UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2018
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 000-31293
EQUINIX, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 77-0487526 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
One Lagoon Drive, Redwood City, California 94065
(Address of principal executive offices, including ZIP code)
(650) 598-6000
(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) Yes ý No ¨ and (2) has been subject to such filing requirements for the past 90 days. Yes ý 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ý | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
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| | Emerging growth company | ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
The number of shares outstanding of the registrant's Common Stock as of November 1, 2018 was 80,390,499.
EQUINIX, INC.
INDEX
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Item 2. | | |
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Item 4. | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
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PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
EQUINIX, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
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| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| (Unaudited) |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 870,486 |
| | $ | 1,412,517 |
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Short-term investments | 15,415 |
| | 28,271 |
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Accounts receivable, net of allowance for doubtful accounts of $16,378 and $18,228 | 662,401 |
| | 576,313 |
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Other current assets | 258,685 |
| | 232,027 |
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Total current assets | 1,806,987 |
| | 2,249,128 |
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Long-term investments | — |
| | 9,243 |
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Property, plant and equipment, net | 10,682,826 |
| | 9,394,602 |
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Goodwill | 4,852,549 |
| | 4,411,762 |
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Intangible assets, net | 2,383,377 |
| | 2,384,972 |
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Other assets | 562,332 |
| | 241,750 |
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Total assets | $ | 20,288,071 |
| | $ | 18,691,457 |
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Liabilities and Stockholders’ Equity | | | |
Current liabilities: | | | |
Accounts payable and accrued expenses | $ | 739,117 |
| | $ | 719,257 |
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Accrued property, plant and equipment | 276,314 |
| | 220,367 |
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Current portion of capital lease and other financing obligations | 98,219 |
| | 78,705 |
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Current portion of mortgage and loans payable | 73,288 |
| | 64,491 |
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Current portion of senior notes | 150,557 |
| | — |
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Other current liabilities | 123,824 |
| | 159,914 |
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Total current liabilities | 1,461,319 |
| | 1,242,734 |
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Capital lease and other financing obligations, less current portion | 1,386,260 |
| | 1,620,256 |
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Mortgage and loans payable, less current portion | 1,327,477 |
| | 1,393,118 |
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Senior notes, less current portion | 8,318,782 |
| | 6,923,849 |
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Other liabilities | 634,060 |
| | 661,710 |
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Total liabilities | 13,127,898 |
| | 11,841,667 |
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Commitments and contingencies (Note 9) |
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Stockholders' equity: | | | |
Common stock, $0.001 par value per share: 300,000,000 shares authorized; 80,390,472 and 79,038,062 shares outstanding | 81 |
| | 79 |
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Additional paid-in capital | 10,592,960 |
| | 10,121,323 |
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Treasury stock, at cost; 397,120 and 402,342 shares | (145,216 | ) | | (146,320 | ) |
Accumulated dividends | (3,145,430 | ) | | (2,592,792 | ) |
Accumulated other comprehensive loss | (922,148 | ) | | (785,189 | ) |
Retained earnings | 779,926 |
| | 252,689 |
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Total stockholders' equity | 7,160,173 |
| | 6,849,790 |
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Total liabilities and stockholders' equity | $ | 20,288,071 |
| | $ | 18,691,457 |
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See accompanying notes to condensed consolidated financial statements.
EQUINIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Unaudited) |
Revenues | $ | 1,283,751 |
| | $ | 1,152,261 |
| | $ | 3,761,571 |
| | $ | 3,168,207 |
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Costs and operating expenses: | | | | | | | |
Cost of revenues | 660,309 |
| | 582,360 |
| | 1,934,540 |
| | 1,573,524 |
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Sales and marketing | 157,920 |
| | 157,619 |
| | 471,898 |
| | 428,112 |
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General and administrative | 206,902 |
| | 185,336 |
| | 620,548 |
| | 558,090 |
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Acquisition costs | (1,120 | ) | | 2,083 |
| | 33,932 |
| | 31,510 |
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Gain on asset sales | (6,013 | ) | | — |
| | (6,013 | ) | | — |
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Total costs and operating expenses | 1,017,998 |
| | 927,398 |
| | 3,054,905 |
| | 2,591,236 |
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Income from operations | 265,753 |
| | 224,863 |
| | 706,666 |
| | 576,971 |
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Interest income | 2,912 |
| | 2,291 |
| | 11,480 |
| | 9,820 |
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Interest expense | (130,566 | ) | | (121,828 | ) | | (391,516 | ) | | (352,554 | ) |
Other income (expense) | 3,744 |
| | (1,076 | ) | | 9,546 |
| | 545 |
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Gain (loss) on debt extinguishment | 1,492 |
| | (22,156 | ) | | (39,214 | ) | | (42,103 | ) |
Income before income taxes | 143,335 |
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| 82,094 |
| | 296,962 |
| | 192,679 |
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Income tax expense | (18,510 | ) | | (2,194 | ) | | (41,625 | ) | | (24,912 | ) |
Net income | $ | 124,825 |
| | $ | 79,900 |
| | $ | 255,337 |
| | $ | 167,767 |
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Earnings per share ("EPS"): | | | | | | | |
Basic EPS | $ | 1.56 |
| | $ | 1.02 |
| | $ | 3.21 |
| | $ | 2.20 |
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Weighted-average shares for basic EPS | 79,872 |
| | 78,055 |
| | 79,533 |
| | 76,283 |
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Diluted EPS | $ | 1.55 |
| | $ | 1.02 |
| | $ | 3.19 |
| | $ | 2.18 |
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Weighted-average shares for diluted EPS | 80,283 |
| | 78,719 |
| | 79,956 |
| | 76,948 |
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Cash dividends declared per common share | $ | 2.28 |
| | $ | 2.00 |
| | $ | 6.84 |
| | $ | 6.00 |
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See accompanying notes to condensed consolidated financial statements.
EQUINIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (Unaudited) |
Net income | $ | 124,825 |
| | $ | 79,900 |
| | $ | 255,337 |
| | $ | 167,767 |
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Other comprehensive income (loss), net of tax: | | | | | | | |
Foreign currency translation adjustment ("CTA") gain (loss), net of tax effect of $(942), $0, $5,043 and $0 | (77,566 | ) | | 100,909 |
| | (352,948 | ) | | 408,830 |
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Net investment hedge CTA gain (loss), net of tax effect of $0, $0, $1,637 and $0 | 27,214 |
| | (60,723 | ) | | 180,694 |
| | (191,121 | ) |
Unrealized gain (loss) on available-for-sale securities, net of tax effect of $0, $(108), $0 and $(178) | — |
| | 245 |
| | — |
| | (85 | ) |
Unrealized gain (loss) on cash flow hedges, net of tax effects of $(2,061), $4,379, $(12,459) and $17,670 | 6,184 |
| | (13,070 | ) | | 37,384 |
| | (52,468 | ) |
Net actuarial gain on defined benefit plans, net of tax effects of $(4), $(4), $(14) and $(14) | 14 |
| | 13 |
| | 35 |
| | 39 |
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Total other comprehensive income (loss), net of tax | (44,154 | ) | | 27,374 |
| | (134,835 | ) | | 165,195 |
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Comprehensive income, net of tax | $ | 80,671 |
| | $ | 107,274 |
| | $ | 120,502 |
| | $ | 332,962 |
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See accompanying notes to condensed consolidated financial statements.
EQUINIX, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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| Nine Months Ended September 30, |
| 2018 | | 2017 |
| (Unaudited) |
Cash flows from operating activities: | | | |
Net income | $ | 255,337 |
| | $ | 167,767 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation | 767,182 |
| | 622,135 |
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Stock-based compensation | 139,849 |
| | 129,602 |
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Amortization of intangible assets | 153,443 |
| | 128,068 |
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Amortization of debt issuance costs and debt discounts and premiums | 10,609 |
| | 20,100 |
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Provision for allowance for doubtful accounts | 4,886 |
| | 6,889 |
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Gain on asset sales | (6,013 | ) | | — |
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Loss on debt extinguishment | 39,214 |
| | 42,103 |
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Other items | 13,040 |
| | 3,437 |
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Changes in operating assets and liabilities: | | | |
Accounts receivable | (85,126 | ) | | (202,430 | ) |
Income taxes, net | (32,876 | ) | | (53,608 | ) |
Other assets | (22,409 | ) | | 29,046 |
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Accounts payable and accrued expenses | 4,782 |
| | 44,952 |
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Other liabilities | 14,879 |
| | 6,293 |
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Net cash provided by operating activities | 1,256,797 |
| | 944,354 |
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Cash flows from investing activities: | | | |
Purchases of investments | (55,181 | ) | | (57,926 | ) |
Sales of investments | 74,376 |
| | 32,867 |
|
Business acquisitions, net of cash and restricted cash acquired | (829,185 | ) | | (3,628,526 | ) |
Purchases of real estate | (136,612 | ) | | (64,964 | ) |
Purchases of other property, plant and equipment | (1,415,509 | ) | | (946,048 | ) |
Proceeds from sale of assets, net of cash transferred | 12,154 |
| | 47,767 |
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Net cash used in investing activities | (2,349,957 | ) | | (4,616,830 | ) |
Cash flows from financing activities: | | | |
Proceeds from employee equity awards | 50,103 |
| | 41,625 |
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Payment of dividends and special distribution | (554,742 | ) | | (463,914 | ) |
Proceeds from public offering of common stock, net of issuance costs | 273,873 |
| | 2,126,341 |
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Proceeds from senior notes | 929,850 |
| | 2,449,700 |
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Proceeds from loans payable | 424,650 |
| | 1,059,800 |
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Repayments of capital lease and other financing obligations | (89,655 | ) | | (60,252 | ) |
Repayments of mortgage and loans payable | (429,498 | ) | | (63,520 | ) |
Repayment of senior notes | — |
| | (500,000 | ) |
Debt extinguishment costs | (20,556 | ) | | (23,020 | ) |
Debt issuance costs | (12,218 | ) | | (56,886 | ) |
Other financing activities | — |
| | (900 | ) |
Net cash provided by financing activities | 571,807 |
| | 4,508,974 |
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Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | (30,944 | ) | | 26,450 |
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Net increase (decrease) in cash, cash equivalents and restricted cash | (552,297 | ) | | 862,948 |
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Cash, cash equivalents and restricted cash at beginning of period | 1,450,701 |
| | 773,247 |
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Cash, cash equivalents and restricted cash at end of period | $ | 898,404 |
| | $ | 1,636,195 |
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Cash and cash equivalents | $ | 870,486 |
| | $ | 1,599,988 |
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Current portion of restricted cash included in other current assets | 17,287 |
| | 25,079 |
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Non-current portion of restricted cash included in other assets | 10,631 |
| | 11,128 |
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Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statement of cash flows | $ | 898,404 |
| | $ | 1,636,195 |
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See accompanying notes to condensed consolidated financial statements.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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1. | Basis of Presentation and Significant Accounting Policies |
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by Equinix, Inc. ("Equinix" or the "Company") and reflect all adjustments, consisting only of normal recurring adjustments, which in the opinion of management are necessary to fairly state the financial position and the results of operations for the interim periods presented. The condensed consolidated balance sheet data as of December 31, 2017 has been derived from audited consolidated financial statements as of that date. The condensed consolidated financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission ("SEC"), but omit certain information and footnote disclosure necessary to present the statements in accordance with generally accepted accounting principles in the United States of America ("U.S. GAAP"). For further information, refer to the Consolidated Financial Statements and Notes thereto included in Equinix’s Form 10-K as filed with the SEC on February 26, 2018. Results for the interim periods are not necessarily indicative of results for the entire fiscal year.
