Crown Castle International Corp. — Q2 2011 Form 10-Q Summary
Business context and reporting period
Unaudited quarterly report for the three and six months ended June 30, 2011, filed August 5, 2011. The company owns, operates and leases wireless communication towers and related distributed antenna systems in the United States, Puerto Rico and Australia. It owned, leased or managed approximately 23,800 towers at quarter-end. Site rental revenue represented 91% of second-quarter consolidated revenue, and the CCUSA segment represented approximately 94%.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenue | $500.3 million | $456.1 million | $999.4 million | $900.5 million |
| Site rental revenue | $457.1 million | $409.6 million | $913.3 million | $816.5 million |
| Operating income | $167.1 million | $132.9 million | $333.6 million | $263.3 million |
| Operating margin | 33.4% | 29.1% | 33.4% | 29.2% |
| Net income attributable to CCIC stockholders | $30.9 million | $(97.5) million | $70.9 million | $(216.8) million |
| Net income attributable to common stockholders after preferred dividends | $25.7 million | $(102.7) million | $60.5 million | $(227.2) million |
| Basic and diluted EPS | $0.09 | $(0.36) | $0.21 | $(0.79) |
| Adjusted EBITDA | $319.9 million | $280.1 million | $639.2 million | $554.3 million |
| Adjusted EBITDA margin | 64.0% | 61.4% | 64.0% | 61.6% |
| Net cash from operating activities | Not separately provided | Not separately provided | $283.8 million | $248.2 million |
| Capital expenditures | Not separately provided | Not separately provided | $116.7 million | $91.8 million |
At June 30, 2011, cash and cash equivalents were $108.1 million, restricted cash was $198.6 million, and total debt and other obligations were $6.816 billion. The company reported $262.0 million of undrawn revolver availability. Redeemable preferred stock had a carrying value of $317.0 million and an aggregate mandatory redemption and liquidation value of approximately $318.1 million.
Material changes versus the prior comparable period
- Second-quarter revenue increased 10%, led by an 11% increase in site rental revenue. First-half revenue increased 11%, with site rental revenue up 12%.
- Management attributed approximately 7% of the site rental increase to new tenant additions, with the remainder driven by renewals, contractual escalations and cancellations, including straight-line accounting effects.
- Operating income increased 26% in the quarter and 27% for the first half, while Adjusted EBITDA increased 14% and 15%, respectively. High incremental margins on additional tenants and cost containment supported the improvement.
- The company moved from a prior-year net loss to net income. The 2010 periods included significant losses on interest rate swaps—$114.6 million in the quarter and $187.9 million for the first half—and a $66.4 million loss on debt purchases and redemptions in the first half. Management stated that all forward-starting swaps were settled in 2010, so similar losses were not expected to recur.
- Operating cash flow increased $35.6 million, or 14%, to $283.8 million for the first half. Investing cash use increased to $128.2 million, primarily because capital expenditures rose to $116.7 million.
- The company repurchased 4.6 million common shares for $192.6 million during the first half, including 3.6 million shares for $150.3 million during the second quarter.
Guidance, outlook, risks and unusual items
- Management expected 2011 site rental revenue growth of 8% to 9% versus 2010 and approximately $300 million of full-year capital expenditures, including sustaining and discretionary spending. Expected sustaining capital expenditures were approximately $20 million to $25 million.
- Management expected cash on hand and operating cash flow, net of cash interest, to cover the next 12 months’ expected $30.7 million of principal repayments and approximately $300 million of capital expenditures.
- The $6.25% convertible preferred stock requires redemption in August 2012 at approximately $318 million plus unpaid dividends unless converted. It was convertible into approximately 8.6 million common shares, and management expected that a substantial portion could convert if the share price remained at or above then-current levels.
- In June 2011, the revolver commitment was increased by $50 million to $450 million. The company had $188 million drawn and $262 million undrawn at quarter-end. Debt maturities were generally long-dated, but the $622.4 million of term loans mature in 2014.
- The company’s leverage covenant was 7.50x or less, compared with 5.3x at June 30, 2011; the interest coverage covenant was at least 2.00x, compared with 3.1x. Management reported no covenant violations and expected continued compliance.
- AT&T’s proposed acquisition of T-Mobile was a principal business risk. AT&T and T-Mobile represented 23% and 11%, respectively, of first-half consolidated revenue and were both located on approximately 4,000 company towers. Network consolidation could reduce or delay tower demand, contract renewals and revenue over multiple years.
- Customer concentration was significant: AT&T, Verizon Wireless, Sprint and T-Mobile collectively contributed approximately 73% of first-half revenue.
- Other risks include customer bankruptcies or contract cancellations, Sprint’s planned network consolidation, impairment of tower assets or customer-related intangibles, refinancing and interest-rate risk, and Australian dollar fluctuations. The Australian segment represented 6% of consolidated revenue for the first half.
- Ordinary-course litigation and claims were disclosed; management did not expect them to materially affect financial position or results of operations.
Important facts for investors to verify
- Whether the expected 8%–9% 2011 site rental growth and approximately $300 million capital expenditure plan were achieved.
- The outcome and operational effects of the proposed AT&T/T-Mobile transaction, including contract cancellations, network overlap and changes in tenant demand.
- The conversion, refinancing or cash redemption of the approximately $318 million preferred stock obligation due in August 2012.
- Compliance with leverage, interest coverage and cash-trap covenants as debt maturities approach.
- Whether Adjusted EBITDA trends remain consistent with GAAP operating income and operating cash flow, recognizing that Adjusted EBITDA is a non-GAAP measure.
- The sustainability of revenue growth given the company’s concentration in four major wireless customers and exposure to customer consolidation.