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 June 30, 2015.

 

¨

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 July 22, 2015, there were 423,279,014 shares of common stock outstanding.

 

 

 


Table of Contents

AMERICAN TOWER CORPORATION

INDEX

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2015

 

         Page No.  
PART I. FINANCIAL INFORMATION   
Item 1.  

Unaudited Condensed Consolidated Financial Statements

     1   
 

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

     1   
 

Condensed Consolidated Statements of Operations for the three and six months ended June  30, 2015 and 2014

     2   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014

     3   
 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014

     4   
 

Condensed Consolidated Statements of Equity for the six months ended June 30, 2015 and 2014

     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

     63   
Item 4.  

Controls and Procedures

     65   
PART II. OTHER INFORMATION   
Item 1.  

Legal Proceedings

     66   
Item 1A.  

Risk Factors

     66   
Item 6.  

Exhibits

     66   
Signatures      67   
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)

 

     June 30, 2015     December 31, 2014  

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 274,702      $ 313,492   

Restricted cash

     135,149        160,206   

Short-term investments

     40,387        6,302   

Accounts receivable, net

     212,919        199,074   

Prepaid and other current assets

     263,274        264,793   

Deferred income taxes

     14,144        14,507   
  

 

 

   

 

 

 

Total current assets

     940,575        958,374   
  

 

 

   

 

 

 

PROPERTY AND EQUIPMENT, net

     9,586,400        7,588,126   

GOODWILL

     4,036,642        4,033,174   

OTHER INTANGIBLE ASSETS, net

     9,853,199        6,900,637   

DEFERRED INCOME TAXES

     222,276        253,186   

DEFERRED RENT ASSET

     1,093,812        1,030,707   

NOTES RECEIVABLE AND OTHER NON-CURRENT ASSETS

     736,821        567,724   
  

 

 

   

 

 

 

TOTAL

   $ 26,469,725      $ 21,331,928   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

CURRENT LIABILITIES:

    

Accounts payable

   $ 82,850      $ 90,366   

Accrued expenses

     412,981        417,754   

Distributions payable

     187,987        159,864   

Accrued interest

     120,482        130,265   

Current portion of long-term obligations

     38,814        897,624   

Unearned revenue

     193,514        233,819   
  

 

 

   

 

 

 

Total current liabilities

     1,036,628        1,929,692   
  

 

 

   

 

 

 

LONG-TERM OBLIGATIONS

     16,185,211        13,711,084   

ASSET RETIREMENT OBLIGATIONS

     824,991        609,035   

OTHER NON-CURRENT LIABILITIES

     1,049,737        1,028,765   
  

 

 

   

 

 

 

Total liabilities

     19,096,567        17,278,576   
  

 

 

   

 

 

 

COMMITMENTS AND CONTINGENCIES

    

EQUITY:

    

Preferred stock: $.01 par value; 20,000,000 shares authorized;

    

5.25%, Series A, 6,000,000 shares issued and outstanding

     60        60   

5.50%, Series B, 1,375,000 and no shares issued and outstanding, respectively

     14        —     

Common stock: $.01 par value; 1,000,000,000 shares authorized; 426,074,991 and 399,508,751 shares issued; and 423,264,965 and 396,698,725 shares outstanding, respectively

     4,260        3,995   

Additional paid-in capital

     9,619,406        5,788,786   

Distributions in excess of earnings

     (876,607     (837,320

Accumulated other comprehensive loss

     (1,228,521     (794,221

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

     (207,740     (207,740
  

 

 

   

 

 

 

Total American Tower Corporation equity

     7,310,872        3,953,560   

Noncontrolling interest

     62,286        99,792   
  

 

 

   

 

 

 

Total equity

     7,373,158        4,053,352   
  

 

 

   

 

 

 

TOTAL

   $ 26,469,725      $ 21,331,928   
  

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  

REVENUES:

        

Rental and management

   $ 1,154,235      $ 1,005,761      $ 2,216,415      $ 1,965,881   

Network development services

     20,140        25,696        37,150        49,665   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating revenues

     1,174,375        1,031,457        2,253,565        2,015,546   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING EXPENSES:

        

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

        

Rental and management (including stock-based compensation expense of $390, $343, $822 and $715, respectively)

     314,285        263,184        573,542        514,019   

Network development services (including stock-based compensation expense of $98, $110, $237 and $242, respectively)

     8,173        9,091        13,556        19,025   

Depreciation, amortization and accretion

     328,356        245,427        591,876        491,190   

Selling, general, administrative and development expense (including stock-based compensation expense of $23,557, $18,382, $52,847 and $42,482, respectively)

     116,338        98,499        239,628        208,528   

Other operating expenses

     17,449        12,757        25,223        26,648   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     784,601        628,958        1,443,825        1,259,410   
  

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING INCOME

     389,774        402,499        809,740        756,136   
  

 

 

   

 

 

   

 

 

   

 

 

 

OTHER INCOME (EXPENSE):

  

Interest income, TV Azteca, net of interest expense of $370, $370, $740 and $741, respectively

     2,662        2,662        5,258        5,257   

Interest income

     4,404        2,281        7,368        4,299   

Interest expense

     (148,507     (146,234     (296,441     (289,541

Loss on retirement of long-term obligations

     (75,068     (1,284     (78,793     (1,522

Other expense (including unrealized foreign currency gains (losses) of $25,461, ($23,553), ($30,007) and ($25,558), respectively)

     (2,129     (16,463     (56,632     (20,206
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expense

     (218,638     (159,038     (419,240     (301,713
  

 

 

   

 

 

   

 

 

   

 

 

 

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES

     171,136        243,461        390,500        454,423   

Income tax provision

     (13,956     (21,802     (37,828     (39,451
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME

     157,180        221,659        352,672        414,972   

Net (income) loss attributable to noncontrolling interest

     (1,124     12,772        (3,299     21,958   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO AMERICAN TOWER CORPORATION STOCKHOLDERS

     156,056        234,431        349,373        436,930   

Dividends on preferred stock

     (26,782     (4,375     (36,601     (4,375
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME ATTRIBUTABLE TO AMERICAN TOWER CORPORATION COMMON STOCKHOLDERS

   $ 129,274      $ 230,056      $ 312,772      $ 432,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME PER COMMON SHARE AMOUNTS:

  

Basic net income attributable to American Tower Corporation common stockholders

   $ 0.31      $ 0.58      $ 0.76      $ 1.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income attributable to American Tower Corporation common stockholders

   $ 0.30      $ 0.58      $ 0.75      $ 1.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:

        

Basic

     423,154        395,872        414,182        395,511   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

     426,933        399,588        418,303        399,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

DISTRIBUTIONS DECLARED PER COMMON SHARE

   $ 0.44      $ 0.34      $ 0.86      $ 0.66   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

2


Table of Contents

AMERICAN TOWER CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2015     2014     2015     2014  

Net income

   $ 157,180      $ 221,659      $ 352,672      $ 414,972   

Other comprehensive (loss) income:

        

Changes in fair value of cash flow hedges, net of taxes of $42, ($141), ($9) and ($24), respectively

     597        367        (345     (337

Reclassification of unrealized losses on cash flow hedges to net income, net of taxes of $22, $41, $46 and $96, respectively

     2,226        629        2,613        1,543   

Foreign currency translation adjustments, net of taxes of $197, ($692), ($12,412) and $364, respectively

     (44,029     (3,104     (476,990     19,388   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive (loss) income

     (41,206     (2,108     (474,722     20,594   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     115,974        219,551        (122,050     435,566   

Comprehensive loss attributable to noncontrolling interest

     17,421        36,370        37,123        61,664   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to American Tower Corporation stockholders

   $ 133,395      $ 255,921      $ (84,927   $ 497,230   
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended
June 30,
 
     2015     2014  

CASH FLOWS FROM OPERATING ACTIVITIES:

  

Net income

   $ 352,672      $ 414,972   

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

  

Stock-based compensation expense

     53,906        43,439   

Depreciation, amortization and accretion

     591,876        491,190   

Loss on early retirement of long-term obligations

     78,793        1,269   

Other non-cash items reflected in statements of operations

     75,531        48,636   

Increase in net deferred rent asset

     (46,653     (46,293

Decrease (increase) in restricted cash

     26,804        (194

Increase in assets

     (99,179     (28,473

Increase in liabilities

     2,710        147,836   
  

 

 

   

 

 

 

Cash provided by operating activities

     1,036,460        1,072,382   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

  

Payments for purchase of property and equipment and construction activities

     (311,122     (466,247

Payments for acquisitions, net of cash acquired

     (670,246     (315,527

Payment for Verizon transaction

     (5,060,416     —     

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

     781,469        338,787   

Payments for short-term investments

     (816,038     (332,684

Deposits, restricted cash and other

     (3,087     (61,134
  

 

 

   

 

 

 

Cash used for investing activities

     (6,079,440     (836,805
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

  

Borrowings under credit facilities

     4,740,308        360,000   

Proceeds from issuance of senior notes, net

     1,492,298        769,640   

Proceeds from term loan

     500,000        —     

Proceeds from other long-term borrowings

     —          3,033   

Proceeds from issuance of securities in securitization transaction

     875,000        —     

Repayments of notes payable, credit facilities, senior notes and capital leases

     (5,931,401     (1,838,728

Distributions to noncontrolling interest holders, net

     (383     (291

Proceeds from stock options and stock purchase plan

     17,364        30,738   

Proceeds from the issuance of common stock, net

     2,440,327        —     

Proceeds from the issuance of preferred stock, net

     1,337,946        583,326   

Payment for early retirement of long-term obligations

     (86,107     (6,767

Deferred financing costs and other financing activities

     (34,284     (22,914

Distributions paid on common stock

     (329,766     (127,269

Distributions paid on preferred stock

     (31,085     —     
  

 

 

   

 

 

 

Cash provided by (used for) financing activities

     4,990,217        (249,232
  

 

 

   

 

 

 

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

     13,973        3,038   
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (38,790     (10,617

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

     313,492        293,576   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

   $ 274,702      $ 282,959   
  

 

 

   

 

 

 

CASH PAID FOR INCOME TAXES (NET OF REFUNDS OF $3,311 AND $6,187, RESPECTIVELY)

   $ 29,911      $ 35,776   
  

 

 

   

 

 

 

CASH PAID FOR INTEREST

   $ 291,103      $ 270,257   
  

 

 

   

 

 

 

NON-CASH INVESTING AND FINANCING ACTIVITIES:

  

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

   $ (20,632   $ 14,959   
  

 

 

   

 

 

 

PURCHASES OF PROPERTY AND EQUIPMENT UNDER CAPITAL LEASES

   $ 10,510      $ 14,585   
  

 

 

   

 

 

 

SETTLEMENT OF ACCOUNTS RECEIVABLE RELATED TO ACQUISITIONS

   $ 735      $ 31,279   
  

 

