10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One):

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2014.

 

¨

Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Commission File Number: 001-14195

 

 

AMERICAN TOWER CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   65-0723837

(State or other jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

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):

 

Large accelerated filer

 

x

  

Accelerated filer

 

¨

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

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 22, 2014, there were 396,462,896 shares of common stock outstanding.

 

 

 


Table of Contents

AMERICAN TOWER CORPORATION

INDEX

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2014

 

         Page No.  
PART I. FINANCIAL INFORMATION   
Item 1.  

Unaudited Condensed Consolidated Financial Statements

     1   
 

Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013

     1   
 

Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013

     2   
 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2014 and 2013

     3   
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013

     4   
 

Condensed Consolidated Statements of Equity for the nine months ended September 30, 2014 and 2013

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

     67   
Item 4.  

Controls and Procedures

     69   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     70   
Item 1A.  

Risk Factors

     70   
Item 6.  

Exhibits

     80   
Signatures      81   
Exhibit Index      Ex-1   


Table of Contents
PART I. FINANCIAL INFORMATION

 

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

    September 30, 2014     December 31, 2013  

ASSETS

   

CURRENT ASSETS:

   

Cash and cash equivalents

  $ 295,613      $ 293,576   

Restricted cash

    135,237        152,916   

Short-term investments

    29,007        18,612   

Accounts receivable, net

    198,119        151,165   

Prepaid and other current assets

    316,164        348,266   

Deferred income taxes

    22,797        22,401   
 

 

 

   

 

 

 

Total current assets

    996,937        986,936   
 

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, net

    7,552,110        7,178,701   

GOODWILL

    3,866,550        3,849,888   

OTHER INTANGIBLE ASSETS, net

    6,389,227        6,568,102   

DEFERRED INCOME TAXES

    252,993        264,277   

DEFERRED RENT ASSET

    1,009,958        918,847   

NOTES RECEIVABLE AND OTHER NON-CURRENT ASSETS

    528,840        509,173   
 

 

 

   

 

 

 

TOTAL

  $ 20,596,615      $ 20,275,924   
 

 

 

   

 

 

 

LIABILITIES AND EQUITY

   

CURRENT LIABILITIES:

   

Accounts payable

  $ 111,001      $ 172,938   

Accrued expenses

    436,711        421,188   

Distributions payable

    147,685        575   

Accrued interest

    91,444        105,751   

Current portion of long-term obligations

    960,461        70,132   

Unearned revenue

    190,616        162,079   
 

 

 

   

 

 

 

Total current liabilities

    1,937,918        932,663   
 

 

 

   

 

 

 

LONG-TERM OBLIGATIONS

    12,973,835        14,408,146   

ASSET RETIREMENT OBLIGATIONS

    566,325        541,807   

OTHER NON-CURRENT LIABILITIES

    933,223        803,268   
 

 

 

   

 

 

 

Total liabilities

    16,411,301        16,685,884   
 

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

   

EQUITY:

   

Preferred stock: $.01 par value; 20,000,000 shares authorized; 5.25% Mandatory Convertible Preferred Stock, Series A, 6,000,000 and no shares issued and outstanding, respectively

    60        —     

Common stock: $.01 par value; 1,000,000,000 shares authorized; 399,207,516 and 397,674,350 shares issued; and 396,397,490 and 394,864,324 shares outstanding, respectively

    3,992        3,976   

Additional paid-in capital

    5,757,233        5,130,616   

Distributions in excess of earnings

    (854,579     (1,081,467

Accumulated other comprehensive loss

    (504,339     (311,220

Treasury stock (2,810,026 shares at cost)

    (207,740     (207,740
 

 

 

   

 

 

 

Total American Tower Corporation equity

    4,194,627        3,534,165   

Noncontrolling interest

    (9,313     55,875   
 

 

 

   

 

 

 

Total equity

    4,185,314        3,590,040   
 

 

 

   

 

 

 

TOTAL

  $ 20,596,615      $ 20,275,924   
 

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

1


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2014     2013     2014     2013  

REVENUES:

       

Rental and management

  $ 1,011,119      $ 796,575      $ 2,977,000      $ 2,363,207   

Network development services

    27,069        11,305        76,734        56,231   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

    1,038,188        807,880        3,053,734        2,419,438   
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

       

Costs of operations (exclusive of items shown separately below):

       

Rental and management (including stock-based compensation expense of $344, $248, $1,059 and $751, respectively)

    272,355        195,953        786,374        585,465   

Network development services (including stock-based compensation expense of $101, $99, $343 and $440, respectively)

    11,847        4,876        30,872        22,839   

Depreciation, amortization and accretion

    249,066        184,922        740,256        555,334   

Selling, general, administrative and development expense (including stock-based compensation expense of $17,824, $14,711, $60,306 and $51,964, respectively)

    108,909        97,781        317,437        298,737   

Other operating expenses

    11,204        15,469        37,852        35,686   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    653,381        499,001        1,912,791        1,498,061   
 

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

    384,807        308,879        1,140,943        921,377   
 

 

 

   

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE):

       

Interest income, TV Azteca, net of interest expense of $371, $371, $1,112 and $1,113, respectively

    2,661        3,544        7,918        10,673   

Interest income

    3,850        2,342        8,149        5,468   

Interest expense

    (143,212     (106,335     (432,753     (318,916

Gain (loss) on retirement of long-term obligations

    2,969        —          1,447        (37,967

Other expense (including unrealized foreign currency losses of $36,998, $30,907, $62,556 and $151,673, respectively)

    (34,019     (29,622     (54,225     (148,991
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

    (167,751     (130,071     (469,464     (489,733
 

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

    217,056        178,808        671,479        431,644   

Income tax provision

    (10,426     (15,586     (49,877     (23,361
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

    206,630        163,222        621,602        408,283   

Net loss attributable to noncontrolling interest

    963        16,901        22,921        43,068   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO AMERICAN TOWER CORPORATION STOCKHOLDERS

    207,593        180,123        644,523        451,351   

Dividends declared on preferred stock

    (7,700     —          (12,075     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO AMERICAN TOWER CORPORATION COMMON STOCKHOLDERS

  $ 199,893      $ 180,123      $ 632,448      $ 451,351   
 

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME PER COMMON SHARE AMOUNTS:

       

Basic net income attributable to American Tower Corporation common stockholders

  $ 0.50      $ 0.46      $ 1.60      $ 1.14   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income attributable to American Tower Corporation common stockholders

  $ 0.50      $ 0.45      $ 1.58      $ 1.13   
 

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

       

Basic

    396,243        394,759        395,758        395,138   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    400,397        398,348        399,806        399,275   
 

 

 

   

 

 

   

 

 

   

 

 

 

DISTRIBUTIONS DECLARED PER COMMON SHARE

  $ 0.36      $ 0.28      $ 1.02      $ 0.81   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

 

    Three months ended
September 30,
    Nine months ended
September 30,
 
    2014     2013     2014     2013  

Net income

  $ 206,630      $ 163,222      $ 621,602      $ 408,283   

Other comprehensive (loss) income:

       

Changes in fair value of cash flow hedges, net of taxes of $(7), $(70), $(31) and $386, respectively

    (519     (1,334     (856     1,415   

Reclassification of unrealized losses on cash flow hedges to net income, net of taxes of $36, $58, $132 and $176, respectively

    542        683        2,085        1,877   

Foreign currency translation adjustments, net of taxes of $7,969, ($2,329), $8,333 and $4,254, respectively

    (254,239     (24,660     (234,851     (120,602
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss

    (254,216     (25,311     (233,622     (117,310
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

    (47,586     137,911        387,980        290,973   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive loss attributable to noncontrolling interest

    1,760        18,453        63,424        45,710   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income attributable to American Tower Corporation stockholders

  $ (45,826   $ 156,364      $ 451,404      $ 336,683   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

3


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Nine months ended
September 30,
 
     2014     2013  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 621,602      $ 408,283   

Adjustments to reconcile net income to cash provided by operating activities:

    

Stock-based compensation expense

     61,708        53,155   

Depreciation, amortization and accretion

     740,256        555,334   

(Gain) loss on early retirement of securitized debt

     (1,447     35,288   

Other non-cash items reflected in statements of operations

     73,825        164,406   

Increase in net deferred rent asset

     (65,460     (83,694

Decrease (increase) in restricted cash

     23,560        (62,703

Increase in assets

     (42,931     (59,267

Increase in liabilities

     158,493        133,641   
  

 

 

   

 

 

 

Cash provided by operating activities

     1,569,606        1,144,443   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Payments for purchase of property and equipment and construction activities

     (723,353     (448,249

Payments for acquisitions, net of cash

     (324,936     (365,658

Proceeds from sale of assets, net of cash

     15,464        —     

Proceeds from sale of short-term investments and other non-current assets

     453,396        27,889   

Payments for short-term investments

     (460,686     (50,224

Deposits, restricted cash, investments and other

     (63,295     (122,396
  

 

 

   

 

 

 

Cash used for investing activities

     (1,103,410     (958,638
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds from short-term borrowings, net

     —          7,544   

Borrowings under credit facilities

     785,000        3,507,000   

Proceeds from issuance of senior notes, net

     1,415,844        2,221,792   

Proceeds from other long-term borrowings

     3,033        27,971   

Proceeds from issuance of Securities in securitization transaction, net

     —          1,778,496   

Repayments of notes payable, credit facilities and capital leases

     (2,928,434     (3,705,454

Contributions from noncontrolling interest holders, net

     5,446        17,584   

Purchases of common stock

     —          (145,012

Proceeds from stock options and stock purchase plan

     47,938        32,973   

Proceeds from the issuance of preferred stock, net

     583,105        —     

Payment for early retirement of securitized debt

     (6,767     (29,234

Deferred financing costs and other financing activities

     (32,129     (9,190

Purchase of noncontrolling interest

     (64,822     —     

Distributions paid on common stock

     (261,913     (209,711

Distributions paid on preferred stock

     (8,138     —     
  

 

 

   

 

 

 

Cash (used for) provided by financing activities

     (461,837     3,494,759   
  

 

 

   

 

 

 

Net effect of changes in foreign currency exchange rates on cash and cash equivalents

     (2,322     (8,829
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     2,037        3,671,735   

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     293,576        368,618   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 295,613      $ 4,040,353   
  

 

 

   

 

 

 

CASH PAID FOR INCOME TAXES (NET OF REFUNDS OF $6,642 AND $17,336, RESPECTIVELY)

   $ 52,379      $ 23,172   
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 438,404      $ 283,145   
  

 

 

   

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

    

INCREASE IN ACCOUNTS PAYABLE AND ACCRUED EXPENSES FOR PURCHASES OF PROPERTY AND EQUIPMENT AND CONSTRUCTION ACTIVITIES

   $ 16,070      $ 17,208   
  

 

 

   

 

 

 

PURCHASES OF PROPERTY AND EQUIPMENT UNDER CAPITAL LEASES

   $ 24,002      $ 16,199   
  

 

 

   

 

 

 

SETTLEMENT OF ACCOUNTS RECEIVABLE RELATED TO ACQUISITIONS

   $ 31,849      $ —     
  

 

 

   

 

 

 

CONVERSION OF THIRD-PARTY DEBT TO EQUITY

   $ 7,750      $ —     
  

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

4


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except share data)

 

    Preferred Stock     Common Stock     Treasury Stock     Additional
Paid-in
Capital
    Other
Comprehensive
Loss
    Distributions
in Excess of
Earnings
    Non-controlling
Interest
    Total
Equity
 
    Issued
Shares
    Amount     Issued
Shares
    Amount     Shares     Amount            

BALANCE, JANUARY 1, 2013

    —        $ —          395,963,218      $ 3,959        (872,005   $ (62,728   $ 5,012,124      $ (183,347   $ (1,196,907   $ 111,080      $ 3,684,181   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation related activity

    —          —          1,343,555        14        —          —          82,874        —          —          —          82,888   

Issuance of common stock- stock purchase plan

    —          —          38,249        —          —          —          2,327        —          —          —          2,327   

Treasury stock activity

    —          —          —          —          (1,938,021     (145,012     —          —          —          —          (145,012

Changes in fair value of cash flow hedges, net of tax

    —          —          —          —          —          —          —          1,167        —          248        1,415   

Reclassification of unrealized losses on cash flow hedges to net income, net of tax

    —          —          —          —          —          —          —          1,764        —          113        1,877   

Foreign currency translation adjustment, net of tax

    —          —          —          —          —          —          —          (117,599     —          (3,003     (120,602

Contributions from noncontrolling interest

    —          —          —          —          —          —          —          —          —          18,020        18,020   

Distributions to noncontrolling interest

    —          —          —          —          —          —          —          —          —          (436     (436

Common stock dividends/distributions declared

    —          —          —          —          —          —          —          —          (321,024     —          (321,024

Net income (loss)

    —          —          —          —          —          —          —          —          451,351        (43,068     408,283   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, SEPTEMBER 30, 2013

    —        $ —          397,345,022      $ 3,973        (2,810,026   $ (207,740   $ 5,097,325      $ (298,015   $ (1,066,580   $ 82,954      $ 3,611,917   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JANUARY 1, 2014

    —        $ —          397,674,350      $ 3,976        (2,810,026   $ (207,740   $ 5,130,616      $ (311,220   $ (1,081,467   $ 55,875      $ 3,590,040   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation related activity

    —          —          1,489,577        15        —          —          90,982        —          —          —          90,997   

Issuance of common stock- stock purchase plan

    —          —          43,589        1        —          —          2,898        —          —          —          2,899   

Issuance of preferred stock

    6,000,000        60        —          —          —          —          582,599        —          —          —          582,659   

Changes in fair value of cash flow hedges, net of tax

    —          —          —          —          —          —          —          (969     —          113        (856

Reclassification of unrealized losses on cash flow hedges to net income, net of tax

    —          —          —          —          —          —          —          1,941        —          144        2,085   

Foreign currency translation adjustment, net of tax

    —          —          —          —          —          —          —          (194,091     —          (40,760     (234,851

Contributions from noncontrolling interest

    —          —          —          —          —          —          —          —          —          13,626        13,626   

Distributions to noncontrolling interest

    —          —          —          —          —          —          —          —          —          (430     (430

Purchase of noncontrolling interest

            —          —          (49,862         (14,960     (64,822

Common stock dividends/distributions declared

    —          —          —          —          —          —          —          —          (405,560     —          (405,560

Preferred stock dividends declared

    —          —          —          —          —          —          —          —          (12,075     —          (12,075

Net income (loss)

    —          —          —          —          —          —          —          —          644,523        (22,921     621,602   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, SEPTEMBER 30, 2014

    6,000,000      $ 60        399,207,516      $ 3,992        (2,810,026   $ (207,740   $ 5,757,233      $ (504,339   $ (854,579   $ (9,313   $ 4,185,314   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Description of Business, Basis of Presentation and Accounting Policies

American Tower Corporation is, through its various subsidiaries (collectively, “ATC” or the “Company”), a global, independent owner, operator and developer of wireless and broadcast communications real estate. The Company’s primary business is the leasing of antenna space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data and data providers, government agencies and municipalities and tenants in a number of other industries. The Company also manages rooftop and tower sites for property owners, operates in-building and outdoor distributed antenna system (“DAS”) networks, holds property interests under third-party communications sites and provides network development services that primarily support its rental and management operations and the addition of new tenants and equipment on its sites. Since January 1, 2012, the Company has been organized and has qualified as a real estate investment trust (“REIT”) for U.S. federal income tax purposes.

