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American Tower 10-Q 2011 Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-Q
(Mark One):
Commission File Number: 001-14195
AMERICAN TOWER CORPORATION (Exact name of registrant as specified in its charter)
116 Huntington Avenue Boston, Massachusetts 02116 (Address of principal executive offices) Telephone Number (617) 375-7500 (Registrant’s telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes x No ¨ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x As of October 21, 2011, there were 393,025,145 shares of Class A Common Stock outstanding.
Table of ContentsAMERICAN TOWER CORPORATION QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011
Table of Contents
AMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS—Unaudited (in thousands, except share data)
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—Unaudited (in thousands, except per share data)
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—Unaudited (in thousands)
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY—Unaudited (in thousands, except share data)
See accompanying notes to unaudited condensed consolidated financial statements.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited
American Tower Corporation is, through its various subsidiaries (collectively, “ATC” or the “Company”), an independent owner, operator and developer of wireless and broadcast communications sites in the United States, Brazil, Chile, Colombia, Ghana, India, Mexico, Peru and South Africa. The Company’s primary business is the leasing of antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies. The Company also manages rooftop and tower sites for property owners, operates in-building and outdoor distributed antenna system (“DAS”) networks and provides network development services that primarily support its rental and management operations and the addition of new tenants and equipment on its sites. ATC is a holding company that conducts its operations through its directly and indirectly owned subsidiaries and its joint ventures. ATC’s principal domestic operating subsidiaries are American Towers LLC (“ATI”) and SpectraSite Communications, LLC (“SpectraSite”). ATC conducts its international operations through its subsidiary, American Tower International, Inc., which in turn conducts operations through its various international operating subsidiaries. The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial information included herein is unaudited; however, the Company believes that all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial position and results of operations for such periods have been included. Results of interim periods may not be indicative of results for the full year. Subsequent events have been evaluated up to the date of issuance of these financial statements. These condensed consolidated financial statements and related notes should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Principles of Consolidation and Basis of Presentation—The accompanying condensed consolidated financial statements include the accounts of the Company and those subsidiaries and joint ventures in which it has a controlling interest. Investments in entities that the Company does not control are accounted for using the equity or cost method, depending upon the Company’s ability to exercise significant influence over operating and financial policies. Significant Accounting Policies and Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the accompanying condensed consolidated financial statements. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued as additional evidence for certain estimates or to identify matters that require additional disclosure. Changes in Presentation—Changes have been made to the presentation of gross purchases and sales of short-term investments within the condensed consolidated statements of cash flows for the nine months ended September 30, 2010. Concentrations of Credit Risk—The Company is subject to concentrations of credit risk related to its cash and cash equivalents, notes receivable, trade receivables and deferred rent asset. The Company mitigates its risk with respect to cash and cash equivalents by maintaining its deposits and contracts at high quality financial institutions and monitoring the credit ratings of those institutions.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
The Company derives the largest portion of its revenues, corresponding trade receivables and the related deferred rent asset from a small number of customers in the telecommunications industry. Approximately 53% of its revenues are derived from four customers. In addition, the Company has concentrations of credit risk in certain geographic areas. The Company mitigates its concentrations of credit risk with respect to notes and trade receivables and the related deferred rent asset by actively monitoring the credit worthiness of its borrowers and customers. In recognizing customer revenue, the Company must assess the collectability of both the amounts billed and the amounts recognized on a straight-line basis. This assessment takes customer credit risk and business and industry conditions into consideration to ultimately determine the collectability of the amounts billed. To the extent the amounts, based on management’s estimates, may not be collectable when billed, recognition is deferred until such point as the uncertainty is resolved. Any amounts which were previously recognized as revenue and subsequently determined to be uncollectible are charged to bad debt expense. The Company’s largest international customer is Iusacell, which is the brand name under which a group of companies controlled by Grupo Iusacell, S.A. de C.V. (“Grupo Iusacell”) operates. Iusacell represented approximately 4% of the Company’s total revenue for nine months ended September 30, 2011. Grupo Iusacell has been engaged in a refinancing of a majority of its U.S. Dollar denominated debt, and in connection with this, two of the legal entities of the group, including Grupo Iusacell, voluntarily filed for a pre-packaged Concurso Mercantil (a process substantially equivalent to Chapter 11 of U.S. Bankruptcy Law) with the backing of a majority of their financial creditors in December 2010 and subsequently concluded the process in April 2011 after a Mexican court ruled in favor of the refinancing plan presented by the two legal entities. As of September 30, 2011, Iusacell notes receivable, net, and related assets (which include financing lease commitments and a deferred rent asset that are primarily long-term in nature) were $17.4 million and $56.3 million, respectively. Recently Adopted Accounting Standards—In October 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance which establishes accounting and reporting guidance for arrangements including multiple revenue-generating activities. This guidance requires companies to allocate the overall consideration to each deliverable under the arrangement using the estimated selling prices in the absence of vendor specific objective evidence or third-party evidence of selling price for deliverables. This guidance was effective for any contracts entered into, or materially modified by the Company on or after January 1, 2011 and did not have a material impact on the Company’s condensed consolidated results of operations or financial position. Accounting Standards Updates—In May 2011, the FASB amended its guidance related to fair value measurement and disclosure. This guidance clarifies existing measurement and disclosure requirements and results in greater consistency between GAAP and International Financial Reporting Standards. This guidance will be effective prospectively for interim and annual periods beginning on or after December 15, 2011. The implementation of this guidance is not expected to have a material impact on the Company’s condensed consolidated results of operations or financial position. In June 2011, the FASB issued amendments to disclosure requirements for presentation of comprehensive income. This guidance, effective retrospectively for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted), requires presentation of total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The implementation of this guidance is not expected to have a material impact on the Company’s condensed consolidated results of operations or financial position.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
In September 2011, the FASB issued guidance on testing goodwill for impairment that will become effective for the interim and annual periods beginning on or after December 15, 2011 (early adoption is permitted). Under the new guidance, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the entity determines that it is more likely than not that the carrying value of a reporting unit is less than its fair value, then performing the two-step impairment test is unnecessary. The implementation of this guidance will have no impact on the Company’s condensed consolidated results of operations or financial position.
As of September 30, 2011, short-term investments included investments with original maturities of three months or more of $4.7 million and available-for-sale securities of less than $0.1 million. As of December 31, 2010, short-term investments included investments with original maturities of three months or more of $46.2 million and available-for-sale securities of $0.2 million.
