American Tower Corporation — Q2 2010 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2010, compared with the corresponding 2009 periods. American Tower owns and operates wireless and broadcast communications sites in the U.S., Mexico, Brazil, India and Chile. Leasing and managing sites generated about 97% of Q2 revenue. At quarter-end, the company reported approximately 20,400 U.S. towers and 7,400 international towers.
Financial performance and position
Amounts are in millions of U.S. dollars except per-share data. The filing reports:
- Q2 revenue: $469.9, up 11% from $423.4. Rental and management revenue rose 12% to $456.5; network development services revenue fell 19% to $13.5.
- Q2 profit: Operating income was $188.7 versus $166.4; net income attributable to American Tower was $99.7 versus $56.3. Diluted EPS was $0.25 versus $0.14.
- Six-month revenue and profit: Revenue was $924.4, up 11%; operating income was $367.6 versus $316.7; net income attributable to American Tower was $196.0 versus $114.9. Diluted EPS was $0.48 versus $0.28.
- Operating margin: Operating income was approximately 40.2% of revenue in Q2 versus 39.3% in Q2 2009, and 39.8% for the first six months versus 38.1%.
- Cash flow: Six-month operating cash flow was $516.4 versus $409.3. Investing used $286.9 and financing used $174.9; cash increased $55.6 to $302.9. Property, equipment and construction payments were $132.5; acquisition payments were $132.5.
- Debt and liquidity: Total debt was approximately $4.15 billion. Cash and cash equivalents were $302.9, with $621.9 available under the revolving facility; reported total liquidity was $924.8. The company was in compliance with its revolving-credit and term-loan financial covenants. Securitization DSCR was 3.21x.
- Balance sheet: Total assets were $8.59 billion, total liabilities $5.16 billion, and stockholders’ equity $3.43 billion at June 30, 2010. Long-term obligations’ estimated fair value was $4.3 billion versus carrying value of $4.2 billion.
Changes versus prior comparable periods
Growth primarily reflected tenant additions and equipment on existing sites, contractual lease escalations, foreign exchange and straight-line rent recognition, as well as sites acquired or constructed since the prior-year period. Q2 legacy sites added $27.8 million of rental revenue and new sites added approximately $21.9 million. For the six months, those contributions were $53.2 million and $44.4 million, respectively. Increased rental operating costs and depreciation partly offset revenue growth. Network development services revenue declined as site acquisition, zoning, permitting and installation work decreased.
Six-month interest expense decreased $9.7 million, mainly due to lower average debt and borrowing rates. Income from continuing operations rose substantially, while the effective tax rate fell to 23.0% from 45.3%; management cited discrete tax benefits, including a $32.6 million reversal of accrued tax liabilities and a $17.3 million net benefit related to net operating losses. Foreign currency losses were $5.8 million for the six months, compared with $1.0 million in 2009. The prior-year comparison also included $8.1 million of discontinued-operations income, versus $0.03 million in 2010.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow to fund 2010 operations, capital expenditures and cash debt service, and expected cash generated over the next 12 months to cover capital expenditures and debt service.
- For 2010, the company expected total capital expenditures of approximately $300–$350 million, including about $50 million for ground-lease purchases and $165–$205 million for other discretionary projects, with approximately 1,200–1,600 new sites planned. It also expected to spend about $430 million on the ETIPL acquisition.
- The company entered definitive agreements to acquire up to 4,450 Indian towers from ETIPL for estimated consideration of approximately $430 million. It expected the deal to close by the end of Q3 2010; required Indian government approval was received July 26. After quarter-end, it borrowed $350 million under its revolving facility to help fund the acquisition.
- Management was considering a possible REIT conversion, but stated there was no certainty it would proceed. It expected to use net operating losses over the next several years.
- Customer concentration is material: four U.S. customers accounted for approximately 60% of six-month revenue. Grupo Iusacell represented about 4%; the company reported $16.7 million of related receivables and $45.2 million of other related assets, and renegotiated payment terms in April 2010.
- Key risks include dependence on wireless carrier demand and a small number of customers, leverage and covenant restrictions, foreign currency and international operating exposure, technology or customer consolidation reducing tower demand, regulatory and zoning constraints, competition, ground-lease rights, and tax uncertainty. Thirteen interest-rate swaps covered $625 million notional through March 2011; variable-rate debt after swaps was $325 million.
- Contingencies include ongoing government inquiries concerning historical stock-option practices; Mexico litigation with potential damages previously identified at approximately $23 million, for which the company could not estimate its share of liability; and a new XCEL-related lawsuit seeking escrow releases and punitive damages exceeding $69 million, which the company said it would contest. The company reported no other pending matters expected by management to materially affect its financial position, results or liquidity.
- Unusual items include the tax benefits described above, foreign-exchange remeasurement losses, and $4.6 million of higher year-to-date acquisition-related operating costs. The filing reported no significant impairment charge during the six months.
Important facts for investors to verify
- Whether core, legacy-site leasing growth and tenant additions continue to offset cancellations, rising site costs and declining network-development revenue.
- ETIPL acquisition closing, final consideration, funding mix and the effect of the additional revolving-credit borrowing on leverage and interest expense.
- Customer concentration and the collectability and repayment schedule of Grupo Iusacell balances under the amended agreements.
- How much of the reported earnings improvement reflects recurring operations versus discrete tax benefits and prior-year discontinued-operations comparisons.
- Debt maturities, covenant headroom, securitization cash-flow tests and the planned pace of share repurchases alongside acquisition and capital-spending commitments.
- Developments in the XCEL lawsuit, Mexico litigation, stock-option inquiries and uncertain tax positions.