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 and SpectraSite Communications, LLC. ATC conducts its international operations primarily through its subsidiary, American Tower International, Inc., which in turn conducts operations through its various international holding and operating subsidiaries and joint ventures.

The Company holds and operates certain of its assets through one or more taxable REIT subsidiaries (“TRSs”). The use of TRSs enables the Company to continue to engage in certain businesses while complying with REIT qualification requirements and also allows the Company to retain income generated by these businesses for reinvestment without the requirement of distributing those earnings. The businesses that the Company holds through its TRSs primarily include certain of its international operations and a portion of its managed network business.

As a REIT, the Company generally is not subject to federal income taxes on its income and gains that the Company distributes to its stockholders, including the income derived from leasing space on its towers. However, even as a REIT, the Company remains obligated to pay income taxes on earnings from its TRS operations. In addition, the Company’s international assets and operations, including those designated as direct or indirect qualified REIT subsidiaries or other disregarded entities of a REIT (collectively, “QRSs”), continue to be subject to taxation in the foreign jurisdictions where those assets are held or those operations are conducted.

The Company may, from time to time, change the election of previously designated TRSs that hold certain of its operations to be treated as QRSs, and may reorganize and transfer certain assets or operations from its TRSs to other subsidiaries, including QRSs. For all periods subsequent to the conversion from a TRS to a QRS, the Company includes the income from the QRS as part of its REIT taxable income for the purpose of computing the Company’s REIT distribution requirements. During the nine months ended September 30, 2014, the Company restructured certain of its German subsidiaries and certain of its domestic TRSs, which included a portion of its network development services segment and indoor DAS networks business, to be treated as QRSs. As a result, as of September 30, 2014, the Company’s QRSs include its domestic tower leasing business, most of its operations in Costa Rica, Germany and Mexico and a portion of its network development services segment and indoor DAS networks business.

The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. The financial information included herein is unaudited; however, the Company believes that all adjustments (consisting primarily 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. 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, 2013.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Principles of Consolidation and Basis of Presentation—The accompanying condensed consolidated financial statements include the accounts of the Company and those entities 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. All intercompany accounts and transactions have been eliminated.

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 significant estimates in the accompanying condensed consolidated financial statements include impairment of long-lived assets (including goodwill), asset retirement obligations, revenue recognition, rent expense, stock-based compensation, income taxes and accounting for business combinations. 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.

Functional Currency—The functional currency of each of the Company’s foreign operating subsidiaries is the respective local currency, except for Costa Rica, where the functional currency is the U.S. Dollar. All foreign currency assets and liabilities held by the subsidiaries are translated into U.S. Dollars at the exchange rate in effect at the end of the applicable fiscal reporting period and all foreign currency revenues and expenses are translated at the average monthly exchange rates. Translation adjustments are reflected in equity as a component of Accumulated other comprehensive income (loss) (“AOCI”) in the condensed consolidated balance sheets.

Transactional gains and losses on foreign currency transactions are reflected in Other expense in the condensed consolidated statements of operations. However, the effect from fluctuations in foreign currency exchange rates on intercompany notes whose payment is not planned or anticipated in the foreseeable future is reflected in AOCI in the condensed consolidated balance sheets. During the three months ended September 30, 2014, the Company recorded unrealized foreign currency losses of $207.1 million, of which $170.1 million was recorded in AOCI and $37.0 million was recorded in Other expense. During the nine months ended September 30, 2014, the Company recorded unrealized foreign currency losses of $275.8 million, of which $213.2 million was recorded in AOCI and $62.6 million was recorded in Other expense.

Accounting Standards Updates—In April 2014, the Financial Accounting Standards Board (the “FASB”) issued additional guidance on reporting discontinued operations. Under this guidance, only disposals representing a strategic shift in operations would be presented as discontinued operations. This guidance requires expanded disclosure that provides information about the assets, liabilities, income and expenses of discontinued operations. Additionally, the guidance requires additional disclosure for a disposal of a significant part of an entity that does not qualify for discontinued operations reporting. This guidance will be effective for reporting periods beginning on or after December 15, 2014 with early adoption permitted for disposals or classifications of assets as held-for-sale that have not been reported in financial statements previously issued or available for issuance. The Company adopted this guidance during the nine months ended September 30, 2014 and the adoption did not have a material effect on the Company’s financial statements.

In May 2014, the FASB issued new revenue recognition guidance, which requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in GAAP. The amendment will become effective on January 1, 2017, and early application is not

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

permitted. The standard permits the use of either the retrospective or cumulative effect transition method. Leases are not included in the scope of this standard. The Company is evaluating the impact this standard will have on its financial statements.

2.    Prepaid and Other Current Assets

Prepaid and other current assets consists of the following as of (in thousands):

 

     September 30, 2014      December 31, 2013 (1)  

Prepaid operating ground leases

   $ 78,215       $ 96,881   

Prepaid income tax

     56,371         52,612   

Acquisition deposit in escrow

     53,040         —     

Prepaid assets

     32,730         34,243   

Unbilled receivables

     27,870         25,412   

Value added tax and other consumption tax receivables

     19,718         77,016   

Other miscellaneous current assets

     48,220         62,102   
  

 

 

    

 

 

 

Balance

   $ 316,164       $ 348,266   
  

 

 

    

 

 

 

 

(1) December 31, 2013 balances have been revised to reflect purchase accounting measurement period adjustments.

3.    Goodwill and Other Intangible Assets

The changes in the carrying value of goodwill for the Company’s business segments are as follows (in thousands):

 

     Rental and Management     Network
Development
Services
    Total  
     Domestic      International      

Balance as of January 1, 2014 (1)

   $ 3,293,899       $ 553,989      $ 2,000      $ 3,849,888   

Additions

     36,453         3,984        —          40,437   

Effect of foreign currency translation

     —           (20,122     —          (20,122

Other (2)

     —           (3,641     (12     (3,653
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

   $ 3,330,352       $ 534,210      $ 1,988      $ 3,866,550   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Balances have been revised to reflect purchase accounting measurement period adjustments.
(2) Other represents the goodwill associated with the Company’s operations in Panama and the Company’s third-party structural analysis business. Both businesses were sold during the three months ended September 30, 2014 (see note 7).

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company’s other intangible assets subject to amortization consist of the following as of (in thousands):

 

        September 30, 2014     December 31, 2013 (1)  
    Estimated
Useful
Lives
  Gross
Carrying
Value
    Accumulated
Amortization
    Net Book
Value
    Gross
Carrying
Value
    Accumulated
Amortization
    Net Book
Value
 
    (years)      

Acquired network location intangibles (2)

  Up to 20   $ 2,389,124      $ (880,732   $ 1,508,392      $ 2,416,110      $ (791,359   $ 1,624,751   

Acquired customer-related intangibles

  15-20     6,147,123        (1,362,712     4,784,411        6,017,875        (1,170,239     4,847,636   

Acquired licenses and other intangibles

  3-20     6,747        (2,972     3,775        6,583        (2,297     4,286   

Economic Rights, TV Azteca

  70     27,879        (14,094     13,785        28,783        (14,229     14,554   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 8,570,873      $ (2,260,510   $ 6,310,363      $ 8,469,351      $ (1,978,124   $ 6,491,227   

Deferred financing costs, net (3)

  N/A         78,864            76,875   
       

 

 

       

 

 

 

Other intangible assets, net

        $ 6,389,227          $ 6,568,102   
       

 

 

       

 

 

 

 

(1) Balances have been revised to reflect purchase accounting measurement period adjustments.
(2) Acquired network location intangibles are amortized over the shorter of the term of the corresponding ground lease taking into consideration lease renewal options and residual value or up to 20 years, as the Company considers these intangibles to be directly related to the tower assets.
(3) Deferred financing costs are amortized over the term of the respective debt instruments to which they relate using the effective interest method. This amortization is included in Interest expense rather than in Depreciation, amortization and accretion expense.

The acquired network location intangibles represent the value to the Company of the incremental revenue growth that could potentially be obtained from leasing the excess capacity on acquired communications sites. The acquired customer-related intangibles typically represent the value to the Company of customer contracts and relationships in place at the time of an acquisition, including assumptions regarding estimated renewals.

The Company amortizes its acquired network location intangibles and customer-related intangibles on a straight-line basis over their estimated useful lives. As of September 30, 2014, the remaining weighted average amortization period of the Company’s intangible assets, excluding deferred financing costs and the TV Azteca Economic Rights detailed in note 5 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2013, is approximately 15 years. Amortization of intangible assets for the three and nine months ended September 30, 2014 was approximately $103.3 million and $307.5 million, respectively, and amortization of intangible assets for the three and nine months ended September 30, 2013 was approximately $57.7 million and $177.9 million, respectively. Amortization expense excludes amortization of deferred financing costs, which is included in Interest expense on the condensed consolidated statements of operations. Based on current exchange rates, the Company expects to record amortization expense (excluding amortization of deferred financing costs) as follows over the remaining current year and the next five subsequent years (in millions):

 

Fiscal Year       

2014 (remaining year)

   $ 102.4   

2015

     402.1   

2016

     399.4   

2017

     397.0   

2018

     394.9   

2019

     392.9   

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

4.    Accrued Expenses

Accrued expenses consists of the following as of (in thousands):

 

     September 30, 2014      December 31, 2013 (1)  

Accrued construction costs

   $ 66,518       $ 52,446   

Accrued property and real estate taxes

     64,619         54,529   

Payroll and related withholdings

     46,516         50,843   

Accrued rent

     35,316         28,456   

Other accrued expenses

     223,742         234,914   
  

 

 

    

 

 

 

Balance

   $ 436,711       $ 421,188   
  

 

 

    

 

 

 

 

(1) December 31, 2013 balances have been revised to reflect purchase accounting measurement period adjustments.

5.    Long-Term Obligations

Current portion of long-term obligations

4.625% Senior Notes—The Company’s 4.625% senior unsecured notes mature on April 1, 2015. As a result, the aggregate principal amount of $600.0 million, net of unamortized discount of $0.1 million, is reflected in Current portion of long-term obligations in the condensed consolidated balance sheets.

Mexican Loan—In connection with the acquisition of towers in Mexico from NII Holdings, Inc. (“NII”) during the fourth quarter of 2013, one of the Company’s Mexican subsidiaries entered into a 5.2 billion Mexican Peso (“MXN”) denominated unsecured bridge loan (the “Mexican Loan”) and subsequently borrowed approximately 4.9 billion MXN (approximately $374.7 million at the date of borrowing). The Mexican subsidiary’s ability to further draw under the Mexican Loan expired in February 2014. During the nine months ended September 30, 2014, the Mexican subsidiary repaid 1.1 billion MXN (approximately $80.4 million on the date of repayment) of the outstanding indebtedness using cash on hand. The Mexican Loan matures on May 1, 2015. As of September 30, 2014, the Company had 3.9 billion MXN (approximately $287.8 million) outstanding under the Mexican Loan, which is reflected in Current portion of long-term obligations in the condensed consolidated balance sheets.

Colombian Bridge Loans—In connection with the acquisition of communications sites in Colombia, one of the Company’s Colombian subsidiaries entered into six Colombian Peso (“COP”) denominated bridge loans for an aggregate principal amount of 108.0 billion COP (approximately $53.2 million). As of September 30, 2014, the interest rate was 7.84% and the maturity date of the loans was October 4, 2014. In October 2014, the Company repaid the bridge loans using proceeds from a new Colombian credit facility (see note 16) and cash on hand.

The remaining current portion of long-term obligations includes payments due within 12 months under (i) certain Global Tower Partners (“GTP”) notes, (ii) the South African facility, (iii) the Colombian long-term credit facility and (iv) capital leases.

Long-term obligations

Costa Rica Loan—In connection with its acquisition of MIP Tower Holdings LLC (“MIPT”), parent company of GTP, the Company assumed $32.6 million of secured debt in Costa Rica (the “Costa Rica Loan”), which it repaid in full in February 2014.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

GTP Notes—In connection with its acquisition of MIPT, the Company assumed approximately $1.49 billion principal amount of indebtedness under six series, consisting of eleven separate classes, of Secured Tower Revenue Notes issued by certain subsidiaries of GTP in several securitization transactions. In August 2014, the Company repaid in full the aggregate principal amount outstanding of $250.0 million under the Series 2010-1 Class C Notes and the Series 2010-1 Class F Notes (together, the “Series 2010-1 Notes”) and wrote-off the unamortized premium associated with the fair value adjustment. As a result, the Company recorded a gain on retirement of long-term obligations in the accompanying condensed consolidated statements of operations of $3.0 million.

Colombian Loan—In connection with the establishment of the Company’s joint venture with Millicom International Cellular SA (“Millicom”) and the acquisition of certain communications sites in Colombia, ATC Colombia B.V., a majority owned subsidiary of the Company, entered into a U.S. Dollar-denominated shareholder loan agreement (the “Colombian Loan”), as the borrower, with the Company’s wholly owned subsidiary (the “ATC Colombian Subsidiary”), and a wholly owned subsidiary of Millicom (the “Millicom Subsidiary”), as the lenders. The portion of the Colombian Loan made by the ATC Colombian Subsidiary was eliminated in consolidation, and the portion of the Colombian Loan made by the Millicom Subsidiary was reported as outstanding debt. During the nine months ended September 30, 2014, the joint venture borrowed an additional $3.0 million under the Colombian Loan, which was subsequently converted from debt to equity. In July 2014, the Company purchased Millicom’s interest in the joint venture and the Colombian Loan using proceeds from borrowings under the Company’s $2.0 billion multi-currency senior unsecured revolving credit facility. As a result, all amounts outstanding under the Colombian Loan are eliminated in consolidation as of September 30, 2014.

Richland Notes—In connection with its acquisition of entities holding a portfolio of communications sites from Richland Properties LLC and other related entities (“Richland”), the Company assumed approximately $196.5 million of secured debt (the “Richland Notes”) and recorded a fair value premium of $5.5 million upon acquisition. In June 2014, the Company repaid the outstanding indebtedness, paid prepayment consideration and wrote-off the unamortized premium associated with the fair value adjustment. As a result, the Company recorded a loss on retirement of long-term obligations in the accompanying condensed consolidated statements of operations of $1.3 million.

Short-Term Credit Facility—On September 20, 2013, the Company entered into a $1.0 billion senior unsecured revolving credit facility (the “Short-Term Credit Facility”), which matured on September 19, 2014. The Short-Term Credit Facility was undrawn at the time of maturity.

2014 Credit Facility—During the nine months ended September 30, 2014, the Company repaid $88.0 million of outstanding indebtedness under its $1.0 billion senior unsecured revolving credit facility (the “2012 Credit Facility”) using net proceeds from a registered public offering of $250.0 million aggregate principal amount of reopened 3.40% senior unsecured notes due 2019 and $500.0 million aggregate principal amount of reopened 5.00% senior unsecured notes due 2024.

On September 19, 2014, the Company entered into an amendment and restatement of the 2012 Credit Facility (the “2014 Credit Facility”), which, among other things, (i) increased the commitments thereunder to $1.5 billion, including a $50.0 million sublimit for swingline loans and a $200.0 million sublimit for letters of credit, (ii) extended the maturity date to January 31, 2020, including up to two optional renewal periods, (iii) amended the limitation on indebtedness of, and guaranteed by, the Company’s subsidiaries to the greater of (x) $800.0 million and (y) 50% of Adjusted EBITDA (as defined in the 2014 Credit Facility) on a consolidated basis as of the last day of the most recently completed fiscal quarter, (iv) permitted indebtedness owed by certain

 

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of the Company’s subsidiaries to its joint venture partners and (v) added an expansion feature, which allows the Company to request up to an aggregate of $500.0 million in additional commitments upon satisfaction of certain conditions.

Amounts borrowed under the 2014 Credit Facility will bear interest, at the Company’s option, at a margin above the London Interbank Offered Rate (“LIBOR”) or the Base Rate. For LIBOR based borrowings, interest rates will range from 1.125% to 2.000% above LIBOR. For Base Rate borrowings, interest rates will range from 0.125% to 1.000% above the Base Rate. In each case, the applicable margin is based upon the Company’s debt ratings. In addition, the 2014 Credit Facility requires a quarterly commitment fee on the undrawn portion of the commitments ranging from 0.125% to 0.400% per annum, based upon the Company’s debt ratings. The current margin over LIBOR that the Company would incur (should it choose LIBOR Advances) on borrowings is 1.250%, and the current commitment fee on the undrawn portion of the commitments is 0.150%. The 2014 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.

As of September 30, 2014, the Company has no amounts outstanding under the 2014 Credit Facility and $7.5 million of undrawn letters of credit. In October 2014, the Company borrowed $304.0 million under the 2014 Credit Facility, which it used to fund acquisitions and repay other existing indebtedness. The Company maintains the ability to draw down and repay amounts under the 2014 Credit Facility in the ordinary course.

2013 Credit Facility—During the nine months ended September 30, 2014, the Company repaid an aggregate of $2.2 billion of revolving indebtedness under its $2.0 billion multi-currency senior unsecured revolving credit facility (as amended, the “2013 Credit Facility”) using (i) proceeds from a registered public offering of $250.0 million aggregate principal amount of reopened 3.40% senior unsecured notes due 2019 and $500.0 million aggregate principal amount of reopened 5.00% senior unsecured notes due 2024, (ii) proceeds from the issuance of mandatory convertible preferred stock in May 2014, (iii) proceeds from a registered public offering of $650.0 million aggregate principal amount of 3.450% senior unsecured notes due 2021 and (iv) cash on hand. During the nine months ended September 30, 2014, the Company borrowed an additional $785.0 million under the 2013 Credit Facility, which it primarily used to (i) fund acquisitions, including the acquisition from Richland, (ii) repay the Richland Notes, (iii) repay the Series 2010-1 Notes and (iv) purchase Millicom’s interest in the Colombian joint venture and the Colombian Loan.

The 2013 Credit Facility matures on June 28, 2018 and includes two optional one-year renewal periods. The 2013 Credit Facility includes an expansion option allowing the Company to request additional commitments of up to $750.0 million, including in the form of a term loan. The 2013 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 current margin over LIBOR that the Company incurs on borrowings is 1.250%, and the current commitment fee on the undrawn portion of the 2013 Credit Facility is 0.150%.

On September 19, 2014, the Company entered into an amendment agreement with respect to the 2013 Credit Facility, which (i) amended the limitation on indebtedness of, and guaranteed by, the Company’s subsidiaries to the greater of (x) $800.0 million and (y) 50% of Adjusted EBITDA (as defined in the 2013 Credit Facility) on a consolidated basis as of the last day of the most recently completed fiscal quarter and (ii) permitted indebtedness owed by certain of the Company’s subsidiaries to its joint venture partners.

As of September 30, 2014, the Company has $410.0 million outstanding under the 2013 Credit Facility and approximately $3.2 million of undrawn letters of credit. In October 2014, the Company repaid a net amount of $139.0 million under the 2013 Credit Facility with borrowings under the 2014 Credit Facility and cash on hand. The Company maintains the ability to draw down and repay amounts under the 2013 Credit Facility in the ordinary course.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

2013 Term Loan—On October 29, 2013, the Company entered into a $1.5 billion unsecured term loan (as amended, the “2013 Term Loan”), which includes an expansion option allowing the Company to request additional commitments of up to $500.0 million. The 2013 Term Loan matures on January 3, 2019, and the current interest rate is LIBOR plus 1.250%.

On September 19, 2014, the Company entered into an amendment agreement with respect to the 2013 Term Loan, which (i) amended the limitation on indebtedness of, and guaranteed by, the Company’s subsidiaries to the greater of (x) $800.0 million and (y) 50% of Adjusted EBITDA (as defined in the 2013 Term Loan) on a consolidated basis as of the last day of the most recently completed fiscal quarter and (ii) permitted indebtedness owed by certain of the Company’s subsidiaries to its joint venture partners.

3.40% Senior Notes and 5.00% Senior Notes Offering—On January 10, 2014, the Company completed a registered public offering through a reopening of its (i) 3.40% senior unsecured notes due 2019 (the “3.40% Notes”), in an aggregate principal amount of $250.0 million and (ii) 5.00% senior unsecured notes due 2024 (the “5.00% Notes”), in an aggregate principal amount of $500.0 million. The net proceeds from the offering were approximately $763.8 million, after deducting commissions and estimated expenses. As a result, the aggregate outstanding principal amount of each of the 3.40% Notes and the 5.00% Notes is $1.0 billion. The Company used a portion of the proceeds, together with cash on hand, to repay $88.0 million of outstanding indebtedness under the 2012 Credit Facility and $710.0 million of outstanding indebtedness under the 2013 Credit Facility.

The reopened 3.40% Notes issued on January 10, 2014 have identical terms as, are fungible with and are part of a single series of senior debt securities with the 3.40% Notes issued on August 19, 2013. The reopened 5.00% Notes issued on January 10, 2014 have identical terms as, are fungible with and are part of a single series of senior debt securities with the 5.00% Notes issued on August 19, 2013. The 3.40% Notes mature on February 15, 2019 and bear interest at a rate of 3.40% per annum. The 5.00% Notes mature on February 15, 2024 and bear interest at a rate of 5.00% per annum. Accrued and unpaid interest on the 3.40% Notes and the 5.00% Notes is payable in U.S. Dollars semi-annually in arrears on February 15 and August 15 of each year, beginning on February 15, 2014. Interest on the 3.40% Notes and the 5.00% Notes accrues from August 19, 2013 and is computed on the basis of a 360-day year comprised of twelve 30-day months.

3.450% Senior Notes Offering—On August 7, 2014, the Company completed a registered public offering of its 3.450% senior unsecured notes due 2021 (the “3.450% Notes”), in an aggregate principal amount of $650.0 million. The net proceeds from the offering were approximately $641.1 million, after deducting commissions and estimated expenses. The Company used the proceeds to repay existing indebtedness under the 2013 Credit Facility.

The 3.450% Notes mature on September 15, 2021 and bear interest at a rate of 3.450% per annum. Accrued and unpaid interest on the 3.450% Notes is payable in U.S. Dollars semi-annually in arrears on March 15 and September 15 of each year, beginning on March 15, 2015. Interest on the 3.450% Notes accrues from August 7, 2014 and is computed on the basis of a 360-day year comprised of twelve 30-day months.

The Company may redeem the 3.40% Notes, the 5.00% Notes or the 3.450% Notes at any time at a redemption price equal to 100% of the principal amount of such notes, plus a make-whole premium, together with accrued interest to the redemption date. If the Company undergoes a change of control and ratings decline, each as defined in the applicable supplemental indenture governing such notes, the Company may be required to repurchase all of the 3.40% Notes, the 5.00% Notes or the 3.450% Notes at a purchase price equal to 101% of the principal amount of such notes, plus accrued and unpaid interest (including additional interest, if any), up to but not including the repurchase date. The 3.40% Notes, the 5.00% Notes and the 3.450% 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.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Each of the applicable supplemental indentures for the 3.40% Notes, the 5.00% Notes and the 3.450% Notes contain certain covenants that restrict the Company’s ability to merge, consolidate or sell assets and its (together with its subsidiaries’) ability 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 each of the supplemental indentures.

6.    Derivative Financial Instruments

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 to 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 portion of changes in the fair value of the derivative is recorded in AOCI and is recognized in the results of operations when the hedged item affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is 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.

Certain of the Company’s foreign subsidiaries have entered into interest rate swap agreements to manage exposure to variability in interest rates on debt in Colombia and South Africa and these interest rate swap agreements have been designated as cash flow hedges.

South Africa

One of the Company’s South African subsidiaries has fifteen interest rate swap agreements outstanding, which mature on the earlier of termination of the underlying debt or March 31, 2020. The interest rate swap agreements provide that the Company pay a fixed interest rate ranging from 6.09% to 7.83% and receive variable interest at the three-month Johannesburg Interbank Agreed Rate (JIBAR) over the term of the interest rate swap agreements. The notional value is reduced in accordance with the repayment schedule under the related credit agreement.

Colombia

One of the Company’s Colombian subsidiaries has an interest rate swap agreement outstanding, which matures on the earlier of termination of the underlying debt or November 30, 2020. The interest rate swap agreement provides that the Company pay a fixed interest rate of 5.78% and receive variable interest at the three-month Inter-bank Rate (“IBR”) over the term of the interest rate swap agreement. The notional value is reduced in accordance with the repayment schedule under the related credit agreement. In connection with the refinancing of its Colombian long-term credit facility in October 2014 (see note 16), the Company terminated its existing interest rate swap agreement and entered into a new interest rate swap agreement in Colombia.

Costa Rica

One of the Company’s Costa Rican subsidiaries had three interest rate swaps agreements, which were terminated upon repayment of the Costa Rica Loan in February 2014.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The notional amount and fair value of the interest rate swap agreements are as follows (in thousands):

 

     September 30, 2014     December 31, 2013  
     Local     USD     Local     USD  

South Africa (ZAR)

        

Notional

     449,046        39,790        469,354        44,732   

Fair Value

     4,879        432        939        90   

Colombia (COP)

        

Notional

     100,490,625        49,540        101,250,000        52,547   

Fair Value

     (2,118,420     (1,044     (3,000,236     (1,557

Costa Rica (USD)

        

Notional

     —          —          N/A        42,000   

Fair Value

     —          —          N/A        (628

As of September 30, 2014 and December 31, 2013, the South African interest rate swap agreements were in asset positions and were included in Notes receivable and other non-current assets on the condensed consolidated balance sheets and the Colombian interest rate swap agreement was in a liability position and was included in Other non-current liabilities on the condensed consolidated balance sheets.

During the three months ended September 30, 2014 and 2013, the interest rate swap agreements had the following impact on the Company’s condensed consolidated financial statements (in thousands):

 

Three months

ended September 30,

  Gain(Loss)
Recognized in
Other
Comprehensive
Loss - Effective
Portion
    Gain(Loss)
Reclassified from
AOCI into  Income -
Effective Portion
    Location of
Gain(Loss)
Reclassified from
AOCI into Income-
Effective Portion
    Gain(Loss)
Recognized

in Income -
Ineffective Portion
    Location of
Gain(Loss)
Recognized in
Income -

Ineffective Portion
 

2014

  $ (526   $ (578     Interest Expense        N/A        N/A   

2013

  $ (1,404   $ (741     Interest Expense        N/A        N/A   

During the nine months ended September 30, 2014 and 2013, the interest rate swap agreements had the following impact on the Company’s condensed consolidated financial statements (in thousands):

 

Nine months

ended September 30,

  Gain(Loss)
Recognized in
Other
Comprehensive
Loss - Effective
Portion
    Gain(Loss)
Reclassified from
AOCI into Income -

Effective Portion
    Location of
Gain(Loss)
Reclassified from
AOCI into Income-
Effective Portion
    Gain(Loss)
Recognized

in Income -
Ineffective Portion
    Location of
Gain(Loss)
Recognized in
Income -

Ineffective Portion
 

2014

  $ (887   $ (2,217     Interest Expense        N/A        N/A   

2013

  $ 1,801      $ (2,053     Interest Expense        N/A        N/A   

As of September 30, 2014, approximately $0.6 million related to derivatives designated as cash flow hedges and recorded in AOCI is expected to be reclassified into earnings in the next twelve months.

