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 the Metronode group of companies 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 15.0% and 20.5% for the six months ended June 30, 2018 and 2017, respectively. The decrease in the effective tax rate for the six months ended June 30, 2018 as compared to the same period in 2017 is primarily due to the reduction of net deferred tax liabilities as a result of a legal entity reorganization in the Company's Americas region during the six months ended June 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. 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, the Company concluded that valuation allowances were still required in certain foreign jurisdictions. Given the strength of the Company’s operations, combined with certain tax strategies, it is reasonably possible that within the next 12 months, positive evidence will be sufficient to release a significant amount of valuation allowance in certain foreign jurisdictions. Release of valuation allowance would result in recognition of certain deferred tax assets and a decrease to income tax expense for the period the release is recorded. The exact timing and amount of the valuation allowance release are subject to change based on the profitability that the foreign jurisdictions are able to sustain. The Company will continue to evaluate the release of valuation allowances on a quarterly basis.

Legislation commonly referred to as the Tax Cuts and Jobs Act (“TCJA”), which was signed into law on December 22, 2017, contains many significant changes to the existing U.S. federal income tax laws. Among other things, the TCJA reduces the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018, limits the tax deductibility of interest expense, accelerates expensing of certain business assets and transitions 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 is 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. The Company is still analyzing the new tax legislation and assessing the impact as of the end of the current quarter. 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 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, 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. The Company plans to elect the practical expedient that it will not reassess whether any expired or existing contracts are or contain leases, the lease classification for any expired or existing leases or initial direct costs for any existing leases. The Company expects to record a significant increase in assets and liabilities on the consolidated balance sheet at adoption due to the recording of right-of-use assets and corresponding lease liabilities for leases that are accounted for as operating leases. 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 the cost 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.

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	June 30, 2018			Adjustments			Balances without adoption of Topic 606
Other current assets	$	249,846		$	(9,675	)	$	240,171
Total current assets	1,850,825			(9,675		)	1,841,150
Other assets	525,961			(183,843		)	342,118
Total assets	$	20,070,288		$	(193,518	)	$	19,876,770
Accounts payable and accrued expenses	$	710,584		$	(1,569	)	$	709,015
Other current liabilities	142,312			15,588			157,900
Total current liabilities	1,433,620			14,019			1,447,639
Other liabilities	633,450			68,038			701,488
Total liabilities	13,145,761			82,057			13,227,818
Accumulated other comprehensive loss	(877,994		)	5,716			(872,278		)
Retained earnings	655,101			(281,291		)	373,810
Total stockholders' equity	6,924,527			(275,575		)	6,648,952
Total liabilities and stockholders' equity	$	20,070,288		$	(193,518	)	$	19,876,770



Statements of Operations	Three Months Ended June 30, 2018			Adjustments			Balance without adoption of Topic 606			Six Months Ended June 30, 2018			Adjustments			Balance without adoption of Topic 606
Revenues	$	1,261,943		$	(2,521	)	$	1,259,422		$	2,477,820		$	(6,357	)	$	2,471,463
Sales and marketing	154,202			4,376			158,578			313,978			7,678			321,656
Total costs and operating expenses	1,046,905			4,376			1,051,281			2,036,907			7,678			2,044,585
Income from operations	215,038			(6,897		)	208,141			440,913			(14,035		)	426,878
Income before income taxes	73,974			(6,897		)	67,077			153,627			(14,035		)	139,592
Income tax expense	(6,356		)	1,146			(5,210		)	(23,115		)	2,520			(20,595		)
Net income	$	67,618		$	(5,751	)	$	61,867		$	130,512		$	(11,515	)	$	118,997
Basic EPS	$	0.85		$	(0.07	)	$	0.78		$	1.64		$	(0.14	)	$	1.50
Diluted EPS	$	0.85		$	(0.07	)	$	0.78		$	1.64		$	(0.15	)	$	1.49



Statements of Cash Flow	Six Months Ended June 30, 2018			Adjustments			Balance without adoption of Topic 606
Cash flows from operating activities:
Net income (loss)	$	130,512		$	(11,515	)	$	118,997
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Changes in operating assets and liabilities:
Income taxes, net	(22,866		)	1,708			(21,158		)
Other assets	3,536			1,509			5,045
Other liabilities	24,288			8,298			32,586
Net cash provided by operating activities	$	839,635		$	—		$	839,635

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.