The changes in the carrying value of goodwill for the nine months ended September 30, 2011 were as follows (in thousands):
The Company’s other intangible assets subject to amortization consist of the following:
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
The Company amortizes these intangibles on a straight-line basis. As of September 30, 2011, the remaining weighted average amortization period of the Company’s intangible assets, excluding the TV Azteca Economic Rights detailed in note 3 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, was approximately 12 years. Amortization of intangible assets for the three and nine months ended September 30, 2011 was approximately $43.3 million and $131.2 million (excluding amortization of deferred financing costs, which is included in interest expense), respectively. Amortization of intangible assets for the three and nine months ended September 30, 2010 was approximately $39.1 million and $114.6 million (excluding amortization of deferred financing costs, which is included in interest expense), respectively. Based on the current estimated useful lives, the Company expects to record amortization expense (excluding amortization of deferred financing costs) as follows over the next five years (in thousands):
Revolving Credit Facility and Term Loan—As of September 30, 2011, the Company had $375.0 million outstanding under its $1.25 billion senior unsecured revolving credit facility (“Revolving Credit Facility”) and had approximately $3.0 million of undrawn letters of credit outstanding. In March 2008, the Company increased its borrowing capacity under the Revolving Credit Facility by adding $325.0 million of term loan commitments (“Term Loan”). As of September 30, 2011, the Term Loan was fully drawn. The Company continues to maintain the ability to draw down and repay amounts under the Revolving Credit Facility in the ordinary course. In October 2011, the Company repaid $100.0 million under the Revolving Credit Facility. The Revolving Credit Facility has a term of five years and, along with the Term Loan, matures on June 8, 2012. Supplemental Credit Facility—On April 8, 2011, the Company entered into a new unsecured revolving credit facility (the “Supplemental Credit Facility”) that allowed the Company to borrow $860.0 million and on June 16, 2011, the Company received additional commitments of $140.0 million. As a result, as of September 30, 2011, the Supplemental Credit Facility allows the Company to borrow up to $1.0 billion. The Supplemental Credit Facility has a term of five years and matures on April 8, 2016. Any outstanding principal and accrued but unpaid interest will be due and payable in full at maturity. The Supplemental Credit Facility does not require amortization of principal and may be paid prior to maturity in whole or in part at the Company’s option without penalty or premium. The Company has the option of choosing either a defined base rate or the London Interbank Offered Rate (“LIBOR”) as the applicable base rate for borrowings under the Supplemental Credit Facility. The interest rate ranges between 1.350% to 2.600% above the LIBOR rate for LIBOR based borrowings or between 0.350% to 1.600% above the defined base rate for base rate borrowings, in each case based upon the Company’s debt ratings. A quarterly commitment fee on the undrawn portion of the Supplemental Credit Facility is required,
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
ranging from 0.250% to 0.550% per annum, based upon the Company’s debt ratings. The current margin over LIBOR that the Company would incur on borrowings is 1.850% and the current commitment fee on the undrawn portion of the Supplemental Credit Facility is 0.350%. The loan agreement contains certain reporting, information, financial ratios and operating covenants and other restrictions (including limitations on additional debt, guaranties, sales of assets and liens) with which the Company must comply. Any failure to comply with the financial and operating covenants of the loan agreement would not only prevent the Company from being able to borrow additional funds, but would constitute a default, which could result in, among other things, the amounts outstanding, including all accrued interest and unpaid fees, becoming immediately due and payable. As of September 30, 2011, the Company had not drawn on the Supplemental Credit Facility. Colombian Short-Term Credit Facility—In connection with the purchase of the exclusive use rights for towers from Telefónica S.A.’s Colombian subsidiary, Colombia Telecomunicaciones S.A. E.S.P. (“Coltel”), the Company entered into a 72.8 billion Colombian Peso-denominated revolving credit facility on September 3, 2010. On November 24, 2010, the Company increased the credit facility by 66.3 billion Colombian Pesos. On July 25, 2011, the Company refinanced this credit facility with a new 141.1 billion Colombian Peso-denominated short-term credit facility. As of September 30, 2011, 141.1 billion Colombian Pesos (approximately $73.1 million) were outstanding under this facility. In October 2011, the maturity date of this facility was extended to December 25, 2011. South African Bridge Loan—In connection with the acquisition of 959 communications sites from Cell C (Pty) Limited (“Cell C”), the Company entered into a 695.4 million South African Rand-denominated bridge loan (“Bridge Loan”) on March 2, 2011. As of September 30, 2011, 695.4 million South African Rand (approximately $85.9 million) was outstanding under the Bridge Loan. In October 2011, the maturity date of the Bridge Loan was extended to November 25, 2011. Ghana Loan—In connection with the establishment of the Company’s joint venture with MTN Group Limited (“MTN Group”) and the acquisitions of communications sites in Ghana, Ghana Tower Interco B.V., a 51% owned subsidiary of the Company, executed a U.S. Dollar-denominated shareholder loan agreement (“Ghana Loan”), as the borrower, with a wholly owned subsidiary of the Company (“ATC Subsidiary”) and Mobile Telephone Networks (Netherlands) B.V., a wholly owned subsidiary of MTN Group (“MTN Subsidiary”), as the lenders. Pursuant to the terms of the Ghana Loan, loans were made to the joint venture in connection with the acquisition of 400 communications sites on May 6, 2011 and 770 communications sites on August 11, 2011. The Ghana Loan accrues interest at 9.0% and matures on May 4, 2016. The portion of the loans made by the ATC Subsidiary is eliminated in consolidation, and the portion of the loans made by the MTN Subsidiary is reported as outstanding debt of the Company. As of September 30, 2011, an aggregate of $80.8 million was payable to the MTN Subsidiary. Stock Repurchase Programs—During the nine months ended September 30, 2011, the Company continued to repurchase shares of its Class A common stock (“Common Stock”) pursuant to its publicly announced stock repurchase programs. In July 2011, the Company ceased making repurchases under the $1.5 billion stock repurchase program originally announced in February 2008 (“2008 Buyback”). In March 2011, the Board of Directors approved a new stock repurchase program, pursuant to which the Company is authorized to purchase up to an additional $1.5 billion of Common Stock (“2011 Buyback”)
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
During the nine months ended September 30, 2011, the Company repurchased 7.6 million shares of its Common Stock for an aggregate of $393.1 million, including commissions and fees, pursuant to the 2008 Buyback and 2011 Buyback. As of September 30, 2011, the Company had repurchased 34.5 million shares of Common Stock for an aggregate of $1,411.6 million, including commissions and fees, pursuant to the 2008 Buyback, and repurchased 2.9 million shares of Common Stock for an aggregate of $150.4 million, including commissions and fees, pursuant to the 2011 Buyback. Between October 1, 2011 and October 21, 2011, the Company repurchased an additional 0.5 million shares of Common Stock for an aggregate of $26.5 million, including commissions and fees, pursuant to the 2011 Buyback. As of October 21, 2011, the Company had repurchased a total of approximately 3.4 million shares of its Common Stock for an aggregate of $176.9 million, including commissions and fees, pursuant to the 2011 Buyback. Under each program, the Company is authorized to purchase shares from time to time through open market purchases or privately negotiated transactions at prevailing prices in accordance with securities laws and other legal requirements, and subject to market conditions and other factors. To facilitate repurchases, the Company makes purchases pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, which allows the Company to repurchase shares during periods when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. In the near term, the Company expects to fund any further repurchases of its Common Stock through a combination of cash on hand, cash generated by operations and borrowings under its credit facilities. Purchases under each program are subject to the Company having available cash to fund repurchases.
