Crown Castle International Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended March 31, 2010, compared with the three months ended March 31, 2009. Crown Castle owned, leased or managed approximately 24,000 wireless communications towers in the United States, Canada and Australia. Site rental, generally supported by long-term contracts and contractual escalators, represented 92% of first-quarter 2010 revenue.
Key financial metrics
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Net revenue | $444.3 million | $402.9 million | +10% |
| Site rental revenue | $406.9 million | $367.7 million | +11% |
| Operating income | $130.4 million | $97.2 million | +34% |
| Operating margin | 29% | 24% | +5 percentage points |
| Adjusted EBITDA | $274.3 million | $242.4 million | +13% |
| Adjusted EBITDA margin | 62% | 60% | +2 percentage points |
| Net income attributable to CCIC stockholders | $(119.3) million | $10.6 million | Decline |
| Loss per diluted share after preferred dividends | $(0.43) | $0.02 | Decline |
| Cash flow from operating activities | $84.3 million | $118.1 million | $(33.8) million |
| Capital expenditures | $36.9 million | $39.3 million | $(2.4) million |
Net loss was driven principally by a $66.4 million loss on debt purchases and redemptions, a $73.3 million loss on interest-rate swaps, and higher interest expense. Interest expense and amortization of deferred financing costs increased 14% to $120.8 million. The tax benefit was $10.3 million; deferred tax benefits were subject to a full valuation allowance because of the company’s history of tax operating losses.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $397.5 million at March 31, 2010, down from $766.1 million at December 31, 2009. Restricted cash totaled $179.7 million.
- Total debt and other obligations were $6.39 billion, including $630.5 million of variable-rate bank debt and $3.47 billion of securitized debt. The revolver had $400 million of undrawn availability.
- The company issued $1.9 billion of 2010 Tower Revenue Notes in January 2010, primarily to refinance the 2005 Tower Revenue Notes, and purchased or redeemed approximately $2.1 billion of face-value debt for $2.15 billion in cash.
- Interest-rate swap liabilities were $352.3 million at March 31, 2010. Certain forward-starting swaps were no longer economic hedges and were marked through earnings.
- Pro forma for April activity, management reported $300.5 million of unrestricted cash, $400 million of revolver availability, and approximately $286 million of swap obligations.
- Management expected available cash, revolver capacity and operating cash flow to cover the next 12 months’ expected $20 million of principal repayments, approximately $285 million of capital expenditures and approximately $286 million of swap obligations.
- There were no financial covenant violations. The consolidated leverage ratio was 5.8 versus a maximum covenant of 7.5, and the interest coverage ratio was 2.7 versus a minimum of 2.0.
Material changes versus the prior comparable period
- Revenue growth reflected new tenant additions, lease escalations, lease renewals and related straight-line accounting. Site rental gross margin increased to 72% in CCUSA from 70%, reflecting high incremental margins on tenant additions.
- Adjusted EBITDA increased 13%, while operating income increased 34%, despite higher interest costs.
- Results shifted from $10.1 million of consolidated net income to a $119.4 million consolidated net loss, primarily because Q1 2009 included gains on debt repurchases and interest-rate swaps, whereas Q1 2010 included substantial losses on both items.
- Operating cash flow decreased 29%, principally due to working-capital timing, cash interest payments and higher interest expense.
- CCAL revenue increased 36%, substantially reflecting a stronger Australian dollar; CCAL represented 6% of consolidated revenue.
- The company repurchased 2.8 million shares during the quarter for $108.7 million. Through the first four months of 2010, it had repurchased 3.4 million shares for $130.1 million.
Guidance, outlook, commentary and risks
- Management expected 2009-to-2010 site rental revenue growth of approximately 7% to 8%.
- Management expected 2010 operating cash flow to be at least equal to 2009’s $571 million, subject to working-capital timing and higher cash interest expense.
- Full-year 2010 capital expenditures were expected to be at least $285 million, including approximately $27 million to $32 million of sustaining capital expenditures and approximately $80 million to $100 million for customer installations and capacity improvements.
- The company did not anticipate needing capital-market refinancing for five years, although it intended to refinance the 2006 Tower Revenue Notes on or before their anticipated November 2011 repayment date.
- If applicable Tower Revenue Notes are not repaid by their anticipated repayment dates, interest rates would increase by approximately 5 percentage points and excess cash flow would be directed toward principal repayment.
- Interest-rate exposure is significant: management estimated that a hypothetical 100-basis-point decline in LIBOR would increase swap settlement liabilities by approximately $217 million and reduce earnings by approximately $147 million.
- Risks include refinancing and capital-market conditions, interest-rate and swap obligations, leverage, reliance on wireless carrier demand, foreign-exchange exposure, customer cancellations, covenant compliance and the ability to realize deferred tax assets. Management reported no material changes to the risk factors in the 2009 Form 10-K.
- Ordinary-course claims, lawsuits and proceedings were not expected by management to have a material adverse effect, although ultimate outcomes were uncertain.
Important facts for investors to verify
- Reconcile the strong revenue and Adjusted EBITDA growth with the GAAP net loss and the recurring cash burden from interest, debt refinancing and swap settlements.
- Review the anticipated repayment and refinancing requirements for the 2006 and 2010 Tower Revenue Notes, including the potential 5-percentage-point interest increase.
- Assess the timing and funding of approximately $286 million of swap obligations and the sensitivity of earnings to LIBOR movements.
- Evaluate whether operating cash flow can support planned capital expenditures, share repurchases, debt service and swap settlements without additional financing.
- Monitor leverage, interest coverage and cash-trap covenant ratios, as well as the company’s ability to refinance debt on commercially reasonable terms.
- Confirm the sustainability of site rental growth, tenant additions, contractual escalators and customer concentration.