American Tower Corporation — Q2 2011 Form 10-Q
Business context and reporting period. Unaudited results for the quarter and six months ended June 30, 2011, compared with the same periods in 2010. American Tower owns, operates and develops wireless and broadcast communications sites across the United States and eight international markets; leasing and management generated about 97% of first-half revenue. Its reported portfolio comprised 38,048 sites, including 21,118 domestic and 16,667 international towers operated under owned or long-term lease arrangements, plus 263 DAS networks.
Financial performance and position
Amounts below are in millions of dollars except per-share data. Company-defined segment gross margin and Adjusted EBITDA are non-GAAP measures.
- Q2 revenue: $597.2, up 27% year over year; rental and management revenue was $583.8. Domestic rental revenue rose 13% and international rental revenue rose 94%.
- Q2 earnings: Operating income was $225.8, up 20%; net income attributable to American Tower was $115.2, up 16%, and diluted EPS was $0.29 versus $0.25. Adjusted EBITDA was $389.1, up 21%.
- Q2 margins: Segment gross margin was $449.7, or about 75% of revenue; GAAP operating margin was about 38%. These are approximate calculations from reported figures.
- First-half results: Revenue was $1,159.9, up 25%; operating income was $444.1, up 21%; net income attributable to the company was $207.1, up 6%; diluted EPS was $0.52 versus $0.48. Adjusted EBITDA was $766.2, up 21%. Segment gross margin was $880.6, approximately 76% of revenue.
- Cash flow: First-half operating cash flow was $559.3 versus $516.4 in 2010. Investing cash use was $1,057.3, including $892.6 for acquisitions and $236.6 for property, equipment and construction. Financing cash use was $57.4. Cash declined $551.4 to $332.5, principally reflecting acquisition spending.
- Debt and liquidity: Total debt was approximately $5.7 billion at June 30; debt carrying value was $5.7 billion and estimated fair value $5.9 billion. Cash plus reported undrawn credit capacity totaled approximately $2.3 billion. The $275 million revolver and $325 million term loan mature June 8, 2012. A new $1.0 billion supplemental revolver, maturing in 2016, was undrawn at quarter-end. The company reported covenant compliance.
- Balance sheet: Cash was $332.5, total assets $11.0 billion, and total liabilities $7.4 billion. Current obligations rose to $782.8 from $74.9 million at year-end, principally reflecting near-term debt maturities and borrowings.
Material changes versus the prior comparable period
- Growth was led by international expansion: approximately 9,500 sites added since April 2010 contributed to Q2 international rental revenue growth; acquisitions included 650 Brazilian sites, 959 South African towers and 400 Ghanaian sites, among other purchases. Management attributed domestic growth mainly to organic leasing activity and escalations.
- International revenue growth also reflects acquisitions, foreign-currency translation and other factors; it should not be read as purely organic growth. First-half international rental revenue was up 85%, including approximately 16% organic growth and 69% from new sites.
- Q2 interest expense rose 33% to $74.5 million, primarily due to higher average debt, partly offset by a lower weighted average borrowing cost. First-half interest expense rose 30% to $148.9 million.
- First-half income tax provision increased to $137.3 million from $58.7 million; the effective tax rate was 40.1% versus 23.0%, reflecting, among other items, fewer tax benefits from discrete items than in 2010.
- Other income included unrealized foreign-currency gains of approximately $27.5 million in Q2 and $43.6 million in the first half, primarily on intercompany and similar balances. These gains are volatile and not necessarily recurring.
Outlook, risks and unusual items
- Management estimated 2011 capital expenditures of $400–$450 million, including $180–$240 million for discretionary projects and construction of approximately 1,200–1,500 new sites. It expected about $240 million of additional 2011 spending on Ghana and South Africa tower acquisitions. A separate Colombia agreement announced in July covered up to 2,126 towers for approximately $182 million, with the first closing expected in Q4, subject to conditions.
- Management said operating cash flow was expected to cover 2011 operating needs, capital expenditures and cash debt service, and believed next-12-month cash generation would be sufficient for capital spending and debt service. These statements are expectations, not guarantees; the filing gives no specific full-year revenue or earnings guidance.
- The board approved preparations for a possible REIT election effective January 1, 2012, subject to approvals and other conditions. The company expected a special distribution of pre-REIT earnings and profits in Q4 2011, preliminarily estimated at no more than $200 million, but noted the timing and amount were uncertain. Regular quarterly distributions were intended to begin in 2012 if the conversion proceeds.
- On June 2, 2011, the company received an SEC subpoena seeking documents, particularly regarding tax accounting and reporting. The company said it was cooperating and could not predict the investigation’s scope or outcome.
- Other contingencies include Mexico litigation with potential damages identified at about $6.7 million, subject to appeal, and an XCEL acquisition dispute that includes a claim for punitive damages exceeding $69 million; the company is defending the claims. Management said other pending matters were not expected to materially affect financial position, results or liquidity.
- Key risks include customer and tenant concentration (four customers represented approximately 54% of revenue), substantial leverage and refinancing needs, foreign-exchange exposure, execution and integration risks from rapid international acquisitions, and uncertainty around REIT qualification and distributions. A 10% adverse currency move was estimated to affect reported revenue, operating results and cash flows by less than 3%, but could create approximately $62.3 million of unrealized gains or losses on certain unsettled foreign-currency balances.
Important facts for investors to verify
- Progress and outcome of the SEC investigation, including any effects on tax accounting or previously reported figures.
- Final acquisition purchase accounting, post-closing adjustments and realized operating performance of recently acquired international sites.
- Refinancing or repayment plans for the $600 million revolver and term loan due in June 2012, and short-term foreign-currency facilities.
- Whether the REIT reorganization and election proceed, and the final amount, tax treatment and funding of any special distribution.
- Organic leasing growth, tenant concentration and foreign-exchange effects, separating these from acquisition-driven revenue growth and unrealized currency gains.