The Company is exposed to certain risks related to its ongoing business operations. The primary risk managed through the use of derivative instruments is interest rate risk. From time to time, the Company enters into interest rate protection agreements to manage exposure on the variable rate debt under its credit facilities and to manage variability in cash flows relating to forecasted interest payments. Under these agreements, the Company is exposed to credit risk to the extent that a counterparty fails to meet the terms of a contract. The Company’s credit risk exposure is limited to the current value of the contract at the time the counterparty fails to perform. If a derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income (loss) and are recognized in the results of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized immediately in the results of operations. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in the results of operations in the period in which the change occurs. All of the Company’s interest rate swap agreements expired in March 2011. As of December 31, 2010, the carrying amounts of the Company’s derivative financial instruments, along with the estimated fair values of the related liabilities were as follows (in thousands):
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
During the nine months ended September 30, 2011 and 2010, the interest rate swap agreements held by the Company had the following impact on other comprehensive income (“OCI”) included in the condensed consolidated balance sheet and in the condensed consolidated statement of operations (in thousands):
The Company determines the fair market values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Below are the three levels of inputs that may be used to measure fair value:
Items Measured at Fair Value on a Recurring Basis—The fair value of the Company’s financial assets and liabilities that are required to be measured on a recurring basis at fair value is as follows:
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
Cash and cash equivalents include short-term investments, including money market funds, with original maturities of three months or less whose fair value equaled cost at September 30, 2011 and December 31, 2010. As of September 30, 2011, there were no interest rate swap agreements outstanding. As of December 31, 2010, the fair value of the Company’s interest rate swap agreements recorded as liabilities is included in other long-term liabilities in the accompanying condensed consolidated balance sheet. Fair valuations of the Company’s interest rate swap agreements reflect the value of the instrument including the values associated with counterparty risk and the Company’s own credit standing. The Company includes in the valuation of the derivative instrument the value of the net credit differential between the counterparties to the derivative contract. Acquisition-related contingent consideration is initially measured and recorded at fair value as an element of consideration paid in connection with an acquisition with subsequent adjustments recognized in other operating expenses in the condensed consolidated statement of operations. The Company determines the fair value of acquisition-related contingent consideration, and any subsequent changes in fair value, using a discounted probability-weighted approach, as determined using Level 3 inputs. During the three and nine months ended September 30, 2011, the fair value of the contingent consideration increased as a result of additions of $2.1 million and $2.2 million, respectively, and changes in fair value of $1.3 million and $1.8 million, respectively. These increases were partially offset by payments during the three and nine months ended September 30, 2011 of $0.9 million and $1.6 million, respectively. Items Measured at Fair Value on a Nonrecurring Basis—During the nine months ended September 30, 2011, long-lived assets held and used with a carrying value of $3.8 billion were written down to their net realizable value, resulting in an asset impairment charge of $0.4 million. These adjustments were determined by comparing the estimated proceeds from sale of assets or the projected future discounted cash flows to be provided from the long-lived assets (calculated using Level 3 inputs) to the asset’s carrying value. Fair Value of Financial Instruments—The carrying value of the Company’s financial instruments, with the exception of long-term obligations, including current portion, reasonably approximate the related fair values as of September 30, 2011 and December 31, 2010. The Company’s estimates of fair value of its long-term obligations, including current portion, are based primarily upon reported market values. As of September 30, 2011, the carrying value and fair value of long-term obligations, including current portion, were $5.8 billion and $6.0 billion, respectively. As of December 31, 2010, the carrying value and fair value of long-term obligations, including current portion, were $5.6 billion and $5.8 billion, respectively.
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full fiscal year. Cumulative adjustments to the Company’s estimate are recorded in the interim period in which a change in the estimated annual effective rate is determined. As of September 30, 2011 and December 31, 2010, the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was approximately $45.9 million and $33.0 million, respectively. The increase in the amount of unrecognized tax benefits during the nine months ended September 30, 2011 is primarily attributable to uncertain tax positions assumed in connection with the Company’s acquisition in Brazil on March 1, 2011. The Company expects the unrecognized tax benefits to change over the next 12 months if certain tax matters ultimately settle with the applicable taxing jurisdiction during this timeframe, as described in note 11 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The impact of the amount of such changes to previously recorded uncertain tax positions could range from zero to $6.0 million. The Company recorded penalties and tax-related interest expense during the three and nine months ended September 30, 2011 of $1.2 million and $3.5 million, respectively, and during the three and nine months ended September 30, 2010 of $0.8 million and $2.2 million, respectively. As of September 30, 2011 and December 31, 2010, the total amount of accrued income tax-related interest and penalties included in other long-term liabilities in the condensed consolidated balance sheets was $26.4 million and $18.0 million, respectively.
The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2011 of $12.1 million and $36.2 million, respectively, and stock-based compensation expense during the three and nine months ended September 30, 2010 of approximately $13.4 million and $40.1 million, respectively. Stock-based compensation expense for the nine months ended September 30, 2011 includes $3.0 million related to the modification of the vesting and exercise terms for certain employees’ equity awards. The Company capitalized $2.4 million of stock-based compensation expense as property and equipment during the three and nine months ended September 30, 2011 and did not capitalize any stock-based compensation expense for the three and nine months ended September 30, 2010. Stock Options—The following table summarizes the Company’s option activity for the nine months ended September 30, 2011:
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
The Company estimates the fair value of each option grant on the date of grant using the Black-Scholes pricing model. The following assumptions were used to determine the grant date fair value for options granted during the nine months ended September 30, 2011:
The weighted average grant date fair value per share during the nine months ended September 30, 2011 was $17.19. As of September 30, 2011, total unrecognized compensation expense related to unvested stock options was $30.0 million, and is expected to be recognized over a weighted average period of approximately two years. Restricted Stock Units—The following table summarizes the Company’s restricted stock unit activity during the nine months ended September 30, 2011:
As of September 30, 2011, total unrecognized compensation expense related to unvested restricted stock units was $71.4 million, and is expected to be recognized over a weighted average period of approximately two years. Employee Stock Purchase Plan—The Company maintains an employee stock purchase plan (“ESPP”) for all eligible employees as described in note 12 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. The offering periods run from June 1 through November 30 and from December 1 through May 31 of each year. During the nine months ended September 30, 2011, employees purchased 43,485 shares under the ESPP and the fair value of such shares was $11.88. Key assumptions used to apply the Black-Scholes pricing model for shares purchased through the ESPP during the nine months ended September 30, 2011 are as follows:
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Table of ContentsAMERICAN TOWER CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited—(Continued)
Basic (loss) income from continuing operations per common share represents (loss) income from continuing operations attributable to American Tower Corporation divided by the weighted average number of common shares outstanding during the period. Diluted (loss) income from continuing operations per common share represents (loss) income from continuing operations attributable to American Tower Corporation divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable upon exercise of stock options, share based awards and warrants as determined under the treasury stock method and upon conversion of the Company’s convertible notes, as determined under the if-converted method. Dilutive common share equivalents also include the dilutive impact of the ALLTEL transaction (see note 10). The following table sets forth basic and diluted income from continuing operations per common share computational data for the three and nine months ended September 30, 2011 and 2010 (in thousands, except per share data):
For the three months ended September 30, 2011, the Company assumed common stock equivalents to be anti-dilutive, as income from continuing operations attributable to American Tower Corporation was in a loss position. For the nine months ended September 30, 2011, the diluted weighted average number of common shares outstanding excluded shares issuable upon exercise of the Company’s stock options and share based awards of 0.9 million, as the effect would be anti-dilutive. For the three and nine months ended September 30, 2010, the diluted weighted average number of common shares outstanding excluded shares issuable upon exercise of the Company’s stock options and share based awards of 1.5 million and 1.7 million, respectively, as the effect would be anti-dilutive. Additionally, for the nine months ended September 30, 2010, the weighted average number of common shares outstanding excluded 0.2 million shares issuable upon conversion of the Company’s convertible notes, which were repaid in 2010.
Litigation The Company periodically becomes involved in various claims, lawsuits and proceedings that are incidental to its business. In the opinion of Company management, after consultation with counsel, other than the legal proceedings discussed below, there are no matters currently pending that would, in the event of an adverse outcome, materially impact the Company’s consolidated financial position, results of operations or cash flows.