Consolidation
The accompanying unaudited condensed consolidated financial statements include the accounts of Equinix and its subsidiaries, including the acquisitions of Metronode from April 18, 2018, Infomart Dallas from April 2, 2018, Itconic from October 9, 2017, the Zenium data center from October 6, 2017, the Verizon data center business from May 1, 2017, and the IO UK data center operating business from February 3, 2017. All intercompany accounts and transactions have been eliminated in consolidation.
Income Taxes
The Company elected to be taxed as a real estate investment trust for federal income tax purposes ("REIT") beginning with its 2015 taxable year. As a result, the Company may deduct the distributions made to its stockholders from taxable income generated by the Company and its qualified REIT subsidiaries ("QRSs"). The Company’s dividends paid deduction generally eliminates the U.S. taxable income of the Company and its QRSs, resulting in no U.S. income tax due. However, the Company's taxable REIT subsidiaries ("TRSs") will continue to be subject to income taxes on any taxable income generated by them. In addition, the foreign operations of the Company will continue to be subject to local income taxes regardless of whether the foreign operations are operated as QRSs or TRSs.
The Company provides for income taxes during interim periods based on the estimated effective tax rate for the year. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the Company, tax law changes and future business acquisitions.
The Company's effective tax rates were 14.0% and 12.9% for the nine months ended September 30, 2018 and 2017, respectively. The increase in the effective tax rate for the nine months ended September 30, 2018 as compared to the same period in 2017 is primarily due to increased profits in higher tax rate jurisdictions, which is partially offset by a release of valuation allowance as a result of a legal entity reorganization in the Company’s Americas region during the nine months ended September 30, 2018.
The Company’s accounting for deferred taxes involves weighing positive and negative evidence relating to the realizability of deferred tax assets in each tax jurisdiction. A release of valuation allowance results in the recognition of certain deferred tax assets and a decrease to income tax expense for the period in which the event occurs. The Company recognized a tax benefit of approximately $33.0 million in the nine months ended September 30, 2018 as a result of concluding that the valuation allowances were no longer required in certain foreign jurisdictions after considering such evidence as the nature, frequency, severity of current and cumulative financial reporting losses, and sources of future taxable incomes and tax planning strategies.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”), which was signed into law on December 22, 2017, amended the existing U.S. federal income tax laws. Among other things, the TCJA reduced the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, limited the tax deductibility of interest expense, accelerated expensing of certain business assets and transitioned the U.S. international taxation from a worldwide tax system to a territorial tax system by imposing a one-time mandatory repatriation of undistributed foreign earnings. The Company recognized an income tax expense of $6.5 million during the fourth quarter of 2017, which was a provisional amount related to the re-measurement of the net deferred tax assets in the U.S. TRS as a result of the reduced corporate income tax rate. At the end of the current quarter, the Company is still in the process of finalizing its U.S. income tax return for the U.S. TRS entities. The Company will conclude whether any adjustments are required to its net deferred tax asset balance in the U.S. when it files its 2017 U.S. federal tax return in the fourth quarter of 2018. Any adjustments to these provisional amounts will be reported as a component of tax expense (benefit) in the reporting period when such adjustments are determined.
Recent Accounting Pronouncements
Accounting Standards Not Yet Adopted
In August 2017, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU was issued to improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and to simplify the application of the hedge accounting guidance in current GAAP. This ASU permits hedge accounting for risk components involving nonfinancial risk and interest rate risk, requires an entity to present the earnings effect of the hedging instrument in the same income statement line item in which the hedged item is reported, no longer requires separate measurement and reporting of hedge ineffectiveness, eases the requirement for hedge effectiveness assessment, and requires a tabular disclosure related to the effect on the income statement of fair value and cash flow hedges. This ASU is effective for annual or any interim reporting periods beginning after December 15, 2018 with early adoption permitted. The Company will adopt the standard on January 1, 2019 and is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements, including its accounting policies, processes and systems.
In June 2016, FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. These disclosures include qualitative and quantitative requirements that provide additional information about the amounts recorded in the financial statements. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company expects this ASU to impact its accounting for allowances for doubtful accounts and is currently evaluating the extent of the impact that the adoption of this standard will have on its consolidated financial statements, including its accounting policies, processes and systems.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02") and issued subsequent amendments to the initial guidance. Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset ("ROU"), which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. The standard allows entities to adopt with one of two methods: the modified retrospective transition method or the alternative transition method. The Company currently anticipates adopting the standard using the alternative transition method, under which the Company will recognize the cumulative effects of initially applying the standard as an adjustment to the opening balance of retained earnings in the period of adoption. The new guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. The Company will adopt the standard on January 1, 2019.
In adopting the new guidance, the Company expects to elect the package of practical expedients which allows the Company not to reassess (1) whether any expired or existing contracts contain leases under the new definition of a lease; (2) the lease classification for any expired or existing leases; and (3) whether previously capitalized initial direct costs would qualify for capitalization under ASC 842. The Company also expects to elect the land easements practical expedient which permits the
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Company not to assess at transition whether any expired or existing land easements are or contain leases if they were not previously accounted for as leases under Topic 840.
The Company expects that this standard will have a material effect on its financial statements including (1) the recognition of new ROU assets and lease liabilities on its balance sheet for operating leases; (2) the de-recognition of existing debt obligations and the corresponding financed assets in build-to-suit lease arrangements for which construction was completed before the effective date and the recognition of new ROU assets and liabilities on completion of construction, with a corresponding net adjustment to retained earnings on the effective date; and (3) significant new disclosures about its leasing activities. The Company is currently evaluating the extent of the impact that the adoption of this standard will have on its consolidated financial statements, including its accounting policies, processes and systems.
Accounting Standards Adopted
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers ("ASU 2014-09") and issued subsequent amendments to the initial guidance, collectively referred as "Topic 606." Topic 606 replaces most existing revenue recognition guidance in U.S. GAAP. The core principle of Topic 606 is that an entity should recognize revenue for the transfer of control of the goods or services equal to the amount that it expects to be entitled to receive for those goods or services. Topic 606 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments.
On January 1, 2018, the Company adopted Topic 606 using the modified retrospective approach applied to those contracts, which were not completed as of January 1, 2018, and recognized a net increase to the opening retained earnings of $269.8 million, net of tax impacts. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while the comparative information has not been restated and continues to be reported under accounting standards in effect for those periods.
In adopting the new guidance, the Company elected to apply the practical expedient which allows the Company, when using the modified retrospective method of adoption, to not retrospectively restate contracts with multiple modifications on a modification by modification basis. Instead, the Company will reflect the aggregate amount of all modifications that occur before the beginning of the earliest period presented using the new standard. In addition, where appropriate, the Company elected to apply the practical expedient to account for the new standard under the portfolio approach as the Company reasonably expects that the effects of applying the guidance under the portfolio approach will not differ materially from applying the guidance to individual contracts.
The most significant impacts to the Company from Topic 606 relate to installation revenue and costs to obtain contracts. Under the new standard, the Company now recognizes installation revenue over the contract period rather than over the estimated installation life as under the prior revenue standard. Under the new standard, the Company is also required to capitalize and amortize certain costs to obtain contracts, rather than expense them immediately as under the previous standard.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The cumulative effect of the changes made to the Company's consolidated January 1, 2018 balance sheet from the adoption of Topic 606 was as follows (in thousands):
|
| | | | | | | | | | | | |
Balance Sheet | | Balance at December 31, 2017 | | Adjustments due to adoption of Topic 606 | | Balance at January 1, 2018 |
Assets | | | | | | |
Other current assets | | $ | 232,027 |
| | $ | 9,002 |
| | $ | 241,029 |
|
Other assets (1) | | 241,750 |
| | 179,578 |
| | 421,328 |
|
Liabilities | | | | | |
|
Other current liabilities | | 159,914 |
| | (16,215 | ) | | 143,699 |
|
Other liabilities (2) | | 661,710 |
| | (63,051 | ) | | 598,659 |
|
Equity | | | | | |
|
|
Accumulated other comprehensive loss (3) | | (785,189 | ) | | (1,930 | ) | | (787,119 | ) |
Retained earnings | | $ | 252,689 |
| | $ | 269,776 |
| | $ | 522,465 |
|
| |
(1) | Includes cumulative adjustments related to cost to obtain contracts, non-current contract assets and deferred tax assets. |
| |
(2) | Includes cumulative adjustments related to non-current deferred revenue and deferred tax liabilities. |
| |
(3) | Includes cumulative adjustments related to CTA. |
The following tables summarize the effects of adopting Topic 606 on the unaudited condensed consolidated financial statement line items (in thousands, except per share data):
|
| | | | | | | | | | | | |
Balance Sheets | | September 30, 2018 | | Adjustments | | Balances without adoption of Topic 606 |
Other current assets | | $ | 258,685 |
| | $ | (9,358 | ) | | $ | 249,327 |
|
Total current assets | | 1,806,987 |
| | (9,358 | ) | | 1,797,629 |
|
Other assets | | 562,332 |
| | (190,276 | ) | | 372,056 |
|
Total assets | | $ | 20,288,071 |
| | $ | (199,634 | ) | | $ | 20,088,437 |
|
Accounts payable and accrued expenses | | $ | 739,117 |
| | $ | (3,110 | ) | | $ | 736,007 |
|
Other current liabilities | | 123,824 |
| | 18,636 |
| | 142,460 |
|
Total current liabilities | | 1,461,319 |
| | 15,526 |
| | 1,476,845 |
|
Other liabilities | | 634,060 |
| | 67,996 |
| | 702,056 |
|
Total liabilities | | 13,127,898 |
| | 83,522 |
| | 13,211,420 |
|
Accumulated other comprehensive loss | | (922,148 | ) | | 7,056 |
| | (915,092 | ) |
Retained earnings | | 779,926 |
| | (290,212 | ) | | 489,714 |
|
Total stockholders' equity | | 7,160,173 |
| | (283,156 | ) | | 6,877,017 |
|
Total liabilities and stockholders' equity | | $ | 20,288,071 |
| | $ | (199,634 | ) | | $ | 20,088,437 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
Statements of Operations | | Three Months Ended September 30, 2018 | | Adjustments | | Balance without adoption of Topic 606 | | Nine Months Ended September 30, 2018 | | Adjustments | | Balance without adoption of Topic 606 |
Revenues | | $ | 1,283,751 |
| | $ | (3,186 | ) | | $ | 1,280,565 |
| | $ | 3,761,571 |
| | $ | (9,543 | ) | | $ | 3,752,028 |
|
Sales and marketing | | 157,920 |
| | 5,202 |
| | 163,122 |
| | 471,898 |
| | 12,880 |
| | 484,778 |
|
Total costs and operating expenses | | 1,017,998 |
| | 5,202 |
| | 1,023,200 |
| | 3,054,905 |
| | 12,880 |
| | 3,067,785 |
|
Income from operations | | 265,753 |
| | (8,388 | ) | | 257,365 |
| | 706,666 |
| | (22,423 | ) | | 684,243 |
|
Income before income taxes | | 143,335 |
| | (8,388 | ) | | 134,947 |
| | 296,962 |
| | (22,423 | ) | | 274,539 |
|
Income tax expense | | (18,510 | ) | | (533 | ) | | (19,043 | ) | | (41,625 | ) | | 1,987 |
| | (39,638 | ) |
Net income | | $ | 124,825 |
| | $ | (8,921 | ) | | $ | 115,904 |
| | $ | 255,337 |
| | $ | (20,436 | ) | | $ | 234,901 |
|
Basic EPS | | $ | 1.56 |
| | $ | (0.11 | ) | | $ | 1.45 |
| | $ | 3.21 |
| | $ | (0.26 | ) | | $ | 2.95 |
|
Diluted EPS | | $ | 1.55 |
| | $ | (0.11 | ) | | $ | 1.44 |
| | $ | 3.19 |
| | $ | (0.25 | ) | | $ | 2.94 |
|
|
| | | | | | | | | | | | |
Statements of Cash Flow | | Nine Months Ended September 30, 2018 | | Adjustments | | Balance without adoption of Topic 606 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 255,337 |
| | $ | (20,436 | ) | | $ | 234,901 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Changes in operating assets and liabilities: | | | | | | |
Income taxes, net | | (32,876 | ) | | 27 |
| | (32,849 | ) |
Other assets | | (22,409 | ) | | 10,565 |
| | (11,844 | ) |
Other liabilities | | 14,879 |
| | 9,844 |
| | 24,723 |
|
Net cash provided by operating activities | | $ | 1,256,797 |
| | $ | — |
| | $ | 1,256,797 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The Company also adopted the following standards during 2018, none of which had a material impact to the Company's condensed consolidated financial statements or financial statement disclosures:
|
| | | | |
Standards | | Description | | Effective Date and Adoption Consideration |
ASU 2017-09 Compensation–Stock Compensation (Topic 718) | | This ASU was issued primarily to provide clarity and reduce both diversity in practice and cost and complexity when applying the guidance in Topic 718 to a change to the terms or conditions of a share-based payment award. This ASU affects any entity that changes the terms or conditions of a share-based payment award. This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. | | January 1, 2018 |
| | | | |
ASU 2017-07 Compensation–Retirement Benefits (Topic 715) | | This ASU was issued primarily to improve the presentation of net periodic pension cost and net periodic post-retirement benefit cost. This ASU requires that an employer reports the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. It also requires the other components of net periodic pension cost and net periodic post-retirement benefit cost to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, only the service cost component is eligible for capitalization, when applicable. | | January 1, 2018 |
| | | | |
ASU 2017-05 Other Income—Gains and Losses from the Derecognition of Non-Financial Assets (Subtopic 610-20) | | This ASU is to clarify the scope of the non-financial asset guidance in Subtopic 610-20 and to add guidance for partial sales of non-financial assets. This ASU defines the term in substance non-financial asset and clarifies that non-financial assets within the scope of Subtopic 610-20 may include non-financial assets transferred within a legal entity to a counterparty. The ASU also provides guidance on the accounting for what often are referred to as partial sales of non-financial assets within the scope of Subtopic 610-20 and contributions of non-financial assets to a joint venture or other non-controlled investee. | | January 1, 2018 |
| | | | |
ASU 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. | | This ASU is to simplify the subsequent measurement of goodwill. The ASU eliminates step 2 from the goodwill impairment test and the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. | | The Company elected to early adopt this ASU on a prospective basis, effective January 1, 2018.
|
| | | | |
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business | | This ASU provides new guidance to assist entities with evaluating when a set of transferred assets and activities is a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. | | The Company adopted this standard on a prospective basis, effective January 1, 2018. The adoption of this standard may impact the accounting of future transactions. |
| | | | |
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory | | This ASU requires the recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. | | January 1, 2018 |
| | | | |
ASU 2016-01 Financial Instruments- Overall (Subtopic 825-10)
| | This ASU requires all equity investments to be measured at fair value with changes in the fair value recognized through net income other than those accounted for under equity method of accounting or those that result in consolidation of the investees. The ASU also requires that an entity present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. | | The Company adopted this standard using the modified retrospective method, effective January 1, 2018 and recorded a net increase to retained earnings of $2.1 million. |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Revenue Recognition
Equinix derives more than 90% of its revenues from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing of cabinet space and power; (2) interconnection offerings, such as cross connects and Equinix Exchange ports; (3) managed infrastructure solutions and (4) other revenues consisting of rental income from tenants or subtenants. The remainder of the Company’s revenues are from non-recurring revenue streams, such as installation revenues, professional services, contract settlements and equipment sales. Revenues are recognized when control of these products and services is transferred to its customers, in an amount that reflects the consideration it expects to be entitled to in exchange for the products and services. Revenues by service lines and geographic areas are included in segment information (see Note 11).
Revenues from recurring revenue streams are generally billed monthly and recognized ratably over the term of the contract, generally one to three years for IBX data center colocation customers. Non-recurring installation fees, although generally paid upfront upon installation, are deferred and recognized ratably over the contract term. Professional service fees and equipment sales are recognized in the period when the services were provided. For the contracts with customers that contain multiple performance obligations, the Company accounts for individual performance obligations separately if they are distinct or as a series of distinct obligations if the individual performance obligations meet the series criteria. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require significant judgment. The transaction price is allocated to the separate performance obligation on a relative standalone selling price basis. The standalone selling price is determined based on overall pricing objectives, taking into consideration market conditions, geographic locations and other factors. Other judgments include determining if any variable consideration should be included in the total contract value of the arrangement such as price increases.
Revenue is generally recognized on a gross basis in accordance with the accounting standard related to reporting revenue on a gross basis as a principal versus on a net basis as an agent, as the Company is primarily responsible for fulfilling the contract, bears inventory risk and has discretion in establishing the price when selling to the customer. To the extent the Company does not meet the criteria for recognizing revenue on a gross basis, the Company records the revenue on a net basis. Revenue from contract settlements, when a customer wishes to terminate their contract early, is generally treated as a contract modification and recognized ratably over the remaining term of the contract, if any.
The Company guarantees certain service levels, such as uptime, as outlined in individual customer contracts. If these service levels are not achieved due to any failure of the physical infrastructure or offerings, or in the event of certain instances of damage to customer infrastructure within the Company’s IBX data centers, the Company would reduce revenue for any credits or cash payments given to the customer. Historically, these credits and cash payments have generally not been significant.
As a result of certain customer agreements being priced in currencies different from the functional currencies of the parties involved, under applicable accounting rules, the Company is deemed to have foreign currency forward contracts embedded in these contracts. The Company assessed these embedded contracts and concluded them to be foreign currency embedded derivatives (see Note 5). These instruments are separated from their host contracts and held on the Company’s condensed consolidated balance sheet at their fair value. The majority of these foreign currency embedded derivatives arise in certain of the Company’s subsidiaries where the local currency is the subsidiary’s functional currency and the customer contract is denominated in the U.S. dollar. Changes in their fair values are recognized within revenues in the Company’s condensed consolidated statements of operations.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Contract Balances
The timing of revenue recognition, billings and cash collections result in accounts receivables, contract assets and deferred revenues. A receivable is recorded at the invoice amount, net of an allowance for doubtful account and is recognized in the period when the Company has transferred products or provided services to its customers and when its right to consideration is unconditional. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 45 days. In instances where the timing of revenue recognition differs from the timing of invoicing, the Company has determined that the Company's contracts generally do not include a significant financing component. The Company assesses collectability based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers although in certain cases the Company obtains a security interest in a customer’s equipment placed in its IBX data centers or obtains a deposit. The Company also maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments for which the Company had expected to collect the revenues. If the financial condition of the Company’s customers were to deteriorate or if they became insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debts, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Company’s reserves. Any amounts that were previously recognized as revenue and subsequently determined to be uncollectable are charged to bad debt expense included in sales and marketing expense in the condensed consolidated statements of operations. A specific bad debt reserve of up to the full amount of a particular invoice value is provided for certain problematic customer balances. An additional reserve is established for all other accounts based on the age of the invoices and an analysis of historical credits issued. Delinquent account balances are written off after management has determined that the likelihood of collection is not probable.
A contract asset exists when the Company has transferred products or provided services to its customers, but customer payment is contingent upon satisfaction of additional performance obligation. Certain contracts include terms related to price arrangements such as price increases and free months. The Company recognizes revenues ratably over the contract term, which could potentially give rise to contract assets during certain periods of the contract term. Contract assets are recorded in other current assets and other assets in the condensed consolidated balance sheet.
Deferred revenue (a contract liability) is recognized when the Company has an unconditional right to a payment before it transfers goods or services to customers. Deferred revenue is included in other current liabilities and other liabilities, respectively, in the condensed consolidated balance sheet.
The following table summarizes the opening and closing balances of the Company's accounts receivable; contract asset, current; contract asset, non-current; deferred revenue, current; and deferred revenue, non-current (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Accounts receivable | | Contract asset, current | | Contract asset, non-current | | Deferred revenue, current | | Deferred revenue, non-current |
Beginning balances as of January 1, 2018 (1) | $ | 576,313 |
| | $ | 9,002 |
| | $ | 16,186 |
| | $ | 71,085 |
| | $ | 53,101 |
|
Closing balances as of September 30, 2018 | 662,401 |
| | 9,543 |
| | 15,950 |
| | 73,688 |
| | 48,051 |
|
Increase/(decrease) | $ | 86,088 |
| | $ | 541 |
| | $ | (236 | ) | | $ | 2,603 |
| | $ | (5,050 | ) |
| |
(1) | Includes cumulative adjustments made to these accounts on January 1, 2018 from the adoption of Topic 606. |
The difference between the opening and closing balances of the Company's accounts receivable, contract assets and deferred revenues primarily results from the timing difference between the satisfaction of the Company's performance obligation and the customer's payment, as well as business combinations closed during the nine months ended September 30, 2018. The amounts of revenue recognized during the nine months ended September 30, 2018 from the opening deferred revenue balance was $70.1 million. For the three and nine months ended September 30, 2018, no impairment loss related to contract balances was recognized in the condensed consolidated statement of operations.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Contract Costs
Direct and indirect costs solely related to obtaining revenue contracts are capitalized as costs of obtaining a contract, when they are incremental and if they are expected to be recovered. Such costs consist primarily of commission fees and sales bonuses, as well as indirect related payroll costs. Contract costs are amortized over the estimated period of benefit on a straight-line basis. The Company elected to apply the practical expedient which allows the Company to expense contract costs when incurred, if the amortization period is one year or less.
The ending balance of net capitalized contract costs as of September 30, 2018 was $181.1 million, which was included in other assets in the condensed consolidated balance sheet. For the three and nine months ended September 30, 2018, $18.5 million and $53.8 million of contract costs were amortized, which were included in sales and marketing expense in the condensed consolidated statement of operations.
Remaining performance obligations
As of September 30, 2018, approximately $5.7 billion of total revenues and deferred installation revenues are expected to be recognized in future periods, the majority of which will be recognized over the next 24 months. While initial contract terms vary in length, substantially all contracts thereafter automatically renew in one-year increments. Included in the remaining performance obligations is either 1) remaining performance obligations under the initial contract terms or 2) remaining performance obligations related to contracts in the renewal period once the initial terms have lapsed. The remaining performance obligations do not include variable consideration related to unsatisfied performance obligations such as the usage of metered power or any contracts that could be terminated without any significant penalties such as the majority of interconnection revenues. The remaining performance obligations include some leasing activities that are insignificant to the Company’s total operations.
The Company elected to apply the practical expedient that allows the Company not to disclose the remaining performance obligations for variable consideration that is allocated to entirely unsatisfied performance obligations or to a wholly unsatisfied distinct good or service that forms part of a single obligation.
The following table sets forth the computation of basic and diluted earnings per share ("EPS") for the periods presented (in thousands, except per share amounts):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 124,825 |
| | $ | 79,900 |
| | $ | 255,337 |
| | $ | 167,767 |
|
Weighted-average shares used to calculate basic EPS | 79,872 |
| | 78,055 |
| | 79,533 |
| | 76,283 |
|
Effect of dilutive securities: | | | | | | | |
Employee equity awards | 411 |
| | 664 |
| | 423 |
| | 665 |
|
Weighted-average shares used to calculate diluted EPS | 80,283 |
| | 78,719 |
| | 79,956 |
| | 76,948 |
|
| | | | | | | |
Basic EPS | $ | 1.56 |
| | $ | 1.02 |
| | $ | 3.21 |
| | $ | 2.20 |
|
Diluted EPS | $ | 1.55 |
| | $ | 1.02 |
| | $ | 3.19 |
| | $ | 2.18 |
|
The Company has excluded common stock related to employee equity awards in the diluted EPS calculation above of 290,000 shares and 73,000 shares for the three months ended September 30, 2018 and 2017, respectively, and 248,000 shares and 88,000 shares for the nine months ended September 30, 2018 and 2017, respectively, because their effect would be anti-dilutive.
2018 Acquisitions
On April 18, 2018, the Company acquired all of the equity interests in Metronode from the Ontario Teachers' Pension Plan Board for a cash purchase price of A$1.033 billion or approximately $804.1 million at the exchange rate in effect on April 18,
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
2018 (the "Metronode Acquisition"). Metronode operated 10 data centers in six metro areas in Australia. The acquisition supports the Company’s ongoing global expansion to meet customer demand in the Asia-Pacific region.
On April 2, 2018, the Company completed the acquisition of Infomart Dallas, including its operations and tenants, from ASB Real Estate Investments (the "Infomart Dallas Acquisition"), for total consideration of approximately $804.0 million. The consideration was comprised of approximately $45.8 million in cash, subject to customary adjustments, and $758.2 million aggregate fair value of 5.000% senior unsecured notes (see Note 8). Prior to the acquisition, a portion of the building was leased to the Company and was being used as its Dallas 1, 2, 3 and 6 data centers, which were all accounted for as build-to-suit leases. Upon acquisition, the Company effectively terminated the leases and settled the related financing obligations and other liabilities related to the leases for approximately $170.3 million and $1.9 million, respectively, and recognized a loss on debt extinguishment of $19.5 million. The acquisition of this highly interconnected facility and tenants adds to the Company’s global platform and secures the ability to further expand in the Americas market in the future.
Both acquisitions constitute a business under the accounting standard for business combinations and, therefore, were accounted for as business combinations using the acquisition method of accounting. Under the acquisition method of accounting, the total purchase price is allocated to the assets acquired and liabilities assumed measured at fair value on the date of acquisition.
A summary of the allocation of total purchase consideration is presented as follows (in thousands):
|
| | | | | | | |
| Metronode | | Infomart Dallas |
Cash and cash equivalents | $ | 3,206 |
| | $ | 17,432 |
|
Accounts receivable | 8,318 |
| | 637 |
|
Other current assets | 9,894 |
| | 395 |
|
Property, plant, and equipment | 297,092 |
| | 355,217 |
|
Intangible assets | 128,229 |
| | 61,233 |
|
Goodwill | 373,585 |
| | 208,799 |
|
Deferred tax assets | 4,112 |
| | — |
|
Other assets (1) | 54,338 |
| | — |
|
Total assets acquired | 878,774 |
| | 643,713 |
|
Accounts payable and accrued liabilities | (17,104 | ) | | (5,056 | ) |
Other current liabilities | (2,038 | ) | | (2,141 | ) |
Other liabilities (1) | (55,581 | ) | | (4,724 | ) |
Net assets acquired | $ | 804,051 |
| | $ | 631,792 |
|
| |
(1) | In connection with the Metronode Acquisition, the Company recorded indemnification assets of $54.3 million, which represented the seller's obligation under the purchase agreement to reimburse pre-acquisition tax liabilities settled after the acquisition. |
The following table presents certain information on the acquired intangible assets (in thousands):
|
| | | | | | | | |
Intangible Assets | | Fair Value | | Estimated Useful Lives (Years) | | Weighted-average Estimated Useful Lives (Years) |
Customer relationships (Metronode) | | $ | 128,229 |
| | 20.0 | | 20.0 |
Customer relationships (Infomart Dallas) | | 31,195 |
| | 20.0 | | 20.0 |
In-place leases (Infomart Dallas) | | 19,959 |
| | 3.6 - 7.5 | | 6.8 |
Trade names (Infomart Dallas) | | 9,614 |
| | 20.0 | | 20.0 |
Favorable leases (Infomart Dallas) | | 465 |
| | 3.6 - 7.5 | | 7.0 |
The fair value of customer relationships was estimated by applying an income approach, by calculating the present value of estimated future operating cash flows generated from existing customers less costs to realize the revenue. The Company applied discount rates of 7.3% for Metronode and 8.0% for Infomart Dallas, which reflected the nature of the assets as they relate to the
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
risk and uncertainty of the estimated future operating cash flows. Other assumptions used to estimate the fair value of customer relationships included projected revenue growth, probability of renewal, customer attrition rates and operating margins. The fair value of Infomart Dallas' trade name was estimated using the relief from royalty approach. The Company applied a relief from royalty rate of 1.5% and a discount rate of 8.0%. The fair value of in-place leases was estimated by projecting the avoided costs, such as the cost of originating the acquired in-place leases, during a typical lease up period. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
The fair value of property, plant and equipment was estimated by applying the cost approach, with the exception of land which was estimated by applying the market approach, for the Metronode Acquisition. For the Infomart Dallas Acquisition, the fair values of land, building and personal property were estimated by applying the market approach, residual income method and cost approach, respectively. The cost approach uses the replacement or reproduction cost as an indicator of fair value. The premise of the cost approach is that a market participant would pay no more for an asset than the amount for which the asset could be replaced or reproduced. The key assumptions of the cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age. The residual income method estimates the fair value of the Infomart Dallas building using an income approach less the fair values attributed to land, personal property, in-place leases and favorable and unfavorable leases.