 

   

 

 

 

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 -
Series A
    Preferred Stock -
Series B
    Common Stock     Treasury Stock     Additional
Paid-in
Capital
    Accumulated
Other

Comprehensive
Loss
    Distributions
in Excess of
Earnings
    Non-
controlling
Interest
    Total
Equity
 
    Issued
Shares
    Amount     Issued
Shares
    Amount     Issued
Shares
    Amount     Shares     Amount            

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

    —          —          —          —          1,093,535        11        —          —          55,935        —          —          —          55,946   

Issuance of common stock-stock purchase plan

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

Issuance of preferred stock

    6,000,000        60        —          —          —          —          —          —          582,820        —          —          —          582,880   

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

    —          —          —          —          —          —          —          —          —          (455     —          118        (337

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

    —          —          —          —          —          —          —          —          —          1,422        —          121        1,543   

Foreign currency translation adjustment, net of tax

    —          —          —          —          —          —          —          —          —          59,333        —          (39,945     19,388   

Contributions from noncontrolling interest

    —          —          —          —          —          —          —          —          —          —          —          7,750        7,750   

Distributions to noncontrolling interest

    —          —          —          —          —          —          —          —          —          —          —          (291     (291

Common stock distributions declared

    —          —          —          —          —          —          —          —          —          —          (262,251     —          (262,251

Preferred stock dividends declared

    —          —          —          —          —          —          —          —          —          —          (4,375     —          (4,375

Net income (loss)

    —          —          —          —          —          —          —          —          —          —          436,930        (21,958     414,972   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JUNE 30, 2014

    6,000,000      $ 60        —        $ —          398,811,474      $ 3,988        (2,810,026   $ (207,740   $ 5,772,269      $ (250,920   $ (911,163   $ 1,670      $ 4,408,164   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JANUARY 1, 2015

    6,000,000      $ 60        —        $ —          399,508,751      $ 3,995        (2,810,026   $ (207,740   $ 5,788,786      $ (794,221   $ (837,320   $ 99,792      $ 4,053,352   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stock-based compensation related activity

    —          —          —          —          672,300        6        —          —          49,155        —          —          —          49,161   

Issuance of common stock-stock purchase plan

    —          —          —          —          43,940        —          —          —          3,465        —          —          —          3,465   

Issuance of common stock

        25,850,000        259          2,440,068              2,440,327   

Issuance of preferred stock

    —          —          1,375,000        14        —          —          —          —          1,337,932        —          —          —          1,337,946   

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

    —          —          —          —          —          —          —          —          —          (340     —          (5     (345

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

    —          —          —          —          —          —          —          —          —          2,583        —          30        2,613   

Foreign currency translation adjustment, net of tax

    —          —          —          —          —          —          —          —          —          (436,543     —          (40,447     (476,990

Contributions from noncontrolling interest

    —          —          —          —          —          —          —          —          —          —          —          51        51   

Distributions to noncontrolling interest

    —          —          —          —          —          —          —          —          —          —          —          (434     (434

Common stock distributions declared

    —          —          —          —          —          —          —          —          —          —          (365,450     —          (365,450

Preferred stock dividends declared

    —          —          —          —          —          —          —          —          —          —          (23,210     —          (23,210

Net income

    —          —          —          —          —          —          —          —          —          —          349,373        3,299        352,672   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

BALANCE, JUNE 30, 2015

    6,000,000      $ 60        1,375,000      $ 14        426,074,991      $ 4,260        (2,810,026   $ (207,740   $ 9,619,406      $ (1,228,521   $ (876,607   $ 62,286      $ 7,373,158   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Business—American Tower Corporation is, through its various subsidiaries (collectively, “ATC” or the “Company”), one of the largest global real estate investment trusts and a leading independent owner, operator and developer of multitenant communications real estate. The Company’s primary business is the leasing of space on multitenant communications sites to wireless service providers, radio and television broadcast companies, wireless 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.

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 operates as a real estate investment trust for U.S. federal income tax purposes (“REIT”) and, therefore, is generally not subject to U.S. federal income taxes on its income and gains that it distributes to its stockholders, including the income derived from leasing space on its towers. However, the Company remains obligated to pay income taxes on earnings from its taxable REIT subsidiaries (“TRSs”). 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. As of June 30, 2015, the Company’s QRSs included its domestic tower leasing business, most of its operations in Costa Rica, Germany and Mexico and a majority of its network development services segment and indoor DAS networks business.

On March 27, 2015, the Company significantly expanded its domestic portfolio by obtaining the exclusive right to lease, acquire or otherwise operate and manage 11,448 wireless communications sites from Verizon Communications Inc. (“Verizon”) in the United States (the “Verizon Transaction”).

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, 2014 (the “2014 Form 10-K”).

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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 and acquisitions of assets. 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.

Accounting Standards Updates—In May 2014, the Financial Accounting Standards Board (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 and will become effective on January 1, 2018. Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method and leases are not included in the scope of this standard. The Company is evaluating the impact this standard will have on its financial statements.

In June 2014, the FASB issued stock-based compensation guidance, which requires a performance target that could be achieved after the requisite service period be treated as a performance condition that affects vesting, rather than a condition that affects the grant-date fair value. The Company early adopted this guidance on a prospective basis during the six months ended June 30, 2015, and it did not have a material effect on the Company’s financial statements.

In April 2015, the FASB issued new guidance on the presentation of debt issuance costs. The guidance requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts and premiums. The update requires retrospective application and the update is effective for annual reporting periods beginning after December 15, 2015. The Company does not expect the adoption of this guidance to have a material effect on its financial statements.

2.    Prepaid and Other Current Assets

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

 

     June 30, 2015      December 31, 2014 (1)  

Prepaid operating ground leases

   $ 109,569       $ 88,053   

Prepaid income tax

     37,138         34,512   

Prepaid assets

     29,812         23,848   

Unbilled receivables

     29,405         25,352   

Value added tax and other consumption tax receivables

     23,155         23,228   

Other miscellaneous current assets

     34,195         69,800   
  

 

 

    

 

 

 

Balance

   $ 263,274       $ 264,793   
  

 

 

    

 

 

 

 

(1) December 31, 2014 balances have been revised to reflect purchase accounting measurement period adjustments.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

3.    Goodwill and Other Intangible Assets

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

 

     Rental and Management     Network
Development
Services
     Total  
     Domestic      International       

Balance as of January 1, 2015 (1)

   $ 3,356,096       $ 675,090      $ 1,988       $ 4,033,174   

Additions

     12,677         51,431        —           64,108   

Effect of foreign currency translation

     —           (60,640     —           (60,640
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance as of June 30, 2015

   $ 3,368,773       $ 665,881      $ 1,988       $ 4,036,642   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) January 1, 2015 balances have been revised to reflect purchase accounting measurement period adjustments.

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

 

        June 30, 2015     December 31, 2014 (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   $ 3,751,373      $ (966,105   $ 2,785,268      $ 2,514,931      $ (901,903   $ 1,613,028   

Acquired customer-related intangibles

  15-20     8,524,816        (1,588,864     6,935,952        6,594,773        (1,429,572     5,165,201   

Acquired licenses and other intangibles

  3-20     33,461        (4,942     28,519        37,471        (3,514     33,957   

Economic Rights, TV Azteca

  70     24,014        (12,302     11,712        25,522        (12,960     12,562   
   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    $ 12,333,664      $ (2,572,213   $ 9,761,451      $ 9,172,697      $ (2,347,949   $ 6,824,748   

Deferred financing costs, net (3)

  N/A         91,748            75,889   
       

 

 

       

 

 

 

Other intangible assets, net

        $ 9,853,199          $ 6,900,637   
       

 

 

       

 

 

 

 

(1) December 31, 2014 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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company amortizes its acquired network location intangibles and customer-related intangibles on a straight-line basis over their estimated useful lives. As of June 30, 2015, 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 the 2014 Form 10-K, was approximately 16 years. Amortization of intangible assets for the three and six months ended June 30, 2015 was approximately $147.6 million and $258.1 million, respectively, and amortization of intangible assets for the three and six months ended June 30, 2014 was approximately $101.6 million and $204.2 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       

2015 (remaining year)

   $ 292.9   

2016

     581.5   

2017

     579.7   

2018

     578.6   

2019

     576.4   

2020

     570.3   

4.    Accrued Expenses

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

 

     June 30, 2015      December 31, 2014  

Accrued property and real estate taxes

   $ 76,070       $ 61,206   

Accrued rent

     44,118         34,074   

Payroll and related withholdings

     42,874         57,110   

Accrued construction costs

     30,801         46,024   

Other accrued expenses

     219,118         219,340   
  

 

 

    

 

 

 

Balance

   $ 412,981       $ 417,754   
  

 

 

    

 

 

 

5.    Long-Term Obligations

Refinancing of GTP Acquisition Partners Securitization—On May 29, 2015, GTP Acquisition Partners I, LLC (“GTP Acquisition Partners”), one of the Company’s wholly owned subsidiaries, repaid all amounts outstanding under the Secured Tower Revenue Notes, Global Tower Series 2011-1, Class C, Secured Tower Revenue Notes, Global Tower Series 2011-2, Class C and Class F and Secured Tower Revenue Notes, Global Tower Series 2013-1, Class C and Class F (the “Existing GTP AP Notes”), plus prepayment consideration and other costs and expenses related thereto, with cash on hand and proceeds from a private issuance (the “2015 Securitization”) of $350.0 million of American Tower Secured Revenue Notes, Series 2015-1, Class A (the “Series 2015-1 Notes”) and $525.0 million of American Tower Secured Revenue Notes, Series 2015-2, Class A (the “Series 2015-2 Notes,” and together with the Series 2015-1 Notes, the “2015 Notes”). During each of the three and six months ended June 30, 2015, the Company recorded a loss on retirement of long-term obligations of $0.8 million, consisting of prepayment consideration, primarily offset by the write-off of the unamortized premium recorded in connection with the assumption of the Existing GTP AP Notes.

The 2015 Notes were issued by GTP Acquisition Partners pursuant to a Third Amended and Restated Indenture and related series supplements, each dated as of May 29, 2015 (collectively, the “Indenture”), between GTP Acquisition Partners and its subsidiaries (the “GTP Entities”) and The Bank of New York Mellon, as

 

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trustee. The Series 2015-1 Notes have an interest rate of 2.350%, an anticipated repayment date of June 15, 2020 and a final repayment date of June 15, 2045. The Series 2015-2 Notes have an interest rate of 3.482%, an anticipated repayment date of June 16, 2025 and a final repayment date of June 15, 2050.

