-6
ASSETS
Current Assets:
Derivative contracts 50,785 —
See accompanying notes to consolidated financial statements.
F-7
ALTICE USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
December 31, 2020 and 2019
(In thousands, except share and per share amounts)
Current Liabilities:
Commitments and contingencies (Note 17)
Stockholders' Equity (Deficiency):
Accumulated other comprehensive income (loss) 3,646 (3,250)
Total Altice USA stockholders' equity (deficiency) (1,141,030) 2,269,964
See accompanying notes to consolidated financial statements.
F-8
ALTICE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2020, 2019 and 2018
(In thousands, except per share amounts)
Operating expenses:
Other income (expense):
Net income attributable to noncontrolling interests (7,296) (1,003) (1,761)
Income per share:
Cash dividends declared per common share $ — $ — $ 2.035
See accompanying notes to consolidated financial statements.
F-9
ALTICE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2020, 2019 and 2018
(In thousands)
Other comprehensive income:
Defined benefit pension plans:
Unrecognized gain arising during period, net of income taxes 8,614 8,430 610
Amortization of actuarial losses — 89 —
Applicable income taxes — (24) —
Amortization of actuarial losses included in other expense, net of tax — 65 —
Settlement loss included in other expense, net 623 1,643 1,268
Foreign currency translation adjustment (2,167) (1,164) 967
Applicable income taxes — — (261)
Foreign currency translation adjustment, net (2,167) (1,164) 706
See accompanying notes to consolidated financial statements.
F-10
Net income attributable to noncontrolling interests — — — — — — 1,761 1,761
Contributions from noncontrolling interests — — — — — — 5,995 5,995
Pension liability adjustments, net of income taxes — — — — 1,536 1,536 — 1,536
Other changes to equity — — (859) — — (859) — (859)
See accompanying notes to consolidated financial statements.
F-11
Net income attributable to noncontrolling interests — — — — — — — 1,003 1,003
Distributions to noncontrolling interests — — — — — — — (1,000) (1,000)
Pension liability adjustments, net of income taxes — — — — — 9,697 9,697 — 9,697
Conversion of Class B to Class A shares 268 (268) — — — — — — —
See accompanying notes to consolidated financial statements.
F-12
Net income attributable to noncontrolling interests — — — — — — — 7,296 7,296
Contributions from noncontrolling interests — — — — — — 12,498 12,498
Pension liability adjustments, net of income taxes — — — — — 9,063 9,063 — 9,063
Conversion of Class B to Class A shares 3 (3) — — — — — — —
See accompanying notes to consolidated financial statements.
F-13
ALTICE USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2020, 2019 and 2018
(In thousands)
Cash flows from operating activities: