American Tower Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Financial statements are unaudited. Unless otherwise noted, amounts below are in U.S. dollars.
Business context
American Tower owns, operates and develops wireless and broadcast communications sites across the United States and eight international markets. Its main business is leasing antenna space; rental and management operations generated about 97% of revenue in the first nine months of 2011. At quarter-end, the company reported 39,927 communications sites, including 21,461 in the United States.
Financial performance and position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2011 | $630.4 million | $1,790.3 million |
| Revenue, 2010 | $513.3 million | $1,437.7 million |
| Revenue growth | 23% | 25% |
| Operating income, 2011 | $228.3 million | $672.4 million |
| Net income (loss) attributable to American Tower, 2011 | $(15.7) million | $191.4 million |
| Net income attributable to American Tower, 2010 | $93.4 million | $289.4 million |
| Adjusted EBITDA, 2011 | $400.6 million | $1,166.8 million |
| Adjusted EBITDA growth | 14% | 19% |
- Margins: Q3 GAAP operating margin was about 36%, versus 42% in Q3 2010. Segment gross margin, a company-defined measure, was $466.7 million in Q3, up 18%; Adjusted EBITDA margin was about 64%, versus 68%. For the nine-month periods, Adjusted EBITDA margin was about 65%, versus 68%.
- Drivers and costs: Management attributed revenue growth to organic leasing and approximately 11,900 sites acquired or constructed since July 1, 2010. International rental revenue rose 79% in Q3, largely reflecting new sites; domestic rental revenue rose 9%. SG&A rose 33% in Q3 and depreciation, amortization and accretion rose 23%.
- Profit volatility: Q3 other expense was $150.9 million, including $145.1 million of unrealized foreign-currency losses, primarily on intercompany and similar balances. This drove the quarterly net loss despite higher operating income. Nine-month other expense was $115.7 million, including $101.5 million of unrealized currency losses.
- Cash flow: Nine-month operating cash flow was $850.0 million, versus $774.6 million in 2010. Investing used $1,559.6 million, including $1,220.6 million for acquisitions and $397.1 million for property, equipment and construction. Financing provided $4.3 million; cash fell by $706.5 million to $177.5 million.
- Liquidity and debt: Reported total liquidity was approximately $2.05 billion: $177.5 million cash, about $872 million available under the $1.25 billion revolving facility, and $1.0 billion under a supplemental facility, which was undrawn at quarter-end. Total debt was approximately $5.83 billion. The revolving facility and fully drawn $325 million term loan mature June 8, 2012. The company reported compliance with its credit-facility covenants.
- Balance sheet: Total assets were $10.90 billion and total stockholders’ equity was $3.35 billion at September 30, 2011. Current liabilities included $861.2 million of current long-term obligations. Cash and cash equivalents declined from $884.0 million at December 31, 2010.
Material changes, outlook and unusual items
- Acquisitions and portfolio expansion were substantial, including purchases in Brazil, Ghana and South Africa. Acquisition spending contributed to the higher use of investing cash. Purchase accounting for several acquisitions remained preliminary.
- The company forecast 2011 capital expenditures of approximately $475 million to $525 million, including $240 million to $280 million for other discretionary projects and construction of approximately 1,600 to 1,800 new sites. It also expected to spend about $172 million during the rest of 2011 on remaining Ghana and South Africa site purchases. These are management estimates, not guarantees.
- Management expected operating cash flow over the next 12 months to cover capital expenditures and cash debt service, with the supplemental credit facility available if needed. The filing does not provide a clear numerical revenue or earnings forecast.
- After quarter-end, the company completed a $500 million offering of 5.90% senior notes due 2021, receiving approximately $495.2 million net, to fund acquisitions and repay some revolving-facility borrowings. It also completed a property-interests acquisition for approximately $500 million, including assumption of about $200 million of debt, and repaid $100 million on the revolving facility.
- REIT plan: The company continued preparing for a possible REIT election effective January 1, 2012, subject to approvals and other conditions. It estimated a potential special distribution of pre-REIT earnings and profits at no more than $200 million, expected to be paid in cash, but said the amount and timing were uncertain. It anticipated regular quarterly distributions beginning in 2012 if it became a REIT.
- Legal and tax matters: The company received an SEC subpoena in June 2011 concerning, in particular, tax accounting and reporting; it said it was cooperating and could not predict the outcome. Unrecognized tax benefits were approximately $45.9 million at quarter-end. A Mexico lawsuit had potential damages of about $6.7 million, but the company could not determine whether liability would survive appeal. The XCEL escrow dispute was settled and dismissed in September 2011.
- Key risks: Revenue concentration is significant: the filing states that four customers represented approximately 53% of total revenue, and separately reports that four customers accounted for 73% of domestic rental revenue and 41% of international rental revenue. Other risks include foreign-currency exposure, tenant consolidation or financial distress, acquisition integration, land-lease rights, substantial leverage, covenant restrictions and the uncertainty of qualifying for and operating as a REIT.
Important facts for investors to verify
- Reconcile customer concentration disclosures and assess exposure to major tenants, including Iusacell, which represented about 4% of nine-month revenue.
- Review the SEC investigation’s scope and any subsequent developments in tax accounting, tax reserves and unrecognized tax benefits.
- Assess refinancing and repayment plans for debt maturing in 2011 and June 2012, alongside the company’s acquisition and repurchase commitments.
- Track the REIT merger approvals, final election decision, distribution amount and funding, and the implications of REIT distribution and asset tests.
- Separate recurring organic growth from acquisition-driven growth and one-time network development revenue; monitor operating costs, foreign exchange effects and acquisition purchase-accounting adjustments.
- Compare actual capital spending, acquisitions, cash generation and debt levels with management’s outlook and covenant headroom.