Amounts due under the 2015 Notes will be paid solely from the cash flows generated from the operation of the 3,621 communications sites (the “Secured Sites”) owned by the GTP Entities. GTP Acquisition Partners is required to make monthly payments of interest on the 2015 Notes, commencing in July 2015. Subject to certain limited exceptions (described below), no payments of principal will be required to be made prior to June 15, 2020, which is the anticipated repayment date for the Series 2015-1 Notes. On a monthly basis, after payment of all required amounts under the applicable agreement, the excess cash flows generated from the operation of the Secured Sites are released to GTP Acquisition Partners, which can then be distributed to, and used by, the Company. However, if the debt service coverage ratio (“DSCR”), generally calculated as the ratio of the net cash flow (as defined in the Indenture) to the amount of interest, servicing fees and trustee fees required to be paid over the succeeding 12 months on the principal amount of the 2015 Notes that will be outstanding on the next payment date were equal to or below 1.30x (the “Cash Trap DSCR”) for such quarter, then all cash flow in excess of amounts required to make debt service payments, to fund required reserves, to pay management fees and budgeted operating expenses and to make other payments required under the transaction documents, referred to as excess cash flow, will be deposited into a reserve account instead of being released to GTP Acquisition Partners. The funds in the reserve account will not be released to GTP Acquisition Partners unless the DSCR exceeds the Cash Trap DSCR for two consecutive calendar quarters.

Additionally, an “amortization period” commences if, as of the end of any calendar quarter, the DSCR falls below 1.15x (the “Minimum DSCR”) and will continue to exist until the DSCR exceeds the Minimum DSCR for two consecutive calendar quarters. During an amortization period, all excess cash flow and any amounts then in the reserve account because the Cash Trap DSCR was not met would be applied to payment of the principal on the 2015 Notes.

The 2015 Notes may be prepaid in whole or in part at any time, provided such payment is accompanied by the applicable prepayment consideration. If prepayment occurs within 12 months of the anticipated repayment date with respect to the Series 2015-1 Notes, or 18 months of the anticipated repayment date with respect to the Series 2015-2 Notes, no prepayment consideration is due. If the Series 2015-1 Notes or the Series 2015-2 Notes have not been repaid in full on the applicable anticipated repayment date, additional interest will accrue on the unpaid principal balance of the applicable series of the 2015 Notes, and such series will begin to amortize on a monthly basis from excess cash flow.

The 2015 Notes are secured by (i) mortgages, deeds of trust and deeds to secure debt on substantially all of the Secured Sites and their operating cash flows, (ii) a security interest in substantially all of the personal property and fixtures of the GTP Entities, including GTP Acquisition Partners’ equity interests in its subsidiaries and (iii) the rights of the GTP Entities under a management agreement. American Tower Holding Sub II, LLC, whose only material assets are its equity interests in GTP Acquisition Partners, has guaranteed repayment of the 2015 Notes and pledged its equity interests in GTP Acquisition Partners as security for such payment obligations.

The Indenture includes covenants customary for notes issued in rated securitizations. Among other things, the GTP Entities are prohibited from incurring other indebtedness for borrowed money or further encumbering their assets. The organizational documents of the GTP Entities contain provisions consistent with rating agency securitization criteria for special purpose entities, including the requirement that they maintain independent directors. The Indenture also contains certain covenants that require GTP Acquisition Partners to provide the trustee with regular financial reports and operating budgets, promptly notify the trustee of events of default and material breaches under the Indenture and other agreements related to the Secured Sites and allow the trustee reasonable access to the Secured Sites, including the right to conduct site investigations. Further, under the

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Indenture, GTP Acquisition Partners is required to maintain reserve accounts, including for amounts received or due from tenants related to future periods, property taxes, insurance, ground rents, certain expenses and debt service. The $18.6 million held in the reserve accounts as of June 30, 2015 is classified as restricted cash on the Company’s accompanying condensed consolidated balance sheet.

Securitized Debt—The Company has several securitizations in place. Cash flows generated by the sites that secure the securitized debt are only available for payment of such debt and are not available to pay the Company’s other obligations or the claims of its creditors. However, subject to certain restrictions, the Company holds the right to the excess cash flows not needed to pay the securitized debt and other obligations arising out of the securitizations. The securitized debt is the obligation of the issuers thereof or borrowers thereunder, as applicable, and their subsidiaries, and not of the Company or its other subsidiaries.

Mexican Loan—In May 2015, upon maturity of its 5.2 billion Mexican Peso (“MXN”) denominated unsecured bridge loan, the Company repaid the remaining outstanding principal balance of 3.9 billion MXN (approximately $251.2 million on the date of repayment) with cash on hand and borrowings under its multi-currency senior unsecured revolving credit facility entered into in June 2013, as amended (the “2013 Credit Facility”).

BR Towers Credit Facility—On March 30, 2015, the Company repaid all amounts outstanding and terminated the Brazilian Reais (“BRL”) denominated credit facility with Banco Nacional de Desenvolvimento Econômico e Social (“BNDES”), which allowed a subsidiary of BR Towers S.A. (“BR Towers”) to borrow up to 48.1 million BRL through an intermediary bank, and which the Company assumed in connection with the acquisition of BR Towers in November 2014.

Brazil Credit Facility—In December 2014, one of the Company’s Brazilian subsidiaries entered into a 271.0 million BRL-denominated credit facility with BNDES, which matures on January 15, 2022 (the “Brazil Credit Facility”). On May 18, 2015, the Brazilian subsidiary borrowed 40.0 million BRL (approximately $13.3 million on the date of borrowing) and maintains the ability to draw on the Brazil Credit Facility until December 30, 2016. The Brazil Credit Facility bears interest at a margin over the long-term interest rate, as defined by BNDES (“TJLP”), and the Special Clearance and Escrow System (“SELIC”) as follows (BRL in millions):

 

     Maximum Borrowing
Amount
     Contractual Interest
Rate
 

Tranche A

     BRL 34.8         TJLP + 4.25%   

Tranche B

     BRL 34.8         SELIC + 4.25%   

Tranche C

     BRL 200.0         6.00%   

Tranche D

     BRL 1.4         TJLP   

As of June 30, 2015, the weighted average interest rate on the borrowings under the Brazil Credit Facility was 11.1%.

2014 Credit Facility—During the six months ended June 30, 2015, the Company increased the maximum Revolving Loan Commitment (as defined in the loan agreement) under its senior unsecured revolving credit facility entered into in January 2012, as amended and restated in September 2014 (the “2014 Credit Facility”) to $2.5 billion. Effective February 20, 2015, the Company received incremental commitments of $500.0 million, and as a result, has the ability to borrow up to $2.0 billion.

During the six months ended June 30, 2015, the Company borrowed an aggregate of $2.1 billion and repaid an aggregate of $1.3 billion of revolving indebtedness under the 2014 Credit Facility. The Company primarily used the borrowings to fund a portion of the Verizon Transaction.

 

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2013 Credit Facility—During the six months ended June 30, 2015, the Company increased the maximum Revolving Loan Commitment (as defined in the loan agreement) under the 2013 Credit Facility to $3.5 billion. Effective February 20, 2015, the Company received incremental commitments of $750.0 million, and as a result, has the ability to borrow up to $2.75 billion.

During the six months ended June 30, 2015, the Company borrowed an aggregate of $2.6 billion and repaid an aggregate of $2.3 billion of revolving indebtedness under the 2013 Credit Facility. The Company primarily used the borrowings to (i) fund a portion of the Verizon Transaction, (ii) fund the TIM Celular S.A. (“TIM”) acquisition and (iii) repay other indebtedness.

In July 2015, the Company borrowed an additional $850.0 million under the 2013 Credit Facility, which was primarily used to fund the Company’s acquisition in Nigeria.

The 2014 Credit Facility and the 2013 Credit Facility do not require amortization of principal and may be paid prior to maturity in whole or in part at the Company’s option without penalty or premium. The Company maintains the ability to draw down and repay amounts under each of the credit facilities in the ordinary course.

2013 Term Loan—In October 2013, the Company entered into an unsecured term loan (the “2013 Term Loan”). During the six months ended June 30, 2015, the maximum Incremental Term Loan Commitments (as defined in the agreement) was increased to $1.0 billion. Effective February 20, 2015, the Company borrowed an additional $500.0 million under the 2013 Term Loan.

The key terms under the 2014 Credit Facility, the 2013 Credit Facility and the 2013 Term Loan as of June 30, 2015 are as follows ($ in millions):

 

     Outstanding
Balance
     Undrawn
LOC
     Maturity Date     Current
margin over
LIBOR (2)
    Current
commitment
fee (3)
 

2014 Credit Facility

   $ 1,980       $ 7.5         January 31, 2020  (1)      1.250     0.150

2013 Credit Facility

   $ 250       $ 3.2         June 28, 2018  (1)      1.250     0.150

2013 Term Loan

   $ 2,000         N/A         January 3, 2019        1.250     N/A   

 

(1) Subject to two optional renewal periods.
(2) LIBOR means the London Interbank Offered Rate.
(3) Fee on undrawn portion of the credit facility.

Amendments to Bank Facilities—During the six months ended June 30, 2015, the Company entered into amendment agreements with respect to the 2014 Credit Facility, the 2013 Credit Facility and the 2013 Term Loan. After giving effect to these amendments, the Company’s permitted ratio of Total Debt to Adjusted EBITDA (as defined in the loan agreements for each of the facilities) is (i) 7.25 to 1.00 for the quarter ended June 30, 2015, (ii) 7.00 to 1.00 for the quarters ended September 30, 2015 and December 31, 2015 and (iii) 6.00 to 1.00 thereafter.

Redemption of Senior Notes—On February 11, 2015, the Company redeemed all of the outstanding 4.625% senior notes due 2015 (the “4.625% Notes”), in accordance with the redemption provisions in the indenture, at a price equal to 100.5898% of the principal amount, plus accrued interest up to, but excluding, February 11, 2015, for an aggregate redemption price of approximately $613.6 million, including approximately $10.0 million in accrued and unpaid interest. On April 29, 2015, the Company redeemed all of the outstanding 7.000% senior notes due 2017 (the “7.000% Notes”), in accordance with the redemption provisions in the indenture, at a price

 

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equal to 114.0629% of the principal amount, plus accrued and unpaid interest up to, but excluding, April 29, 2015, for an aggregate redemption price of approximately $571.7 million, including approximately $1.4 million in accrued and unpaid interest.

During each of the three and six month periods ended June 30, 2015, the Company recorded a loss on retirement of long-term obligations of $74.3 million related to the redemption of the 7.000% Notes, which included prepayment consideration, the remaining portion of unamortized deferred financing costs and the write-off of the remaining settlement cost of a treasury rate lock related to the 7.000% Notes. In addition, during the six months ended June 30, 2015, the Company recorded a loss on retirement of long-term obligations of $3.7 million related to the redemption of the 4.625% Notes, which included prepayment consideration and the remaining portion of the unamortized discount and deferred financing costs. Each redemption was funded with borrowings under the Company’s existing credit facilities and cash on hand. Upon completion of these redemptions, none of the 4.625% Notes or the 7.000% Notes remained outstanding.