For additional information on the Company’s interest rate swap agreements, see notes 7 and 8.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

7.    Fair Value Measurements

The Company determines the fair value 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:

 

Level 1 Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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 (in thousands):

 

     September 30, 2014  
      Fair Value Measurements
Using
     Assets/Liabilities
at Fair Value
 
      Level 1    Level 2      Level 3     

Assets:

           

Short-term investments (1)

      $ 29,007          $ 29,007   

Interest rate swap agreements

      $ 432          $ 432   

Liabilities:

           

Acquisition-related contingent consideration

         $ 27,424       $ 27,424   

Interest rate swap agreements

      $ 1,044          $ 1,044   

 

     December 31, 2013  
      Fair Value  Measurements
Using
     Assets/Liabilities
at Fair Value
 
      Level 1    Level 2      Level 3     

Assets:

           

Short-term investments (1)

      $ 18,612          $ 18,612   

Interest rate swap agreements

      $ 90          $ 90   

Liabilities:

           

Acquisition-related contingent consideration

         $ 31,890       $ 31,890   

Interest rate swap agreements

      $ 2,185          $ 2,185   

 

(1) Consists of highly liquid investments with original maturities in excess of three months.

Interest Rate Swap Agreements

The fair value of the Company’s interest rate swap agreements is determined using pricing models with inputs that are observable in the market or can be derived principally from, or corroborated by, observable market data. Fair valuations of the interest rate swap agreements reflect the value of the instrument including the values associated with counterparty risk, the Company’s own credit standing and the value of the net credit differential between the counterparties to the derivative contract.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Acquisition-Related Contingent Consideration

The Company may be required to pay additional consideration under certain agreements for the acquisition of communications sites if specific conditions are met or events occur. In Colombia and Ghana, the Company may be required to pay additional consideration upon the conversion of certain barter agreements with other wireless carriers to cash-paying lease agreements. In addition, in Costa Rica and the United States, the Company may be required to pay additional consideration if certain pre-designated tenant leases commence during a specified period of time.

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 statements 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. This approach takes into consideration Level 3 unobservable inputs including probability assessments of expected future cash flows over the period in which the obligation is expected to be settled and applies a discount factor that captures the uncertainties associated with the obligation. Changes in these unobservable inputs could significantly impact the fair value of the liabilities recorded in the accompanying condensed consolidated balance sheets and adjustments recorded in the condensed consolidated statements of operations.

As of September 30, 2014, the Company estimates that the value of all potential acquisition-related contingent consideration required payments to be between zero and $39.0 million. During the three months ended September 30, 2014 and 2013, the fair value of the contingent consideration changed as follows (in thousands):

 

     2014     2013  

Balance as of July 1

   $ 31,025      $ 21,218   

Additions

     106        3,599   

Payments

     (209     (3,729

Change in fair value

     (974     1,303   

Foreign currency translation adjustment

     (1,794     18   

Other (1)

     (730     —     
  

 

 

   

 

 

 

Balance as of September 30

   $ 27,424      $ 22,409   
  

 

 

   

 

 

 

During the nine months ended September 30, 2014 and 2013, the fair value of the contingent consideration changed as follows (in thousands):

 

     2014     2013  

Balance as of January 1

   $ 31,890      $ 23,711   

Additions

     512        4,087   

Payments

     (1,498     (7,952

Change in fair value

     (1,344     4,610   

Foreign currency translation adjustment

     (1,406     (2,047

Other (1)

     (730     —     
  

 

 

   

 

 

 

Balance as of September 30

   $ 27,424      $ 22,409   
  

 

 

   

 

 

 

 

(1) In connection with the sale of operations in Panama, the buyer assumed the Company’s potential obligations related to additional purchase price consideration.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Items Measured at Fair Value on a Nonrecurring Basis

Assets Held and Used—The Company’s long-lived assets are measured at fair value on a nonrecurring basis using Level 3 inputs. During the three and nine months ended September 30, 2014, the Company did not record any asset impairment charges and during the three and nine months ended September 30, 2013, the Company recorded asset impairment charges of $1.9 million and $2.0 million, respectively, which are recorded in Other operating expenses in the accompanying condensed consolidated statements of operations.

During the three months ended September 30, 2014, NII, a U.S. corporation, filed for Chapter 11 bankruptcy protection on behalf of itself and certain of its subsidiaries. NII is the ultimate parent company of certain operating subsidiaries in Brazil, Chile and Mexico that collectively represent approximately 6% of the Company’s consolidated revenues for the nine months ended September 30, 2014. None of these subsidiaries were included in NII’s Chapter 11 filing. The Company’s assessment did not identify any indicators of impairment as of September 30, 2014.

Sale of Assets—During the nine months ended September 30, 2014, the Company completed the sale of its operations in Panama and its third-party structural analysis business for an aggregate sale price of $17.9 million, plus a working capital adjustment. At the time of sale, the carrying value of these assets primarily included $8.1 million of property and equipment, $7.8 million of intangible assets and $3.6 million of goodwill. The Company recorded a net impairment charge of $2.2 million in Other operating expenses in the accompanying condensed consolidated statements of operations.

There were no other items measured at fair value on a nonrecurring basis during the nine months ended September 30, 2014.

Fair Value of Financial Instruments—The Company’s financial instruments for which the carrying value reasonably approximates fair value at September 30, 2014 and December 31, 2013 include cash and cash equivalents, restricted cash, accounts receivable and accounts payable. The Company’s estimates of fair value of its long-term obligations, including the current portion, are based primarily upon reported market values. For long-term debt not actively traded, fair value is estimated using either indicative price quotes or a discounted cash flow analysis using rates for debt with similar terms and maturities. As of September 30, 2014, the carrying value and fair value of long-term obligations, including the current portion, are $13.9 billion and $14.3 billion, respectively, of which $9.6 billion is measured using Level 1 inputs and $4.7 billion is measured using Level 2 inputs. As of December 31, 2013, the carrying value and fair value of long-term obligations, including the current portion, were $14.5 billion and $14.7 billion, respectively, of which $8.6 billion was measured using Level 1 inputs and $6.1 billion was measured using Level 2 inputs.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

8.    Accumulated Other Comprehensive Loss

The changes in Accumulated other comprehensive loss for the three months ended September 30, 2014 and 2013 are as follows (in thousands):

 

    Unrealized Losses on
Cash Flow Hedges
    Deferred Loss on the
Settlement of the
Treasury Rate Lock
    Foreign Currency
Items
    Total  

Balance as of July 1, 2014

  $ (1,301   $ (2,630   $ (246,989   $ (250,920

Other comprehensive loss before reclassifications, net of tax

    (514     —          (253,424     (253,938

Amounts reclassified from accumulated other comprehensive loss, net of tax (1)

    319        200        —          519   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

    (195     200        (253,424     (253,419
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

  $ (1,496   $ (2,430   $ (500,413   $ (504,339
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Losses on cash flow hedges and loss on the settlement of the treasury rate lock have been reclassified into Interest expense in the accompanying condensed consolidated statements of operations. The tax effect of less than $0.1 million is included in income tax expense for the three months ended September 30, 2014.

 

    Unrealized Losses on
Cash Flow Hedges
    Deferred Loss on the
Settlement of the
Treasury Rate Lock
    Foreign Currency
Items
    Total  

Balance as of July 1, 2013

  $ (1,182   $ (3,427   $ (269,647   $ (274,256

Other comprehensive loss before reclassifications, net of tax

    (1,289     —          (23,114     (24,403

Amounts reclassified from accumulated other comprehensive loss, net of tax (1)

    445        199        —          644   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive (loss) income

    (844     199        (23,114     (23,759
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

  $ (2,026   $ (3,228   $ (292,761   $ (298,015
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Losses on cash flow hedges and loss on the settlement of the treasury rate lock have been reclassified into Interest expense in the accompanying condensed consolidated statements of operations. The tax effect of less than $0.1 million is included in income tax expense for the three months ended September 30, 2013.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The changes in Accumulated other comprehensive loss for the nine months ended September 30, 2014 and 2013 are as follows (in thousands):

 

    Unrealized Losses on
Cash Flow Hedges
    Deferred Loss on the
Settlement of the
Treasury Rate Lock
    Foreign Currency
Items
    Total  

Balance as of January 1, 2014

  $ (1,869   $ (3,029   $ (306,322   $ (311,220

Other comprehensive loss before reclassifications, net of tax

    (969     —          (194,091     (195,060

Amounts reclassified from accumulated other comprehensive loss, net of tax (1)

    1,342        599        —          1,941   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    373        599        (194,091     (193,119
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2014

  $ (1,496   $ (2,430   $ (500,413   $ (504,339
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Losses on cash flow hedges and loss on the settlement of the treasury rate lock have been reclassified into Interest expense in the accompanying condensed consolidated statements of operations. The tax effect of $0.1 million is included in income tax expense for the nine months ended September 30, 2014.

 

    Unrealized Losses on
Cash Flow Hedges
    Deferred Loss on the
Settlement of the
Treasury Rate Lock
    Foreign Currency
Items
    Total  

Balance as of January 1, 2013

  $ (4,358   $ (3,827   $ (175,162   $ (183,347

Other comprehensive income (loss) before reclassifications, net of tax

    1,167        —          (117,599     (116,432

Amounts reclassified from accumulated other comprehensive loss, net of tax (1)

    1,165        599        —          1,764   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    2,332        599        (117,599     (114,668
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2013

  $ (2,026   $ (3,228   $ (292,761   $ (298,015
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Losses on cash flow hedges and loss on the settlement of the treasury rate lock have been reclassified into Interest expense in the accompanying condensed consolidated statements of operations. The tax effect of $0.1 million is included in income tax expense for the nine months ended September 30, 2013.

9.    Income Taxes

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 tax rate is determined. The Company reorganized to qualify as a REIT for the taxable year commencing January 1, 2012. As a REIT, the Company continues to be subject to income taxes on the income of its TRSs, and taxation in foreign jurisdictions where it conducts international operations. Under the provisions of the Internal Revenue Code of 1986, as amended, the Company may deduct amounts distributed to stockholders against the income generated in its QRSs. The Company is able to offset income in both its TRSs and QRSs by utilizing their respective net operating losses. In addition, MIPT has been organized and has qualified as a REIT. For so long as MIPT continues to elect separate REIT status, it is independently subject to, and must comply with, the same REIT requirements that the Company must satisfy in order to qualify as a REIT, together with all other rules applicable to REITs.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company provides valuation allowances if, based on the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets.

As of September 30, 2014 and December 31, 2013, the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was approximately $39.1 million and $31.1 million, respectively. The increase in the amount of unrecognized tax benefits during the three and nine months ended September 30, 2014 is primarily attributable to the additions to the Company’s existing tax positions and fluctuations in foreign currency exchange rates. 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 14 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2013. The impact of the amount of such changes to previously recorded uncertain tax positions could range from zero to $19.4 million.

The Company recorded penalties and income tax-related interest expense during the three and nine months ended September 30, 2014 of $1.8 million and $4.8 million, respectively, and during the three and nine months ended September 30, 2013 of $0.9 million and $3.5 million, respectively. As of September 30, 2014 and December 31, 2013, the total amount of accrued penalties and income tax-related interest included in Other non-current liabilities in the condensed consolidated balance sheets was $34.0 million and $30.9 million, respectively.

10.    Stock-Based Compensation

The Company recognized stock-based compensation expense during the three and nine months ended September 30, 2014 of $18.3 million and $61.7 million, respectively, and stock-based compensation expense during the three and nine months ended September 30, 2013 of $15.1 million and $53.2 million, respectively. Stock-based compensation expense for the nine months ended September 30, 2013 included $1.1 million related to the modification of the vesting and exercise terms for certain employees’ equity awards. The Company capitalized $0.4 million of stock-based compensation expense as property and equipment during each of the three months ended September 30, 2014 and 2013, and $1.2 million of stock-based compensation expense as property and equipment during each of the nine months ended September 30, 2014 and 2013.

Summary of Stock-Based Compensation Plans—The Company maintains equity incentive plans that provide for the grant of stock-based awards to its directors, officers and employees. The 2007 Equity Incentive Plan (the “2007 Plan”) provides for the grant of non-qualified and incentive stock options, as well as restricted stock units, restricted stock and other stock-based awards. Exercise prices in the case of non-qualified and incentive stock options are not less than the fair value of the underlying common stock on the date of grant. Equity awards typically vest ratably over various periods, generally four years, and stock options generally expire ten years from the date of grant. As of September 30, 2014, the Company has the ability to grant stock-based awards with respect to an aggregate of 14.3 million shares of common stock under the 2007 Plan.

The Company’s Compensation Committee adopted a death, disability and retirement benefits program in connection with equity awards granted on or after January 1, 2013, which provides for accelerated vesting and extended exercise periods of stock options and restricted stock units upon an employee’s death or permanent disability, or upon an employee’s qualified retirement, provided certain eligibility criteria are met. Due to the accelerated recognition of stock-based compensation expense related to awards granted to retirement eligible employees, the Company recognized an incremental $1.7 million and $11.4 million of stock-based compensation expense during the three and nine months ended September 30, 2014, respectively, and an incremental $0.2 million and $7.5 million of stock-based compensation expense during the three and nine months ended September 30, 2013, respectively.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Stock Options—The Company’s option activity for the nine months ended September 30, 2014 is as follows:

 

     Number of
Options
 

Outstanding as of January 1, 2014

     6,106,171   

Granted

     1,858,633   

Exercised

     (1,013,650

Forfeited

     (159,503

Expired

     (33,188
  

 

 

 

Outstanding as of September 30, 2014

     6,758,463   
  

 

 

 

The fair value of each option granted during the nine months ended September 30, 2014 is estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions noted in the table below:

 

Range of risk-free interest rate

   1.46%-1.74%

Weighted average risk-free interest rate

   1.64%

Expected life of option grants

   4.5 years

Range of expected volatility of underlying stock price

   22.45%-23.35%

Weighted average expected volatility of underlying stock price

   23.09%

Expected annual dividend yield

   1.50%

The weighted average grant date fair value per share during the nine months ended September 30, 2014 was $14.84. As of September 30, 2014, total unrecognized compensation expense related to unvested stock options is $38.2 million and is expected to be recognized over a weighted average period of approximately two years.

