American Tower Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated results; comparisons are with the corresponding 2011 periods. American Tower owns, operates and develops wireless and broadcast communications sites, principally earning revenue by leasing antenna space. It began operating as a REIT for federal income tax purposes on January 1, 2012.
Key financial results
Amounts are in millions of dollars except per-share data. Segment gross margin and Adjusted EBITDA are management-defined non-GAAP measures.
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Operating revenue | $697.7 (+17%) | $597.2 | $1,394.3 (+20%) | $1,159.9 |
| Operating income | $270.5 (+20%) | $225.8 | $544.9 (+23%) | $444.1 |
| Net income | $33.7 (-70%) | $113.2 | $244.0 (+19%) | $205.1 |
| Net income attributable to American Tower | $48.2; diluted EPS $0.12 | $115.2; diluted EPS $0.29 | $269.5; diluted EPS $0.68 | $207.1; diluted EPS $0.52 |
| Adjusted EBITDA | $465.6 (+20%) | $389.1 | $928.2 (+21%) | $766.2 |
| Cash from operating activities | Not presented quarterly | Not presented quarterly | $762.9 | $559.3 |
- Revenue and segment performance: Rental and management revenue was $682.3 million in Q2, up 17%; network development services revenue was $15.5 million, up 15%. Q2 domestic and international rental segment gross margins were $385.3 million (+14%) and $135.7 million (+28%), respectively. First-half segment operating profit was $738.9 million domestic (+16%) and $222.3 million international (+44%); network development services operating profit was $11.6 million (-3%).
- Profit and unusual items: Q2 net income fell sharply despite higher operating income, principally because other expense included $114.9 million of unrealized foreign-currency losses, versus $27.5 million of unrealized gains in Q2 2011. First-half other expense included $59.0 million of unrealized FX losses, compared with $43.6 million of gains a year earlier. The difference between consolidated net income and income attributable to American Tower reflects losses attributable to non-controlling interests.
- Interest, taxes and costs: Q2 interest expense rose 35% to $100.2 million; first-half expense rose 31% to $195.4 million, reflecting higher average debt and a modestly higher weighted borrowing cost. First-half income tax provision declined to $51.1 million from $137.3 million, with REIT conversion reducing the effective tax rate to 17.3% from 40.1%; the company also recorded a $47.6 million increase in valuation allowances on certain deferred tax assets.
- Cash flow and investment: First-half investing cash outflow was $766.9 million, including $532.9 million of net acquisition payments and $226.4 million for property, equipment and construction. Financing activities provided $170.3 million; cash increased $151.7 million to $481.9 million. Operating cash flow growth was attributed to stronger segment operating performance and working-capital benefits, including faster VAT recovery, partly offset by higher cash interest paid.
- Margins and depreciation: Depreciation, amortization and accretion rose 24% in Q2 to $172.1 million and 19% in the first half to $321.7 million, mainly due to sites acquired or built. First-half other operating expenses increased 31% to $27.8 million, including impairment and asset-disposal costs; a long-lived-asset impairment charge of $10.7 million was recorded.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $481.9 million; total current assets were $919.0 million and current liabilities were $906.5 million. Total assets were $12.71 billion and total equity was $3.49 billion.
- Outstanding debt was approximately $7.47 billion, compared with $7.24 billion at December 31, 2011. Total reported liquidity was approximately $2.48 billion, including cash and $2.00 billion of available capacity under revolving credit facilities, net of letters of credit.
- Key financing transactions included $700 million of 4.70% senior notes due 2022 and a $750 million unsecured term loan due 2017, bearing LIBOR plus 1.75% at quarter-end. The revolvers had no borrowings outstanding at June 30. A $1.75 billion securitization had an anticipated repayment date of April 2014.
- Management reported compliance with applicable credit-facility financial covenants at quarter-end. The securitization debt-service coverage ratio was 3.87x. The filing notes that covenant breaches could restrict borrowing or accelerate debt, and a securitization default could put the pledged towers at risk.
Material changes, outlook and risks
- Growth and acquisitions: The portfolio comprised 49,468 communications sites at June 30, including approximately 21,592 domestic and 27,611 international towers and 265 DAS networks. Management attributed much of revenue growth to acquired or constructed sites, including approximately 14,360 additions since January 1, 2011. First-half acquisitions included 700 Brazilian sites and 962 sites in Uganda; the Brazil purchase price was payable in July.
- Organic growth and currency: Management cited recurring lease revenue, contractual escalators, new tenant leases and wireless network investment as growth drivers. It reported more than $17 billion of non-cancellable future tenant lease revenue, excluding straight-line lease accounting. International results were materially affected by currency translation; approximately 29% of first-half revenue was generated internationally.
- Capital spending outlook: Management expected 2012 capital expenditures of approximately $500–$600 million, including $265–$335 million for discretionary projects and construction of approximately 1,800–2,200 new sites. It expected operating cash flow over the next 12 months to cover capital expenditures and cash debt service. The filing does not provide a clear full-year earnings or revenue forecast.
- REIT distributions: The company declared distributions of $0.21 and $0.22 per share in 2012; the latter, approximately $86.9 million in total, was paid July 18. REIT status generally requires annual distributions of at least 90% of REIT taxable income. Future distribution amounts remain subject to board discretion, cash availability, debt restrictions and tax requirements.
- Currency and other exposures: The filing estimates that a 10% adverse exchange-rate movement would produce approximately $175 million of unrealized gains or losses on certain unsettled intercompany and similar balances. Foreign-exchange movements, international regulation and political conditions, and the ability to repatriate funds are material risks.
- Tenant and business risks: Four tenants represented approximately 74% of domestic rental and management revenue, and five tenants represented approximately 54% of international segment revenue in the first half. Risks include tenant financial distress or consolidation, technology changes that reduce tower demand, competition, ground-lease renewals, acquisition integration and REIT qualification.
- Contingencies: The company reported an ongoing SEC subpoena investigation concerning, among other matters, tax accounting and reporting; it could not predict the scope or outcome. A Mexico litigation matter could involve asserted damages of approximately $7.9 million, but whether damages will be assessed against the company’s subsidiary or enforceable in the U.S. was uncertain. Potential acquisition-related contingent consideration was estimated at up to $46.6 million.
Important facts for investors to verify
- How much of revenue and EBITDA growth reflects acquired sites versus organic leasing, and how foreign-exchange movements affect reported international results.
- Whether the REIT conversion, deferred-tax valuation allowances and related tax positions produce sustainable tax savings; monitor the SEC inquiry and uncertain tax benefits.
- Debt maturities, refinancing needs, borrowing costs and covenant headroom, including the 2014 anticipated securitization repayment and short-term Colombian borrowings.
- Whether forecast 2012 capital spending and new-site construction remain within plan while funding distributions and debt service.
- Tenant concentration, lease renewals, site-level demand, acquisition integration and any developments in the Mexico litigation or contingent acquisition payments.