2.800% Senior Notes and 4.000% Senior Notes Offering—On May 7, 2015, the Company completed a registered public offering of $750.0 million aggregate principal amount of 2.800% senior unsecured notes due 2020 (the “2.800% Notes”) and $750.0 million aggregate principal amount of 4.000% senior unsecured notes due 2025 (the “4.000% Notes”). The net proceeds from this offering were approximately $1,480.1 million, after deducting commissions and estimated expenses. The Company used the proceeds to repay existing indebtedness under the 2013 Credit Facility.

The 2.800% Notes will mature on June 1, 2020 and bear interest at a rate of 2.800% per annum. The 4.000% Notes will mature on June 1, 2025 and bear interest at a rate of 4.000% per annum. Accrued and unpaid interest on the notes will be payable in U.S. Dollars semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2015. Interest on the notes will accrue from May 7, 2015 and will be computed on the basis of a 360-day year comprised of twelve 30-day months.

The Company may redeem the notes at any time, in whole or in part, at the applicable redemption price. If the Company redeems the 2.800% Notes prior to May 1, 2020 or the 4.000% Notes prior to March 1, 2025, it will pay a redemption price equal to 100% of the principal amount of the notes plus a make-whole premium, together with accrued interest to the redemption date. If the Company redeems the 2.800% Notes on or after May 1, 2020 or the 4.000% Notes on or after March 1, 2025, it will not be required to pay a make-whole premium. In addition, if the Company undergoes a change of control and ratings decline, each as defined in the supplemental indenture, it may be required to repurchase all of the notes at a purchase price equal to 101% of the principal amount of the notes, plus accrued and unpaid interest (including additional interest, if any), up to but not including the repurchase date. The notes rank equally with all of the Company’s other senior unsecured debt and are structurally subordinated to all existing and future indebtedness and other obligations of its subsidiaries.

The supplemental indenture contains 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 the supplemental indenture.

6.     Derivative Financial Instruments

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

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

South Africa

One of the Company’s South African subsidiaries has 15 interest rate swap agreements outstanding, which mature on the earlier of termination of the underlying debt or March 31, 2020. These 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

In connection with entering into a Colombian Peso (“COP”) denominated credit facility in October 2014 (the “Colombian Credit Facility”), one of the Company’s Colombian subsidiaries entered into an interest rate swap agreement with certain of the lenders under the Colombian Credit Facility. This swap agreement matures on the earlier of termination of the underlying debt or April 24, 2021 and provides that the Company pay a fixed interest rate of 5.74% and receive variable interest at the three-month Inter-bank Rate (“IBR”) over the term of the agreement. The notional value is reduced in accordance with the repayment schedule under the Colombian Credit Facility.

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

 

     June 30, 2015     December 31, 2014  
     Local     USD     Local     USD  

South Africa (ZAR)

        

Notional

     421,342        34,625        440,614        38,080   

Fair Value

     2,708        223        1,016        88   

Colombia (COP)

        

Notional

     97,500,000        37,716        100,000,000        41,798   

Fair Value

     (1,723,016     (667     (1,548,688     (647

As of June 30, 2015 and December 31, 2014, the South African 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 agreement was in a liability position and included in Other non-current liabilities on the condensed consolidated balance sheets.

In addition to the interest rate swap agreements, the Company was amortizing the settlement cost of a treasury rate lock as additional interest expense over the term of the 7.000% Notes. In connection with the redemption of the 7.000% Notes, the Company recognized $2.0 million of the remaining deferred loss on the settlement cost as a loss on retirement of long-term obligations in the condensed consolidated statements of operations.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

During the three months ended June 30, 2015 and 2014, the interest rate swap agreements and treasury rate lock had the following impact on the Company’s condensed consolidated financial statements (in thousands):

 

Three Months

Ended June 30,

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

Effective Portion
    Location of
Gain(Loss)
Reclassified from
AOCI into Income -
Effective Portion (1)
  Gain(Loss)
Recognized
in Income -
Ineffective Portion
    Location of
Gain(Loss)
Recognized in
Income -

Ineffective Portion
 

2015

  $ 639      $ (2,248   Interest Expense/

Loss on Retirement
of Long-Term
Obligations

    N/A        N/A   

2014

  $ 226      $ (670   Interest Expense     N/A        N/A   

During the six months ended June 30, 2015 and 2014, the interest rate swap agreements and treasury rate lock had the following impact on the Company’s condensed consolidated financial statements (in thousands):

 

Six Months

Ended June 30,

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

Effective Portion
    Location of
Gain(Loss)
Reclassified from
AOCI into Income -
Effective Portion (1)
  Gain(Loss)
Recognized
in Income -
Ineffective Portion
    Location of
Gain(Loss)
Recognized in
Income -

Ineffective Portion
 

2015

  $ (354   $ (2,659   Interest Expense/

Loss on Retirement
of Long-Term
Obligations

    N/A        N/A   

2014

  $ (361   $ (1,639   Interest Expense     N/A        N/A   

 

(1) For each of the three and six months ended June 30, 2015, the Company reclassified $2.0 million from Accumulated other comprehensive loss into Loss on retirement of long-term obligations in connection with the redemption of the 7.000% Notes and the write-off of the deferred loss on the settlement of the treasury rate lock.

As of June 30, 2015, approximately $0.5 million of the amount related to derivatives designated as cash flow hedges and recorded in Accumulated other comprehensive loss was expected to be reclassified into earnings in the next 12 months.

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

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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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):

 

     June 30, 2015  
     Fair Value  Measurements
Using
     Assets/Liabilities
at Fair Value
 
   Level 1    Level 2      Level 3     

Assets:

           

Short-term investments (1)

      $ 40,387          $ 40,387   

Interest rate swap agreements

        223            223   

Liabilities:

           

Acquisition-related contingent consideration

         $ 24,867       $ 24,867   

Interest rate swap agreements

      $ 667          $ 667   

 

     December 31, 2014  
     Fair Value  Measurements
Using
     Assets/Liabilities
at Fair Value
 
   Level 1    Level 2      Level 3     

Assets:

           

Short-term investments (1)

      $ 6,302          $ 6,302   

Interest rate swap agreements

      $ 88          $ 88   

Liabilities:

           

Acquisition-related contingent consideration

         $ 28,524       $ 28,524   

Interest rate swap agreements

      $ 647          $ 647   

 

(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 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.

Acquisition-Related Contingent Consideration

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.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

As of June 30, 2015, the Company estimated the value of all potential acquisition-related contingent consideration required payments to be between zero and $33.9 million. During the three months ended June 30, 2015 and 2014, the fair value of the contingent consideration changed as follows (in thousands):

 

     2015     2014  

Balance as of April 1

   $ 27,203      $ 31,342   

Additions

     117        406   

Settlements

     (2,327     (674

Change in fair value

     —          (952

Foreign currency translation adjustment

     (126     903   
  

 

 

   

 

 

 

Balance as of June 30

   $ 24,867      $ 31,025   
  

 

 

   

 

 

 

During the six months ended June 30, 2015 and 2014, the fair value of the contingent consideration changed as follows (in thousands):

 

     2015     2014  

Balance as of January 1

   $ 28,524      $ 31,890   

Additions

     1,311        406   

Settlements

     (3,353     (1,289

Change in fair value

     —          (370

Foreign currency translation adjustment

     (1,615     388   
  

 

 

   

 

 

 

Balance as of June 30

   $ 24,867      $ 31,025   
  

 

 

   

 

 

 

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 six months ended June 30, 2015 and 2014, the Company did not record any asset impairment charges.

Assets Held-for-Sale—During the six months ended June 30, 2014, based on a strategic review of the international rental and management segment and components of the network development services segment, the Company determined that its operations in Panama and its third-party structural analysis business were held-for-sale. The Company recorded an impairment charge of $4.1 million during the three and six months ended June 30, 2014 to write down the intangibles and goodwill to fair value. The impairment charge was recorded in Other operating expenses in the accompanying condensed consolidated statements of operations and the adjustment was determined by comparing the estimated net proceeds from sale of assets or the projected future discounted cash flows to be provided from the long-lived assets (calculated using Level 3 inputs) to the asset’s carrying value.

There were no other items measured at fair value on a nonrecurring basis during the six months ended June 30, 2015.

Fair Value of Financial Instruments—The Company’s financial instruments for which the carrying value reasonably approximates fair value at June 30, 2015 and December 31, 2014 included 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 June 30, 2015, the carrying value and fair value of long-term obligations, including the current portion, were $16.2 billion and $16.5 billion, respectively, of which

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

$9.9 billion was measured using Level 1 inputs and $6.6 billion was measured using Level 2 inputs. As of December 31, 2014, the carrying value and fair value of long-term obligations, including the current portion, were $14.6 billion and $15.0 billion, respectively, of which $9.7 billion was measured using Level 1 inputs and $5.3 billion was measured using Level 2 inputs.

8.    Accumulated Other Comprehensive Loss

The changes in Accumulated other comprehensive loss for the three months ended June 30, 2015 and 2014 were 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 April 1, 2015

  $ (2,082   $ (2,031   $ (1,201,747   $ (1,205,860

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

    569        —          (25,441     (24,872

Amounts reclassified from accumulated other comprehensive loss, net of tax

    180        2,031        —          2,211   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    749        2,031        (25,441     (22,661
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2015

  $ (1,333   $ —        $ (1,227,188   $ (1,228,521
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Balance as of April 1, 2014

  $ (1,970   $ (2,829   $ (267,611   $ (272,410

Other comprehensive income before reclassifications, net of tax

    325        —          20,622        20,947   

Amounts reclassified from accumulated other comprehensive loss, net of tax

    344        199        —          543   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

    669        199        20,622        21,490   
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

 

The changes in Accumulated other comprehensive loss for the six months ended June 30, 2015 and 2014 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, 2015

  $ (1,345   $ (2,231   $ (790,645   $ (794,221

Other comprehensive loss before reclassifications, net of tax

    (340     —          (436,543     (436,883

Amounts reclassified from accumulated other comprehensive loss, net of tax

    352        2,231        —          2,583   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income (loss)

    12        2,231        (436,543     (434,300
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2015

  $ (1,333   $ —        $ (1,227,188   $ (1,228,521
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

    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) income before reclassifications, net of tax

    (455     —          59,333        58,878   

Amounts reclassified from accumulated other comprehensive loss, net of tax

    1,023        399        —          1,422   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net current-period other comprehensive income

    568        399        59,333        60,300   
 

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

 

During each of the three and six months ended June 30, 2015, $2.0 million related to the deferred loss on the settlement of the treasury rate lock was reclassified from Accumulated other comprehensive loss into Loss on retirement of long-term obligations in connection with redemption of the 7.000% Notes. The remaining losses on cash flow hedges have been reclassified into Interest expense in the accompanying condensed consolidated statements of operations and the associated tax effect of less than $0.1 million for each of the three and six months ended June 30, 2015 and 2014, respectively, is included in Income tax provision.

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. As a REIT, the Company continues to be subject to income taxes on the income of its TRSs and income 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 2013, the Company acquired MIP Tower Holdings LLC (“MIPT”), which had been organized and qualified as a REIT. The Company intends to file a tax election pursuant to which MIPT will no longer operate as a separate REIT for federal and state income tax purposes, effective July 25, 2015. In connection with this election, the Company expects to incur a one-time cash tax charge of approximately $92.5 million, based on preliminary calculations, in the second half of 2015.

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 June 30, 2015 and December 31, 2014, the total amount of unrecognized tax benefits that would impact the effective tax rate, if recognized, was approximately $31.9 million. The amount of unrecognized tax benefits during the three and six months ended June 30, 2015 includes additions to the Company’s existing tax positions, partially offset by foreign currency fluctuations. 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 the 2014 Form 10-K. The impact of the amount of these changes to previously recorded uncertain tax positions could range from zero to $8.1 million.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The Company recorded penalties and income tax-related interest expense during the three and six months ended June 30, 2015 of $0.6 million and $1.5 million, respectively, and during the three and six months ended June 30, 2014 of $1.9 million and $3.2 million, respectively. As of June 30, 2015 and December 31, 2014, the total amount of accrued income tax related interest and penalties included in Other non-current liabilities in the condensed consolidated balance sheets was $24.5 million and $24.9 million, respectively.

10.    Stock-Based Compensation

The Company recognized stock-based compensation expense during the three and six months ended June 30, 2015 of $24.0 million and $53.9 million, respectively, and stock-based compensation expense during the three and six months ended June 30, 2014 of $18.8 million and $43.4 million, respectively. The Company capitalized $0.6 million and $1.1 million of stock-based compensation expense as property and equipment during the three and six months ended June 30, 2015, respectively, and capitalized $0.4 million and $0.8 million of stock-based compensation expense as property and equipment during the three and six months ended June 30, 2014, respectively.

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 for time-based restricted stock units (“RSUs”) and stock options and three years for performance-based restricted stock units (“PSUs”). Stock options generally expire ten years from the date of grant. As of June 30, 2015, the Company had the ability to grant stock-based awards with respect to an aggregate of 11.6 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 that 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. Accordingly, for grants made on or after January 1, 2013, the Company recognizes compensation expense for stock options and RSUs over the shorter of (i) the four-year vesting period or (ii) the period from the date of grant to the date the employee becomes eligible for such retirement benefits, which may occur upon grant; and recognizes compensation expense for PSUs over the three-year vesting period, subject to adjustment based on the date the employee becomes eligible for such retirement benefits.

Stock Options—The Company’s option activity for the six months ended June 30, 2015 was as follows:

 

     Number of
Options
 

Outstanding as of January 1, 2015

     6,508,435   

Granted

     2,004,100   

Exercised

     (221,703

Forfeited

     (93,021

Expired

     (1,475
  

 

 

 

Outstanding as of June 30, 2015

     8,196,336   
  

 

 

 

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The fair value of each option granted during the six months ended June 30, 2015 was estimated on the date of grant using the Black-Scholes option pricing model based on the assumptions noted in the table below.

Key assumptions used to apply this pricing model are as follows:

 

Range of risk-free interest rate

   1.32%-1.62%

Weighted average risk-free interest rate

   1.62%

Expected life of option grants

   4.5 years

Range of expected volatility of underlying stock price

   21.09%-21.20%

Weighted average expected volatility of underlying stock price

   21.09%

Range of expected annual dividend yield

   1.50%-1.85%

The weighted average grant date fair value per share during the six months ended June 30, 2015 was $15.09. As of June 30, 2015, total unrecognized compensation expense related to unvested stock options was $39.3 million and is expected to be recognized over a weighted average period of approximately two years.

Restricted Stock Units and Performance-Based Restricted Stock Units—The Company’s RSU and PSU activity for the six months ended June 30, 2015 was as follows:

 

     RSUs     PSUs (1)  

Outstanding as of January 1, 2015

     1,758,817        —     

Granted

     692,340        23,379   

Vested

     (671,652     —     

Forfeited

     (70,695     —     
  

 

 

   

 

 

 

Outstanding as of June 30, 2015

     1,708,810        23,379   
  

 

 

   

 

 

 

 

(1) Represents the target number of shares issuable at the end of the three-year performance cycle attributable to the first year’s performance period.

Restricted Stock Units—As of June 30, 2015, total unrecognized compensation expense related to unvested RSUs granted under the 2007 Plan was $100.0 million and is expected to be recognized over a weighted average period of approximately three years.

Performance-Based Restricted Stock Units—During the six months ended June 30, 2015, the Company granted an aggregate of 70,135 PSUs to its executive officers and established the performance metric for this award. Threshold, target and maximum parameters were established for the metric for each year in the three-year performance period, and will be used to calculate the number of shares that will be issuable when the award vests, which may range from zero to 200 percent of the target amount. At the end of the three-year performance period, the number of shares that are earned and vest will depend on the degree of achievement against the pre-established performance goal. PSUs that have been earned over the performance period will be paid out in common stock at the end of the performance period, subject generally to the executive’s continued employment and will accrue dividend equivalents prior to vesting, which will be paid out only in respect of shares actually earned and vested. As the performance metric is tied to year-over-year growth and actual results for the metric will not be determined until the end of each respective fiscal year, the Company is unable to determine the annual target for the second and third years of the performance period for this award at this time. Accordingly, an aggregate of 46,756 PSUs granted on March 10, 2015 are not included in the table above. The grant date fair value per share of the PSUs for which terms have been established was $94.57.

During the three and six months ended June 30, 2015, the Company recorded $0.6 million and $0.7 million, respectively, in stock-based compensation expense for equity awards in which the performance goals have been

 

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established and are probable of being achieved. The remaining unrecognized compensation expense related to these awards at June 30, 2015 was $1.6 million based on the Company’s current assessment of the probability of achieving the performance goals. The weighted-average period over which the cost will be recognized is one year.

Employee Stock Purchase Plan—The Company maintains an employee stock purchase plan (“ESPP”) pursuant to which eligible employees may purchase shares of the Company’s common stock 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 six months ended June 30, 2015, employee contributions were accumulated to purchase approximately 44,000 shares under the ESPP.

Key assumptions used to apply the Black-Scholes pricing model for shares purchased through the ESPP during the six months ended June 30, 2015, which resulted in a fair value per share of $16.40, were as follows:

 

Approximate risk-free interest rate

     0.06

Expected life of shares

     6 months   

Expected volatility of underlying stock price over the option period

     13.91

Expected annual dividend yield

     1.85

11.    Equity

Common Stock Offering—On March 3, 2015, the Company completed a registered public offering of 23,500,000 shares of its common stock, par value $0.01 per share, at $97.00 per share. On March 5, 2015, the Company issued an additional 2,350,000 shares of common stock in connection with the underwriters’ exercise in full of their over-allotment option. Aggregate net proceeds were approximately $2.44 billion after deducting commissions and estimated expenses. The Company used the net proceeds from this offering to fund a portion of the Verizon Transaction.

Series B Preferred Stock Offering—On March 3, 2015, the Company completed a registered public offering of 12,500,000 depositary shares, each representing a 1/10th interest in a share of its 5.50% Mandatory Convertible Preferred Stock, Series B, par value $0.01 per share (the “Series B Preferred Stock”), at $100.00 per depositary share. On March 5, 2015, the Company issued an additional 1,250,000 depositary shares in connection with the underwriters’ exercise in full of their over-allotment option. Aggregate net proceeds were approximately $1.34 billion after deducting commissions and estimated expenses. The Company used the net proceeds from this offering to fund a portion of the Verizon Transaction. On March 3, 2015, upon receipt of the proceeds of this offering and the common stock offering described above, the Company terminated the commitment letter dated February 5, 2015 with Goldman Sachs Bank USA and Goldman Sachs Lending Partners LLC entered into in connection with the Verizon Transaction.

Unless converted or redeemed earlier, each share of the Series B Preferred Stock will convert automatically on February 15, 2018, into between 8.5911 and 10.3093 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 February 15, 2018, holders of the Series B 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 the Series B Preferred Stock are payable on a cumulative basis when, as and if declared by the Company’s Board of Directors at an annual rate of 5.50% on the liquidation preference of $1,000.00 per share (and, correspondingly, $100.00 per share with respect to the depositary shares) on February 15, May 15, August 15 and November 15 of each year, commencing on May 15, 2015 to, and

 

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including, February 15, 2018. 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 Series B Preferred Stock provide that, unless full cumulative dividends have been paid or set aside for payment on all outstanding Series B Preferred Stock for all prior dividend periods, no dividends may be declared or paid on common stock.

Series A Preferred Stock—The Company has 6,000,000 shares outstanding of its 5.25% Mandatory Convertible Preferred Stock, Series A, par value $0.01 per share (the “Series A Preferred Stock” and, together with the Series B Preferred Stock, the “Mandatory Convertible Preferred Stock”).

Unless converted earlier, each share of the Series A 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 Series A 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 the Series A Preferred Stock are payable on a cumulative basis when, as and if declared by the Company’s Board of Directors 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.

Sales of Equity Securities—The Company receives proceeds from sales of its equity securities pursuant to the ESPP and upon exercise of stock options granted under its equity incentive plans. During the six months ended June 30, 2015, the Company received an aggregate of $17.4 million in proceeds upon exercises of stock options and the ESPP.

Distributions—During the six months ended June 30, 2015, the Company declared or paid the following cash distributions:

 

Declaration Date

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

Common Stock

           

December 2, 2014

     January 13, 2015         December 16, 2014       $ 0.38       $ 150.7   

March 5, 2015

     April 28, 2015         April 10, 2015       $ 0.42       $ 177.7   

May 21, 2015

     July 16, 2015         June 17, 2015       $ 0.44       $ 186.2   

Series A Preferred Stock

           

December 2, 2014

     February 16, 2015         February 1, 2015       $ 1.3125       $ 7.9   

April 14, 2015

     May 15, 2015         May 1, 2015       $ 1.3125       $ 7.9   

Series B Preferred Stock

           

April 14, 2015

     May 15, 2015         May 1, 2015       $ 11.1528       $ 15.3   

The Company accrues distributions on unvested restricted stock units granted subsequent to January 1, 2012, which are payable upon vesting. As of June 30, 2015, the amount accrued for distributions payable related to unvested restricted stock units was $3.6 million. During the six months ended June 30, 2015, the Company paid $1.2 million of distributions upon the vesting of restricted stock units.

To maintain its qualification for taxation as a REIT, the Company expects to continue paying distributions, the amount, timing and frequency of which will be determined, and subject to adjustment, by the Company’s Board of Directors.

 

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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 upon (i) the vesting of restricted stock awards, (ii) exercise of stock options and (iii) conversion of the Company’s Mandatory Convertible Preferred Stock. Dilutive common share equivalents also include the dilutive impact of the ALLTEL transaction (see note 13).

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 six months ended June 30, 2015 and 2014 (in thousands, except per share data):

 

     Three Months Ended June 30,     Six Months Ended June 30,  
             2015                     2014                     2015                     2014          

Net income attributable to American Tower Corporation stockholders

   $ 156,056      $ 234,431      $ 349,373      $ 436,930   

Dividends on preferred stock

     (26,782     (4,375     (36,601     (4,375
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American Tower Corporation common stockholders

     129,274        230,056        312,772        432,555   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average common shares outstanding

     423,154        395,872        414,182        395,511   

Dilutive securities

     3,779        3,716        4,121        3,941   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average common shares outstanding

     426,933        399,588        418,303        399,452   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.31      $ 0.58      $ 0.76      $ 1.09   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.30      $ 0.58      $ 0.75      $ 1.08   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 June 30,      Six Months Ended June 30,  
             2015                      2014                      2015                      2014          

Restricted stock awards

     —           3         —           1   

Stock options

     1,734         2,497         1,229         2,342   

Preferred stock

     17,349         3,733         13,364         1,877   

 

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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.

Lease Obligations

Tenant Leases—As part of the Verizon Transaction, the Company entered into leases or subleases with Verizon with respect to 11,448 communications sites with an initial non-cancellable term of ten years. In addition, the Company assumed the rights under the tenant leases that were in place on such sites at the time of the transaction. At the time of the transaction, the total estimated future minimum rental receipts under the non-cancellable Verizon leases and assumed third-party leases was approximately $3.0 billion and was expected to be recognized over an average period of approximately 10 years.

Lease Obligations—In connection with the Verizon Transaction, the Company assumed the interest in and obligations under certain ground leases. Many of the leases contain renewal options with specified increases in lease payments upon exercise of the renewal option. Escalation clauses present in operating leases, excluding those tied to the Consumer Price Index (CPI) or other inflation-based indices, are recognized on a straight-line basis over the non-cancellable term of the leases. Future minimum rental payments under non-cancellable operating leases include payments for certain renewal periods at the Company’s option because failure to renew could result in a loss of the applicable communications sites and related revenues from tenant leases, thereby making it reasonably assured that the Company will renew the leases. At the time of the transaction, the Company’s future minimum rental payments under non-cancellable operating leases, including certain renewal periods related to the Verizon communications sites, was approximately $2.2 billion and was expected to be recognized over an average period of approximately 17 years.

Commitments

Verizon Transaction—On March 27, 2015, the Company entered into an agreement with various operating entities of Verizon that provides for the lease, sublease or management of 11,285 wireless communications sites from Verizon commencing March 27, 2015. The average term of the lease or sublease for all sites at the inception of the agreement was approximately 28 years, assuming renewals or extensions of the underlying ground leases for the sites. The Company has the option to purchase the leased sites in tranches, subject to the applicable lease, sublease or management right upon its scheduled expiration. Each tower is assigned to an annual tranche, ranging from 2034 to 2047, which represents the outside expiration date for the sublease rights to the towers in each tranche. The purchase price for each tranche is a fixed amount stated in the sublease for such tranche plus the fair market value of certain alterations made to the related towers. The aggregate purchase option price for the towers leased and subleased is approximately $5.0 billion. Verizon will occupy the sites as a tenant for an initial term of ten years with eight optional successive five-year terms; each such term shall be governed by standard master lease agreement terms established as a part of the transaction.

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 2,400 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

 

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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 June 30, 2015, the Company has purchased an aggregate of 31 of the subleased towers upon expiration of the applicable agreement. The aggregate purchase option price for the remaining towers leased and subleased is approximately $675.3 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.

ALLTEL Transaction—In December 2000, the Company entered into an agreement with ALLTEL, a predecessor entity to Verizon Wireless, to acquire towers through a 15-year sublease agreement. Pursuant to the agreement, as amended, with Verizon Wireless, 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 $74.2 million as of June 30, 2015. At the expiration of the sublease, the purchase price would be payable in cash or, at Verizon Wireless’s or its assignee’s option, as applicable, with 769 shares of the Company’s common stock per tower, which would be valued at approximately $127.1 million in the aggregate based on the closing price at June 30, 2015.

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. The Company challenged the assessment before India’s Income Tax Appellate Tribunal, which issued a decision in the Company’s favor on April 15, 2015, finding, consistent with precedent from the Bombay High Court, that no income tax obligation arose as a result of the issuance of share capital. The tax authority has the right to appeal this decision in accordance with applicable Indian law.

14.    Acquisitions and Other Transactions

The estimates of the fair value of the assets or rights 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 accounting for the acquisitions that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, including contingent consideration, 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 evaluates 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

 

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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 six months ended June 30, 2015, the Company made certain measurement period adjustments related to several acquisitions consummated in 2014 and therefore retrospectively adjusted the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2014.

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 six months ended June 30, 2015 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 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 2015 acquisitions and the Verizon Transaction on the Company’s revenues and gross margin for the three months ended June 30, 2015 was approximately $111.8 million and $54.0 million, respectively, and the estimated aggregate impact for the six months ended June 30, 2015 was approximately $116.3 million and $56.1 million, respectively. The revenues and gross margin amounts also reflect incremental revenues from the addition of new tenants to such sites subsequent to the transaction date. Incremental amounts of segment selling, general, administrative and development expense have not been reflected, as the amounts attributable to transactions are not comparable.

For those acquisitions accounted for as business combinations, the Company recognizes acquisition and merger related expenses in the period in which they are incurred and services are received. Acquisition and merger related expenses 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 directly related to the transaction. Integration costs include incremental and non-recurring costs necessary to convert data, retain employees and otherwise enable the Company to operate new businesses efficiently. The Company records acquisition and merger related expenses, as well as integration costs, in Other operating expenses in the condensed consolidated statements of operations.

During the three and six months ended June 30, 2015 and 2014, the Company recorded the following acquisition and merger related expenses and integration costs (in thousands):

 

     Three Months Ended June 30,      Six Months Ended June 30,  
             2015                      2014                      2015                      2014          

Acquisition and merger related expenses (1)

   $ 5,021       $ 4,854       $ 7,987       $ 14,606   

Integration costs

   $ 4,525       $ 3,217       $ 6,280       $ 5,686   

 

(1) Acquisition and merger related expenses for the six months ended June 30, 2015 do not reflect approximately $9.9 million of transaction costs related to the Verizon Transaction as these costs have been capitalized as part of the assets’ fair value.

 

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Verizon Transaction

On March 27, 2015, the Company completed its acquisition of the exclusive right to lease, acquire or otherwise operate and manage 11,448 wireless communications sites from Verizon for approximately $5.053 billion in cash pursuant to the Master Agreement entered into on February 5, 2015 and the related Master Prepaid Lease, Management Agreement, Sale Site Master Lease Agreement and MPL Site Master Lease Agreement, subject to certain post-closing adjustments.

The Company, through its wholly-owned subsidiary, leased or subleased from certain Verizon subsidiaries 11,285 communications sites, including the interest in the land, the tower and certain related improvements and tower related assets pursuant to the Master Prepaid Lease. Under the Master Prepaid Lease, the Company has the exclusive right to lease and operate the Verizon communications sites for a weighted average term of approximately 28 years and the Company will have the option to purchase the communications sites in various tranches at the end of the respective lease or sublease terms at a fixed amount stated in the sublease for such tranche plus the fair market value of certain alterations made to the related towers. The Company accounted for the payment with respect to the leased sites as a capital lease and the respective lease and non-lease elements related to tower assets and intangible assets, as described below. The total consideration allocated to this element of the overall transaction was $4.964 billion, which included approximately $9.9 million of transaction costs.

In addition, the Company, through its wholly-owned subsidiary, acquired 163 additional communications sites. The Company accounted for these sites as a business combination and the purchase price of $99.0 million is reflected below in “2015 Acquisitions.”

Upon closing, the Company agreed to lease, sublease or otherwise make available collocation space at each of the communications sites to Verizon for an initial non-cancellable term of ten years, subject to automatic extension for eight additional five-year renewal terms. The initial collocation rent is $1,900 per month for each communications site, with annual rent increases of 2%.

The Company funded the Verizon Transaction with (i) proceeds from its concurrent registered public offerings of its common stock and Series B Preferred Stock, (ii) borrowings under the Company’s revolving credit facilities and (iii) cash on hand.

The Company included the Verizon Transaction in the unaudited pro forma financial results included herein as if the capital lease began on January 1, 2014. Management relied on various estimates and assumptions due to the fact that Verizon did not operate the sites as a business and the sites were utilized primarily by Verizon as a component of its network infrastructure.

The following table summarizes the allocation of consideration transferred for the 11,285 communications sites under the Master Prepaid Lease (in thousands). Balances are reflected in the accompanying condensed consolidated balance sheets as of June 30, 2015 and represent the asset balances of the capital lease.

 

Current assets

   $ 6,685   

Non-current assets

     167,315   

Property and equipment

     2,024,887   

Intangible assets (1):

  

Customer-related intangible assets

     1,788,574   

Network location intangible assets

     1,188,033   

Current liabilities

     (10,747

Other non-current liabilities (2)

     (200,530
  

 

 

 

Fair value of consideration transferred (3)

   $ 4,964,217   
  

 

 

 

 

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(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) Represents liabilities recorded for asset retirement obligations.
(3) Includes approximately $9.9 million of transaction costs, which have been capitalized as part of the assets’ fair value, $7.1 million of which was paid during the six months ended June 30, 2015.

The acquisitions described below under “2015 Acquisitions” and “2014 Acquisitions” are accounted for as business combinations and are consistent with the Company’s strategy to expand in selected geographic areas.

2015 Acquisitions

TIM Acquisition—On April 29, 2015, the Company acquired 4,176 communications sites from TIM pursuant to its previously announced agreement for a purchase price of approximately 1.9 billion BRL (approximately $644.3 million at the date of acquisition). Pursuant to the terms of the agreement, the remaining sites become available for purchase through October 2016. In connection with this closing, the amount of the letters of credit with Banco Santander was reduced to approximately 92.1 million BRL (approximately $29.7 million), corresponding to certain obligations related to the Company’s acquisition agreement.

Other International Acquisitions—During the six months ended June 30, 2015, the Company acquired a total of 18 communications sites and related assets in Brazil and Uganda for an aggregate purchase price of $2.6 million. Of the total purchase price, $1.9 million is reflected in Accounts payable in the condensed consolidated balance sheet as of June 30, 2015 and the remaining balance was satisfied with cash consideration and by the issuance of credits to be applied against trade accounts receivable. The purchase prices are subject to post-closing adjustments.