As of September 30, 2018, the Company had not completed the detailed valuation analysis of Metronode or Infomart Dallas to derive the fair value of the following items including, but not limited to: property, plant and equipment, intangible assets and related tax impacts; therefore, the allocation of the purchase price to assets acquired and liabilities assumed is based on provisional estimates and is subject to continuing management analysis. During the quarter ended September 30, 2018, the Company updated the preliminary allocation of purchase price for Metronode and Infomart Dallas from the provisional amounts reported as of June 30, 2018. The adjustments made during the three months ended September 30, 2018 primarily resulted in a decrease in property, plant and equipment of $10.1 million and an increase in goodwill and intangible assets of $5.0 million and $4.8 million, respectively, for Metronode Acquisition. The adjustments for Infomart Dallas Acquisition primarily resulted in a decrease in property, plant and equipment of $6.8 million and an increase in goodwill of $5.2 million. The changes in fair value of acquired assets and liabilities assumed did not have a significant impact on the Company's results of operations for the three and nine months ended September 30, 2018.
Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed. Goodwill is attributable to the workforce of the acquired business and the projected revenue increase expected to arise from future customers after the Metronode and Infomart Dallas acquisitions. Goodwill from the acquisition of Metronode is not amortizable for local tax purposes and is attributable to the Company's Asia-Pacific region. Goodwill from the acquisition of Infomart Dallas is expected to be deductible for local tax purposes and is attributable to the Company's Americas region. Operating results of Metronode and Infomart Dallas have been reported in the Asia-Pacific and Americas regions, respectively.
The Company incurred acquisition costs of approximately $31.5 million for the nine months ended September 30, 2018 and insignificant acquisition costs for the three months ended September 30, 2018 for both acquisitions. For the three months ended September 30, 2018, the Company's results of operations include $28.1 million of revenues and insignificant net income from operations from the combined operations of Metronode and Infomart Dallas. For the nine months ended September 30, 2018, the Company's results of operations include $52.1 million of revenues and $2.7 million of net income from operations from the combined operations of Metronode and Infomart Dallas.
Certain Verizon Data Center Assets Acquisition
On May 1, 2017, the Company completed the acquisition of certain colocation business from Verizon consisting of 29 data center buildings located in the United States, Brazil and Colombia, for a cash purchase price of approximately $3.6 billion (the "Verizon Data Center Acquisition"). The addition of these facilities and customers adds to the Company's global platform, increases interconnections and assists with the Company's penetration of the enterprise and strategic markets, including government and energy.
The Company incurred acquisition costs of approximately $1.2 million and $27.6 million during the three and nine months ended September 30, 2017, respectively.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Purchase Price Allocation
The final purchase price allocation is as follows (in thousands):
|
| | | |
| Certain Verizon Data Center Assets |
Cash and cash equivalents | $ | 1,073 |
|
Accounts receivable | 2,019 |
|
Other current assets | 7,319 |
|
Property, plant, and equipment | 840,335 |
|
Intangible assets (1) | 1,693,900 |
|
Goodwill | 1,095,262 |
|
Total assets acquired | 3,639,908 |
|
Accounts payable and accrued liabilities | (1,725 | ) |
Other current liabilities | (2,020 | ) |
Capital lease and other financing obligations | (17,659 | ) |
Deferred tax liabilities | (18,129 | ) |
Other liabilities | (5,689 | ) |
Net assets acquired | $ | 3,594,686 |
|
| |
(1) | The nature of the intangible assets acquired is customer relationships with an estimated useful life of 15 years. Included in this amount is a customer relationship intangible asset for Verizon totaling $245.3 million. Pursuant to the acquisition agreement, the Company formalized agreements to provide pre-existing space and services to Verizon at the acquired data centers. |
The fair value of customer relationships was estimated by applying an income approach. The Company applied discount rates ranging from 7.7% to 12.2%, which reflected the nature of the assets as they relate to the risk and uncertainty of the estimated future operating cash flows. Other assumptions used to estimate the fair value of customer relationships include projected revenue growth, customer attrition rates, sales and marketing expenses and operating margins. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements.
The fair value of property, plant and equipment was estimated by applying the cost approach, with the exception of land which was estimated by applying the market approach. The cost approach is to use the replacement or reproduction cost as an indicator of fair value. The assumptions of the cost approach include replacement cost new, physical deterioration, functional and economic obsolescence, economic useful life, remaining useful life, age and effective age.
Goodwill is attributable to the workforce of the acquired business and the projected revenue increase expected to arise from future customers after the Verizon Data Center Acquisition. Goodwill is expected to be deductible for U.S. tax purposes and is attributable to the Company's Americas region. For the three months ended September 30, 2018 and 2017, the Company's results of operations included the Verizon Data Center Acquisition's revenues of $133.3 million and $137.0 million, respectively, and net income from operations of $35.1 million and $29.2 million, respectively. For the nine months ended September 30, 2018 and 2017, Verizon Data Center Acquisition's revenues were $401.5 million and $223.7 million, respectively, and net income from operations were $105.2 million and $56.3 million, respectively.
Other 2017 Acquisitions
In addition to the Verizon Data Center Acquisition, the Company also acquired Itconic and Zenium's data center business during 2017. Acquisition costs incurred for these acquisitions during the three and nine months ended September 30, 2018 were not significant to the Company's condensed consolidated statements of operations.
On October 9, 2017, the Company completed the acquisition of Itconic for a cash purchase price of €220.5 million or $259.1 million at the exchange rate in effect on October 9, 2017. Itconic was a data center provider in Spain and Portugal, and also included CloudMas, an Itconic subsidiary which was focused on supporting enterprise adoption and use of cloud services. Itconic’s operating results have been reported in the EMEA region following the date of acquisition.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The nature of the intangible assets acquired from the Itconic acquisition is customer relationships with an estimated useful life of 15 years. The fair value of customer relationships was estimated by applying an income approach. The Company applied a discount rate of 16.0%, which reflected the risk and uncertainty of the estimated future operating cash flows. Other assumptions included projected revenue growth, customer attrition rates and operating margins. The fair value measurements were based on significant inputs that are not observable in the market and thus represent Level 3 measurements as defined in the accounting standard for fair value measurements. Goodwill is attributable to the workforce of the acquired business and the projected revenue increase from future customers expected to arise after the acquisition.
On October 6, 2017, the Company acquired Zenium's data center business in Istanbul for a cash payment of approximately $92.0 million. Zenium's operating results have been reported in the EMEA region following the date of acquisition. The nature of the intangible assets acquired from this acquisition is customer relationships with an estimated useful life of 15 years.
During the three months ended September 30, 2018, the Company completed the detailed valuation analysis to derive the fair value of assets acquired and liabilities assumed from the Itconic and the Zenium data center acquisitions and updated the final allocation of purchase price from the provisional amounts reported as of December 31, 2017. The adjustments for Zenium data center acquisition primarily resulted in an increase in property, plant and equipment of $5.2 million and a corresponding decrease in other assets of $5.2 million. The adjustments for Itconic primarily resulted in a decrease in property, plant and equipment of $3.6 million and an increase in goodwill of $2.6 million. The changes in fair value of acquired assets and liabilities assumed did not have a significant impact on the Company’s results of operations for the three and nine months ended September 30, 2018.
The final purchase price allocations for both acquisitions are as follows (in thousands):
|
| | | | | | | |
| Itconic | | Zenium data center |
Cash and cash equivalents | $ | 15,659 |
| | $ | 692 |
|
Accounts receivable | 16,429 |
| | 198 |
|
Other current assets | 1,885 |
| | 6,430 |
|
Property, plant, and equipment | 64,499 |
| | 58,931 |
|
Intangible assets | 101,755 |
| | 7,900 |
|
Goodwill | 127,711 |
| | 21,834 |
|
Other assets | 4,025 |
| | 313 |
|
Total assets acquired | 331,963 |
| | 96,298 |
|
Accounts payable and accrued liabilities | (15,846 | ) | | (1,012 | ) |
Other current liabilities | (12,374 | ) | | (451 | ) |
Capital lease and other financing obligations | (30,666 | ) | | — |
|
Loans payable | (3,253 | ) | | — |
|
Deferred tax liabilities | (3,198 | ) | | (2,227 | ) |
Other liabilities | (7,515 | ) | | (614 | ) |
Net assets acquired | $ | 259,111 |
| | $ | 91,994 |
|
On February 3, 2017, the Company acquired IO UK's data center operating business in Slough, United Kingdom, for a cash payment of £29.1 million or approximately $36.3 million at the exchange rate in effect on February 3, 2017 ("IO Acquisition"). The acquired facility was renamed London 10 ("LD10") data center. LD10's operating results have been reported in the EMEA region following the date of acquisition. As of December 31, 2017, the Company finalized the allocation of purchase price for the acquisition.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Goodwill from the acquisitions of Itconic, the Zenium data center and IO UK's data center is not deductible for local tax purposes and is attributable to the Company's EMEA region. For the three months ended September 30, 2017, the incremental revenues from the IO Acquisition were not significant and for the nine months ended September 30, 2017, the incremental revenues were $4.0 million. The incremental net losses were not significant for both periods. For the three and nine months ended September 30, 2018, the Company's results of operations include $21.5 million and $63.6 million of revenues, respectively, from the combined operations of Itconic, the Zenium data center and IO UK's data center and an insignificant net loss from operations.
Unaudited Pro Forma Combined Financial Information
The following unaudited pro forma combined financial information has been prepared by the Company using the acquisition method of accounting to give effect to the Verizon Data Center Acquisition as though it occurred on January 1, 2017. The incremental results of operations from the other acquisitions are not significant and are therefore not reflected in the pro forma combined results of operations.
The Company completed the Verizon Data Center Acquisition on May 1, 2017. The unaudited pro forma combined financial information for the three and nine months ended September 30, 2017 combine the actual results of the Company and the actual Verizon Data Center Acquisition operating results for the period prior to the acquisition date and reflect certain adjustments, such as additional depreciation, amortization and interest expense on assets and liabilities acquired and acquisition financings.
The Company and Verizon entered into agreements at the closing of the Verizon Data Center Acquisition pursuant to which the Company will provide space and services to Verizon at the acquired data centers. These arrangements are not reflected in the unaudited pro forma combined financial information.
The unaudited pro forma combined financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have actually been reported had the acquisition occurred on the above dates, nor is it necessarily indicative of the future results of operations of the combined company.
The following table sets forth the unaudited pro forma combined results of operations for the three and nine months ended September 30, 2017 (in thousands, except per share amounts):
|
| | | | | | | |
| Three Months Ended September 30, 2017 | | Nine months ended September 30, 2017 |
Revenues | $ | 1,152,261 |
| | $ | 3,309,381 |
|
Net income from operations | 80,135 |
| | 194,504 |
|
Basic EPS | 1.03 |
| | 2.50 |
|
Diluted EPS | 1.02 |
| | 2.48 |
|
| |
5. | Derivatives and Hedging Activities |
Derivatives Designated as Hedging Instruments
Net Investment Hedges. The Company is exposed to the impact of foreign exchange rate fluctuations on its investments in foreign subsidiaries whose functional currencies are other than the U.S. dollar. In order to mitigate the impact of foreign currency exchange rates, the Company has entered into various foreign currency debt obligations, which are designated as hedges against the Company's net investment in foreign subsidiaries. As of September 30, 2018 and December 31, 2017, the total principal amount of foreign currency debt obligations designated as net investment hedges, were $4,190.8 million and $3,149.5 million, respectively. From time to time, the Company also uses foreign exchange forward contracts to hedge against the effect of foreign exchange rate fluctuations on a portion of its net investment in the foreign subsidiaries. For a net investment hedge, changes in the fair value of the hedging instrument designated as a net investment hedge, except the ineffective portion and forward points, are recorded as a component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheet.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The Company recorded pre-tax net foreign exchange gains of $27.2 million and $179.0 million in other comprehensive income (loss) for the three and nine months ended September 30, 2018, respectively, and pre-tax net foreign exchange losses of $60.7 million and $191.1 million in other comprehensive income (loss) for the three and nine months ended September 30, 2017, respectively. The Company recorded no ineffectiveness from its net investment hedges for the three and nine months ended September 30, 2018 and 2017.
Cash Flow Hedges. The Company hedges its foreign currency translation exposure for forecasted revenues and expenses in its EMEA region between the U.S. dollar and the British Pound, Euro, Swedish Krona and Swiss Franc. From time to time, the foreign currency forward and option contracts that the Company uses to hedge this exposure are designated as cash flow hedges under the accounting standard for derivatives and hedging.
The Company enters into intercompany hedging instruments ("intercompany derivatives") with a wholly-owned subsidiary of the Company in order to hedge certain forecasted revenues and expenses denominated in currencies other than the U.S. dollar. Simultaneously, the Company enters into derivative contracts with unrelated third parties to externally hedge the net exposure created by such intercompany derivatives.
The following disclosure is prepared on a consolidated basis. Assets and liabilities resulting from intercompany derivatives have been eliminated in consolidation. As of September 30, 2018, the Company's cash flow hedge instruments had maturity dates ranging from October 2018 to September 2020 as follows (in thousands):
|
| | | | | | | | | | | |
| Notional Amount | | Fair Value (1) | | Accumulated Other Comprehensive Income (Loss) (2) (3) |
Derivative assets | $ | 626,012 |
| | $ | 29,965 |
| | $ | 23,770 |
|
Derivative liabilities | 135,194 |
| | (3,549 | ) | | (6,190 | ) |
Total | $ | 761,206 |
| | $ | 26,416 |
| | $ | 17,580 |
|
| |
(1) | All derivatives related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss). |
| |
(3) | The Company recorded a net gain of $11.0 million within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenues and expenses as they mature in the next 12 months. |
As of December 31, 2017, the Company's cash flow hedge instruments had maturity dates ranging from January 2018 to October 2019 as follows (in thousands):
|
| | | | | | | | | | | |
| Notional Amount | | Fair Value (1) | | Accumulated Other Comprehensive Income (Loss) (2) (3) |
Derivative assets | $ | 72,262 |
| | $ | 2,379 |
| | $ | 2,055 |
|
Derivative liabilities | 440,637 |
| | (29,777 | ) | | (34,311 | ) |
Total | $ | 512,899 |
| | $ | (27,398 | ) | | $ | (32,256 | ) |
| |
(1) | All derivatives related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss). |
| |
(3) | The Company recorded a net loss of $26.7 million within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenues and expenses as they mature over the next 12 months. |
During the three months ended September 30, 2018, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $3.9 million. During the three months ended September 30, 2017, the ineffective and excluded portions of cash flow hedges recognized in other income (expense) were not significant. During the three months ended September 30, 2018, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues was $3.3 million and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses was not significant. During the three months ended September 30, 2017, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses were not significant.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
During the nine months ended September 30, 2018, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $10.3 million. During the nine months ended September 30, 2017, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $3.6 million. During the nine months ended September 30, 2018, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues was $34.6 million and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses was $17.5 million. During the nine months ended September 30, 2017, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenues was $25.8 million and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $13.4 million.
Derivatives Not Designated as Hedging Instruments
Embedded Derivatives. The Company is deemed to have foreign currency forward contracts embedded in certain of the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host contracts and carried on the Company’s balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Company’s foreign subsidiaries pricing their customer contracts in the U.S. dollar. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three and nine months ended September 30, 2018, the gains (losses) associated with these embedded derivatives were not significant. During the three months ended September 30, 2017, the gains (losses) associated with these embedded derivatives were not significant. During the nine months ended September 30, 2017, the net losses associated with these embedded derivatives was $6.3 million.
Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to help manage the foreign exchange risk associated with the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved ("economic hedges of embedded derivatives"). Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the three and nine months ended September 30, 2018 and 2017. During the three and nine months ended September 30, 2018 and 2017, the gains (losses) associated with these contracts were not significant.
Foreign Currency Forward Contracts. The Company also uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated monetary assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of its foreign currency-denominated monetary assets and liabilities change. Gains and losses on these contracts are included in other income (expense), on a net basis, along with the foreign currency gains and losses of the related foreign currency-denominated monetary assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and nine months ended September 30, 2018 and 2017. During the three and nine months ended September 30, 2018, the Company recognized net gains of $17.1 million and $60.7 million, respectively, associated with these contracts. During the three and nine months ended September 30, 2017, the Company recognized net losses of $23.1 million and $60.2 million, respectively, associated with these contracts.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Offsetting Derivative Assets and Liabilities
The following table presents the fair value of derivative instruments recognized in the Company's condensed consolidated balance sheets as of September 30, 2018 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Gross Amounts | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Consolidated Balance Sheet Amounts(1) | | Gross Amounts not Offset in the Consolidated Balance Sheet(2) | | Net |
Assets: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Foreign currency forward contracts designated as cash flow hedges | $ | 29,965 |
| | $ | — |
| | $ | 29,965 |
| | $ | (3,549 | ) | | $ | 26,416 |
|
Not designated as hedging instruments: |
| | | |
| |
| |
|
Embedded derivatives | 5,648 |
| | — |
| | 5,648 |
| | — |
| | 5,648 |
|
Economic hedges of embedded derivatives | 24 |
| | — |
| | 24 |
| | (10 | ) | | 14 |
|
Foreign currency forward contracts | 22,503 |
| | — |
| | 22,503 |
| | (652 | ) | | 21,851 |
|
| 28,175 |
| | — |
| | 28,175 |
| | (662 | ) | | 27,513 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (1,245 | ) | | (1,245 | ) |
| $ | 58,140 |
| | $ | — |
| | $ | 58,140 |
| | $ | (5,456 | ) | | $ | 52,684 |
|
Liabilities: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Foreign currency forward contracts designated as cash flow hedges | $ | 3,549 |
| | $ | — |
| | $ | 3,549 |
| | $ | (3,549 | ) | | $ | — |
|
Not designated as hedging instruments: |
| | | |
| |
| |
|
Embedded derivatives | 1,922 |
| | — |
| | 1,922 |
| | — |
| | 1,922 |
|
Economic hedges of embedded derivatives | 300 |
| | — |
| | 300 |
| | (10 | ) | | 290 |
|
Foreign currency forward contracts | 1,607 |
| | — |
| | 1,607 |
| | (652 | ) | | 955 |
|
| 3,829 |
| | — |
| | 3,829 |
| | (662 | ) | | 3,167 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (1,245 | ) | | (1,245 | ) |
| $ | 7,378 |
| | $ | — |
| | $ | 7,378 |
| | $ | (5,456 | ) | | $ | 1,922 |
|
| |
(1) | As presented in the Company's condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default. For presentation on the condensed consolidated balance sheets, the Company does not offset fair value amounts recognized for derivative instruments under master netting arrangements. |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
The following table presents the fair value of derivative instruments recognized in the Company's condensed consolidated balance sheets as of December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | | | |
| Gross Amounts | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Consolidated Balance Sheet Amounts(1) | | Gross Amounts not Offset in the Consolidated Balance Sheet(2) | | Net |
Assets: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Foreign currency forward contracts designated as cash flow hedges | $ | 2,379 |
| | $ | — |
| | $ | 2,379 |
| | $ | (2,379 | ) | | $ | — |
|
Not designated as hedging instruments: | | | | | | | | | |
Embedded derivatives | 5,076 |
| | — |
| | 5,076 |
| | — |
| | 5,076 |
|
Economic hedges of embedded derivatives | 325 |
| | — |
| | 325 |
| | — |
| | 325 |
|
Foreign currency forward contracts | 505 |
| | — |
| | 505 |
| | (340 | ) | | 165 |
|
| 5,906 |
| | — |
| | 5,906 |
| | (340 | ) | | 5,566 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (490 | ) | | (490 | ) |
| $ | 8,285 |
| | $ | — |
| | $ | 8,285 |
| | $ | (3,209 | ) | | $ | 5,076 |
|
Liabilities: | | | | | | | | | |
Designated as hedging instruments: | | | | | | | | | |
Foreign currency forward contracts designated as cash flow hedges | $ | 29,777 |
| | $ | — |
| | $ | 29,777 |
| | $ | (2,379 | ) | | $ | 27,398 |
|
Not designated as hedging instruments: | | | | | | | | | |
Embedded derivatives | 3,503 |
| | — |
| | 3,503 |
| | — |
| | 3,503 |
|
Economic hedges of embedded derivatives | 20 |
| | — |
| | 20 |
| | — |
| | 20 |
|
Foreign currency forward contracts | 7,547 |
| | — |
| | 7,547 |
| | (340 | ) | | 7,207 |
|
| 11,070 |
| | — |
| | 11,070 |
| | (340 | ) | | 10,730 |
|
Additional netting benefit | — |
| | — |
| | — |
| | (490 | ) | | (490 | ) |
| $ | 40,847 |
| | $ | — |
| | $ | 40,847 |
| | $ | (3,209 | ) | | $ | 37,638 |
|
| |
(1) | As presented in the Company's condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities. |
| |
(2) | The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default. For presentation on the condensed consolidated balance sheets, the Company does not offset fair value amounts recognized for derivative instruments under master netting arrangements. |
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| |
6. | Fair Value Measurements |
Fair value estimates are made as of a specific point in time based on methods using the market approach valuation method which uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities or other valuation techniques. These techniques involve uncertainties and are affected by the assumptions used and the judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors.