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SEC Subpoena—On June 2, 2011, the Company received a subpoena from the SEC requesting certain documents from 2007 through the date of the subpoena, including in particular documents related to the Company’s tax accounting and reporting. While the Company believes this investigation may in part relate to a former employee’s complaints received in the past, which the Company previously investigated with the assistance of outside counsel and a forensic accounting firm, finding no material issues, the Company cannot at this time predict the scope or the outcome of this investigation. The Company understands that its independent registered public accounting firm and one of its consultants have also received subpoenas primarily related to the Company’s tax accounting and reporting during this period and its investigation into this complaint. The Company is cooperating and intends to continue to cooperate fully with the SEC with respect to its investigation. Mexico Litigation—One of the Company’s subsidiaries, SpectraSite Communications, Inc. (“SCI”), is involved in a lawsuit brought in Mexico against a former Mexican subsidiary of SCI (the subsidiary of SCI was sold in 2002, prior to the Company’s merger with SCI’s parent in 2005). The lawsuit concerns a terminated tower construction contract and related agreements with a wireless carrier in Mexico. The primary issue for the Company is whether SCI itself can be found liable to the Mexican carrier. The trial and lower appellate courts initially found that SCI had no such liability in part because Mexican courts do not have the necessary jurisdiction over SCI. In September 2010, following several decisions by Mexican appellate courts, including the Supreme Court of Mexico, and related appeals by both parties, an intermediate appellate court issued a new decision that would, if enforceable, reimpose liability on SCI. In its decision, the intermediate appellate court identified potential damages of approximately $6.7 million, and on October 14, 2010, the Company filed a new constitutional appeal to again dispute the decision. As a result, at this stage of the proceeding, the Company is unable to determine whether the liability imposed on SCI by the September 2010 decision will survive or to estimate its share, if any, of that potential liability if the decision survives the pending appeal. XCEL Litigation—On June 3, 2010, Horse-Shoe Capital (“Horse-Shoe”), a company formed under the laws of the Republic of Mauritius, filed a complaint in the Supreme Court of the State of New York, New York County, with respect to Horse-Shoe’s sale of XCEL Telecom Private Limited (“XCEL”) to American Tower Mauritius (“AT Mauritius”), the Company’s wholly owned subsidiary formed under the laws of the Republic of Mauritius. The complaint named AT Mauritius, ATI and the Company as defendants, and the dispute concerned the timing and amount of distributions to be made by AT Mauritius to Horse-Shoe from a $7.5 million holdback escrow account and a $15.7 million tax escrow account, each established by the transaction agreements at closing. The complaint sought release of the entire holdback escrow account, plus an additional $2.8 million, as well as the release of approximately $12.0 million of the tax escrow account. The complaint also sought punitive damages in excess of $69.0 million. The Company filed an answer to the complaint in August 2010, disputing both the amounts alleged to be owed under the escrow agreements as well as the timing of the escrow distributions. The Company also asserted in its answer that the demand for punitive damages was meritless. The parties filed cross-motions for summary judgment concerning the release of the tax escrow account and, in January 2011, the court granted the Company’s motion for summary judgment, finding no obligation for the Company to release the disputed portion of the tax escrow until 2013. In March 2011, Horse-Shoe filed a motion for summary judgment seeking disbursement of $5.3 million of the holdback escrow account that it claimed is undisputed. The court denied Horse-Shoe’s motion in May 2011. In August 2011, the Company entered into a settlement agreement with Horse-Shoe pursuant to which (i) $7.3 million from the holdback escrow account was distributed to Horse-Shoe and the remainder to the Company; (ii) no funds were distributed from the tax escrow; and (iii) Horse-Shoe released all of its claims against the Company. The case was dismissed in September 2011.
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Commitments AT&T Transaction—The Company has an agreement with SBC Communications Inc., a predecessor entity to AT&T Inc. (“AT&T”), for the lease or sublease of approximately 2,500 towers from AT&T between December 2000 and August 2004. All of the towers are part of the Company’s securitization transaction. The average term of the lease or sublease for all sites at the inception of the agreement was approximately 27 years, assuming renewals or extensions of the underlying ground leases for the sites. The Company has the option to purchase the sites subject to the applicable lease or sublease upon its expiration. Each tower is assigned to an annual tranche, ranging from 2013 to 2032, which represents the outside expiration date for the sublease rights to that tower. The purchase price for each site is a fixed amount stated in the sublease for that site plus the fair market value of certain alterations made to the related tower by AT&T. The aggregate purchase option price for the towers leased and subleased was approximately $485.2 million as of September 30, 2011, and will accrete at a rate of 10% per year to the applicable expiration of the lease or sublease of a site. For all such sites purchased by the Company prior to June 30, 2020, AT&T will continue to lease the reserved space at the then-current monthly fee which shall escalate in accordance with the standard master lease agreement for the remainder of AT&T’s tenancy. Thereafter, AT&T shall have the right to renew such lease for up to four successive five-year terms. For all such sites purchased by the Company subsequent to June 30, 2020, AT&T has the right to continue to lease the reserved space for successive one year terms at a rent equal to the lesser of the agreed upon market rate and the then current monthly fee, which is subject to an annual increase based on changes in the Consumer Price Index. ALLTEL Transaction—In December 2000, the Company entered into an agreement with ALLTEL (which completed its merger with Verizon Wireless in January 2009) to acquire towers from ALLTEL through a 15-year sublease agreement. Pursuant to the agreement with ALLTEL, as amended, the Company acquired rights to a total of approximately 1,800 towers in tranches between April 2001 and March 2002. The Company has the option to purchase each tower at the expiration of the applicable sublease, which will occur in tranches between April 2016 and March 2017 based on the original closing date for such tranche of towers. The purchase price per tower as of the original closing date was $27,500 and will accrete at a rate of 3% per annum through the expiration of the applicable sublease. The aggregate purchase option price for the subleased towers was approximately $66.6 million as of September 30, 2011. At ALLTEL’s option, at the expiration of the sublease, the purchase price would be payable in cash or with 769 shares of the Company’s Common Stock per tower.
Acquisitions ETIPL Acquisition—On August 6, 2010, the Company’s indirectly held, wholly owned Indian subsidiary, Transcend Infrastructure Limited, acquired substantially all the issued and outstanding shares of Essar Telecom Infrastructure Private Limited (“ETIPL”), for an aggregate purchase price of approximately $420.7 million. During the nine months ended September 30, 2011, the Company made certain purchase accounting measurement period adjustments and retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2010. The acquisition has been accounted for as a business combination. The purchase price was allocated to the acquired assets and liabilities based on the estimated fair value of the acquired assets at the date of acquisition. The allocation of the purchase price was finalized during the three months ended September 30, 2011.
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The following table summarizes the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed at the acquisition date (in thousands):
Peru Acquisition—On August 9, 2010, the Company announced that it had entered into a definitive agreement to purchase towers from Telefónica del Peru S.A.A. As of September 30, 2011, the Company acquired 475 communications sites in various tranches during 2010. The acquisition had a final purchase price, after certain post-closing adjustments, of $87.8 million. During the nine months ended September 30, 2011, the Company made certain purchase accounting measurement period adjustments and retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2010. The acquisition has been accounted for as a business combination. The purchase price was allocated to the acquired assets and liabilities based on the estimated fair value of the acquired assets at the date of acquisition. The allocation of the purchase price for the first acquisition completed in August 2010 was finalized during the three months ended September 30, 2011. The preliminary allocation of the purchase price for the acquisitions which closed in October, November and December 2010 will be finalized upon completion of the analyses of fair value of the net assets acquired.
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The following table summarizes the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed at the acquisition date (in thousands):
Chile-VTR Acquisition—On February 1, 2011, the Company acquired 140 communications sites from VTR Banda Ancha (Chile) S.A. and its affiliates, and subsequently purchased 40 communications sites under construction in March 2011 for an aggregate purchase price of $19.9 million. The acquisition is consistent with the Company’s strategy to expand in selected international markets. The acquisition is being accounted for as a business combination. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at the date of acquisition. The preliminary allocation of the purchase price will be finalized upon completion of the transaction and the analyses of fair value of the net assets acquired and may result in the recognition of goodwill. The following table summarizes the allocation of the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed based upon their estimated fair value at the date of acquisition (in thousands):
Chile-Telefónica Acquisition—On June 29, 2010, the Company entered into definitive agreements to purchase towers from Telefónica Chile S.A. and its affiliates. On April 28, 2011, the Company signed an amendment to these agreements and acquired an additional 165 communications sites for an aggregate purchase
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price of $17.7 million. After certain post-closing adjustments, the purchase price was increased to $19.4 million. The purchase price is subject to additional post-closing adjustments, following completion of the Company’s post-closing due diligence of the communications sites acquired. The acquisition is consistent with the Company’s strategy to expand in selected international markets. The acquisition is being accounted for as a business combination. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at the date of acquisition. The preliminary allocation of the purchase price will be finalized upon completion of the transaction and the analyses of fair value of the net assets acquired and may result in the recognition of goodwill. The following table summarizes the allocation of the purchase consideration paid and the amounts of assets acquired and liabilities assumed based upon their estimated fair value at the date of acquisition for those communications sites acquired in 2011 (in thousands):
Colombia—Moviles Acquisition—During October 2010, the Company entered into a definitive agreement to purchase towers from Telefónica Moviles Colombia S.A. Pursuant to this agreement, the Company completed the purchase of 500 towers during the year ended December 31, 2010 for an aggregate purchase price of $72.7 million, which was subsequently reduced to $72.0 million, after certain post-closing adjustments. The purchase price is subject to additional post-closing adjustments, following completion of the Company’s post-closing due diligence of the communications sites acquired. During the nine months ended September 30, 2011, the Company made certain purchase accounting measurement period adjustments and retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2010. The acquisition is consistent with the Company’s strategy to expand in selected international markets. The acquisition is being accounted for as a business combination. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at the date of acquisition. The preliminary allocation of the purchase price will be finalized upon completion of the transaction and the analyses of fair value of the net assets acquired.