U.S. Acquisitions—During the six months ended June 30, 2015, the Company acquired a total of 194 communications sites and equipment, as well as three property interests, in the United States for an aggregate purchase price of $125.4 million (including $1.3 million for the estimated fair value of contingent consideration). Included in these sites are the 163 communications sites acquired as part of the Verizon Transaction, described above. The purchase prices are subject to post-closing adjustments.

The following table summarizes the preliminary allocation of the purchase price for the fiscal year 2015 acquisitions based upon their estimated fair value at the date of acquisition (in thousands). Balances are reflected in the accompanying condensed consolidated balance sheet as of June 30, 2015.

 

     TIM     Other International     U.S.  

Current assets

   $ —        $ —        $ 194   

Non-current assets

     —          —          985   

Property and equipment

     209,539        1,284        32,803   

Intangible assets (1):

  

Customer-related intangible assets

     304,367        822        47,408   

Network location intangible assets

     98,316        463        33,633   

Current liabilities

     —          —          (287

Other non-current liabilities

     (19,286     (61     (1,986
  

 

 

   

 

 

   

 

 

 

Net assets acquired

     592,936        2,508        112,750   

Goodwill (2)

     51,344        87        12,677   
  

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

     644,280        2,595        125,427   

Debt assumed

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Purchase Price

   $ 644,280      $ 2,595      $ 125,427   
  

 

 

   

 

 

   

 

 

 

 

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(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) Goodwill was allocated to the Company’s rental and management segments. The Company expects goodwill recorded in its domestic rental and management segment will be deductible for tax purposes and goodwill recorded in its international rental and management segment will not be deductible for tax purposes.

2014 Acquisitions

BR Towers Acquisition—On November 19, 2014, the Company completed the acquisition of 100% of the equity interests of BR Towers. At closing, BR Towers owned 2,504 towers and four property interests, as well as the exclusive use rights for 2,113 additional towers and 43 property interests in Brazil. The Company completed the acquisition for an estimated preliminary purchase price of approximately $568.9 million, which was subsequently reduced to approximately $558.7 million during the six months ended June 30, 2015. In addition, the Company paid approximately $61.1 million to acquire all outstanding preferred equity and assumed approximately $261.1 million of BR Towers’ existing indebtedness. The Company has repaid approximately $137.9 million of principal balance subsequent to closing, including the repayment of $15.8 million during the six months ended June 30, 2015.

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 Properties LLC and other related entities (“Richland”) for an aggregate purchase price of $189.4 million, which was subsequently reduced to $188.9 million during the six months ended June 30, 2015. In addition, the Company assumed $196.5 million of Richland’s 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.

Other International Acquisitions—During the year ended December 31, 2014, the Company acquired 159 additional communications sites and related assets in Brazil, Ghana, Mexico and Uganda, for an aggregate purchase price of $28.3 million (including value added tax of $1.2 million). The Company also acquired 299 communications sites in Mexico for a purchase price of $40.3 million (including value added tax of $5.6 million), which reflected approximately $3.4 million of net liabilities assumed. Total purchase price 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. The allocation of the purchase price for these acquisitions was finalized during the year ended December 31, 2014.

Other U.S. Acquisitions—During the year ended December 31, 2014, the Company acquired 184 additional communications sites and equipment, as well as six property interests, in the United States for an aggregate purchase price of $180.8 million (including $6.3 million for the estimated fair value of contingent consideration). The purchase prices are subject to post-closing adjustments.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

The following table summarizes the updated allocation of the purchase price 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 herein.

 

     BR Towers     Richland (1)     Other U.S.  

Current assets

   $ 32,075      $ 8,583      $ 332   

Non-current assets

     9,365        —          1,041   

Property and equipment

     133,930        154,899        38,092   

Intangible assets (2):

  

Customer-related intangible assets

     495,455        186,455        88,490   

Network location intangible assets

     136,692        3,409        38,470   

Other intangible assets

     32,123        —          —     

Current liabilities

     (23,930     (3,635     (1,997

Other non-current liabilities

     (101,892     (2,922     (1,675
  

 

 

   

 

 

   

 

 

 

Net assets acquired

     713,818        346,789        162,753   

Goodwill (3)

     167,097        44,128        18,069   
  

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

     880,915        390,917        180,822   

Debt assumed (4)

     (261,136     (201,999     —     

Preferred stock outstanding

     (61,056     —          —     
  

 

 

   

 

 

   

 

 

 

Purchase Price

   $ 558,723      $ 188,918      $ 180,822   
  

 

 

   

 

 

   

 

 

 

 

(1) The allocation of the purchase price was finalized during the six months ended June 30, 2015.
(2) Customer-related intangible assets and network location intangible assets are amortized on a straight-line basis over periods of up to 20 years. Other intangible assets are amortized on a straight-line basis over the life of the lease, which is a period of 11 years.
(3) Goodwill was allocated to the Company’s rental and management segments, and the Company expects goodwill recorded will be deductible for tax purposes except for goodwill associated with BR Towers, where goodwill is expected to be partially deductible.
(4) Assumed BR Towers debt approximated fair value at the date of acquisition and included $11.5 million of current indebtedness. Assumed Richland debt included $196.5 million of Richland’s indebtedness and a fair value adjustment of $5.5 million. The fair value adjustments were based primarily on reported market values using Level 2 inputs.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

Unless otherwise noted, the following table summarizes the preliminary allocation of the purchase price 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 consolidated balance sheets in the 2014 Form 10-K.

 

     BR Towers     Richland     Other U.S.  

Current assets

   $ 31,832      $ 8,583      $ 797   

Non-current assets

     9,135        —          —     

Property and equipment

     141,422        185,777        38,413   

Intangible assets (1):

  

Customer-related intangible assets

     495,279        169,452        89,990   

Network location intangible assets

     136,233        1,700        39,470   

Other intangible assets

     37,664        —          —     

Current liabilities

     (23,930     (3,635     (1,997

Other non-current liabilities

     (101,508     (2,922     (1,675
  

 

 

   

 

 

   

 

 

 

Net assets acquired

     726,127        358,955        164,998   

Goodwill (2)

     164,955        32,423        15,824   
  

 

 

   

 

 

   

 

 

 

Fair value of net assets acquired

     891,082        391,378        180,822   

Debt assumed (3)

     (261,136     (201,999     —     

Preferred stock outstanding

     (61,056     —          —     
  

 

 

   

 

 

   

 

 

 

Purchase Price

   $ 568,890      $ 189,379      $ 180,822   
  

 

 

   

 

 

   

 

 

 

 

(1) Customer-related intangible assets and network location intangible assets are amortized on a straight-line basis over periods of up to 20 years. Other intangible assets are amortized on a straight-line basis over the life of the lease, which is a period of 11 years.
(2) Goodwill was allocated to the Company’s rental and management segments, and the Company expects goodwill recorded will be deductible for tax purposes except for goodwill associated with BR Towers where goodwill is expected to be partially deductible.
(3) Assumed BR Towers debt approximated fair value at the date of acquisition and included $11.5 million of current indebtedness. Richland debt assumed included $196.5 million of Richland’s indebtedness and a fair value adjustment of $5.5 million. The fair value adjustments were based primarily on reported market values using Level 2 inputs.

 

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Pro Forma Consolidated Results

The following table presents the unaudited pro forma financial results as if the 2015 acquisitions, as well as the Verizon Transaction described above, had occurred on January 1, 2014 and the 2014 acquisitions had occurred on January 1, 2013 (in thousands, except per share data). The pro forma consolidated results do not reflect the impact of the acquisition in Nigeria described in note 16. Management relied on various estimates and assumptions due to the fact that some of the transactions 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 may not be available. The pro forma results do not include any anticipated cost synergies, costs or other integration impacts. Accordingly, such pro forma amounts are not necessarily indicative of the results that actually would have occurred had the transactions been completed on the dates indicated, nor are they indicative of the future operating results of the Company.

 

    Three Months Ended June 30,     Six Months Ended June 30,  
            2015                     2014                     2015                     2014          

Pro forma revenues

  $ 1,182,098      $ 1,173,563      $ 2,376,710      $ 2,311,108   

Pro forma net income attributable to American Tower Corporation common stockholders

  $ 129,460      $ 174,338      $ 273,838      $ 320,473   

Pro forma net income per common share amounts:

       

Basic net income attributable to American Tower Corporation common stockholders

  $ 0.31      $ 0.41      $ 0.65      $ 0.76   

Diluted net income attributable to American Tower Corporation common stockholders

  $ 0.30      $ 0.41      $ 0.64      $ 0.75   

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 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.

A summary of the value of the Company’s contingent consideration is as follows (in thousands):

 

     Maximum
potential  value (1)
     Estimated value  at
June 30, 2015 (2)
     Three Months Ended
June 30, 2015
    Six Months Ended
June 30, 2015
 
           Additions (3)      Settlements     Additions (3)      Settlements  

Colombia

   $ 27,344       $ 18,264       $ —         $ —        $ —         $ —     

Costa Rica

     175         175         —           (1,723     —           (1,723

Ghana

     409         409         —           —          —           —     

United States

     6,019         6,019         117         (604     1,311         (1,630
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 33,947       $ 24,867       $ 117       $ (2,327   $ 1,311       $ (3,353

 

(1) The maximum potential value is based on exchange rates at June 30, 2015. The minimum value could be zero.
(2) Estimate is determined using a probability weighted average of expected outcomes as of June 30, 2015.
(3) Based on preliminary acquisition accounting upon closing of certain acquisitions during the three and six months ended June 30, 2015.

 

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AMERICAN TOWER CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For more information regarding contingent consideration, see note 7.

15.    Business Segments

The Company operates its business in three reportable segments, (i) domestic rental and management, (ii) international rental and management and (iii) network development services. The Company’s primary business is leasing space on multitenant communications sites to wireless service providers, radio and television broadcast companies, wireless 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 June 30, 2015, consisted 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, Nigeria, 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 the 2014 Form 10-K. 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 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 six months ended June 30, 2015 and 2014 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

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 the 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 June 30, 2015   Domestic     International          
    (in thousands)  

Segment revenues

  $ 802,841      $ 351,394      $ 1,154,235      $ 20,140        $ 1,174,375   

Segment operating expenses (1)

    182,172        131,723        313,895        8,075          321,970   

Interest income, TV Azteca, net

    —          2,662        2,662        —            2,662   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    620,669        222,333        843,002        12,065          855,067   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

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

    31,243        29,981        61,224        3,439          64,663   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 589,426      $ 192,352      $ 781,778      $ 8,626        $ 790,404   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

          $ 24,045        24,045   

Other selling, general, administrative and development expense

            28,118        28,118   

Depreciation, amortization and accretion

            328,356        328,356   

Other expense (2)

            238,749        238,749   
           

 

 

 

Income from continuing operations before income taxes

            $ 171,136   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 19,383,596      $ 6,860,199      $ 26,243,795      $ 71,268      $ 154,662      $ 26,469,725   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expense exclude stock-based compensation expense of $0.5 million and $23.6 million, respectively.
(2) Other expense primarily includes interest expense and loss on retirement of long-term obligations.

