Crown Castle International Corp. — Q3 2012 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and nine months ended September 30, 2012. Crown Castle owns, operates and leases shared wireless infrastructure, including approximately 24,400 towers, distributed antenna systems and third-party land interests in the United States, Puerto Rico and Australia. The filing registrant is Crown Castle International Corp.
Site rental revenue represented 87% of third-quarter consolidated revenue and is generated primarily under long-term contracts. The company completed the WCP acquisition in January 2012 and the approximately $1.0 billion NextG Networks acquisition in April 2012.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Change |
|---|---|---|---|
| Net revenues | $621.3 million | $513.9 million | 21% |
| Site rental revenue | $538.8 million | $468.9 million | 15% |
| Network services and other revenue | $82.6 million | $45.0 million | 84% |
| Operating income | $220.8 million | $181.9 million | 21% |
| Operating margin | 36% | 35% | Improved |
| Net income attributable to CCIC stockholders | $42.0 million | $51.3 million | Down $9.2 million |
| Adjusted EBITDA | $400.2 million | $332.4 million | 21% |
| Diluted earnings per share | $0.14 | $0.15 | Down |
| Metric | Nine months 2012 | Nine months 2011 | Change |
|---|---|---|---|
| Net revenues | $1.759 billion | $1.513 billion | 16% |
| Operating income | $626.0 million | $515.5 million | 21% |
| Net income attributable to CCIC stockholders | $208.1 million | $122.2 million | 70% |
| Adjusted EBITDA | $1.139 billion | $971.6 million | 17% |
| Basic earnings per share | $0.71 | $0.37 | Up |
For the first nine months, net cash provided by operating activities was $524.5 million, compared with $455.3 million in the prior-year period. Capital expenditures were $283.4 million, including $19.0 million of sustaining capital expenditures. Investing cash outflow was $1.518 billion, primarily reflecting $1.236 billion of business acquisitions.
At September 30, 2012, cash and cash equivalents were $118.9 million and restricted cash was $273.3 million. Total debt and other obligations were $8.383 billion, including $2.076 billion of variable-rate bank debt and $6.307 billion of fixed-rate or other obligations. Total equity was $2.943 billion.
Material changes versus the prior comparable period
- Revenue growth reflected new tenant additions, contract renewals and escalations, acquisitions, and increased carrier network-enhancement activity.
- Q3 site rental gross margin increased 16%, and management reported an 80% incremental margin on the related increase in site rental revenue. For the first nine months, the incremental site rental margin was 83%.
- Network services revenue increased sharply because of LTE upgrades and other carrier network work; this business is more variable and is not generally supported by long-term contracts.
- Adjusted EBITDA increased 21% in Q3 and 17% for the first nine months, while depreciation, amortization and accretion increased because of assets and intangible assets acquired in the NextG transaction.
- Interest expense increased 14% in Q3 and 12% for the first nine months because of higher debt levels following the 2012 refinancing and acquisitions.
- Q3 net income declined despite higher operating income because interest expense and the income tax provision increased. The Q3 tax provision was $32.3 million versus $2.8 million in the prior-year quarter.
- The company converted all outstanding 6.25% redeemable convertible preferred stock into approximately 8.3 million common shares in February 2012. Common shares outstanding increased to approximately 293.2 million at September 30, 2012.
- The company refinanced its prior credit facility and term loans with a $3.1 billion senior credit facility, including a $1.0 billion revolving facility, a $500 million Term Loan A and a $1.6 billion Term Loan B.
Guidance, outlook, risks and unusual items
- Management expected full-year 2012 site rental revenue growth of approximately 13%, with new tenant additions contributing more than 12% to year-over-year growth. It expected full-year capital expenditures to exceed $350 million, with sustaining capital expenditures of approximately $33 million to $35 million.
- Management expected operating cash flow, cash on hand and available revolver capacity to cover debt service, capital expenditures and the proposed T-Mobile transaction over the following 12 months.
- In September 2012, Crown Castle agreed to acquire exclusive rights to lease, operate or otherwise acquire up to approximately 7,180 T-Mobile towers for approximately $2.4 billion in cash, subject to conditions and adjustments. Closing was expected in the fourth quarter of 2012.
- In October 2012, after the quarter end, the company issued $1.65 billion of 5.25% Senior Notes due 2023. Proceeds were intended to partially fund the T-Mobile transaction or, if necessary, be used for general corporate purposes or debt repayment.
- After giving effect to the October notes, management reported approximately $1.750 billion of cash, $1.0 billion of undrawn revolver availability and $10.033 billion of debt and other long-term obligations. The consolidated leverage ratio increased from approximately 5.7 times to 6.5 times and remained below the 7.0-times restrictive covenant.
- Management reported no financial covenant violations. As of September 30, 2012, CCOC net leverage was 4.4 times against a maximum of 6.0 times, and interest coverage was 4.3 times against a minimum of 2.5 times.
- Risks include execution and integration of NextG, the newer and less-established small-cell business model, customer concentration, potential network consolidation following the proposed T-Mobile and MetroPCS transaction, refinancing risk, variable-rate debt exposure, and the possibility that the T-Mobile transaction may be delayed, reduced or not completed.
- The nine-month results included $12.1 million of acquisition and integration costs, $8.3 million of asset write-down charges and a $14.6 million loss on retirement of long-term obligations. The company also reversed $90.1 million of federal and state deferred-tax valuation allowances, materially affecting the year-to-date tax benefit.
Important facts for investors to verify
- Whether the proposed T-Mobile transaction closed as expected, the final number of towers acquired and the final purchase price.
- The effect of the $1.65 billion notes and T-Mobile financing on leverage, interest expense, covenants and liquidity.
- NextG integration progress, small-cell tenancy growth, margins and required capital expenditures.
- Customer concentration and possible contract cancellations or delayed demand associated with carrier consolidation, including T-Mobile and MetroPCS.
- The timing and refinancing requirements for the WCP securitized notes and tower revenue notes, including potential 5% interest-rate increases and cash-flow sweeps if not refinanced by anticipated repayment dates.
- The sustainability of the reported revenue and Adjusted EBITDA growth, particularly the more volatile network services contribution and the use of non-GAAP Adjusted EBITDA.