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The following table summarizes the preliminary allocation of the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed based on the estimated fair value of the acquired assets and assumed liabilities at the date of acquisition (in thousands):
South Africa Acquisition—On November 4, 2010, the Company entered into a definitive agreement with Cell C to purchase up to approximately 1,400 existing towers, and up to 1,800 additional towers that either are under construction or will be constructed, for an aggregate purchase price of up to approximately $430.0 million. On March 8, 2011, the Company completed the purchase of 959 existing towers through its local South African subsidiary for an aggregate purchase price of $149.1 million, including value added tax, using cash on hand, local financing and funds contributed by South African investors who currently hold an approximate 25% noncontrolling interest in the Company’s South African subsidiary. On July 25, 2011, the Company completed the purchase of an additional 329 existing towers from Cell C for approximately $51.5 million, including value added tax, and contingent consideration of $2.1 million. The Company expects to close on the remaining 76 existing towers during 2011, subject to customary closing conditions. The agreement with Cell C requires the Company to make a one-time payment based on the annualized rent for each collocation installed for a specific wireless carrier on the acquired towers occurring within a four year period after the initial closing date. Based on current estimates, the Company estimates the future value of contingent consideration payments required to be made under the agreement to be between zero and $10.4 million. The fair value of the contingent consideration, which had preliminarily been estimated at zero, is estimated to be $6.2 million using a probability-weighted average of the expected outcomes at September 30, 2011. During the three months ended September 30, 2011, the Company recorded $4.1 million of the $6.2 million as other operating expenses in the condensed consolidated statement of operations. The acquisition is consistent with the Company’s strategy to expand in selected international markets. The acquisition is being accounted for as a business combination. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at the date of acquisition. The preliminary allocation of the purchase price will be finalized upon the final settlement of the purchase price with the sellers and the subsequent completion of analyses of the fair value of the assets and liabilities acquired.
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The following table summarizes the allocation of the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed based upon their estimated fair value at the date of acquisition (in thousands):
Brazil Acquisition—On March 1, 2011, the Company acquired 100% of the outstanding shares of a company that owned 627 communications sites in Brazil for $553.2 million, which was subsequently increased to $585.4 million as a result of acquiring 39 additional communications sites and certain post-closing adjustments. The acquisition is subject to a post-closing purchase price adjustment, following completion of the Company’s post-closing due diligence of the acquired company’s financial results. The acquisition is consistent with the Company’s strategy to expand in selected international markets. The acquisition is being accounted for as a business combination. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at the date of acquisition. The preliminary allocation of the purchase price will be finalized upon the settlement of the purchase price with the sellers and the subsequent completion of analyses of the fair value of the assets and liabilities acquired. The following table summarizes the allocation of the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed based upon their estimated fair value at the date of acquisition (in thousands):
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Ghana Acquisition—On December 6, 2010, the Company entered into a definitive agreement with MTN Group to establish a joint venture in Ghana. The joint venture is managed by the Company and owns a tower operations company in Ghana. As the Company has a controlling financial interest in the joint venture, the financial results have been consolidated in the Company’s financial statements. Pursuant to the agreement, the joint venture expects to purchase a total of up to 1,876 existing towers from MTN’s operating subsidiary in Ghana (“MTN Ghana”) in various tranches throughout 2011 and early 2012, subject to customary closing conditions. The Company signed the necessary agreements to establish the joint venture on May 3, 2011. On May 6, 2011, the joint venture acquired 400 communications sites for an aggregate purchase price of $110.5 million, including value added tax, which was subsequently increased to $115.3 million after certain post closing adjustments. On August 11, 2011, the joint venture acquired 770 communications sites for an aggregate purchase price of approximately $204.2 million, including value added tax, subject to a post-closing purchase price adjustment. MTN Ghana will be the anchor tenant on each of the towers purchased. The acquisition is consistent with the Company’s strategy to expand in selected international markets. The acquisition is being accounted for as a business combination. The purchase price was preliminarily allocated to the acquired assets and liabilities based upon their estimated fair value at the date of acquisition. The preliminary allocation of the purchase price will be finalized upon the final settlement of the purchase price with the sellers and the subsequent completion of analyses of the fair value of the asset and liabilities acquired. The following table summarizes the allocation of the aggregate purchase price consideration paid and the amounts of assets acquired and liabilities assumed based upon their estimated fair value at the date of acquisition (in thousands):
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U.S. Acquisitions—During the nine months ended September 30, 2011, the Company acquired a total of 135 communications sites and equipment in the United States for $65.2 million and contingent consideration of $0.1 million. The terms of the contingent consideration require the Company to make a one-time payment based on the annualized rent for the installation of a wireless provider on one of the communications sites acquired. Based on current estimates, the Company expects the future value of contingent consideration payments required to be made under the agreement to be between zero and $0.2 million. The fair value of the contingent consideration as of September 30, 2011 is estimated to be $0.1 million. These acquisitions are consistent with the Company’s strategy to expand in selected geographic areas and have been accounted for as business combinations. The following table summarizes the preliminary allocation of the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed based on the estimated fair value of the acquired assets and assumed liabilities at the date of acquisition (in thousands):
During the nine months ended September 30, 2011, the Company made certain purchase accounting measurement period adjustments to several U.S. acquisitions and retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet for the year ended December 31, 2010. The following table summarizes the aggregate purchase consideration paid and the amounts of assets acquired and liabilities assumed at the acquisition date for acquisitions which closed during the year ended December 31, 2010 (in thousands):
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The allocation of the purchase price will be finalized upon completion of analyses of the fair value of the assets acquired and liabilities assumed. Other Transactions Coltel Transaction—On September 3, 2010, the Company entered into a definitive agreement to purchase the exclusive use rights for towers in Colombia from Coltel until 2023, when ownership of the towers will transfer to the Company at no additional cost. Pursuant to that agreement, during the nine months ended September 30, 2011, the Company completed the purchase of exclusive use rights for 180 towers for an aggregate purchase price of approximately $30.6 million, of which $30.5 million was paid during the nine months ended September 30, 2011. The transaction has been accounted for as a capital lease, with the aggregated purchase price being allocated to property and equipment and non-current assets. Colombia Acquisition—On July 17, 2011, the Company entered into a definitive agreement with Colombia Movil S.A. E.S.P. (“Colombia Movil”), a subsidiary of Millicom International Cellular S.A (“Millicom”), whereby a Colombian subsidiary of the Company will purchase up to 2,126 towers from Colombia Movil for an aggregate purchase price of approximately $182.0 million. Through a Millicom subsidiary, Millicom and Colombia Movil’s other shareholders will have an option to acquire an indirect, substantial minority equity interest in the Colombian subsidiary of the Company. The Company expects to close on the first tranche of towers during the fourth quarter of 2011, subject to customary closing conditions. U.S. Property Interests Acquisition—On September 3, 2011, the Company entered into an agreement to acquire from Unison Holdings, LLC and Unison Site Management II, L.L.C. various limited liability companies holding a portfolio of property interests under approximately 1,800 communications sites in the United States. The acquisition includes property interests under the Company’s existing communications sites in accordance with its current land purchase program, as well as property interests under carrier customer and other third-party communications sites providing complementary leasing and recurring cash flow. The acquisition closed on October 14, 2011 for an aggregate purchase price of approximately $500.0 million, which included the assumption of approximately $200.0 million of existing indebtedness.