Restricted Stock Units—The Company’s restricted stock unit activity for the nine months ended September 30, 2014 is as follows:

 

     Number of
Units
 

Outstanding as of January 1, 2014

     1,840,137   

Granted

     786,584   

Vested

     (702,723

Forfeited

     (150,241
  

 

 

 

Outstanding as of September 30, 2014

     1,773,757   
  

 

 

 

As of September 30, 2014, total unrecognized compensation expense related to unvested restricted stock units granted under the 2007 Plan is $87.5 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 15 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2013. Under the ESPP, shares of the Company’s common stock may be purchased on the last day of each bi-annual offering period at a 15% discount of the lower of the closing market value on the first or last day of such offering period. 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, 2014, employee contributions were accumulated to purchase an estimated 65,000 shares under the ESPP.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Key assumptions used to apply the Black-Scholes pricing model for shares purchased through the ESPP during the nine months ended September 30, 2014, which resulted in a fair value per share of $14.35, are as follows:

 

Approximate risk-free interest rate

   0.11%

Expected life of shares

   6 months

Expected volatility of underlying stock price over the option period

   16.59%

Expected annual dividend yield

   1.50%

11.    Equity

Mandatory Convertible Preferred Stock Offering—On May 12, 2014, the Company completed a registered public offering of 6,000,000 shares of its 5.25% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share (the “Mandatory Convertible Preferred Stock”). The net proceeds of the offering were $582.9 million after deducting commissions and estimated expenses. The Company used the net proceeds from this offering to fund acquisitions, including the acquisition from Richland, initially funded by indebtedness incurred under the 2013 Credit Facility. 

Unless converted earlier, each share of the Mandatory Convertible Preferred Stock will automatically convert on May 15, 2017, into between 0.9174 and 1.1468 shares of common stock, depending on the applicable market value of the common stock and subject to anti-dilution adjustments. Subject to certain restrictions, at any time prior to May 15, 2017, holders of the Mandatory Convertible Preferred Stock may elect to convert all or a portion of their shares into common stock at the minimum conversion rate then in effect.

Dividends on shares of Mandatory Convertible Preferred Stock are payable on a cumulative basis when, as and if declared by the Company’s Board of Directors (or an authorized committee thereof) at an annual rate of 5.25% on the liquidation preference of $100.00 per share, on February 15, May 15, August 15 and November 15 of each year, commencing on August 15, 2014 to, and including, May 15, 2017. The Company may pay dividends in cash or, subject to certain limitations, in shares of common stock or any combination of cash and shares of common stock. The terms of the Mandatory Convertible Preferred Stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding Mandatory Convertible Preferred Stock for all prior dividend periods, no dividends may be declared or paid on common stock.

Stock Repurchase Program—In March 2011, the Board of Directors approved a stock repurchase program, pursuant to which the Company is authorized to purchase up to $1.5 billion of common stock (the “2011 Buyback”). On September 6, 2013, the Company temporarily suspended repurchases in connection with its acquisition of MIPT.

Under the 2011 Buyback, 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.

The Company continues to manage the pacing of the remaining $1.1 billion under the 2011 Buyback in response to general market conditions and other relevant factors, including its financial policies. 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 the 2011 Buyback are subject to the Company having available cash to fund repurchases.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Sales of Equity Securities—The Company receives proceeds from sales of its equity securities pursuant to its ESPP and upon exercise of stock options granted under its equity incentive plans. During the nine months ended September 30, 2014, the Company received an aggregate of $47.9 million in proceeds upon exercises of stock options and from its ESPP.

Distributions—During the nine months ended September 30, 2014, the Company declared the following cash distributions:

 

    Declaration Date     Payment Date     Record Date     Distribution
per share
    Aggregate
Payment Amount
(in millions)
 

Common stock

    March 6, 2014        April 25, 2014        April 10, 2014      $ 0.32      $ 126.6   

Common stock

    May 21, 2014        July 16, 2014        June 17, 2014      $ 0.34      $ 134.6   

Common stock

    September 10, 2014        October 7, 2014        September 23, 2014      $ 0.36      $ 142.7   

Preferred stock

    May 21, 2014        August 15, 2014        August 1, 2014      $ 1.3563      $ 8.1   

Preferred stock

    September 10, 2014        November 17, 2014        November 1, 2014      $ 1.3125      $ 7.9   

The Company accrues distributions on unvested restricted stock unit awards granted subsequent to January 1, 2012, which are payable upon vesting. As of September 30, 2014, the amount accrued for distributions payable related to unvested restricted stock units is $2.9 million. During the nine months ended September 30, 2014, the Company paid $0.7 million of distributions upon the vesting of restricted stock units.

To maintain its REIT status, the Company expects to continue paying regular distributions, the amount, timing and frequency of which will be determined at the sole discretion of the Company’s Board of Directors.

12.    Earnings Per Share

Basic net income per common share represents net income attributable to American Tower Corporation common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted net income per common share represents net income attributable to American Tower Corporation common stockholders divided by the weighted average number of common shares outstanding during the period and any dilutive common share equivalents, including shares issuable (i) upon the vesting of restricted stock awards, (ii) upon exercise of stock options and (iii) upon conversion of the Mandatory Convertible Preferred Stock (see note 11). Dilutive common share equivalents also include the dilutive impact of the Verizon transaction (see note 13).

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company uses the treasury stock method to calculate the effect of its outstanding restricted stock awards and stock options and uses the if-converted method to calculate the effect of its outstanding Mandatory Convertible Preferred Stock. The following table sets forth basic and diluted net income per common share computational data for the three and nine months ended September 30, 2014 and 2013 (in thousands, except per share data):

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
             2014                     2013                      2014                     2013          

Net income attributable to American Tower Corporation stockholders

   $ 207,593      $ 180,123       $ 644,523      $ 451,351   

Dividends declared on preferred stock

     (7,700     —           (12,075     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income attributable to American Tower Corporation common stockholders

     199,893        180,123         632,448        451,351   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic weighted average common shares outstanding

     396,243        394,759         395,758        395,138   

Dilutive securities

     4,154        3,589         4,048        4,137   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     400,397        398,348         399,806        399,275   
  

 

 

   

 

 

    

 

 

   

 

 

 

Basic net income attributable to American Tower Corporation common stockholders per common share

   $ 0.50      $ 0.46       $ 1.60      $ 1.14   
  

 

 

   

 

 

    

 

 

   

 

 

 

Diluted net income attributable to American Tower Corporation common stockholders per common share

   $ 0.50      $ 0.45       $ 1.58      $ 1.13   
  

 

 

   

 

 

    

 

 

   

 

 

 

Shares Excluded From Dilutive Effect

The following shares were not included in the computation of diluted earnings per share because the effect would be anti-dilutive (in thousands, on a weighted average basis):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
             2014                      2013                      2014                      2013          

Restricted stock awards

     —           14         —           —     

Stock options

     1         2,517         2,255         1,096   

Preferred stock (1)

     6,688         —           3,473         —     

 

(1) Issued on May 12, 2014.

13.    Commitments and Contingencies

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, 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 liquidity.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

TriStar Litigation—The Company was involved in several lawsuits against TriStar Investors LLP and its affiliates (“TriStar”) in various states regarding single tower sites where TriStar had taken land interests under the Company’s owned or managed sites and the Company believes TriStar induced the landowner to breach obligations to the Company. In addition, on February 16, 2012, TriStar brought a federal action against the Company in the United States District Court for the Northern District of Texas (the “District Court”), in which TriStar principally alleged that the Company made misrepresentations to landowners when competing with TriStar for land under the Company’s owned or managed sites. On January 22, 2013, the Company filed an amended answer and counterclaim against TriStar and certain of its employees, denying Tristar’s claims and asserting that TriStar engaged in a pattern of unlawful activity, including: (i) entering into agreements not to compete for land under certain towers; and (ii) making widespread misrepresentations to landowners regarding both TriStar and the Company. Both parties sought injunctive relief that would prohibit the other party from making certain statements when interacting with landowners, as well as significant damages. On April 3, 2014, the District Court ruled on the parties’ cross-motions for summary judgment, permitting both parties’ claims of misrepresentation to proceed to trial, as well as related state law actions, and dismissing certain of the parties’ other claims. Pursuant to a Settlement Agreement dated July 9, 2014, all pending state and federal actions between the Company and TriStar were dismissed with prejudice and without payment of damages.

Commitments

AT&T Transaction—The Company has an agreement with SBC Communications Inc., a predecessor entity to AT&T Inc. (“AT&T”), that currently provides for the lease or sublease of approximately 2,430 towers from AT&T with the lease commencing between December 2000 and August 2004. Substantially all of the towers are part of the Company’s securitization transaction completed in March 2013. 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. As of September 30, 2014, the Company has purchased four of the subleased towers upon expiration of the applicable agreement. The aggregate purchase option price for the remaining towers leased and subleased is approximately $638.6 million, and will accrete at a rate of 10% per annum through 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.

Verizon Transaction—In December 2000, the Company entered into an agreement with ALLTEL, a predecessor entity to Verizon Wireless (“Verizon”), to acquire towers through a 15-year sublease agreement. Pursuant to the agreement, as amended, with Verizon, the Company acquired rights to 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 is approximately $72.8 million as of September 30, 2014. At Verizon’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, which would be valued at approximately $127.8 million in the aggregate based on the closing price at September 30, 2014.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Other Contingencies—The Company is subject to income tax and other taxes in the geographic areas where it operates, and periodically receives notifications of audits, assessments or other actions by taxing authorities. The Company evaluates the circumstances of each notification based on the information available, and records a liability for any potential outcome that is probable or more likely than not unfavorable, if the liability is also reasonably estimable. On January 21, 2014, the Company received an income tax assessment in the amount of 22.6 billion Indian Rupees (approximately $369.0 million on the date of assessment), asserting tax liabilities arising out of a transfer pricing review of transactions by Essar Telecom Infrastructure Private Limited (“ETIPL”), and more specifically involving the issuance of share capital and the determination by the tax authority that an income tax obligation arose as a result of such issuance. The assessment was made with respect to transactions that took place in the tax year commencing in 2008, prior to the Company’s acquisition of ETIPL. Under the Company’s definitive acquisition agreement of ETIPL, the seller is obligated to indemnify and defend the Company with respect to any tax-related liability that may arise from activities prior to March 31, 2010. The Company believes that there is no basis upon which the tax assessment can be enforced under existing tax law and accordingly has not recorded an obligation in the consolidated financial statements. The assessment is being challenged with the appellate authorities.

14.    Acquisitions

All of the acquisitions described below are accounted for as business combinations and are consistent with the Company’s strategy to expand in selected geographic areas.

The estimates of the fair value of the assets acquired and liabilities assumed at the date of the applicable acquisition are subject to adjustment during the measurement period (up to one year from the particular acquisition date). The primary areas of the preliminary purchase price allocations that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, including contingent consideration, and residual goodwill and any related tax impact. The fair value of these net assets acquired are based on management’s estimates and assumptions, as well as other information compiled by management, including valuations that utilize customary valuation procedures and techniques. While the Company believes that such preliminary estimates provide a reasonable basis for estimating the fair value of assets acquired and liabilities assumed, it will evaluate any necessary information prior to finalization of the fair value. During the measurement period, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the revised estimated values of those assets or liabilities as of that date. The effect of measurement period adjustments to the estimated fair value is reflected as if the adjustments had been completed on the acquisition date. The impact of all changes that do not qualify as measurement period adjustments are included in current period earnings. If the actual results differ from the estimates and judgments used in these fair values, the amounts recorded in the condensed consolidated financial statements could be subject to a possible impairment of the intangible assets or goodwill, or require acceleration of the amortization expense of intangible assets in subsequent periods. During the nine months ended September 30, 2014, the Company made certain purchase accounting measurement period adjustments related to several acquisitions and therefore retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2013.

Impact of current year acquisitions—The Company typically acquires communications sites from wireless carriers or other tower operators and subsequently integrates those sites into its existing portfolio of communications sites. The financial results of the Company’s acquisitions have been included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2014 from the date of the respective acquisition. The date of acquisition, and by extension the point at which the Company begins to recognize the results of an acquisition, may be dependent upon, among other things, the receipt of contractual consents, the commencement and extent of leasing arrangements and the timing of the transfer of title

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

or rights to the assets, which may be accomplished in phases. Sites acquired from communications service providers may never have been operated as a business and may have been utilized solely by the seller as a component of its network infrastructure. An acquisition, depending on its size and nature, may or may not involve the transfer of business operations or employees.

The estimated aggregate impact of the 2014 acquisitions on the Company’s revenues and gross margin for the three months ended September 30, 2014 is approximately $12.6 million and $9.5 million, respectively, and the estimated aggregate impact for the nine months ended September 30, 2014 is approximately $22.8 million and $17.1 million, respectively. The revenues and gross margin amounts also reflect incremental revenues from the addition of new tenants to the acquired sites subsequent to the date of acquisition. Incremental amounts of segment selling, general, administrative and development expense have not been reflected as the amounts attributable to acquisitions are not comparable.

The Company recognizes acquisition and merger related costs in the period in which they are incurred and services are received. Acquisition and merger related costs may include finder’s fees, advisory, legal, accounting, valuation and other professional or consulting fees, fair value adjustments to contingent consideration and general administrative costs, and are included in Other operating expenses in the condensed consolidated statements of operations. During the three and nine months ended September 30, 2014, the Company recognized acquisition and merger related expenses of $4.1 million and $18.7 million, respectively. During the three and nine months ended September 30, 2013, the Company recognized acquisition and merger related expenses of $8.9 million and $25.8 million, respectively. In addition, during the three and nine months ended September 30, 2014, the Company recorded $5.2 million and $10.9 million, respectively, of integration costs related to recently closed acquisitions.

2014 Acquisitions

Richland Acquisition—On April 3, 2014, the Company, through one of its wholly-owned subsidiaries, acquired entities holding a portfolio of 59 communications sites, which at the time of acquisition were leased primarily to radio and television broadcast tenants, and four property interests in the United States from Richland for an aggregate purchase price of $385.9 million. The purchase price was satisfied with approximately $182.9 million in cash, approximately $6.5 million payable to the seller upon satisfaction of certain closing conditions and the assumption of $196.5 million of existing indebtedness. In June 2014, the Company repaid the outstanding indebtedness, paid prepayment consideration and wrote-off the unamortized premium associated with the fair value adjustment. 

International Acquisitions—During the nine months ended September 30, 2014, the Company acquired a total of 151 communications sites and related assets in Brazil, Ghana, Mexico and Uganda, for total consideration of $27.9 million (including value added tax of $1.0 million). The Company also acquired 299 communications sites in Mexico for an aggregate purchase price of $43.7 million (including value added tax of $5.6 million). The Company assumed net liabilities of approximately $3.4 million, resulting in total consideration of approximately $40.3 million, which was satisfied by the issuance of approximately $36.3 million of credits to be applied against trade accounts receivable and cash consideration of approximately $4.0 million. Each purchase price is subject to post-closing adjustments.