Cash, Cash Equivalents and Investments. The fair value of the Company's investments in money market funds approximates their face value. Such instruments are included in cash equivalents. The Company’s money market funds and publicly traded equity securities are classified within Level 1 of the fair value hierarchy because they are valued using quoted prices for identical instruments in active markets. The fair value of the Company's other investments, including certificates of deposit, approximates their face value. The fair value of these investments is priced based on the quoted market price for similar instruments or nonbinding market prices that are corroborated by observable market data. Such instruments are classified within Level 2 of the fair value hierarchy. The Company determines the fair values of its Level 2 investments by using inputs such as actual trade data, benchmark yields, broker/dealer quotes, and other similar data, which are obtained from quoted market prices, custody bank, third-party pricing vendors, or other sources. The Company uses such pricing data as the primary input to make its assessments and determinations as to the ultimate valuation of its investment portfolio and has not made, during the periods presented, any material adjustments to such inputs. The Company is responsible for its condensed consolidated financial statements and underlying estimates.
The Company uses the specific identification method in computing realized gains and losses. Realized gains and losses on the investments are included within other income (expense) in the Company’s condensed consolidated statements of operations. The Company's investments in publicly traded equity securities are carried at fair value. Subsequent to the adoption of ASU 2016-01, unrealized gains and losses on publicly traded equity securities are reported within other income (expense) in the Company’s condensed consolidated statements of operations. Prior to the adoption of ASU 2016-01, unrealized gains and losses on publicly traded equity securities were reported in stockholders’ equity as a component of other comprehensive income or loss. Upon adoption of ASU 2016-01, the Company recorded a net cumulative effect increase of $2.1 million to retained earnings.
Derivative Assets and Liabilities. For derivatives, the Company uses forward contract and option models employing market observable inputs, such as spot currency rates and forward points with adjustments made to these values utilizing published credit default swap rates of its foreign exchange trading counterparties and other comparable companies. The Company has determined that the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, therefore the derivatives are categorized as Level 2.
The Company did not have any nonfinancial assets or liabilities measured at fair value on a recurring basis as of September 30, 2018 and December 31, 2017.
The Company's financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2018 were as follows (in thousands):
|
| | | | | | | | | | | |
| Fair Value at September 30, 2018 | | Fair Value Measurement Using |
| Level 1 | | Level 2 |
Assets: | | | | | |
Cash | $ | 639,941 |
| | $ | 639,941 |
| | $ | — |
|
Money market and deposit accounts | 230,545 |
| | 230,545 |
| | — |
|
Publicly traded equity securities | 4,098 |
| | 4,098 |
| | — |
|
Certificates of deposit | 11,317 |
| | — |
| | 11,317 |
|
Derivative instruments (1) | 58,140 |
| | — |
| | 58,140 |
|
Total | $ | 944,041 |
| | $ | 874,584 |
| | $ | 69,457 |
|
Liabilities: | | | | | |
Derivative instruments (1) | $ | 7,378 |
| | $ | — |
| | $ | 7,378 |
|
Total | $ | 7,378 |
| | $ | — |
| | $ | 7,378 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| |
(1) | Includes both foreign currency embedded derivatives and foreign currency forward contracts. Amounts are included within other current assets, other assets, others current liabilities and other liabilities in the Company’s accompanying condensed consolidated balance sheet. |
The Company's financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2017 were as follows (in thousands):
|
| | | | | | | | | | | |
| Fair Value at December 31, 2017 | | Fair Value Measurement Using |
| Level 1 | | Level 2 |
Assets: | | | | | |
Cash | $ | 985,382 |
| | $ | 985,382 |
| | $ | — |
|
Money market and deposit accounts | 427,135 |
| | 427,135 |
| | — |
|
Publicly traded equity securities | 6,163 |
| | 6,163 |
| | — |
|
Certificates of deposit | 31,351 |
| | — |
| | 31,351 |
|
Derivative instruments (1) | 8,285 |
| | — |
| | 8,285 |
|
Total | $ | 1,458,316 |
| | $ | 1,418,680 |
| | $ | 39,636 |
|
Liabilities: | | | | | |
Derivative instruments (1) | $ | 40,847 |
| | $ | — |
| | $ | 40,847 |
|
Total | $ | 40,847 |
| | $ | — |
| | $ | 40,847 |
|
| |
(1) | Includes both foreign currency embedded derivatives and foreign currency forward contracts. Amounts are included within other current assets, other assets, other current liabilities and other liabilities in the Company's accompanying condensed consolidated balance sheet. |
The Company did not have any Level 3 financial assets or financial liabilities as of September 30, 2018 and December 31, 2017.
Capital Lease and Other Financing Obligations
Stockholm 2 ("SK2") Data Center
In March 2018, the Company acquired the land and building for the SK2 IBX data center for cash consideration of SEK457.9 million or approximately $54.9 million at the exchange rate in effect on March 31, 2018. The Company had previously accounted for SK2 as a build-to-suit arrangement. As a result of the purchase, the prior arrangement was effectively terminated and the financing obligation was settled in full. The Company settled the financing obligation of the SK2 data center for SEK234.5 million or approximately $28.1 million and recognized a loss on debt extinguishment of SEK170.5 million or approximately $20.4 million at the exchange rate in effect on March 31, 2018.
Tokyo 11 ("TY11") Data Center
In February 2018, the Company entered into a lease agreement for the TY 11 IBX data center. Pursuant to the accounting standard for leases, the Company assessed the lease classification of the TY11 lease and determined that the lease should be accounted for as a capital lease. During the three months ended March 31, 2018, the Company recorded a capital lease obligation totaling approximately ¥2,348.5 million, or approximately $22.1 million at the exchange rate in effect on March 31, 2018. The lease has a term of 30 years through February 2048.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Maturities of Capital Lease and Other Financing Obligations
The Company's capital lease and other financing obligations are summarized as follows (in thousands):
|
| | | | | | | | | | | |
| Capital Lease Obligations | | Other Financing Obligations (1) | | Total |
2018 (3 months remaining) | $ | 30,616 |
| | $ | 26,131 |
| | $ | 56,747 |
|
2019 | 95,623 |
| | 70,531 |
| | 166,154 |
|
2020 | 95,667 |
| | 70,308 |
| | 165,975 |
|
2021 | 93,735 |
| | 71,216 |
| | 164,951 |
|
2022 | 93,398 |
| | 71,382 |
| | 164,780 |
|
Thereafter | 840,407 |
| | 707,111 |
| | 1,547,518 |
|
Total minimum lease payments | 1,249,446 |
| | 1,016,679 |
| | 2,266,125 |
|
Plus amount representing residual property value | — |
| | 453,757 |
| | 453,757 |
|
Less amount representing interest | (514,003 | ) | | (721,400 | ) | | (1,235,403 | ) |
Present value of net minimum lease payments | 735,443 |
| | 749,036 |
| | 1,484,479 |
|
Less current portion | (43,271 | ) | | (54,948 | ) | | (98,219 | ) |
Total | $ | 692,172 |
| | $ | 694,088 |
| | $ | 1,386,260 |
|
(1) Other financing obligations are primarily related to build-to-suit arrangements.