The Company operates in three business segments: domestic rental and management, international rental and management and network development services. The domestic rental and management segment provides for the leasing of antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies in the United States. The international rental and management segment provides for the leasing of antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies in Brazil, Chile, Colombia, Ghana, India, Mexico, Peru and South Africa. Through its network development services segment, the Company offers tower-related services in the United States, including site acquisition, zoning and permitting services and structural analyses services which primarily support the Company’s site leasing business and the addition of new tenants and equipment on its sites.
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The accounting policies applied in compiling segment information below are similar to those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. In evaluating financial performance, management focuses on segment gross margin and segment operating profit. The Company defines segment gross margin as segment revenue less segment operating expenses excluding stock-based compensation expense recorded in costs of operations; depreciation, amortization and accretion; selling, general, administrative and development expense; and other operating expenses. The Company defines segment operating profit as segment gross margin less selling, general, administrative and development expense attributable to the segment, excluding stock-based compensation expense and corporate expenses. For reporting purposes, the international rental and management segment operating profit and segment gross margin also include interest income, TV Azteca, net. These measures of segment gross margin and segment operating profit are also before interest income, interest expense, loss on retirement of long-term obligations, other income (expense), net income attributable to noncontrolling interest, income (loss) on equity method investments, income taxes and discontinued operations. Summarized financial information concerning the Company’s reportable segments for the three and nine months ended September 30, 2011 and 2010 is shown in the tables below. The Other column reconciles segment operating profit to income (loss) before income taxes, noncontrolling interest and income (loss) on equity method investments and represents amounts excluded from specific segments, such as business development operations, stock-based compensation expense and corporate expenses included in selling, general, administrative and development expense; other operating expense; interest income; interest expense; loss on retirement of long-term obligations; and other income (expense), as these amounts are not utilized in assessing each segment’s performance.
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Senior Notes Offering—On October 6, 2011, the Company completed a registered public offering of $500.0 million aggregate principal amount of its 5.90% senior notes due 2021 (“5.90% Notes”). The net proceeds to the Company from the offering were approximately $495.2 million, after deducting commissions and expenses. The Company used the net proceeds to finance acquisitions and repay a portion of the outstanding indebtedness incurred under its Revolving Credit Facility. The 5.90% Notes mature on November 1, 2021, and interest is payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2012. The Company may redeem the 5.90% Notes at any time at a redemption price equal to 100% of the principal amount, plus a make-whole premium, together with accrued interest to the redemption date. Interest on the notes will accrue from October 6, 2011 and will be computed on the basis of a 360-day year comprised of twelve 30-day months. If the Company undergoes a change of control, as defined in the prospectus supplement to the prospectus dated as of May 13, 2010, and ratings decline (in the event that on or within 90 days after an announcement of a change of control, both of its current investment grade credit ratings cease to be investment grade), the Company will be required to offer to repurchase all of the 5.90% Notes at a purchase price equal to 101% of the principal amount, plus accrued and unpaid interest up to but not including the repurchase date. The 5.90% Notes rank equally with all of the Company’s other senior unsecured debt and are structurally subordinated to all existing and future indebtedness and other obligations of its subsidiaries. The indenture contains certain covenants that restrict the Company’s ability to merge, consolidate or sell assets and its (together with its subsidiaries’) ability
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to incur liens. These covenants are subject to a number of exceptions, including that the Company and its subsidiaries may incur certain liens on assets, mortgages or other liens securing indebtedness, if the aggregate amount of such liens does not exceed 3.5x Adjusted EBITDA, as defined in the indenture. U.S. Property Interests Purchase—Subsequent to the end of the third quarter, the Company entered into a transaction to purchase property interests under certain of its existing communications sites in the United States for total consideration of up to $86.0 million, subject to customary closing conditions. The purchase of the property interests is in accordance with its current land purchase program.
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This Quarterly Report on Form 10-Q contains forward-looking statements relating to our goals, beliefs, plans or current expectations and other statements that are not of historical facts. For example, when we use words such as “project,” “believe,” “anticipate,” “expect,” “forecast,” “estimate,” “intend,” “should,” “would,” “could” or “may,” or other words that convey uncertainty of future events or outcomes, we are making forward-looking statements. Certain important factors may cause actual results to differ materially from those indicated by our forward-looking statements, including those set forth under the caption “Risk Factors” in Part II, Item 1A. of this Quarterly Report on Form 10-Q. Forward-looking statements represent management’s current expectations and are inherently uncertain. We do not undertake any obligation to update forward-looking statements made by us. The discussion and analysis of our financial condition and results of operations that follow are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ significantly from these estimates under different assumptions or conditions. This discussion should be read in conjunction with our condensed consolidated financial statements herein and the accompanying notes thereto, information set forth under the caption “Critical Accounting Policies and Estimates” beginning on page 47 of our Annual Report on Form 10-K for the year ended December 31, 2010, in particular, the information set forth therein under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Overview We are a leading wireless and broadcast communications infrastructure company that owns, operates and develops communications sites. Our communications site portfolio of 39,927 sites, as of September 30, 2011, includes wireless communications towers, broadcast communications towers and distributed antenna system (“DAS”) networks, which are collocation solutions to support seamless in-building and outdoor wireless coverage. Our portfolio consists of towers that we own and towers that we operate pursuant to long-term lease arrangements, including, as of September 30, 2011, 21,209 towers domestically and 18,460 towers internationally. Our portfolio also includes 258 in-building and outdoor DAS networks that we operate in malls, casinos and other in-building applications, and select outdoor environments. In addition to the communications sites in our portfolio, we manage rooftop and tower sites for property owners. Our primary business is leasing antenna space on multi-tenant communications sites to wireless service providers and radio and television broadcast companies. We refer to this business as our rental and management operations, which accounted for approximately 97% of our total revenues for the nine months ended September 30, 2011. The following table details the number of communications sites we own or operate in the countries in which we operate as of September 30, 2011:
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Table of ContentsIn the section that follows, we provide information regarding management’s expectations of long-term drivers of demand for our communications sites, as well as our current quarter to date and year to date results of operations, financial position and sources and uses of liquidity. In addition, we highlight key trends, which management believes provides valuable insight into our operating and financial resource allocation decisions. Revenue Growth. Our revenue is primarily generated from tenant leases, and the annual rental payments vary considerably depending upon various factors, including but not limited to, tower location, amount of tenant equipment on the tower, ground space required by the tenant, and remaining tower capacity. We measure the remaining tower capacity by assessing several factors, including tower height, tower type, environmental conditions, existing equipment on the tower and zoning and permitting regulations in effect in the jurisdiction where the tower is located. In many instances, tower capacity can be increased through tower augmentation. Our tenant leases are typically non-cancellable and have annual rent escalations. Our primary costs typically include ground rent, property taxes and repairs and maintenance, which are primarily fixed, with annual cost escalations. In our international markets, a portion of our operating costs is passed through to our tenants, such as ground rent and/or fuel costs. The primary factors affecting the consistent incremental growth in our revenues and cash flows for our domestic and international rental and management segments are new revenue generated from new sites acquired or constructed since the beginning of the prior year period (“new sites”) and organic revenue growth, which consists of:
We continue to believe that our site leasing revenue is likely to increase due to the growing use of wireless communications services and our ability to meet that demand by adding new tenants and new equipment for existing tenants on our legacy sites, which increases the utilization and profitability of our sites. In addition, we believe the majority of our site leasing activity will continue to come from wireless service providers. Our legacy site portfolio and our established tenant base provide us with new business opportunities, which have historically resulted in consistent and predictable revenue growth. In addition, we intend to continue to supplement the growth on our legacy sites by selectively developing or acquiring new sites in our existing and new markets where we can achieve our return on investment criteria. As we continue to focus on growing our rental and management operations, we anticipate that our network development services revenue will continue to represent a small percentage of our total revenues. Through our network development services segment, we offer tower-related services, including site acquisition, zoning and permitting services and structural analysis services, which primarily support our site leasing business and the addition of new tenants and equipment on our sites. Our continuing operations are reported in three segments, domestic rental and management, international rental and management and network development services. Management focuses on segment gross margin and segment operating profit as a means to measure operating performance in our business segments. We define segment gross margin as segment revenue less segment operating expenses excluding stock-based compensation expense recorded in costs of operations; depreciation, amortization and accretion; selling, general, administrative and development expense; and other operating expenses. We define segment operating profit as segment gross margin less selling, general, administrative and development expense attributable to the segment, excluding stock-based compensation expense and corporate expenses. Segment gross margin and segment operating profit for the international rental and management segment also include interest income, TV Azteca, net (see note 12 to our condensed consolidated financial statements included herein). These measures of segment gross margin and segment operating profit are also before interest income, interest expense, loss on retirement of long-term obligations, other income (expense), net income attributable to noncontrolling interest, income (loss) on equity method investments, income taxes and discontinued operations.
