Crown Castle International Corp. — Q2 2012 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and six months ended June 30, 2012. Crown Castle owns, operates and leases shared wireless infrastructure, primarily towers, distributed antenna systems and small cells, and third-party land interests in the United States, Puerto Rico and Australia. Site rental revenues are predominantly recurring and generated under long-term contracts.
During the period, Crown Castle completed the Wireless Capital Partners acquisition on January 31, 2012 and the approximately $1.0 billion NextG Networks acquisition on April 10, 2012, substantially expanding its ground-lease and small-cell operations.
Key Financial Metrics
| Metric | Q2 2012 | Q2 2011 | Change |
|---|---|---|---|
| Net revenues | $585.5 million | $500.3 million | 17% |
| Site rental revenue | $517.6 million | $457.1 million | 13% |
| Network services and other revenue | $67.9 million | $43.2 million | 57% |
| Operating income | $203.0 million | $167.1 million | 21% |
| Operating margin | 34.7% | 33.4% | Up 1.3 percentage points |
| Net income attributable to CCIC stockholders | $116.0 million | $30.9 million | Up $85.1 million |
| Adjusted EBITDA | $378.5 million | $319.9 million | 18% |
| Adjusted EBITDA margin | 64.6% | 63.9% | Up 0.7 percentage points |
| Basic and diluted EPS | $0.40 | $0.09 | Up $0.31 |
The quarterly net income increase was materially affected by a $90.1 million federal and state deferred tax valuation allowance reversal, partly offset by higher interest expense and a $7.5 million loss on retirement of long-term obligations.
| Metric | Six months ended June 30, 2012 | Six months ended June 30, 2011 | Change |
|---|---|---|---|
| Net revenues | $1.137 billion | $999.4 million | 14% |
| Operating income | $405.2 million | $333.6 million | 21% |
| Net income attributable to CCIC stockholders | $166.0 million | $70.9 million | Up $95.2 million |
| Adjusted EBITDA | $738.6 million | $639.2 million | 16% |
| Net cash provided by operating activities | $324.3 million | $283.8 million | 14% |
| Capital expenditures | $159.7 million | $116.7 million | Up $43.0 million |
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $96.2 million at June 30, 2012, excluding $284.96 million of restricted cash.
- Total debt and other obligations were $8.387 billion, compared with $6.886 billion at December 31, 2011. Fair value was reported at $9.018 billion.
- The company had $1.0 billion of undrawn revolving credit availability, subject to covenant restrictions.
- Approximately 75% of debt had fixed-rate coupons; $2.086 billion, or approximately 25% of total debt, was floating-rate debt.
- Six-month financing cash inflows of $1.049 billion primarily reflected $2.1 billion of term-loan borrowings, partly offset by debt repayments, debt purchases and financing costs.
- The January 2012 refinancing established a $1.0 billion revolver due 2017, a $500 million Term Loan A due 2017 and a $1.6 billion Term Loan B due 2019. The proceeds funded the acquisitions, refinanced existing debt and supported general corporate purposes.
- Management expected cash on hand, operating cash flow and revolver availability to cover the next 12 months of $79.3 million of principal payments and capital expenditures expected to exceed $375 million. Management did not anticipate a need to access capital markets to refinance existing debt until at least 2015.
Material Changes and Unusual Items
- NextG contributed to higher revenue, depreciation and amortization, acquisition and integration costs, and small-cell exposure. Q2 integration costs were $6.3 million; six-month integration costs were $6.7 million.
- The acquisitions resulted in approximately $682.1 million of NextG goodwill and $54.8 million of WCP goodwill, subject to preliminary purchase price allocations.
- Income tax results included a $90.1 million valuation allowance reversal. Management expected a total tax rate of approximately 44% for the remainder of 2012, comprising an approximately 41% deferred tax rate and 3% current tax rate.
- The company converted all 6.111 million shares of its 6.25% redeemable convertible preferred stock into approximately 8.3 million common shares in early 2012. Preferred stock dividends declined to $2.6 million in the first half of 2012 from $10.4 million in the prior-year period.
- Six-month capital expenditures included $57.1 million for land interests, $56.3 million for infrastructure improvements and other projects, $34.9 million for infrastructure construction, and $11.5 million of sustaining capital expenditures.
Guidance, Outlook and Management Commentary
- Management expected full-year 2012 site rental revenue growth of approximately 13% versus 2011, including the effects of carrier network enhancements and the WCP and NextG acquisitions.
- New tenant additions were expected to contribute more than 6% to year-over-year site rental revenue growth, while the existing business base was expected to contribute less than 1% because anticipated contract cancellations were expected to offset escalations and straight-line renewals.
- Management expected sustaining capital expenditures of approximately $27 million to $32 million for 2012 and total 2012 capital expenditures in excess of $375 million.
- Management cited continued wireless data growth, smartphone adoption, 4G deployment and carrier investments in network capacity as key demand drivers. The company reported an 81% incremental margin on additional site rental revenue in Q2 and an 85% incremental margin for the first half.
- As of June 30, 2012, all reported debt covenant ratios complied with requirements. The CCOC net leverage ratio was 4.6 against a maximum of 6.0, and interest coverage was 4.1 against a minimum of 2.5.
- Subsequent to quarter-end, a July 2012 T-Mobile modernization agreement was included in updated tenant-lease cash payment estimates. Total expected tenant lease payments were reported at $18.9 billion, including $11.1 billion thereafter.
Risks and Contingencies
- Small-cell operations have different contract, landlord, service-level, safety and liability risks from traditional towers. Adoption, co-location and renewal rates may be slower than expected.
- NextG integration, employee retention and realization of anticipated operating benefits remain material execution risks.
- Failure to refinance or repay tower revenue notes and WCP securitized notes by anticipated repayment dates could trigger additional interest of approximately 5% annually and accelerated cash-flow-based principal repayment provisions.
- Approximately $29.5 million of restricted cash acquired with WCP was required to be spent on third-party land interests by November 2012 or used to repay WCP debt.
- Revenue is concentrated among major wireless carriers; Verizon Wireless, AT&T, Sprint Nextel and T-Mobile represented 72% of consolidated revenue.
- Network services revenue is comparatively variable because it is not generally supported by long-term contracts.
- The company remains exposed to floating interest rates, refinancing risk, Australian-dollar fluctuations, acquisition execution risk and changes in wireless-carrier capital spending.
- The company reported ordinary-course claims and litigation but stated that it did not expect them to have a material adverse effect on consolidated financial position or results of operations.
Investor Verification Checklist
- Verify the sustainability of reported revenue and Adjusted EBITDA growth after isolating the contributions of NextG, WCP, tax benefits and other acquisition-related items.
- Reconcile Adjusted EBITDA to GAAP operating income, net income and operating cash flow, noting that Adjusted EBITDA excludes significant depreciation, interest, taxes and other items.
- Review the ability to fund more than $375 million of expected 2012 capital expenditures while servicing $8.4 billion of debt and meeting covenant requirements.
- Assess refinancing and repayment plans for obligations with anticipated repayment dates beginning in 2015, including potential 5% interest-rate step-ups.
- Monitor NextG integration, small-cell tenant additions, customer and landlord renewals, and the company’s ability to achieve expected long-term margins.
- Evaluate the impact of the deferred tax valuation allowance reversal separately from recurring earnings and confirm the expected 44% tax rate for the remainder of 2012.
- Review customer concentration, carrier cancellation timing and the sensitivity of network-services revenue to carrier deployment activity.