American Tower Corporation — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Unaudited consolidated results; amounts below are in millions except per-share data and where noted.
Business context
American Tower owns, operates and develops wireless and broadcast communications sites in the U.S., Mexico, Brazil and India. Its portfolio comprised more than 25,800 sites, including approximately 19,600 U.S. tower sites, 6,000 international sites and 200 distributed antenna system networks. Rental and management generated about 96% of Q2 revenue.
Key financial results
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Operating revenue | $423.4 | $393.7 | $832.0 | $775.9 |
| Operating income | $166.4 | $154.8 | $316.7 | $299.6 |
| Income from continuing operations | $51.4 | $50.8 | $107.1 | $93.0 |
| Net income attributable to American Tower | $56.3 | $158.8 | $114.9 | $200.9 |
| Basic / diluted EPS | $0.14 / $0.14 | $0.40 / $0.38 | $0.29 / $0.28 | $0.51 / $0.48 |
| Cash from operating activities | — | $409.3 | $359.1 |
Q2 operating margin was approximately 39.3%, essentially unchanged from 2008. Q2 rental and management revenue rose 6% to $406.8 million; network development services revenue increased 77% to $16.6 million. For the first half, revenue increased 7%, and continuing-operations income rose 15%. Interest expense for the first half declined to $124.2 million from $128.0 million.
Q2 net income fell sharply year over year because Q2 2008 included a $106.1 million tax benefit associated with discontinued operations (Verestar). Q2 2009 discontinued-operations income was $5.1 million. The $6.0 million loss on debt retirement in 2009 related to the repurchase of 7.50% notes.
Cash, debt and liquidity
- Cash and cash equivalents were $323.6 million at June 30, 2009, versus $143.1 million at year-end 2008. First-half operating cash flow of $409.3 million was offset by $211.8 million used in investing and $16.8 million used in financing; cash increased $180.6 million.
- Total debt was approximately $4.44 billion. The company reported total liquidity of approximately $868.9 million, comprising cash and approximately $545.3 million available under its $1.25 billion revolving facility. The facility had $700 million drawn; the $325 million term loan was fully drawn.
- In June, the company issued $300 million of 7.25% senior notes due 2019, receiving approximately $291.6 million net. Proceeds funded the tender offer for $204.2 million principal of 7.50% notes and repayment of $50 million of revolving debt. The remaining $20.8 million of 7.50% notes were redeemed on July 20, 2009.
- Fifteen interest-rate swaps covered $775 million notional, with rates of 2.86%–4.08% and maturities through March 2011. A 10% increase in interest rates (about 27 basis points) was estimated to increase annual pre-tax expense and cash outflow by $0.3 million.
Material changes, outlook and management commentary
- Rental growth reflected leasing and additional equipment on existing sites, contractual escalators and sites added to the portfolio; foreign exchange movements and straight-line lease accounting partially offset growth. Approximately 2,780 sites had been acquired or constructed since Q2 2008.
- First-half cash used in investing increased to $211.8 million, principally reflecting the XCEL acquisition, higher property and construction spending, and short-term investments. The company acquired India-based XCEL on May 27 for approximately $98 million; XCEL had about 1,660 towers and 70 more in development. Preliminary goodwill was $45.9 million.
- Management estimated 2009 capital expenditures of $220–$255 million, including construction of approximately 900–1,100 sites and DAS networks. It expected operating cash flow to cover 2009 operations, capital expenditures and cash debt service, and the next twelve months’ capital needs and debt service. It said additional capital might be raised opportunistically for repurchases, debt repurchases or other corporate purposes.
- During the first half, the company repurchased 2.3 million shares for $69.6 million; it bought another 1.2 million shares for $38.2 million through July 24. Cumulative repurchases under the $1.5 billion program were $641.2 million as of that date.
- After quarter-end, the company announced redemption of $162.2 million of 3.00% convertible notes; holders could convert through August 26, 2009. It also completed the first tranche of a Brazil acquisition in July, purchasing 230 sites for about $50 million under an agreement covering up to 350 sites for about $70 million.
Risks and contingencies
- Four customers accounted for approximately 63% of Q2 revenue. AT&T Mobility represented 20%, Sprint Nextel 18%, Verizon Wireless and ALLTEL 16%, and T-Mobile 9%. Grupo Iusacell, about 5% of first-half revenue, had suspended debt-service payments on U.S.-dollar debt; American Tower reported $30.9 million of net receivables and $34.3 million of other related assets.
- Debt covenants, refinancing access and securitization cash-flow tests are material liquidity risks. The securitized towers’ debt-service coverage ratio was 3.01x at quarter-end; a decline could trap cash or trigger amortization. The company reported compliance with revolving-facility and term-loan covenants.
- Other risks include customer consolidation or reduced carrier spending, foreign-exchange and international operating exposure, technology changes, zoning and regulation, competition, ground-lease renewals, and the ability to fund future growth and repurchases.
- A Mexican litigation matter involving a former subsidiary had a lower appellate ruling identifying potential damages of approximately $23 million; a further appeal was pending, and the company said it could not estimate its potential liability. SEC, U.S. Attorney and IRS reviews of historical stock-option practices remained ongoing; the DOL had closed its review without action. Management stated other pending matters were not expected to materially affect financial position, results or liquidity.
- Tax items included $13.7 million of additional tax expense following conclusion of federal audits for 2004–2005, a $9.2 million benefit from expiration of a foreign statute of limitations, and $4.5 million of previously recognized benefits treated as uncertain. The Q2 effective tax rate was 50.0%; first-half rate was 45.3%.
Most important facts for investors to verify
- Reconcile recurring tower-leasing growth, tenant additions and organic site performance with acquisition-driven growth and currency effects.
- Track customer concentration and collection risk, especially Grupo Iusacell receivables and related assets.
- Review debt maturities, post-quarter redemptions and conversion activity, available revolver capacity, covenant headroom and securitization cash-flow tests.
- Compare actual 2009 capital expenditures, new-site deployment and acquisition spending with management’s stated ranges and cash-flow expectations.
- Monitor the outcome and financial effects, if any, of tax examinations, the Mexican litigation and continuing government reviews of stock-option practices.