Operating Leases
Minimum future operating lease payments as of September 30, 2018 are summarized as follows (in thousands):
|
| | | |
Years ending: | |
2018 (3 months remaining) | $ | 48,596 |
|
2019 | 187,318 |
|
2020 | 177,240 |
|
2021 | 165,351 |
|
2022 | 157,565 |
|
Thereafter | 1,252,186 |
|
Total | $ | 1,988,256 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Mortgage and Loans Payable
As of September 30, 2018 and December 31, 2017, the Company's mortgage and loans payable consisted of the following (in thousands):
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Term loans | $ | 1,360,722 |
| | $ | 1,417,352 |
|
Mortgage payable and loans payable | 45,076 |
| | 48,872 |
|
| 1,405,798 |
| | 1,466,224 |
|
Less amount representing unamortized debt discount and debt issuance cost | (6,959 | ) | | (10,666 | ) |
Add amount representing unamortized mortgage premium | 1,926 |
| | 2,051 |
|
| 1,400,765 |
| | 1,457,609 |
|
Less current portion | (73,288 | ) | | (64,491 | ) |
Total | $ | 1,327,477 |
| | $ | 1,393,118 |
|
JPY Term Loan
On July 26, 2018, the Company entered into an amendment to its existing credit agreement, dated as of December 12, 2017. The amendment provided for a senior unsecured term loan in an aggregate principal amount of ¥47.5 billion (the "JPY Term Loan"). The Company is required to repay the JPY Term Loan at the rate of 5% of the original principal amount per annum with the remaining balance to be repaid in full on December 12, 2022. The JPY Term Loan bears interest at a rate based on LIBOR plus a margin that can vary from 1.00% to 1.70% and contains customary covenants consistent with the existing credit agreement.
On July 31, 2018, the Company drew down the full ¥47.5 billion of the JPY Term Loan, or approximately $424.7 million at the exchange rate effective on July 31, 2018, and prepaid the remaining principal of its existing Japanese Yen Term Loan of ¥43.8 billion or approximately $391.3 million. In connection with this prepayment of its existing Japanese Yen Term Loan, the Company recognized a loss on debt extinguishment of $2.2 million for the three months ended September 30, 2018. As of September 30, 2018, total outstanding borrowings under the JPY Term Loan were ¥47.5 billion, or approximately $418.0 million at the exchange rate effective on that date. As of September 30, 2018, debt issuance costs, net of amortization, related to the JPY Term Loan were $4.5 million at the exchange rate in effect on that date.
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Senior Notes
As of September 30, 2018 and December 31, 2017, the Company's senior notes consisted of the following (in thousands):
|
| | | | | | | | | | | | | |
| September 30, 2018 | | December 31, 2017 |
| Amount | | Effective Rate | | Amount | | Effective Rate |
5.000% Infomart Senior Notes | $ | 750,000 |
| | 4.40 | % | | $ | — |
| | — | % |
5.375% Senior Notes due 2022 | 750,000 |
| | 5.56 | % | | 750,000 |
| | 5.56 | % |
5.375% Senior Notes due 2023 | 1,000,000 |
| | 5.51 | % | | 1,000,000 |
| | 5.51 | % |
2.875% Euro Senior Notes due 2024 | 870,600 |
| | 3.08 | % | | — |
| | — | % |
5.750% Senior Notes due 2025 | 500,000 |
| | 5.88 | % | | 500,000 |
| | 5.88 | % |
2.875% Euro Senior Notes due 2025 | 1,160,800 |
| | 3.04 | % | | 1,201,000 |
| | 3.04 | % |
5.875% Senior Notes due 2026 | 1,100,000 |
| | 6.03 | % | | 1,100,000 |
| | 6.03 | % |
2.875% Euro Senior Notes due 2026 | 1,160,800 |
| | 3.04 | % | | 1,201,000 |
| | 3.04 | % |
5.375% Senior Notes due 2027 | 1,250,000 |
| | 5.51 | % | | 1,250,000 |
| | 5.51 | % |
| 8,542,200 |
| | | | 7,002,000 |
| | |
Less amount representing unamortized debt issuance cost | (78,961 | ) | | | | (78,151 | ) | | |
Add amount representing unamortized debt premium | 6,100 |
| | | | — |
| | |
| 8,469,339 |
| | | | 6,923,849 |
| | |
Less current portion | (150,557 | ) | | | | — |
| | |
Total | $ | 8,318,782 |
| | | | $ | 6,923,849 |
| | |
Infomart Senior Notes
On April 2, 2018, in connection with the closing of the Infomart Dallas Acquisition, the Company issued $750.0 million aggregate principal amount of 5.000% senior unsecured notes in five new series due in each of April 2019, October 2019, April 2020, October 2020 and April 2021, with each series consisting of $150.0 million principal amount, which are collectively referred to as the "Infomart Senior Notes". The Infomart Senior Notes were fair valued as of the acquisition date and the Company recognized debt premium of $8.2 million. Interest on the notes is payable semi-annually on April 2 and October 2 of each year, commencing on October 2, 2018. The Infomart Senior Notes are not redeemable prior to their maturity dates. As of September 30, 2018, debt premium, net of amortization, related to the Infomart Senior Notes was $6.1 million.
2024 Euro Senior Notes
On March 14, 2018, the Company issued €750.0 million, or approximately $929.9 million in U.S. dollars, at the exchange rate in effect on March 14, 2018, aggregate principal amount of 2.875% senior notes due March 15, 2024, which are referred to as the "2024 Euro Senior Notes". Interest on the notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2018. Debt issuance costs related to the 2024 Euro Senior Notes were $11.6 million. As of September 30, 2018, debt issuance costs related to the 2024 Euro Senior Notes, net of amortization, were $9.9 million at the exchange rate in effect on that date.
All senior notes are unsecured and rank equal in right of payment to the Company’s existing or future senior indebtedness and senior in right of payment to the Company’s existing and future subordinated indebtedness. The senior notes are effectively subordinated to all of the existing and future secured debt, including debt outstanding under any bank facility or secured by any mortgage, to the extent of the assets securing such debt. They are also structurally subordinated to any existing and future indebtedness and other liabilities (including trade payables) of any of the Company’s subsidiaries.
Each series of senior notes is governed by a supplemental indenture between the Company and U.S. Bank National Association, as trustee. The supplemental indenture contains covenants that limit the Company’s ability and the ability of its subsidiaries to, among other things:
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
| |
• | enter into sale-leaseback transactions; and |
| |
• | merge or consolidate with any other person. |
The Company is not required to make any mandatory redemption with respect to the senior notes; however, upon the event of a change in control, the Company may be required to offer to purchase the senior notes.
Optional Redemption Schedule
|
| | | | | |
Senior Note Description | Early Equity Redemption Price | First Scheduled Redemption Date | First Scheduled Redemption Price | Second Year Redemption Price | Third Year Redemption Price |
2.875% Euro due 2024 | 102.875% | September 15, 2020 | 101.438% | 100.719% | 100.000% |
The 2024 Euro Senior Notes provide for optional redemption. Within 90 days of the closing of one or more equity offerings and at any time prior to the first scheduled redemption date listed in the Optional Redemption Schedule, the Company may redeem up to 35% of the aggregate principal amount of the notes outstanding, at a redemption price listed in the Optional Redemption Schedule, plus accrued and unpaid interest to the redemption date, provided that at least 65% of the aggregate principal amount of the notes issued under the supplemental indenture remains outstanding immediately after such redemption(s).
On or after the first scheduled redemption date listed in the Optional Redemption Schedule, the Company may redeem all or a part of the notes, on one or more occasions, at the redemption prices (expressed as percentages of principal amount) set forth in the Optional Redemption Schedule, plus accrued and unpaid interest thereon, if any, if redeemed during the twelve month period beginning on the first scheduled redemption date and at reduced scheduled redemption prices during the twelve or eighteen-month periods beginning on the anniversaries of the first scheduled redemption date.
In addition, at any time prior to the first scheduled redemption date, the Company may redeem all or a part of the senior notes at a redemption price equal to 100% of the principal amount of senior notes redeemed plus the applicable premium (the "Applicable Premium") and accrued and unpaid interest, subject to the rights of the holders of record of the senior notes on the relevant record date to receive interest due on the relevant interest payment date. The Applicable Premium means the greater of:
| |
(1) | 1.0% of the principal amount of the 2024 Euro Senior Notes; |
(a)the present value at such redemption date of (i) the redemption price of the 2024 Euro Senior Notes at the first scheduled redemption date, plus (ii) all required interest payments due on the 2024 Euro Senior Notes through the first scheduled redemption date computed using a discount rate equal to the treasury rate as of such redemption date plus 50 basis points; over
(b)the principal amount of the 2024 Euro Senior Notes.
Maturities of Debt Instruments
The following table sets forth maturities of the Company's debt, including mortgage and loans payable, and senior notes, gross of debt issuance costs, debt discounts and debt premiums, as of September 30, 2018 (in thousands):
|
| | | |
Years ending: | |
2018 (3 months remaining) | $ | 18,645 |
|
2019 | 373,376 |
|
2020 | 373,307 |
|
2021 | 223,042 |
|
2022 | 1,915,189 |
|
Thereafter | 7,046,365 |
|
Total | $ | 9,949,924 |
|
EQUINIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
(Unaudited)
Fair Value of Debt Instruments
The following table sets forth the estimated fair values of the Company's mortgage and loans payable and senior notes, including current maturities, as of (in thousands):
|
| | | | | | | |
| September 30, 2018 | | December 31, 2017 |
Mortgage and loans payable | $ | 1,403,365 |
| | $ | 1,464,877 |
|
Senior notes | 8,641,497 |
| | 7,288,673 |
|
The fair value of the mortgage and loans payable, which were not publicly traded, was estimated by considering the Company's credit rating, current rates available to the Company for debt of the same remaining maturities and terms of the debt (Level 2). The fair value of the senior notes, which were traded in the public debt market, was based on quoted market prices (Level 1).
Interest Charges
The following table sets forth total interest costs incurred and total interest costs capitalized for the periods presented (in thousands):
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Interest expense | $ | 130,566 |
| | $ | 121,828 |
| | $ | 391,516 |
| | $ | 352,554 |
|
Interest capitalized | 6,206 |
| | 6,174 |
| | 13,004 |
| | 20,573 |
|
Interest charges incurred | $ | 136,772 | |