 

    Rental and Management     Total Rental  and
Management
    Network
Development
Services
    Other     Total  
Three Months Ended June 30, 2014   Domestic     International          
    (in thousands)  

Segment revenues

  $ 659,743      $ 346,018      $ 1,005,761      $ 25,696        $ 1,031,457   

Segment operating expenses (1)

    126,340        136,501        262,841        8,981          271,822   

Interest income, TV Azteca, net

    —          2,662        2,662        —            2,662   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    533,403        212,179        745,582        16,715          762,297   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

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

    28,313        34,472        62,785        2,326          65,111   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 505,090      $ 177,707      $ 682,797      $ 14,389        $ 697,186   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

    $ 18,835        18,835   

Other selling, general, administrative and development expense

            15,006        15,006   

Depreciation, amortization and accretion

            245,427        245,427   

Other expense (2)

            174,457        174,457   
           

 

 

 

Income from continuing operations before income taxes

            $ 243,461   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 14,149,220      $ 6,466,380      $ 20,615,600      $ 58,611      $ 173,526      $ 20,847,737   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expense exclude stock-based compensation expense of $0.5 million and $18.4 million, respectively.
(2) Other expense primarily includes interest expense.

 

    Rental and Management     Total Rental  and
Management
    Network
Development
Services
    Other     Total  
Six Months Ended June 30, 2015   Domestic     International          
    (in thousands)  

Segment revenues

  $ 1,520,721      $ 695,694      $ 2,216,415      $ 37,150        $ 2,253,565   

Segment operating expenses (1)

    315,204        257,516        572,720        13,319          586,039   

Interest income, TV Azteca, net

    —          5,258        5,258        —            5,258   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment gross margin

    1,205,517        443,436        1,648,953        23,831          1,672,784   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

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

    58,065        64,592        122,657        6,875          129,532   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Segment operating profit

  $ 1,147,452      $ 378,844      $ 1,526,296      $ 16,956        $ 1,543,252   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Stock-based compensation expense

          $ 53,906        53,906   

Other selling, general, administrative and development expense

            57,249        57,249   

Depreciation, amortization and accretion

            591,876        591,876   

Other expense (2)

            449,721        449,721   
           

 

 

 

Income from continuing operations before income taxes

            $ 390,500   
           

 

 

 

 

(1) Segment operating expenses and segment selling, general, administrative and development expense exclude stock-based compensation expense of $1.1 million and $52.8 million, respectively.
(2) Other expense primarily includes interest expense and loss on retirement of long-term obligations.

 

     Rental and Management      Total Rental  and
Management
     Network
Development
Services
     Other      Total  
Six Months Ended June 30, 2014    Domestic      International              
     (in thousands)  

Segment revenues

   $ 1,295,522       $ 670,359       $ 1,965,881       $ 49,665          $ 2,015,546   

Segment operating expenses (1)

     247,849         265,455         513,304         18,783            532,087   

Interest income, TV Azteca, net

     —           5,257         5,257         —              5,257   
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Segment gross margin

     1,047,673         410,161         1,457,834         30,882            1,488,716   
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

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

     55,722         63,688         119,410         4,856            124,266   
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Segment operating profit

   $ 991,951       $ 346,473       $ 1,338,424       $ 26,026          $ 1,364,450   
  

 

 

    

 

 

    

 

 

    

 

 

       

 

 

 

Stock-based compensation expense

      $ 43,439         43,439   

Other selling, general, administrative and development expense

                 41,780         41,780   

Depreciation, amortization and accretion

                 491,190         491,190   

Other expense (2)

                 333,618         333,618   
                 

 

 

 

Income from continuing operations before income taxes

                  $ 454,423   
                 

 

 

 

 

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(1) Segment operating expenses and segment selling, general, administrative and development expense exclude stock-based compensation expense of $1.0 million and $42.5 million, respectively.
(2) Other expense primarily includes interest expense.

16.    Subsequent Events

Airtel Acquisition—On November 24, 2014, certain of the Company’s subsidiaries entered into a definitive agreement with certain of Bharti Airtel Limited’s subsidiaries (“Airtel”) for the sale of over 4,800 of Airtel’s communications sites in Nigeria. On July 1, 2015, the Company acquired 4,699 communications sites from Airtel for a purchase price of approximately $1.087 billion, including value added tax, of which $735.7 million was paid in July 2015, with the remainder to be paid prior to January 15, 2016. The purchase price is subject to post-closing adjustments.

The following table summarizes the preliminary allocation of the purchase price for the Airtel acquisition based upon the estimated fair value at the date of acquisition (in thousands):

 

     Airtel  

Non-current assets

   $ 37,994   

Property and equipment

     569,929   

Intangible assets (1):

  

Customer-related intangible assets

     145,731   

Network location intangible assets

     258,708   

Other non-current liabilities

     (8,056
  

 

 

 

Net assets acquired

     1,004,306   

Goodwill (2)

     82,731   
  

 

 

 

Fair value of net assets acquired

     1,087,037   

Debt assumed

     —     
  

 

 

 

Purchase Price

   $ 1,087,037   
  

 

 

 

 

(1) Customer-related intangible assets and network location intangible assets will be amortized on a straight-line basis over a period of up to 20 years.
(2) The Company expects goodwill recorded in its international rental and management segment will not be deductible for tax purposes.

 

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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 I, Item 1A. of our Annual Report on Form 10-K for the year ended December 31, 2014 (the “2014 Form 10-K”). 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 assumptions 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 from these estimates and such differences could be material to the financial statements. 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 the 2014 Form 10-K, 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 one of the largest global real estate investment trusts and a leading independent owner, operator and developer of multitenant communications real estate. Our primary business is the leasing of space on multitenant communications sites to wireless service providers, radio and television broadcast companies, wireless data providers, government agencies and municipalities and tenants in a number of other industries. 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. We refer to this business as our rental and management operations, which accounted for approximately 98% of our total revenues for the six months ended June 30, 2015 and includes our domestic rental and management segment and our international rental and management segment. 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 operate as a real estate investment trust for U.S. federal income tax purposes (“REIT”).

On March 27, 2015, we significantly expanded our domestic portfolio by obtaining the exclusive right to lease, acquire or otherwise operate and manage 11,448 wireless communications sites from Verizon Communications Inc. (“Verizon”) in the United States (the “Verizon Transaction”). On July 1, 2015, we expanded our international footprint by acquiring 4,699 communications sites in Nigeria. Our communications real estate portfolio of 92,729 sites as of June 30, 2015, included 40,064 communications towers domestically, 52,211 communications towers internationally and 454 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.

 

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The following table details the number of communications sites, excluding managed sites, we owned or operated as of June 30, 2015:

 

Country

   Number of
Owned  Towers
     Number of
Operated  Towers (1)
     Number of Owned
DAS Sites
 

United States

     21,620         18,444         326   

International:

        

Brazil

     14,059         2,268         47   

Chile

     1,165                 5   

Colombia

     2,971         706         1   

Costa Rica

     464                   

Germany

     2,030                   

Ghana

     2,067                 12   

India

     13,883                 23   

Mexico

     8,522         199         40   

Peru

     579                   

South Africa

     1,918                   

Uganda

     1,380                   

 

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

We operate in three reportable segments: domestic rental and management, international rental and management and network development services. In evaluating operating performance in each business segment, management uses, among other factors, segment gross margin and segment operating profit (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. The primary factors affecting the revenue growth of our domestic and international rental and management segments are:

 

   

Recurring organic revenue 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;

 

   

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”).

Due to our diversified communications site portfolio, our tenant lease rates vary considerably depending upon numerous factors, including, but not limited to, amount and type of tenant equipment on the tower, ground space required by the tenant, remaining tower capacity and tower location. 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.

 

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The majority of our tenant leases with wireless carriers have an initial non-cancellable term of ten years, with multiple renewal terms. Accordingly, nearly all of the revenue generated by our rental and management operations during the six months ended June 30, 2015 was 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 June 30, 2015, we expect to generate approximately $29 billion of non-cancellable tenant lease revenue over future periods, absent the impact of straight-line lease accounting. This expected revenue includes the impact of the tenant leases we entered into or assumed in connection with the Verizon Transaction. 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. In addition, certain of our tenant leases provide for additional revenue to cover costs, such as ground rent or power and fuel costs.

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 six months ended June 30, 2015, loss of revenue from tenant lease cancellations or renegotiations represented approximately 2% 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:

 

   

Subscribers’ use of wireless data continues to grow rapidly given increasing smartphone and other advanced device penetration, the proliferation of bandwidth-intensive applications on these devices and the continuing evolution of the mobile ecosystem. We believe carriers will be compelled to deploy additional equipment on existing networks while also rolling out more advanced wireless networks to address coverage and capacity needs resulting from this increasing wireless data usage.

 

   

The deployment of advanced wireless technology across existing wireless networks will provide higher speed data services and further 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 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 various stages of network development to diversify our international exposure and position us to benefit from a number of different

 

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wireless technology deployments over the long term. In addition, we have focused on building relationships with large multinational carriers such as Bharti Airtel Limited, 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, Nigeria 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. A majority of consumers in these markets still utilize basic wireless services, predominantly on feature phones, and advanced device penetration remains low. 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. Consumers in these regions are increasingly adopting smartphones and other advanced devices, and as a result, the usage of bandwidth-intensive mobile applications is growing materially. 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 amongst their customer base. With higher smartphone and advanced device 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 52,000 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 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.

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.

For more information regarding these measures, see “Non-GAAP Financial Measures” under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2014 Form 10-K.

Results of Operations

Three and Six Months Ended June 30, 2015 and 2014 (in thousands, except percentages)

Revenue 

 

    Three Months Ended
June 30,
    Amount of
Increase
(Decrease)
    Percent
Increase
(Decrease)
    Six Months Ended
June 30,
    Amount of
Increase
(Decrease)
    Percent
Increase
(Decrease)
 
    2015     2014         2015     2014      

Rental and management

               

Domestic

  $ 802,841      $ 659,743      $ 143,098        22   $ 1,520,721      $ 1,295,522      $ 225,199        17

International

    351,394        346,018        5,376        2     695,694        670,359        25,335        4
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total rental and management

    1,154,235        1,005,761        148,474        15     2,216,415        1,965,881        250,534        13

Network development services

    20,140        25,696        (5,556     (22 )%      37,150        49,665        (12,515     (25 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

  $ 1,174,375      $ 1,031,457      $ 142,918        14   $ 2,253,565      $ 2,015,546      $ 238,019        12

 

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