Crown Castle International Corp. — FY2013 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2013; the source also provides unaudited quarterly information, including the fourth quarter. Crown Castle owns, operates and leases shared wireless infrastructure, primarily towers and, to a lesser extent, distributed antenna systems and other small-cell assets, in the United States and Australia. At year-end, it owned, leased or managed approximately 39,600 U.S. towers and 1,700 Australian towers. Site rental revenue represented 83% of consolidated revenue, and the weighted-average remaining term of customer contracts was approximately eight years, representing approximately $22.1 billion of contracted tenant payments.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenue | $3,022.4 million | $2,432.7 million | +24% |
| Site rental revenue | $2,503.6 million | $2,124.2 million | +18% |
| Network services and other revenue | $518.8 million | $308.5 million | +68% |
| Operating income | $921.8 million | $834.7 million | +10% |
| Operating margin | 30.5% | 34.3% | Lower |
| Adjusted EBITDA | $1,794.1 million | $1,552.7 million | +16% |
| Adjusted EBITDA margin | 59.4% | 63.8% | Lower |
| Net income attributable to CCIC stockholders | $90.1 million | $188.6 million | Lower |
| Net income attributable to common stockholders | $78.7 million | $186.0 million | Lower |
| Diluted earnings per share | $0.26 | $0.64 | Lower |
| Net cash provided by operating activities | $1,237.7 million | $772.6 million | +60% |
| Capital expenditures | $567.8 million | $441.4 million | +29% |
Operating income margin and Adjusted EBITDA margin declined primarily because acquisition-related costs, depreciation and amortization, and network-services costs grew faster than revenue. Adjusted EBITDA is a non-GAAP measure and is not necessarily comparable with similarly titled measures used by other companies.
Year-end cash and cash equivalents were $223.4 million, restricted cash was approximately $188.5 million, and total debt and other long-term obligations were $11.6 billion. Approximately 66% of debt carried fixed-rate coupons and approximately 82% was secured. Revolving-credit availability was approximately $1.1 billion at year-end. The company reported no financial covenant violations; its reported CCOC total net leverage ratio was 4.6x and consolidated interest coverage ratio was 5.4x.
Material changes versus the prior comparable period
- Revenue growth reflected new tenant additions, contractual escalations, LTE-related modifications, acquisitions and higher network-services activity. CCUSA revenue increased 25%; CCAL revenue increased 7%, including an adverse foreign-exchange effect.
- The company completed the approximately $4.827 billion AT&T Acquisition on December 16, 2013. The transaction provided exclusive rights to lease, operate or otherwise acquire towers representing approximately 24% of the company’s tower portfolio. It contributed $17.9 million of 2013 revenue and an approximately $8.9 million net loss, including acquisition and financing effects.
- The AT&T Acquisition was funded with approximately $3.0 billion of net common-stock proceeds, $950.9 million of net mandatory-convertible preferred-stock proceeds, borrowings and cash. The company issued 41.4 million common shares and approximately 9.8 million preferred shares.
- Goodwill increased to $4.916 billion from $3.120 billion, principally because of $1.769 billion of goodwill recorded for the AT&T Acquisition. The AT&T purchase-price allocation remained preliminary at year-end.
- The company refinanced and amended portions of its credit facility, issued incremental term loans, extended certain maturities and repaid or redeemed its 9% senior notes and 7.75% secured notes. Debt-retirement losses declined to $37.1 million from $132.0 million in 2012.
- Net income declined despite stronger operating results because 2013 included a $198.6 million income-tax provision, including a $67.4 million non-cash charge related to the REIT conversion. The prior year included a $100.1 million tax benefit, including valuation-allowance reversals.
- The company began operating as a REIT for U.S. federal income-tax purposes effective January 1, 2014. It generally expects to distribute at least 90% of REIT taxable income, subject to applicable limitations and board approval.
Guidance, outlook, commentary, risks and unusual items
- Management expected 2014 site-rental growth to benefit from the AT&T Acquisition, prior acquisitions, contractual escalations and continued wireless-network investment. It expected new-tenant contribution to increase from 2013 levels.
- Management expected sustaining capital expenditures of approximately 2% of 2014 net revenue and total 2014 capital expenditures in excess of $500 million.
- Management did not expect customer consolidations or related non-renewals to have a material adverse effect on 2014 operations or cash flow, but expected Sprint’s iDEN decommissioning to reduce consolidated site-rental revenue by approximately 1% in 2014 and approximately 2% after 2014.
- Customer concentration is significant: Sprint, T-Mobile, AT&T and Verizon Wireless represented 88% of 2013 consolidated revenue. Consolidation, insolvency, network sharing, contract non-renewal or reduced carrier capital spending could materially affect revenue and cash flow.
- Debt refinancing is a major risk. Contractual debt obligations were approximately $11.6 billion, while total contractual obligations, including interest and lease commitments, were approximately $33.0 billion. Certain tower-revenue and WCP securitized notes have anticipated repayment dates beginning in 2015; failure to refinance could increase interest rates and trigger cash-flow-based amortization.
- The company had approximately $1.2 billion of estimated undiscounted future asset-retirement obligations, with a recorded net present value of approximately $118.4 million.
- REIT qualification depends on complex income, asset, ownership and distribution tests. Small-cell operations and Australian tower operations were initially expected to be held in taxable REIT subsidiaries, and the company had requested an IRS ruling concerning the qualification of certain small-cell assets and rents.
- The mandatory-convertible preferred stock carries a 4.50% dividend and is scheduled to convert on November 1, 2016 into between 1.0811 and 1.3513 common shares per preferred share, subject to adjustments. Failure to pay preferred dividends could restrict common dividends.
- The company’s business is exposed to competition, technology substitution, zoning and environmental regulation, land-lease renewal risk, Australian-dollar fluctuations and execution risk associated with integrating the AT&T towers. Management reported no material pending legal proceeding and no material control deficiency.
Important facts for investors to verify
- Reconcile reported 2014 and later results with the full-year contribution, integration costs and final purchase-price allocation of the AT&T Acquisition.
- Monitor tenant additions, churn and non-renewals associated with Sprint’s iDEN shutdown and carrier consolidation.
- Assess leverage, secured collateral, covenant headroom and refinancing plans for the 2015 anticipated repayment dates and later maturities.
- Verify the sustainability of operating cash flow after capital expenditures, common dividends and preferred dividends.
- Review the company’s continued REIT qualification, IRS ruling status for small cells, taxable REIT subsidiary exposure and required dividend distributions.
- Evaluate customer concentration and the effect of any changes in carrier network investment, technology deployment or wireless-infrastructure demand.
- Confirm the final valuation of AT&T-related property, intangible assets, goodwill and associated depreciation and amortization.