Other U.S. Acquisitions—During the nine months ended September 30, 2014, the Company acquired a total of 44 communications sites and equipment, as well as four property interests, in the United States for total consideration of $49.1 million (including $0.4 million of contingent consideration). The aggregate purchase price is subject to post-closing adjustments.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the preliminary allocation of the aggregate consideration paid and the amounts of assets acquired and liabilities assumed for the fiscal year 2014 acquisitions based upon their estimated fair value at the date of acquisition (in thousands). Balances are reflected in the accompanying condensed consolidated balance sheets as of September 30, 2014.

 

     Richland     International     Other U.S.  

Current assets

   $ 8,583      $ 6,883      $ 82   

Non-current assets

     —          1,512        —     

Property and equipment

     176,648        31,374        9,696   

Intangible assets (1):

      

Customer-related intangible assets

     179,752        20,627        29,232   

Network location intangible assets

     2,100        10,871        5,501   

Current liabilities

     (3,635     (863     (784

Long-term obligations (2)

     (201,999     —          —     

Other non-current liabilities

     (2,922     (6,206     (222
  

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

   $ 158,527      $ 64,198      $ 43,505   
  

 

 

   

 

 

   

 

 

 

Goodwill (3)

     30,852        3,984        5,601   

 

(1) Customer-related intangible assets and network location intangible assets are amortized on a straight-line basis over periods of up to 20 years.
(2) Long-term obligations included $196.5 million of Richland’s indebtedness and a fair value adjustment of $5.5 million. The fair value adjustment was based primarily on reported market values using Level 2 inputs.
(3) Goodwill was allocated to the Company’s domestic and international rental and management segments, as applicable, and the Company expects goodwill recorded will be deductible for tax purposes.

2013 Acquisitions

MIPT Acquisition

On October 1, 2013, the Company, through its wholly owned subsidiary American Tower Investments LLC, acquired 100% of the outstanding common membership interests of MIPT, a private REIT and the parent company of GTP, an owner and operator, through its various operating subsidiaries, of approximately 4,860 communications sites in the United States and approximately 510 communications sites in Costa Rica and Panama. GTP also manages rooftops and holds property interests that it leases to communications service providers and third-party tower operators. The Company sold its operations in Panama in September 2014 (see note 7).

The purchase price of $4.9 billion was satisfied with approximately $3.3 billion in cash, including an aggregate of approximately $2.8 billion from borrowings under the Company’s credit facilities, and the assumption of approximately $1.5 billion of MIPT’s existing indebtedness.

The consideration consisted of the following (in thousands):

 

Cash consideration (1)

   $ 3,330,462   

Assumption of existing indebtedness at historical cost

     1,527,621   
  

 

 

 

Estimated total purchase price

   $ 4,858,083   
  

 

 

 

 

(1) Cash consideration includes $14.5 million of an additional purchase price adjustment which was paid to the sellers during the nine months ended September 30, 2014 and is reflected in Accrued expenses on the consolidated balance sheet included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The allocation of the purchase price was finalized as of September 30, 2014. The following table summarizes the allocation of the aggregate purchase price paid and the amounts of assets acquired and liabilities assumed for the MIPT acquisition based upon the estimated fair value at the date of acquisition (in thousands).

 

     Final Purchase Price
Allocation (1)
    Preliminary Purchase
Price Allocation (2)
 

Cash and cash equivalents

   $ 35,967      $ 35,967   

Restricted cash

     30,883        30,883   

Accounts receivable, net

     10,102        10,021   

Prepaid and other current assets

     40,865        22,875   

Property and equipment

     910,713        996,901   

Intangible assets (3):

    

Customer-related intangible assets

     2,456,582        2,629,188   

Network location intangible assets

     528,900        467,300   

Notes receivable and other non-current assets

     68,388        4,220   

Accounts payable

     (9,969     (9,249

Accrued expenses

     (42,867     (37,004

Accrued interest

     (3,253     (3,253

Current portion of long-term obligations

     (2,820     (2,820

Unearned revenue

     (35,905     (35,753

Long-term obligations (4)

     (1,573,366     (1,573,366

Asset retirement obligations

     (57,965     (43,089

Other non-current liabilities

     (17,837     (37,326
  

 

 

   

 

 

 

Fair value of net assets acquired

   $ 2,338,418      $ 2,455,495   
  

 

 

   

 

 

 

Goodwill (5)

     992,044        874,967   

 

(1) Balances are reflected in the accompanying condensed consolidated balance sheets as of September 30, 2014.
(2) Balances are reflected in the consolidated balance sheets in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
(3) Customer-related intangible assets and network location intangible assets are amortized on a straight-line basis over periods of up to 20 years.
(4) Long-term obligations included $1.5 billion of MIPT’s existing indebtedness and a fair value adjustment of $53.0 million. The fair value adjustment was based primarily on reported market values using Level 2 inputs.
(5) Goodwill was allocated to the Company’s domestic and international rental and management segments, as applicable, and the Company expects goodwill recorded will not be deductible for tax purposes.

Other 2013 Acquisitions

Axtel Mexico Acquisition—On January 31, 2013, the Company acquired 883 communications sites from Axtel, S.A.B. de C.V. for an aggregate purchase price of $248.5 million.

NII Acquisition—On August 8, 2013, the Company entered into an agreement with NII to acquire up to 1,666 communications sites in Mexico and 2,790 communications sites in Brazil in two separate transactions.

On November 8, 2013, the Company acquired 1,473 communications sites in Mexico from NII for an initial aggregate purchase price of approximately $436.0 million (including value added tax of approximately $60.3 million) and net assets of approximately $0.9 million for total cash consideration of approximately $436.9 million. The purchase price was subsequently reduced to approximately $427.0 million (including value added tax of approximately $59.0 million) during the nine months ended September 30, 2014 as a result of post-closing adjustments. The purchase price is subject to further post-closing adjustments. The Company’s right to purchase additional sites in Mexico expired on May 30, 2014.

 

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On December 6, 2013, the Company acquired 1,931 communications sites in Brazil from NII for an initial aggregate purchase price of approximately $349.0 million. The purchase price was subsequently reduced to approximately $340.6 million during the nine months ended September 30, 2014 as a result of post-closing adjustments. In addition, in June 2014, the Company purchased an additional 103 communications sites for an aggregate purchase price of approximately $18.6 million, which are reflected above in “2014 Acquisitions.” The purchase price is subject to post-closing adjustments and the purchase of the remaining sites is subject to diligence and customary closing conditions. The Company’s right to purchase additional sites in Brazil expires on December 31, 2014.

Z-Sites Acquisition—On November 29, 2013, the Company acquired 238 communications sites from Z-Sites Locação de Imóveis Ltda for an aggregate purchase price of approximately $122.8 million. The purchase price was subsequently increased to approximately $123.9 million during the nine months ended September 30, 2014 and is subject to post-closing adjustments.

Other International Acquisitions—During the year ended December 31, 2013, the Company acquired a total of 714 additional communications sites in Brazil, Chile, Colombia, Ghana, Mexico and South Africa, for an aggregate purchase price of $89.8 million (including contingent consideration of $4.1 million and value added tax of $4.9 million).

Other U.S. Acquisitions—During the year ended December 31, 2013, the Company acquired a total of 55 additional communications sites and 23 property interests in the United States for an aggregate purchase price of $65.6 million, subject to post-closing adjustments. The purchase price included cash paid of approximately $65.2 million and net liabilities assumed of approximately $0.4 million.

The following table summarizes the updated allocation of the aggregate purchase price paid and the amounts of assets acquired and liabilities assumed for the fiscal year 2013 acquisitions based upon their estimated fair value at the date of acquisition (in thousands). Balances are reflected in the accompanying condensed consolidated balance sheets herein.

 

    Axtel
Mexico (1)
    NII
Mexico (2)
    NII Brazil     Z-Sites     Other
International
    Other U.S.  

Current assets

  $ —        $ 59,938      $ —        $ —        $ 4,863      $ 1,220   

Non-current assets

    2,626        10,738        7,184        6,436        1,991        44   

Property and equipment

    86,100        143,680        110,398        26,881        44,844        23,537   

Intangible assets (3):

           

Customer-related intangible assets

    119,392        132,897        142,151        62,286        20,590        29,325   

Network location intangible assets

    43,031        66,069        80,069        17,350        20,727        7,935   

Current liabilities

    —          —          —          —          —          (454

Other non-current liabilities

    (9,377     (10,478     (13,188     (1,502     (8,168     (848
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

  $ 241,772      $ 402,844      $ 326,614      $ 111,451      $ 84,847      $ 60,759   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill (4)

    6,751        25,056        13,946        12,493        4,970        4,403   

 

(1) The allocation of the purchase price was finalized during the year ended December 31, 2013.
(2) Current assets includes approximately $59.0 million of value added tax.
(3) Customer-related intangible assets and network location intangible assets are amortized on a straight-line basis over periods of up to 20 years.
(4) Goodwill was allocated to the Company’s domestic and international rental and management segments, as applicable, and the Company expects goodwill recorded will be deductible for tax purposes.

 

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The following table summarizes the preliminary allocation, unless otherwise noted, of the aggregate purchase price paid and the amounts of assets acquired and liabilities assumed for the fiscal year 2013 acquisitions. The allocation is based upon the estimated fair value at the date of acquisition (in thousands). Balances are reflected in the consolidated balance sheets in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

    Axtel
Mexico (1)
    NII
Mexico (2)
    NII Brazil     Z-Sites     Other
International
    Other U.S.  

Current assets

  $ —        $ 61,183      $ —        $ —        $ 4,863      $ 1,220   

Non-current assets

    2,626        11,969        4,484        6,157        1,991        44   

Property and equipment

    86,100        147,364        105,784        24,832        44,844        23,803   

Intangible assets (3):

           

Customer-related intangible assets

    119,392        135,175        149,333        64,213        20,590        29,325   

Network location intangible assets

    43,031        63,791        93,867        17,123        20,727        7,607   

Current liabilities

    —          —          —          —          —          (454

Other non-current liabilities

    (9,377     (10,478     (13,188     (1,502     (8,168     (786
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

  $ 241,772      $ 409,004      $ 340,280      $ 110,823      $ 84,847      $ 60,759   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill (4)

    6,751        27,928        8,704        11,953        4,970        4,403   

 

(1) The allocation of the purchase price was finalized during the year ended December 31, 2013.
(2) Current assets includes approximately $60.3 million of value added tax.
(3) Customer-related intangible assets and network location intangible assets are amortized on a straight-line basis over periods of up to 20 years.
(4) Goodwill was allocated to the Company’s domestic and international rental and management segments, as applicable, and the Company expects goodwill recorded will be deductible for tax purposes.

Pro Forma Consolidated Results

The following table presents the unaudited pro forma financial results as if the 2013 acquisitions had occurred on January 1, 2012 and the 2014 acquisitions had occurred on January 1, 2013 (in thousands, except per share data). Management relied on various estimates and assumptions due to the fact that some of the acquisitions never operated as a business and were utilized solely by the seller as a component of their network infrastructure. As a result, historical operating results for these acquisitions are not available. The pro forma results do not include any anticipated cost synergies, costs or other effects of the planned integration of the acquisitions. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the acquisitions been completed on the dates indicated, nor are they indicative of the future operating results of the Company.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
             2014                      2013                      2014                      2013          

Pro forma revenues

   $ 1,038,188       $ 938,082       $ 3,069,254       $ 2,817,239   

Pro forma net income attributable to American Tower Corporation common stockholders

   $ 199,893       $ 147,156       $ 634,166       $ 359,819   

Pro forma net income per common share amounts:

           

Basic net income attributable to American Tower Corporation common stockholders

   $ 0.50       $ 0.37       $ 1.60       $ 0.91   

Diluted net income attributable to American Tower Corporation common stockholders

   $ 0.50       $ 0.37       $ 1.59       $ 0.90   

 

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Other Signed Acquisitions

BR Towers Acquisition—On June 13, 2014, the Company entered into an agreement with GPCP V, a private equity fund managed by GP Investments, Ltd., FIP Multisetorial Plus, a private equity fund managed by Bradesco BBI, and other shareholders, to acquire 100% of the equity interests of BR Towers S.A., a Brazilian telecommunications real estate company that is expected to own approximately 2,530 towers and the exclusive use rights for approximately 2,110 additional towers in Brazil at closing. At signing, the estimated purchase price was 2.18 billion Brazilian Reais (“BRL”) (approximately $889.9 million based on exchange rates at September 30, 2014), subject to customary adjustments and regulatory approval. The Company deposited 130.0 million BRL (approximately $53.0 million based on exchange rates at September 30, 2014) in escrow for this transaction, which is reflected in Prepaid and other current assets in the condensed consolidated balance sheets as of September 30, 2014.

U.S. Acquisition—In July 2014, the Company entered into an agreement to acquire up to 154 communications sites in the United States for approximately $132.5 million, subject to customary adjustments. In October 2014, the Company acquired 120 of those communications sites for approximately $110.1 million, subject to post-closing adjustments.

Acquisition-Related Contingent Consideration

The Company may be required to pay additional consideration under certain agreements for the acquisition of communications sites if specific conditions are met or events occur.

Colombia—Under the terms of the agreement with Colombia Movil S.A. E.S.P., the Company is required to make additional payments upon the conversion of certain barter agreements with other wireless carriers to cash paying lease agreements. Based on current estimates, the Company expects the value of potential contingent consideration payments required to be made under the agreement to be between zero and $34.8 million and estimates it to be $23.3 million using a probability weighted average of the expected outcomes as of September 30, 2014. During the three and nine months ended September 30, 2014, the Company recorded an increase in fair value of $0.4 million and $1.4 million, respectively, in Other operating expenses in the accompanying condensed consolidated statements of operations.

Ghana—Under the terms of its agreement, as amended, with MTN Group Limited, the Company is required to make additional payments upon the conversion of certain barter agreements with other wireless carriers to cash paying lease agreements. Based on current estimates, the Company expects the value of potential contingent consideration payments required to be made under the amended agreement to be between zero and $0.5 million and estimates it to be $0.5 million using a probability weighted average of the expected outcomes as of September 30, 2014.