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Table of ContentsREIT Election. On May 19, 2011, our Board of Directors approved a plan to reorganize our business operations so that we would be eligible to elect to be treated as a REIT for federal income tax purposes. In connection with this reorganization, we propose to merge with and into American Tower REIT, Inc. (“American Tower REIT”), a newly formed, wholly owned subsidiary of American Tower, at which time the separate existence of American Tower will cease and American Tower REIT will be the surviving entity of the merger. On August 24, 2011, our Board of Directors approved an Agreement and Plan of Merger between us and American Tower REIT. Upon the effectiveness of the merger, American Tower REIT will change its name to “American Tower Corporation” and will succeed to and continue to operate the existing business of American Tower. The merger will facilitate our compliance with REIT tax rules by ensuring the effective adoption of the charter provisions that implement share ownership and transfer restrictions required by the REIT tax rules. We initially filed a registration statement on Form S-4 with the Securities and Exchange Commission (“SEC”) on June 3, 2011, which describes the merger and REIT election. We expect to hold a special meeting of stockholders on November 29, 2011 for the purpose of voting on that proposed merger. The registration statement, as amended, was declared effective by the SEC on September 22, 2011. On October 11, 2011, we commenced mailing of a notice of our special meeting and definitive proxy statement/prospectus to our holders of record as of October 3, 2011. The merger and REIT election are subject to final approval by our Board of Directors. We continue to anticipate electing REIT status for the taxable year beginning January 1, 2012, but there is no certainty as to the timing of a REIT election or whether we will make a REIT election at all. In preparation for an election to REIT status, we continue to make progress on our operational readiness initiatives, which include finalizing systems and process changes by year-end. The principal reorganization transactions are the qualification or formation of qualified REIT subsidiaries (“QRSs”) and taxable REIT subsidiaries (“TRSs”). We will hold and operate substantially all of our domestic wireless and broadcast tower leasing business directly and indirectly through one or more QRSs, and we will hold our network development services segment and DAS networks business, as currently structured and operated, and international operations through one or more TRSs. In the future, we may elect to reorganize and transfer certain assets or operations, such as our international operations, from our TRSs to other subsidiaries of American Tower REIT, including QRSs. For purposes of qualifying as a REIT, we intend to issue a special distribution to stockholders of our undistributed earnings and profits (“E&P”) attributable to the taxable period ending prior to January 1, 2012. We expect that the special E&P distribution will be declared and paid in the fourth quarter of 2011. However, our Board of Directors may determine to pay the special E&P distribution at another time, but not later than December 31, 2012 if we elect REIT status for the taxable year beginning January 1, 2012. Based on our preliminary analysis, we currently estimate that the aggregate amount of the special E&P distribution will be no more than $200 million, and we expect to pay it solely with cash on hand. We will not make a special E&P distribution, however, if we determine that we do not have any pre-REIT accumulated earnings and profits. Non-GAAP Financial Measures Included in our analysis of our results of operations are discussions regarding earnings before interest, taxes, depreciation, amortization and accretion, as adjusted (“Adjusted EBITDA”). We define Adjusted EBITDA as net income before: income (loss) from discontinued operations, net; income (loss) from equity method investments; income tax provision (benefit); other income (expense); loss on retirement of long-term obligations; interest expense; interest income; other operating expenses; depreciation, amortization and accretion; and stock-based compensation expense. Adjusted EBITDA is not intended to replace net income or any other performance measures determined in accordance with GAAP. Rather, Adjusted EBITDA is presented as we believe it is a useful indicator of our current operating performance. We believe that Adjusted EBITDA is useful to an investor in evaluating our operating performance because (1) it is the primary measure used by our management team for purposes of decision making and for evaluating the performance of our operating segments; (2) it is a component of the
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Table of Contentscalculation used by our lenders to determine compliance with certain debt covenants; (3) it is widely used in the tower industry to measure operating performance as depreciation, amortization and accretion may vary significantly among companies depending upon accounting methods and useful lives, particularly where acquisitions and non-operating factors are involved; (4) it provides investors with a meaningful measure for evaluating our period to period operating performance by eliminating items which are not operational in nature; and (5) it provides investors with a measure for comparing our results of operations to those of different companies by excluding the impact of long-term strategic decisions which can differ significantly from company to company, such as decisions with respect to capital structure, capital investments and the tax jurisdictions in which companies operate. Our measurement of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies. A reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measure, has been included below. Results of Operations Three Months Ended September 30, 2011 and 2010 (in thousands) Revenue
Total revenues for the three months ended September 30, 2011, increased 23% to $630.4 million. The increase was primarily attributable to an increase in both of our rental and management segments, including organic revenue growth attributable to our legacy sites and revenue growth attributable to the approximately 11,900 new sites that we have constructed or acquired since July 1, 2010. Domestic rental and management segment revenue for the three months ended September 30, 2011 increased 9% to $436.8 million. This growth was comprised of:
International rental and management segment revenue for the three months ended September 30, 2011 increased 79% to $178.0 million. This growth was comprised of:
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Table of ContentsNetwork development services segment revenue for the three months ended September 30, 2011 increased 16% to $15.6 million. The increase was primarily attributable to a favorable one-time item. Gross Margin
Total gross margin for the three months ended September 30, 2011 increased 18% to $466.7 million. The increase was primarily attributable to increases in our rental and management segments. Domestic rental and management segment gross margin for the three months ended September 30, 2011 increased 9% to $345.7 million. The growth was primarily attributable to the increase in revenue as described above, and was partially offset by a 10% increase in direct operating costs, of which 9% was attributable to expense increases on our legacy domestic sites and 1% was attributable to the incremental direct operating costs associated with the addition of approximately 900 new domestic sites since July 1, 2010. International rental and management segment gross margin for the three months ended September 30, 2011 increased 61% to $113.2 million. The growth was primarily attributable to the increase in revenue as described above, and was partially offset by a 107% increase in direct operating costs, including pass-through expenses, of which 2% was attributable to expense increases on our legacy international sites, including changes in foreign currency exchange rates and 105% was attributable to the incremental costs associated with the addition of approximately 11,000 new international sites since July 1, 2010. Network development services segment gross margin for the three months ended September 30, 2011 increased 32% to $7.8 million. The increase was primarily attributable to the non-recurring increase in revenue described above. Selling, General, Administrative and Development Expense
Total selling, general, administrative and development expense (“SG&A”) for the three months ended September 30, 2011 increased 33% to $76.5 million. The increase was primarily attributable to an increase in both of our rental and management segments.
