Crown Castle International Corp. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2013, filed August 6, 2013. Crown Castle owns, operates and leases shared wireless infrastructure, including approximately 31,600 towers, small-cell/DAS networks and related land interests. Operations are reported through CCUSA and the 77.6%-owned Australian subsidiary CCAL. Site rental revenue is predominantly recurring and generated under long-term contracts.
Financial performance and key metrics
| Metric | Q2 2013 | Q2 2012 | Change |
|---|---|---|---|
| Net revenues | $734.9 million | $585.5 million | Up 26% |
| Site rental revenue | $616.8 million | $517.6 million | Up 19% |
| Network services and other revenue | $118.1 million | $67.9 million | Up 74% |
| Operating income | $230.0 million | $203.0 million | Up 13% |
| Net income attributable to CCIC stockholders | $52.4 million | $116.0 million | Down 55% |
| Adjusted EBITDA | $444.4 million | $378.5 million | Up 17% |
| Net cash from operating activities | Not separately presented for the quarter | Not separately presented for the quarter |
| Metric | Six months ended June 30, 2013 | Six months ended June 30, 2012 | Change |
|---|---|---|---|
| Net revenues | $1.475 billion | $1.137 billion | Up 30% |
| Operating income | $465.0 million | $405.2 million | Up 15% |
| Net income attributable to CCIC stockholders | $67.8 million | $166.0 million | Down 59% |
| Adjusted EBITDA | $885.2 million | $738.6 million | Up 20% |
| Net cash from operating activities | $560.0 million | $324.3 million | Up 73% |
| Capital expenditures | $254.8 million | $159.7 million | Up $95.1 million |
Q2 operating margin was approximately 31.3%, compared with 34.7% in the prior-year quarter. Q2 net margin attributable to CCIC stockholders was approximately 7.1%, compared with 19.8%. Q2 Adjusted EBITDA margin was approximately 60.5%, compared with 64.6%. The margin comparisons were affected by higher operating costs, increased depreciation and amortization, and the prior-year tax benefit.
At June 30, 2013, cash and cash equivalents were $126.9 million, excluding restricted cash. Total debt and other obligations were $10.8 billion, including $3.1 billion of variable-rate debt; approximately 71% of debt had fixed-rate coupons. Undrawn revolving-credit availability was reported as $434.0 million in MD&A, while the debt note disclosed $454.0 million at June 30; this discrepancy should be verified. Total equity was approximately $2.9 billion.
Material changes versus the prior comparable period
- Revenue growth was driven by acquisitions, tenant additions, customer contract renewals and escalations, carrier network upgrades and higher network-services activity.
- The 2012 T-Mobile, NextG and WCP acquisitions materially increased the reported revenue base. Management estimated that the T-Mobile and NextG acquisitions increased Q2 2013 revenue by $75.5 million and reduced net income by $7.6 million, excluding acquisition financing interest.
- Operating expenses increased faster than revenue in Q2, including site-rental costs up 36%, network-services costs up 74% and depreciation, amortization and accretion up 25%.
- Net income declined primarily because Q2 2012 included a $68.9 million tax benefit from the reversal of valuation allowances, whereas Q2 2013 included a $36.6 million tax provision.
- Six-month interest expense increased 8% to $304.6 million, partly reflecting acquisition-related financing. Six-month losses on retirement of long-term obligations increased to $36.5 million from $14.6 million.
- The company repurchased 1.4 million common shares for $98.9 million during the first half, including approximately 1.1 million shares purchased in the open market during Q2.
- In April 2013, the company refinanced its Term Loan B, reducing the applicable interest-rate margin by 75 basis points. It also redeemed the remaining 9% Senior Notes and 7.75% Secured Notes during the first half.
Liquidity, outlook, risks and unusual items
- Management expects operating cash flow, cash on hand and revolving-credit availability to cover the next 12 months of approximately $97.0 million of principal payments and more than $500 million of capital expenditures. It did not anticipate needing capital-market refinancing before at least 2015.
- Management expects 2013 sustaining capital expenditures of approximately $36 million to $40 million and total 2013 capital expenditures in excess of $500 million.
- The company targets leverage of approximately four to six times Adjusted EBITDA and interest coverage of approximately three times Adjusted EBITDA. Consolidated leverage was 6.2 times at June 30, 2013, below a 7.0-times restrictive covenant; management reported no covenant violations.
- The company had approximately $2.7 billion of federal net operating losses and expected to use them between 2013 and 2017 based on current projections. Management was evaluating a potential REIT conversion, which could require common-stock dividends and could leave certain subsidiaries subject to corporate income taxes.
- Wireless carriers represented a substantial concentration of revenue: Sprint 30%, T-Mobile 21%, AT&T 17% and Verizon Wireless 16% of six-month 2013 consolidated revenue, or 84% in total. Customer consolidation, non-renewals and carrier network changes remain important risks.
- Debt refinancing and interest-rate exposure are material. A hypothetical 0.125 percentage-point increase in rates was estimated to increase annual interest expense by approximately $2 million after giving effect to the LIBOR floor, or approximately $4 million excluding that floor.
- Several securitized debt instruments have anticipated repayment dates beginning in 2015. Failure to repay or refinance certain instruments could trigger approximately 5% additional interest and accelerated amortization provisions.
- Foreign-currency translation produced a $38.2 million loss in other comprehensive income for the first half. CCAL represented approximately 5% of consolidated revenue and operating income.
- The company was involved in ordinary-course claims and proceedings, but management did not expect them to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Reconcile the $434 million revolving-credit availability in MD&A with the $454 million amount in the debt note.
- Assess whether revenue and Adjusted EBITDA growth remains acquisition-driven or is being sustained by organic tenant additions, escalations and carrier spending.
- Review the effect of customer concentration and the T-Mobile/MetroPCS and Sprint/Clearwire transactions on lease renewals, cancellations and future site demand.
- Evaluate refinancing requirements beginning in 2015, including potential higher rates and accelerated amortization under securitized debt agreements.
- Monitor leverage, covenant headroom and the company’s ability to fund more than $500 million of annual capital expenditures while repurchasing stock.
- Distinguish GAAP earnings and cash flow from non-GAAP Adjusted EBITDA, which management states may not be comparable with similarly titled measures used by other companies.
- Verify the assumptions, timing and tax consequences of any potential REIT conversion.