MIPT—In connection with the acquisition of MIPT, the Company assumed additional contingent consideration liability related to previously closed acquisitions in Costa Rica, Panama and the United States. The Company is required to make additional payments to the sellers if certain pre-designated tenant leases commence during a limited specified period of time after the applicable acquisition was completed, generally one year or less. The Company initially recorded $9.3 million of contingent consideration liability as part of the preliminary purchase price allocation upon closing of the acquisition. Based on current estimates, the Company expects the value of potential contingent consideration payments required to be made under these agreements to be between zero and $3.4 million. During the three and nine months ended September 30, 2014, the Company (i) recorded a decrease in fair value of $1.4 million and $2.8 million, respectively, in Other operating expenses in the accompanying condensed consolidated statements of operations, (ii) made payments under these agreements of $0.1 million and $1.4 million, respectively, (iii) reduced its contingent consideration liability by $0.7 million as a

 

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portion of the Company’s obligations was assumed by the buyer in conjunction with the sale of operations in Panama and (iv) recorded additional liability of $0.1 million. As a result, the Company estimates the value of potential contingent consideration payments required under these agreements to be $3.4 million using a probability weighted average of the expected outcomes as of September 30, 2014.

Other U.S.—In connection with other acquisitions in the United States, the Company is required to make additional payments if certain pre-designated tenant leases commence during a specified period of time. During the nine months ended September 30, 2014, the Company recorded $0.4 million of contingent consideration liability as part of the preliminary purchase price allocation upon closing of certain acquisitions. During the three and nine months ended September 30, 2014, the Company made payments under these agreements of $0.1 million. Based on current estimates, the Company expects the value of potential contingent consideration payments required to be made under these agreements to be between zero and $0.3 million and estimates it to be $0.3 million using a probability weighted average of the expected outcomes as of September 30, 2014.

For more information regarding contingent consideration, see note 7.

15.    Business Segments

The Company operates in three business segments, (i) domestic rental and management, (ii) international rental and management and (iii) network development services. The Company’s primary business is the leasing of antenna space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data and data providers, government agencies and municipalities and tenants in a number of other industries. This business is referred to as the Company’s rental and management operations and is comprised of domestic and international segments, which, as of September 30, 2014, consist of the following:

 

   

Domestic: rental and management operations in the United States; and

 

   

International: rental and management operations in Brazil, Chile, Colombia, Costa Rica, Germany, Ghana, India, Mexico, Peru, South Africa and Uganda.

The Company has applied the aggregation criteria to operations within the international rental and management operating segments on a basis consistent with management’s review of information and performance evaluation.

The Company’s network development services segment offers tower-related services in the United States, including site acquisition, zoning and permitting services and structural analysis services, which primarily support its site leasing business and the addition of new tenants and equipment on its sites. The network development services segment is a strategic business unit that offers different services from the rental and management operating segments and requires different resources, skill sets and marketing strategies.

The accounting policies applied in compiling segment information below are similar to those described in note 1 to the Company’s consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2013. Among other factors, in evaluating financial performance in each business segment, management uses 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 gross margin and segment operating profit also include Interest income, TV Azteca, net. These measures of segment gross margin and segment operating profit are also before Interest

 

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income, Interest expense, Gain (loss) on retirement of long-term obligations, Other income (expense), Net income (loss) attributable to noncontrolling interest, Income (loss) on equity method investments and Income tax benefit (provision). The categories of expenses indicated above, such as depreciation, have been excluded from segment operating performance as they are not considered in the review of information or the evaluation of results by management. There are no significant revenues resulting from transactions between the Company’s operating segments. All intercompany transactions are eliminated to reconcile segment results and assets to the condensed consolidated statements of operations and condensed consolidated balance sheets.

Summarized financial information concerning the Company’s reportable segments for the three and nine months ended September 30, 2014 and 2013 is shown in the following tables. The “Other” column (i) 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 expenses; Interest income; Interest expense; Gain (loss) on retirement of long-term obligations; and Other income (expense), and (ii) reconciles segment operating profit to Income from continuing operations before income taxes, as these amounts are not utilized in assessing each segment’s performance.

 

    Rental and Management     Total Rental and
Management
    Network
Development
Services
    Other     Total  
Three months ended September 30, 2014   Domestic     International          
    (in thousands)  

Segment revenues

  $ 663,570      $ 347,549      $ 1,011,119      $ 27,069        $ 1,038,188   

Segment operating expenses (1)

    133,951        138,060        272,011        11,746          283,757   

Interest income, TV Azteca, net

    —          2,661        2,661        —            2,661   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    529,619        212,150        741,769        15,323          757,092   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment selling, general, administrative and development expense (1)

    30,955        33,441        64,396        3,020          67,416   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 498,664      $ 178,709      $ 677,373      $ 12,303        $ 689,676   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

          $ 18,269        18,269   

Other selling, general, administrative and development expense

            23,669        23,669   

Depreciation, amortization and accretion

            249,066        249,066   

Other expense (principally interest expense and other expenses)

            181,616        181,616   
           

 

 

 

Income from continuing operations before income taxes

            $ 217,056   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 14,202,456      $ 6,190,104      $ 20,392,560      $ 40,903      $ 163,152      $ 20,596,615   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expenses exclude stock-based compensation expense of $0.4 million and $17.8 million, respectively.

 

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    Rental and Management     Total Rental and
Management
    Network
Development
Services
    Other     Total  
Three months ended September 30, 2013   Domestic     International          
    (in thousands)  

Segment revenues

  $ 529,941      $ 266,634      $ 796,575      $ 11,305        $ 807,880   

Segment operating expenses (1)

    95,232        100,473        195,705        4,777          200,482   

Interest income, TV Azteca, net

    —          3,544        3,544        —            3,544   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    434,709        169,705        604,414        6,528          610,942   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment selling, general, administrative and development expense (1)

    24,523        31,728        56,251        1,880          58,131   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 410,186      $ 137,977      $ 548,163      $ 4,648        $ 552,811   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

          $ 15,058        15,058   

Other selling, general, administrative and development expense

            24,939        24,939   

Depreciation, amortization and accretion

            184,922        184,922   

Other expense (principally interest expense and other (expense) income)

            149,084        149,084   
           

 

 

 

Income from continuing operations before income taxes

            $ 178,808   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 12,037,318      $ 5,427,416      $ 17,464,734      $ 49,973      $ 666,613      $ 18,181,320   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expenses exclude stock-based compensation expense of $0.3 million and $14.7 million, respectively.

 

    Rental and Management     Total Rental  and
Management
    Network
Development
Services
    Other     Total  
Nine months ended September 30, 2014   Domestic     International          
    (in thousands)  

Segment revenues

  $ 1,959,092      $ 1,017,908      $ 2,977,000      $ 76,734        $ 3,053,734   

Segment operating expenses (1)

    381,800        403,515        785,315        30,529          815,844   

Interest income, TV Azteca, net

    —          7,918        7,918        —            7,918   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    1,577,292        622,311        2,199,603        46,205          2,245,808   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment selling, general, administrative and development expense (1)

    86,677        97,129        183,806        7,876          191,682   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 1,490,615      $ 525,182      $ 2,015,797      $ 38,329        $ 2,054,126   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

          $ 61,708        61,708   

Other selling, general, administrative and development expense

            65,449        65,449   

Depreciation, amortization and accretion

            740,256        740,256   

Other expense (principally interest expense and other expenses)

            515,234        515,234   
           

 

 

 

Income from continuing operations before income taxes

            $ 671,479   
           

 

 

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expenses exclude stock-based compensation expense of $1.4 million and $60.3 million, respectively.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

    Rental and Management     Total Rental  and
Management
    Network
Development
Services
    Other     Total  
Nine months ended September 30, 2013   Domestic     International          
    (in thousands)  

Segment revenues

  $ 1,566,660      $ 796,547      $ 2,363,207      $ 56,231        $ 2,419,438   

Segment operating expenses (1)

    282,273        302,441        584,714        22,399          607,113   

Interest income, TV Azteca, net

    —          10,673        10,673        —            10,673   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    1,284,387        504,779        1,789,166        33,832          1,822,998   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment selling, general, administrative and development expense (1)

    71,664        93,753        165,417        7,105          172,522   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 1,212,723      $ 411,026      $ 1,623,749      $ 26,727        $ 1,650,476   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

          $ 53,155        53,155   

Other selling, general, administrative and development expense

            74,251        74,251   

Depreciation, amortization and accretion

            555,334        555,334   

Other expense (principally interest expense and other (expense) income)

            536,092        536,092   
           

 

 

 

Income from continuing operations before income taxes

            $ 431,644   
           

 

 

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expenses exclude stock-based compensation expense of $1.2 million and $52.0 million, respectively.

16.    Subsequent Events

Colombian Credit Facility—On October 14, 2014, one of the Company’s Colombian subsidiaries (“ATC Sitios”) entered into a loan agreement for a new 200.0 billion COP (approximately $96.8 million at the date of borrowing) denominated long-term credit facility (the “Colombian Credit Facility”), which it used, together with cash on hand, to repay the previously existing COP denominated long-term credit facility entered into in October 2012, as well as to repay the Colombian bridge loans on October 24, 2014.

Any outstanding principal and accrued but unpaid interest will be due and payable in full at maturity. The Colombian Credit Facility matures on April 24, 2021 and may be prepaid in whole or in part, subject to certain limitations and prepayment consideration, at any time.

Principal and interest are payable quarterly in arrears with principal due in accordance with the repayment schedule included in the loan agreement. Interest accrues at a per annum rate equal to 4.00% above the three-month IBR in effect at the beginning of each Interest Period (as defined in the loan agreement), which results in an interest rate of 8.38% as of October 24, 2014. The loan agreement also requires that ATC Sitios manage exposure to variability in interest rates on certain of the amounts outstanding under the Colombian Credit Facility. Accordingly, ATC Sitios entered into an interest rate swap agreement with an aggregate notional value of 100.0 billion COP (approximately $48.4 million) with certain of the lenders under the Colombian Credit Facility on October 27, 2014. As of October 27, 2014, the interest rate, after giving effect to the interest rate swap agreements, is 9.06%.

The Colombian Credit Facility is secured by, among other things, liens on towers owned by ATC Sitios. The loan agreement contains certain reporting, information, financial ratios and operating covenants. Failure to comply with certain of the financial and operating covenants 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.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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,” “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” of our Annual Report on Form 10-K for the year ended December 31, 2013, and 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 independent owner, operator and developer of wireless and broadcast communications real estate. Our primary business is the leasing of antenna space on multi-tenant communications sites to wireless service providers, radio and television broadcast companies, wireless data and data providers, government agencies and municipalities and tenants in a number of other industries. 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, 2014. Through our network development services, we offer tower-related services domestically, 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, including in connection with provider network upgrades. We began operating as a real estate investment trust (“REIT”) for federal income tax purposes effective January 1, 2012.

Our communications real estate portfolio of 69,912 sites, as of September 30, 2014, includes wireless and broadcast communications towers and distributed antenna system (“DAS”) networks, which provide seamless coverage solutions in certain in-building and outdoor wireless environments. Our portfolio primarily consists of towers that we own and towers that we operate pursuant to long-term lease arrangements, including, as of September 30, 2014, 28,394 towers domestically and 41,125 towers internationally. Our portfolio also includes 393 DAS networks. In addition to the communications sites in our portfolio, we manage rooftop and tower sites for property owners under various contractual arrangements. We also hold property interests that we lease to communications service providers and third-party tower operators.

In October 2013, we acquired MIP Tower Holdings LLC (“MIPT”), a private REIT and parent company to Global Tower Partners (“GTP”), an owner and operator of approximately 5,370 communications sites, through its various operating subsidiaries, in the United States, Costa Rica and Panama. GTP also manages rooftops and holds property interests that it leases to communications service providers and third-party tower operators. As a result of our acquisition of MIPT, we own an interest in a subsidiary REIT, and are currently evaluating the continued election of MIPT’s private REIT status. In September 2014, we completed the sale of the operations in Panama.

 

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The following table details the number of communications sites, excluding managed sites, we own or operate as of September 30, 2014:

 

Country

   Number of
Owned  Sites
     Number of
Operated  Sites (1)
 

United States

     21,488         7,211   

International:

     

Brazil

     6,826         155   

Chile

     1,160         —     

Colombia

     2,850         706   

Costa Rica

     460         —     

Germany

     2,031         —     

Ghana

     2,033         —     

India

     12,553         —     

Mexico

     8,532         199   

Peru

     528         —     

South Africa

     1,917         —     

Uganda

     1,263         —     

 

(1) All of the communications sites we operate are held pursuant to long-term capital leases, including those subject to purchase options.

Our continuing operations are reported in three segments: domestic rental and management, international rental and management and network development services. Among other factors, in evaluating operating performance in each business segment, management uses segment gross margin and segment operating profit. 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 expense. 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 15 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, Gain (loss) on retirement of long-term obligations, Other income (expense), Net income (loss) attributable to noncontrolling interest, Income (loss) on equity method investments and Income tax benefit (provision).

In 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 results of operations, financial position and sources and uses of liquidity. In addition, we highlight key trends, which management believes provide valuable insight into our operating and financial resource allocation decisions.

Revenue Growth. Due to our diversified communications site portfolio, our tenant lease rates vary considerably depending upon numerous factors, including but not limited to, tower location, amount and type 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.

The primary factors affecting the revenue growth of our domestic and international rental and management segments are:

 

   

Recurring revenues from tenant leases attributable to sites that existed in our portfolio as of the beginning of the prior year period (“legacy sites”);

 

   

Contractual rent escalations on existing tenant leases, net of cancellations;

 

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New revenue attributable to leasing additional space on our legacy sites; and

 

   

New revenue attributable to sites acquired or constructed since the beginning of the prior year period (“new sites”).

The majority of our tenant leases with wireless carriers are typically for an initial non-cancellable term of five to ten years, with multiple five-year renewal terms. Accordingly, nearly all of the revenue generated by our rental and management operations during the nine months ended September 30, 2014 is recurring revenue that we should continue to receive in future periods. Based upon foreign currency exchange rates and the tenant leases in place as of September 30, 2014, we expect to generate approximately $23 billion of non-cancellable tenant lease revenue over future periods, absent the impact of straight-line lease accounting. Most of our tenant leases have provisions that periodically increase the rent due under the lease, typically annually based on a fixed escalation (approximately 3% in the United States) or an inflationary index in our international markets, or a combination of both.

Revenue lost from either cancellations of leases at the end of their terms or rent negotiations historically has not had a material adverse effect on the revenues generated by our rental and management operations. During the nine months ended September 30, 2014, loss of revenue from tenant lease cancellations or renegotiations represented approximately 1.5% of our rental and management operations revenues.