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Table of ContentsDomestic rental and management segment SG&A for the three months ended September 30, 2011 increased 43% to $20.5 million. The increase was primarily attributable to initiatives designed to drive growth and to support a growing portfolio, including increased staffing in field operations, sales and finance, information technology, as well as costs associated with establishing a dedicated team to more actively pursue new product lines, such as shared generators and outdoor DAS networks. International rental and management segment SG&A for the three months ended September 30, 2011, increased 67% to $21.6 million. The increase was primarily attributable to our increased international expansion initiatives in Brazil, Chile, Colombia, Ghana, India, Peru and South Africa and changes in foreign currency exchange rates. Network development services segment SG&A for the three months ended September 30, 2011 was consistent with the three months ended September 30, 2010. Segment Operating Profit
Total segment operating profit for the three months ended September 30, 2011 increased 16% to $422.7 million. The increase was primarily attributable to the increase in both our rental and management segments’ gross margin, and was partially offset by increases in SG&A in both of our rental and management segments. Domestic rental and management segment operating profit for the three months ended September 30, 2011 increased 7% to $325.2 million. The growth was primarily attributable to the increase in our domestic rental and management segment gross margin (9%), as described above, and was partially offset by increases in our domestic rental and management segment SG&A (43%), as described above. International rental and management segment operating profit for the three months ended September 30, 2011 increased 60% to $91.5 million. The growth was primarily attributable to the increase in our international rental and management segment gross margin (61%), as described above, and was partially offset by increases in our international rental and management segment SG&A (67%), as described above. Network development services segment operating profit for the three months ended September 30, 2011 increased 31% to $5.9 million. The increase was primarily related to the non-recurring increase in revenue described above. Depreciation, Amortization and Accretion
Depreciation, amortization and accretion for the three months ended September 30, 2011 increased 23% to $142.1 million. The increase was primarily attributable to the depreciation, amortization and accretion associated with the acquisition or construction of approximately 11,900 sites since July 1, 2010, which resulted in an increase in property and equipment.
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Table of ContentsOther Operating Expenses
Other operating expenses for the three months ended September 30, 2011 increased 239% to $14.6 million. The increase was primarily attributable to an increase in losses recognized upon the disposal of assets and an increase in consulting and legal costs associated with our evaluation of a potential election to REIT status. Interest Expense
Interest expense for the three months ended September 30, 2011 increased 24% to $77.8 million. The increase was primarily attributable to an increase in average debt outstanding, partially offset by a reduction in our annualized weighted average cost of borrowing from 5.45% to 5.36%. Other (Expense) Income
Other expense for the three months ended September 30, 2011 was $150.9 million, as compared to other income of $8.2 million for the three months ended September 30, 2010. During the three months ended September 30, 2011, we recorded unrealized foreign currency losses resulting primarily from fluctuations in the foreign currency exchange rates associated with our intercompany notes and similar unaffiliated balances denominated in a currency other than the subsidiaries’ functional currencies of approximately $145.1 million and other miscellaneous expenses of approximately $6.0 million. During the three months ended September 30, 2010, we recorded unrealized foreign currency gains of approximately $8.9 million. Income Tax Provision
The income tax provision for the three months ended September 30, 2011 decreased 65% to $24.7 million. The effective tax rate (“ETR”) for the three months ended September 30, 2011, increased to 498.3% from 43.0%. The increase in ETR is primarily attributable to unrealized foreign currency losses, described above, which had an impact of reducing income from continuing operations before income taxes and income from equity method investments by approximately $145.1 million. During the three months ended September 30, 2010, discrete items resulted in an increase in the income tax provision of approximately $4.3 million and ETR of 2.6%.
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Table of ContentsThe ETRs on income from continuing operations for the three months ended September 30, 2011 and 2010 differ from the federal statutory rate due primarily to adjustments for foreign items, non-deductible stock-based compensation expense, tax reserves and state taxes. Net Income/Adjusted EBITDA
Net income for the three months ended September 30, 2011 decreased 121% to a loss of $19.7 million. The decrease was primarily attributable to an increase in other expense, primarily due to unrealized foreign currency losses, depreciation, amortization and accretion, other operating expense and interest expense, partially offset by an increase in segment operating profit and a decrease in income tax provision, as described above. Adjusted EBITDA for the three months ended September 30, 2011 increased 14% to $400.6 million. Adjusted EBITDA growth was primarily attributable to the increase in our gross margin (18%) and was partially offset by an increase in selling, general, administrative and development expenses (33%). Results of Operations Nine Months Ended September 30, 2011 and 2010 (in thousands) Revenue
Total revenues for the nine months ended September 30, 2011, increased 25% to $1,790.3 million. The increase was primarily attributable to an increase in both of our rental and management segments, including organic revenue growth attributable to our legacy sites and revenue growth attributable to the approximately 12,700 new sites that we have constructed or acquired since January 1, 2010.
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Table of ContentsDomestic rental and management segment revenue for the nine months ended September 30, 2011 increased 12% to $1,279.3 million. This growth was comprised of:
International rental and management segment revenue for the nine months ended September 30, 2011 increased 83% to $466.0 million. This growth was comprised of:
Network development services segment revenue for the nine months ended September 30, 2011 increased 20% to $45.0 million. The increase was primarily attributable to a number of favorable one-time items. Gross Margin
Total gross margin for the nine months ended September 30, 2011 increased 22% to $1,347.3 million. The increase was primarily attributable to increases in both of our rental and management segments and our network development services segment. Domestic rental and management segment gross margin for the nine months ended September 30, 2011 increased 12% to $1,017.5 million. The growth was primarily attributable to the increase in revenue as described above, and was partially offset by a 9% increase in direct operating costs, of which 6% was attributable to expense increases on our legacy domestic sites and 3% was attributable to the incremental direct operating costs associated with the addition of approximately 1,300 new domestic sites since January 1, 2010. International rental and management segment gross margin for the nine months ended September 30, 2011 increased 66% to $306.8 million. The growth was primarily attributable to the increase in revenue as described above, and was partially offset by a 109% increase in direct operating costs, including pass-through expenses, of which 10% was attributable to expense increases on our legacy international sites and changes in foreign
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Table of Contentscurrency exchange rates, and 99% was attributable to the incremental costs associated with the addition of approximately 11,400 new international sites since January 1, 2010. Network development services segment gross margin for the nine months ended September 30, 2011 increased 32% to $23.1 million. The increase was primarily attributable to the nonrecurring increase in revenue described above. Selling, General, Administrative and Development Expense
Total SG&A for the nine months ended September 30, 2011 increased 31% to $214.9 million. The increase was primarily attributable to an increase in both of our rental and management segments. Domestic rental and management segment SG&A for the nine months ended September 30, 2011 increased 35% to $56.5 million. The increase was primarily attributable to initiatives designed to drive growth and to support a growing portfolio, including increased staffing in field operations, sales and finance, information technology, as well as costs associated with establishing a dedicated team to more actively pursue new product lines, such as shared generators and outdoor DAS networks. International rental and management segment SG&A for the nine months ended September 30, 2011 increased 90% to $60.6 million. The increase was primarily attributable to our increased international expansion initiatives in Brazil, Chile, Colombia, Ghana, India, Peru and South Africa and changes in foreign currency exchange rates. Network development services segment SG&A for the nine months ended September 30, 2011 increased 14% to $5.1 million. The increase was primarily attributable to costs incurred to support our new tower development and our site acquisition, zonin | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||