Crown Castle International Corp. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2012; filed May 3, 2012. The company owns, operates and leases wireless infrastructure, including towers, distributed antenna systems and third-party land interests, primarily in the United States and Australia. Results are unaudited and should be read with the 2011 Form 10-K.
Financial performance and key metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Site rental revenue | $497.5 million | $456.2 million | Up 9% |
| Network services and other revenue | $54.2 million | $42.8 million | Up 27% |
| Total revenue | $551.7 million | $499.0 million | Up 11% |
| Operating income | $202.2 million | $166.4 million | Up 22% |
| Operating margin | 36.7% | 33.3% | Up 3.4 percentage points |
| Net income attributable to CCIC stockholders | $50.0 million | $40.0 million | Up 25% |
| Net income attributable to common stockholders after preferred dividends | $47.4 million | $34.8 million | Up 36% |
| Diluted earnings per share | $0.17 | $0.12 | Up $0.05 |
| Adjusted EBITDA | $360.1 million | $319.3 million | Up 13% |
| Adjusted EBITDA margin | 65.2% | 64.0% | Up 1.2 percentage points |
| Net cash provided by operating activities | $162.2 million | $127.5 million | Up 27% |
Site rental revenue represented approximately 90% of consolidated revenue and was supported by tenant additions, contract renewals, escalations and the WCP acquisition. Management reported a 91% incremental margin on the increase in site rental revenue. Network services revenue was more variable and benefited from a greater mix of higher-margin site development services.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.064 billion at March 31, 2012, including a substantial increase related to debt financing; unrestricted cash reported in the pro forma liquidity summary was $94.9 million, excluding restricted cash.
- Restricted cash totaled approximately $294.0 million.
- Total debt and other obligations were $8.421 billion, compared with $6.886 billion at December 31, 2011. Long-term debt and other obligations were $8.343 billion.
- The company completed a $3.1 billion senior secured credit facility refinancing consisting of a $1.0 billion revolving facility, a $500 million Term Loan A and a $1.6 billion Term Loan B. The revolver was undrawn at March 31, 2012.
- Undrawn revolving credit availability was $1.0 billion. Approximately 75% of debt had fixed-rate coupons; $2.1 billion, or approximately 25% of total debt, was floating-rate debt.
- Management stated that cash on hand, revolver availability and operating cash flow were expected to cover the next 12 months of $77.8 million in principal payments and approximately $300 million of capital expenditures.
- The company reported no financial covenant violations and stated that it expected to remain in compliance. Pro forma net leverage under the credit agreement was 4.9x against a 6.0x maximum, and interest coverage was 4.0x against a 2.5x minimum.
Cash flow and capital allocation
| Cash flow item | Q1 2012 | Q1 2011 |
|---|---|---|
| Operating activities | $162.2 million | $127.5 million |
| Investing activities | $(285.2) million | $(52.8) million |
| Financing activities | $1.105 billion | $(105.6) million |
| Capital expenditures | $65.1 million | $52.7 million |
| Acquisition payments | $221.3 million | $0.4 million |
Capital expenditures included $4.2 million of sustaining expenditures, $27.9 million for land interests, $25.9 million for infrastructure improvements and other activities, and $7.0 million for wireless infrastructure construction. The company repurchased approximately $35.5 million of common stock through employee tax-withholding share settlements and did not pay common dividends.
Material changes versus the prior comparable period
- Revenue growth and high incremental site rental margins increased operating income and Adjusted EBITDA.
- Interest expense increased by $10.8 million, or 9%, primarily because of higher debt outstanding following the refinancing and acquisitions.
- The company recorded a $7.1 million loss on the retirement of long-term obligations, including debt purchases and refinancing-related write-offs.
- Income taxes changed from a $0.8 million benefit in Q1 2011 to a $6.7 million provision in Q1 2012, although valuation allowances continued to affect the effective tax rate.
- WCP was acquired on January 31, 2012 for a purchase price of $214.7 million, including $39.2 million of restricted cash and excluding assumed debt. WCP contributed approximately 2,300 ground lease-related assets and $336.3 million of assumed debt after fair-value adjustments.
- The company converted all 6.111 million outstanding shares of 6.25% redeemable convertible preferred stock into approximately 8.3 million common shares. No preferred shares remained outstanding at March 31, 2012.
Guidance, outlook, risks and unusual items
- Management expected full-year 2012 site rental revenue to grow approximately 10% from 2011, including WCP and NextG. New tenant additions, including the expected impact of Sprint Network Vision deployments, were expected to contribute approximately 5% year-over-year growth.
- The 2012 outlook did not assume net growth from the existing base of business because expected lease escalations and straight-line renewal effects were expected to be offset by anticipated customer cancellations related to prior wireless carrier consolidation.
- Management expected approximately $300 million of 2012 capital expenditures, including approximately $23 million to $28 million of sustaining capital expenditures.
- NextG acquisition closed on April 10, 2012 for approximately $1.0 billion in cash. NextG had more than 7,000 on-air distributed antenna system nodes, approximately 1,500 nodes under construction and rights to more than 4,600 miles of fiber. The acquisition was not included in Q1 operating results but was reflected in certain pro forma liquidity and covenant disclosures.
- The company expected to reverse up to $100 million of its federal deferred tax valuation allowance as an income tax benefit in Q2 2012 because of deferred tax liabilities recorded in connection with the NextG acquisition.
- Key risks include slower-than-expected wireless carrier investment, customer cancellations and consolidation, execution and integration risk related to WCP and NextG, and the different operating, contractual, safety and liability risks associated with small-cell networks.
- Debt-related risks include floating-rate exposure, refinancing requirements beginning at least in 2015, anticipated repayment dates for certain securitized notes, potential approximately 5% interest-rate increases if specified repayment dates are missed, and cash-trap or accelerated amortization provisions.
- The company was subject to ordinary-course claims and proceedings; management did not expect them to have a material adverse effect, although ultimate outcomes remain uncertain.
Investor verification checklist
- Verify the post-quarter-end financial impact, purchase accounting and integration progress for the NextG acquisition.
- Assess whether the projected 2012 site rental growth and approximately 5% tenant-addition contribution were achieved.
- Monitor leverage, interest coverage, floating-rate exposure and compliance with credit facility and securitized-debt covenants.
- Review the timing and amount of the expected federal valuation allowance reversal and its effect on reported earnings.
- Evaluate customer concentration: Verizon Wireless, AT&T, Sprint Nextel and T-Mobile represented approximately 75% of consolidated revenue.
- Track small-cell customer additions, renewals, construction activity, margins and integration costs following the NextG acquisition.
- Reconcile Adjusted EBITDA to GAAP operating results and cash flow because the company’s definition is non-GAAP and may not be comparable with other issuers.