American Tower Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Unaudited consolidated results. American Tower owns, operates and develops wireless and broadcast communications sites; recurring site leasing represented about 97% of quarterly revenue. Its portfolio included approximately 21,000 domestic and 16,000 international towers, plus about 200 DAS networks.
Financial performance
Amounts below are in millions of U.S. dollars, except per-share data and percentages.
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $562.7 | $454.4 | +24% |
| Operating income | $218.3 | $178.8 | +22% |
| Net income attributable to American Tower | $91.8 | $96.3 | -5% |
| Diluted EPS | $0.23 | $0.24 | Down $0.01 |
| Adjusted EBITDA (non-GAAP) | $377.1 | $311.5 | +21% |
| Cash from operating activities | $283.8 | $253.6 | +$30.2 |
- Revenue growth: Domestic rental and management revenue rose 13% to $417.6 million; international rental and management revenue rose 75% to $129.0 million; network development services revenue increased 51% to $16.0 million. International growth included significant acquired-site contributions.
- Margins: GAAP operating margin was approximately 38.8%, versus 39.4% a year earlier. Adjusted EBITDA margin was approximately 67.0%, versus 68.5%. Segment gross margin increased 23% to $430.9 million. The filing attributes margin pressure in part to higher operating costs and growth in international pass-through costs.
- Profit drivers: Operating income growth was offset below the operating line by higher interest expense and a higher income-tax provision. Interest expense increased 27% to $74.4 million. The effective tax rate rose to 43.7% from 22.7%, primarily reflecting different discrete tax items between periods. Net income also benefited from $13.7 million of other income, mainly unrealized foreign-exchange gains.
- Cash flow and investment: Investing activities used $674.5 million, including $617.3 million for acquisitions and $97.9 million for property, equipment and construction. Financing activities used $137.5 million, including $127.7 million of share repurchases and debt repayments, partly offset by short-term borrowings. Cash and equivalents fell to $362.8 million from $884.0 million at year-end.
- Debt and liquidity: Total debt was approximately $5.57 billion; long-term obligations, including current maturities, had a reported carrying value of about $5.6 billion and fair value of $5.7 billion. Management reported March 31 liquidity of approximately $1.405 billion, comprising $362.8 million cash and approximately $1.042 billion available under the existing revolving facility. Current liabilities were $826.4 million and current assets $951.4 million.
Material changes and developments
- Revenue growth reflected organic leasing gains, contractual escalators and approximately 9,900 sites constructed or acquired since January 1, 2010. The company reported roughly 11% organic growth in domestic rental revenue and 21% in international rental revenue; international growth also included substantial new-site contribution.
- Q1 acquisitions included 627 Brazilian towers for $553.2 million, 959 South African towers for $149.1 million, 180 Chilean sites for $19.9 million and 42 U.S. sites for $23.8 million, among other activity. Acquisition payments and purchase-price allocations may be subject to adjustment.
- Debt increased in connection with growth and financing activity. Short-term obligations included approximately $74.3 million under a Colombian facility due May 26, 2011 and a $102.7 million South African bridge loan due September 30, 2011.
- The company repurchased 2.4 million shares for $122.7 million, including fees, during the quarter. In March, the board authorized a further $1.5 billion buyback program; additional repurchases remained subject to available cash and market conditions.
Outlook, risks and unusual items
- Capital spending outlook: Management expected 2011 capital expenditures of approximately $400–$450 million, including $200–$220 million for other discretionary projects and construction of approximately 1,200–1,500 sites. It also expected to spend approximately $264 million during the rest of 2011 on up to 2,071 international towers and 64 exclusive-use tower rights.
- Liquidity outlook: Management believed operating cash flow would be sufficient for the next 12 months’ capital expenditures and cash debt service. The filing also notes future capital needs may require additional financing. A new $860 million unsecured revolving facility, potentially expandable to $1.0 billion subject to additional commitments, was entered into on April 8, 2011 and matures in 2016; it was subsequent to quarter-end.
- REIT consideration: Management was actively evaluating a possible U.S. REIT election for 2012, potentially deciding as early as the second half of 2011. A board decision was required; the company stated there was no certainty it would elect REIT status. A preliminary estimate put accumulated earnings and profits through 2011 at no more than $200 million.
- Key exposures: Four customers accounted for approximately 55% of total revenue, according to the credit-risk note. The risk discussion separately states four customers represented 74% of domestic segment revenue and four represented 49% of international segment revenue. International operations exposed the company to political, regulatory, tax and currency risks; about 23% of revenue was denominated in foreign currencies. A hypothetical 10% adverse currency move on unsettled intercompany balances could have produced approximately $53 million in unrealized losses.
- Debt covenants: The company reported compliance with its credit-facility covenants at quarter-end. The securitized tower borrowers’ debt-service coverage ratio was 3.54x; a decline could trap excess cash or trigger amortization. Covenant breaches could restrict borrowing or make debt immediately due.
- Contingencies and unusual items: Litigation includes a Mexican tower-construction dispute with potential damages identified at approximately $6.7 million, with outcome and company exposure unclear, and the XCEL escrow dispute, where a court ruled the disputed tax escrow need not be released until 2013; other claims remain pending. Q1 also included acquisition-related costs, REIT-evaluation legal and consulting costs, a one-time network-services revenue item, and unrealized foreign-exchange gains. The company reported a $0.2 million impairment charge.
- Customer-specific matter: Iusacell represented about 4% of total revenue. Its controlling group completed a court-approved refinancing process in April 2011. American Tower disclosed related notes receivable and other assets of $20.1 million and $52.5 million, respectively, at March 31.
Important facts for investors to verify
- Whether acquired sites deliver expected tenant additions, revenue, margins and returns, and whether purchase-price allocations or post-closing adjustments change.
- Near-term refinancing or repayment of the Colombian facility and South African bridge loan, and the effect of the April 2011 supplemental credit facility on liquidity and borrowing costs.
- Customer concentration, tenant credit quality, lease cancellations and the differing concentration percentages disclosed in the filing.
- Execution of the 2011 capital-spending and acquisition plans while funding buybacks and meeting debt-service and covenant requirements.
- Any board decision on REIT status, the related tax and distribution consequences, and changes in uncertain tax positions.
- Developments in the XCEL and Mexican litigation, foreign-exchange exposure, and the company’s ability to maintain securitization cash-flow thresholds.