01—Abstract
Summary
Summary of the 10-K/A filed June 25, 2007. Cited figures are marked; the original filing is the authoritative source.
Crown Castle International Corp. (CCI) filed Amendment No. 1 to its 2006 Form 10-K on June 25, 2007, to revise its financial statements for non-cash equity-based compensation charges tied to historical stock option practices.
The revision moves approximately $84.0 milliona of cumulative stock-based compensation expense (about $78.0 million of it relating to 1998–2001) out of a January 1, 2006 SAB 108 cumulative-effect adjustment and into the restated 2004 and 2005 results and opening accumulated deficit as of January 1, 2004. The amendment has no impact on total stockholders' equity, additional paid-in capital, or accumulated deficit as of January 1, 2006 or later, and no impact on net income for periods after January 1, 2006. Reported 2006 net loss was $41.9 million, with net loss after preferred dividends of $62.7 million, while operating income rose to $121.4 million from $24.2 million, driven by 16.5% revenue growth to $788.2 million and site rental gross margin expansion.
The most important development for investors is the Global Signal merger, completed January 12, 2007 for roughly $4.0 billionb in stock and cash, which added 10,749 towers and roughly $1.8 billion of assumed debt. Pro forma, Crown Castle now owns or manages about 23,661 towers, including roughly 21,700 in the U.S., making it the largest U.S. wireless tower company by count.
The merger, together with the $600 millionc January 2007 share repurchase from Global Signal's former holders and new term debt, significantly raised leverage: debt plus redeemable preferred to equity was 1.77x, and expected 2007 interest expense is $348–353 million. The company also disclosed a material weakness inherited from Global Signal that was not remediated during 2006, along with an ongoing SEC informal inquiry and shareholder derivative litigation related to historic stock option practices.
02—Key points
Key Highlights
- Restatement scope: approximately $84.0 million net cumulative non-cash equity compensation revision, with about $78.0 million relating to 1998–2001; no impact on total stockholders' equity or on net income after January 1, 2006.
- 2006 results: total net revenues rose 16.5% to $788.2 million; operating income increased to $121.4 million from $24.2 million; net loss was $41.9 million (net loss after preferred dividends of $62.7 million).
- Site rental gross margin: site rental revenues grew to $696.7 million, with incremental site rental margin of 84.8%, reflecting the fixed-cost nature of tower operations.
- Global Signal merger: closed January 12, 2007 for approximately $4.0 billion, adding 10,749 towers; former Global Signal holders own about 32.7% of Crown Castle's shares.
- Leverage increased: total indebtedness of $5.95 billion as of year-end 2006 (pro forma for the 2007 Term Loan and January 2007 stock purchase); debt plus redeemable preferred to equity of 1.77x; expected 2007 interest expense of $348–353 million.
- Customer concentration: four carriers (Sprint Nextel, AT&T, Verizon Wireless, T-Mobile) accounted for 67.2% of 2006 consolidated revenues (68.3% pro forma for Global Signal).
- Material weakness: Global Signal reported material weaknesses in internal control over financial reporting that were not remediated during 2006 and remain a risk during integration.
03—Questions
Frequently Asked Questions
Does this amendment change Crown Castle's reported profits or equity?
No. The amendment reclassifies the roughly $84.0 million equity-compensation adjustment from a January 1, 2006 cumulative-effect entry into the 2004 and 2005 periods and the opening accumulated deficit as of January 1, 2004. Total stockholders' equity, additional paid-in capital, and accumulated deficit as of January 1, 2006 and later are unchanged, and net income for periods after 2005 is not affected. The restatement does change reported 2004 and 2005 results.
How large is the Global Signal acquisition and how does it change the company?
The merger was valued at about $4.0 billion (excluding about $1.8 billion of Global Signal debt that remained outstanding). It added 10,749 towers, which increased Crown Castle's total to roughly 23,661 towers and made it the largest U.S. tower company by count. It also significantly raised interest expense and leverage, and introduced integration risk and expenses.
What are the main risks for investors?
Key risks include high leverage (debt plus preferred to equity of 1.77x), customer concentration with four carriers providing about two-thirds of revenue, carrier consolidation that could reduce tower demand, ground lease renewal exposure (about 9.8% of towers on land with less than 10 years of tenure), the unremediated Global Signal material weakness, integration risk, and pending shareholder derivative litigation tied to historic stock option practices. Modeo, a development-stage mobile TV business with no revenue, and the FiberTower investment add further risk.
How strong are the underlying tower cash flows?
Site rental revenue is largely contracted: management states that in any year more than 90% of site rental revenue (excluding acquisitions) is contracted in advance, with typical lease terms of five to 10 years. Operating cash flow rose to $275.8 million in 2006 from $204.9 million in 2005, and Adjusted EBITDA reached $427.4 million, up from $335.1 million.
Does Crown Castle pay dividends or buy back stock?
The company has never paid cash dividends on common stock and states a policy of retaining cash for expansion, debt reduction, or share repurchases. It repurchased 15.9 million shares in 2006 for $518.0 million and bought 17.7 million shares for $600.0 million from Global Signal's significant stockholders in January 2007. It continues to pay cumulative dividends on its 6.25% convertible preferred stock, which is required to be redeemed in August 2012.
04—Continue