Demand Drivers. 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 the corresponding incremental demand for our wireless real estate. By adding new tenants and new equipment for existing tenants on our sites, we are able to increase these sites’ utilization and profitability. 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 organic revenue growth as wireless carriers seek to increase the coverage and capacity of their existing networks, while also deploying next generation wireless technologies. In addition, we intend to continue to supplement the organic growth on our legacy sites by selectively developing or acquiring new sites in our existing and new markets where we can achieve our risk adjusted return on investment objectives. In a majority of our international markets, revenue also includes the reimbursement of direct costs such as ground rent or power and fuel costs.

Based on industry research and projections, we expect the following key industry trends will result in incremental revenue opportunities for us:

 

   

The deployment of advanced wireless technology across existing wireless networks will provide higher speed data services and enable fixed broadband substitution. As a result, we expect our tenants to continue deploying additional equipment across their existing networks.

 

   

Wireless service providers compete based on the quality of their existing wireless networks, which is driven by capacity and coverage. To maintain or improve their network performance as overall network usage increases, our tenants continue deploying additional equipment across their existing sites while also adding new cell sites. We anticipate increasing network densification over the next several years, as existing network infrastructure is anticipated to be insufficient to account for rapidly increasing levels of wireless data usage.

 

   

Wireless service providers are also investing in reinforcing their networks through incremental backhaul and the utilization of on-site generators, which typically results in additional equipment or space leased at the tower site, and incremental revenue.

 

   

Wireless service providers continue to acquire additional spectrum, and as a result are expected to add additional sites and equipment to their network as they seek to optimize their network configuration.

As part of our international expansion initiatives, we have targeted markets in three stages of network development in order to diversify our international exposure and position us to benefit from a number of different wireless technology deployments over the long term. In addition, we have focused on building relationships with

 

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large multinational carriers such as MTN Group Limited, Telefónica S.A. and Vodafone Group PLC. We believe that consistent carrier investments in their networks across our international markets position us to generate meaningful organic revenue growth going forward.

In emerging markets, such as Ghana, India and Uganda, wireless networks tend to be significantly less advanced than those in the United States, and initial voice networks continue to be deployed in underdeveloped areas. In more developed urban locations within these markets, early-stage data network deployments are underway. Carriers are focused on completing voice network build-outs while also investing in initial data networks as wireless data usage and smartphone penetration within their customer bases begin to accelerate.

In markets with rapidly evolving network technology, such as South Africa and most of the countries in Latin America where we do business, initial voice networks, for the most part, have already been built out, and carriers are focused on third generation (3G) network build outs, with select investments in fourth generation (4G) technology. Recent spectrum auctions in these rapidly evolving markets have allowed incumbent carriers to accelerate their data network deployments and have also enabled new entrants to begin initial investments in data networks. Smartphone penetration and wireless data usage in these markets are growing rapidly, which mandates that carriers continue to invest in their networks in order to maintain and augment their quality of service.

Finally, in markets with more mature network technology, such as Germany, carriers are focused on deploying 4G data networks to account for rapidly increasing wireless data usage. With a more mature customer base, higher smartphone penetration and significantly higher per capita data usage, carrier investment in networks is focused on 4G coverage and capacity.

We believe that the network technology migration we have seen in the United States, which has led to significantly denser networks and meaningful new business commencements for us over a number of years, will ultimately be replicated in our less advanced international markets. As a result, we expect to be able to leverage our extensive international portfolio of over 41,000 communications sites and the relationships we have built with our carrier customers to drive sustainable, long-term growth.

Rental and Management Operations Expenses. Direct operating expenses incurred by our domestic and international rental and management segments include direct site level expenses and consist primarily of ground rent and power and fuel costs, some of which may be passed through to our tenants, as well as property taxes, repairs and maintenance. These segment direct operating expenses exclude all segment and corporate selling, general, administrative and development expenses, which are aggregated into one line item entitled Selling, general, administrative and development expense in our condensed consolidated statements of operations. In general, our domestic and international rental and management segments’ selling, general, administrative and development expenses do not significantly increase as a result of adding incremental tenants to our legacy sites and typically increase only modestly year-over-year. As a result, leasing additional space to new tenants on our legacy sites provides significant incremental cash flow. We may, however, incur additional segment selling, general, administrative and development expenses as we increase our presence in geographic areas where we have launched operations or are focused on expanding our portfolio. Our profit margin growth is therefore positively impacted by the addition of new tenants to our legacy sites and can be temporarily diluted by our development activities.

Network Development Services Segment Revenue Growth. 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.

 

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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”), Funds From Operations, as defined by the National Association of Real Estate Investment Trusts (“NAREIT FFO”) and Adjusted Funds From Operations (“AFFO”).

We define Adjusted EBITDA as Net income before Income (loss) on discontinued operations, net; Income (loss) on equity method investments; Income tax benefit (provision); Other income (expense); Gain (loss) on retirement of long-term obligations; Interest expense; Interest income; Other operating income (expense); Depreciation, amortization and accretion; and stock-based compensation expense.

NAREIT FFO is defined as net income before gains or losses from the sale or disposal of real estate, real estate related impairment charges, real estate related depreciation, amortization and accretion and dividends declared on preferred stock, and including adjustments for (i) unconsolidated affiliates and (ii) noncontrolling interest.

We define AFFO as NAREIT FFO before (i) straight-line revenue and expense; (ii) stock-based compensation expense; (iii) the non-cash portion of our tax provision; (iv) non-real estate related depreciation, amortization and accretion; (v) amortization of deferred financing costs, capitalized interest, debt discounts and premiums and long-term deferred interest charges; (vi) other income (expense); (vii) gain (loss) on retirement of long-term obligations; (viii) other operating income (expense); and adjustments for (ix) unconsolidated affiliates and (x) noncontrolling interest, less cash payments related to capital improvements and cash payments related to corporate capital expenditures.

Adjusted EBITDA, NAREIT FFO and AFFO are not intended to replace net income or any other performance measures determined in accordance with GAAP. Neither NAREIT FFO nor AFFO represent cash flows from operating activities in accordance with GAAP and, therefore, these measures should not be considered indicative of cash flows from operating activities as a measure of liquidity or of funds available to fund our cash needs, including our ability to make cash distributions. Rather, Adjusted EBITDA, NAREIT FFO and AFFO are presented as we believe each is a useful indicator of our current operating performance. We believe that these metrics are useful to an investor in evaluating our operating performance because (1) each is a key measure used by our management team for purposes of decision making and for evaluating the performance of our operating segments; (2) Adjusted EBITDA is a component of the calculation used by our lenders to determine compliance with certain debt covenants; (3) Adjusted EBITDA 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) each provides investors with a meaningful measure for evaluating our period-to-period operating performance by eliminating items that are not operational in nature; and (5) each provides investors with a measure for comparing our results of operations to those of other companies.

Our measurement of Adjusted EBITDA, NAREIT FFO and AFFO may not, however, be fully comparable to similarly titled measures used by other companies. Reconciliations of Adjusted EBITDA, NAREIT FFO and AFFO to net income, the most directly comparable GAAP measure, have been included below.

 

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Results of Operations

Three Months Ended September 30, 2014 and 2013 (in thousands, except percentages)

Revenue 

 

     Three Months Ended
September 30,
     Amount of
Increase
(Decrease)
     Percent
Increase
(Decrease)
 
     2014      2013        

Rental and management

           

Domestic

   $ 663,570       $ 529,941       $ 133,629         25

International

     347,549         266,634         80,915         30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental and management

     1,011,119         796,575         214,544         27   

Network development services

     27,069         11,305         15,764         139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 1,038,188       $ 807,880       $ 230,308         29

Total revenues for the three months ended September 30, 2014 increased 29% to $1,038.2 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 13,825 new sites that we have constructed or acquired since July 1, 2013. Approximately $86.9 million of the increase was attributable to revenues generated by MIPT.

Domestic rental and management segment revenue for the three months ended September 30, 2014 increased 25% to $663.6 million. This growth was comprised of:

 

   

Revenue growth of approximately 15% attributable to the addition of approximately 4,860 domestic sites, as well as managed sites, rooftops and land interests under third-party sites in connection with our acquisition of MIPT;

 

   

Revenue growth from legacy sites of approximately 8%, which includes approximately 7% primarily generated by new tenant leases and amendments to existing tenant leases and approximately 1% attributable to contractual rent escalations, net of tenant lease cancellations;

 

   

Revenue growth of approximately 3% from approximately 885 new sites, as well as land interests under third-party sites, constructed or acquired since July 1, 2013 (excluding MIPT); and

 

   

A decrease of approximately 1% from the impact of straight-line lease accounting.

International rental and management segment revenue for the three months ended September 30, 2014 increased 30% to $347.5 million. This growth was comprised of:

 

   

Revenue growth of approximately 19% from approximately 8,080 new sites constructed or acquired since July 1, 2013 (including approximately 460 sites in Costa Rica in connection with our acquisition of MIPT);

 

   

Revenue growth from legacy sites of approximately 17%, which includes approximately 14% primarily generated by new tenant leases and amendments to existing tenant leases and approximately 3% attributable to contractual rent escalations, net of tenant lease cancellations;

 

   

Revenue growth of approximately 1% from the impact of straight-line lease accounting; and

 

   

A decrease of approximately 7% attributable to the negative impact from foreign currency translation, which includes, among others, the negative impact of approximately 5% related to fluctuations in Ghanaian Cedi (“GHS”) and approximately 1% related to fluctuations in each of South African Rand (“ZAR”) and Mexican Pesos (“MXN”).

 

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Network development services segment revenue for the three months ended September 30, 2014 increased 139% to $27.1 million. The increase was primarily due to an increase in site acquisition, zoning and permitting services associated with certain tenants’ next generation technology network upgrade projects, including an increase in volume as a result of the additional sites acquired as part of the acquisition of MIPT.

Gross Margin

 

     Three Months Ended
September 30,
     Amount  of
Increase
(Decrease)
     Percent
Increase
(Decrease)
 
     2014      2013        

Rental and management

           

Domestic

   $ 529,619       $ 434,709       $ 94,910         22

International

     212,150         169,705         42,445         25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental and management

     741,769         604,414         137,355         23   

Network development services

     15,323         6,528         8,795         135

Domestic rental and management segment gross margin for the three months ended September 30, 2014 increased 22% to $529.6 million. This growth was comprised of:

 

   

Gross margin growth of approximately 14% attributable to the addition of approximately 4,860 domestic sites, as well as managed sites, rooftops and land interests under third-party sites, in connection with our acquisition of MIPT;

 

   

Gross margin growth from legacy sites of approximately 8%, primarily associated with the increase in revenue, as described above;

 

   

Gross margin growth from new sites (excluding MIPT) of approximately 3%, primarily associated with the increase in revenue, as described above; and

 

   

A decrease of approximately 3% from the impact of straight-line lease accounting.

International rental and management segment gross margin for the three months ended September 30, 2014 increased 25% to $212.2 million. This growth was comprised of:

 

   

Gross margin growth from new sites (including MIPT) of approximately 14%, primarily associated with the increase in revenue, as described above;

 

   

Gross margin growth from legacy sites of approximately 16%, primarily associated with the increase in revenue, as described above;

 

   

Gross margin growth of approximately 1% from the impact of straight-line lease accounting; and

 

   

A decrease of approximately 6% attributable to the negative impact from foreign currency translation, which includes, among others, the negative impact of approximately 5% related to fluctuations in GHS and approximately 1% related to fluctuations in each of ZAR and MXN.

Network development services segment gross margin for the three months ended September 30, 2014 increased 135% to $15.3 million, primarily due to the increase in revenue as described above.

 

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Selling, General, Administrative and Development Expense

 

     Three Months Ended
September 30,
     Amount  of
Increase
(Decrease)
     Percent
Increase
(Decrease)
 
     2014      2013        

Rental and management

           

Domestic

   $ 30,955       $ 24,523       $ 6,432         26

International

     33,441         31,728         1,713         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental and management

     64,396         56,251         8,145         14   

Network development services

     3,020         1,880         1,140         61   

Other

     41,493         39,650         1,843         5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total selling, general, administrative and development expense

   $ 108,909       $ 97,781       $ 11,128         11

Total selling, general, administrative and development expense (“SG&A”) for the three months ended September 30, 2014 increased 11% to $108.9 million.

Domestic rental and management segment SG&A for the three months ended September 30, 2014 increased 26% to $31.0 million. The increase was primarily driven by increased personnel costs to support our business, including additional costs associated with the acquisition of MIPT.

International rental and management segment SG&A for the three months ended September 30, 2014 increased 5% to $33.4 million. The increase was primarily due to the impact of increased personnel costs to support our business, partially offset by the favorable impact of foreign currency fluctuations, as well as the reversal of bad debt expense for amounts previously reserved.

Network development services segment SG&A for the three months ended September 30, 2014 increased 61% to $3.0 million. The increase was primarily due to higher personnel costs related to additional site acquisition, zoning and permitting services associated with certain tenants’ next generation technology network upgrade projects, including an increase in volume as a result of the additional sites acquired as part of the acquisition of MIPT.

Other SG&A for the three months ended September 30, 2014 increased 5% to $41.5 million, primarily due to an increase of $3.1 million related to stock-based compensation expense, partially offset by a $1.3 million decrease in corporate SG&A. The decrease in corporate SG&A was primarily related to a reduction in legal expenses of $2.3 million, partially offset by an increase in other personnel costs to support our business.

Operating Profit 

 

     Three Months Ended
September 30,
     Amount  of
Increase
(Decrease)
     Percent
Increase
(Decrease)
 
     2014      2013        

Rental and management

           

Domestic

   $ 498,664       $ 410,186       $ 88,478         22

International

     178,709         137,977         40,732         30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total rental and management

     677,373         548,163         129,210         24   

Network development services

     12,303         4,648         7,655         165

Domestic rental and management segment operating profit for the three months ended September 30, 2014 increased 22% to $498.7 million. The growth was primarily attributable to the increase in our domestic rental and management segment gross margin (22%) and was partially offset by an increase in our domestic rental and management segment SG&A (26%).

 

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International rental and management segment operating profit for the three months ended September 30, 2014 increased 30% to $178.7 million. The growth was primarily attributable to the increase in our international rental and management segment gross margin (25%) and was partially offset by an increase in our international rental and management segment SG&A (5%).

Network development services segment operating profit for the three months ended September 30, 2014 increased 165% to $12.3 million. The increase was primarily attributable to the increase in network development services segment gross margin (135%) and was partially offset by an