Crown Castle International Corp. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Filed November 8, 2013, for the quarter and nine months ended September 30, 2013. Crown Castle owns, operates and leases shared wireless infrastructure, including approximately 31,600 towers, small-cell networks and related land interests in the United States, Puerto Rico and Australia. The filing is unaudited and should be read with the 2012 Form 10-K.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net revenues | $749.0 million | $621.3 million | $2.224 billion | $1.759 billion |
| Site rental revenue | $620.8 million | $538.8 million | $1.853 billion | $1.554 billion |
| Operating income | $222.8 million | $220.8 million | $687.9 million | $626.0 million |
| Net income attributable to CCIC stockholders | $45.8 million | $42.0 million | $113.7 million | $208.1 million |
| Adjusted EBITDA | $440.6 million | $400.2 million | $1.326 billion | $1.139 billion |
| Net cash from operating activities | Not separately provided | Not separately provided | $838.9 million | $524.5 million |
- Q3 net revenue increased 21%; site rental revenue increased 15%; network services and other revenue increased 55%.
- Q3 operating margin was approximately 29.7%, compared with 35.5% in the prior-year quarter. Net margin attributable to CCIC stockholders was approximately 6.1%, compared with 6.8%. Adjusted EBITDA margin was approximately 58.8%, compared with 64.4%.
- For the first nine months, operating margin was approximately 30.9%, versus 35.6%; net margin attributable to CCIC stockholders was approximately 5.1%, versus 11.8%; and Adjusted EBITDA margin was approximately 59.6%, versus 64.8%.
- Lower nine-month net income primarily reflected an $88.3 million income-tax provision in 2013 versus a $29.4 million tax benefit in 2012, higher interest expense and $36.5 million of losses on debt retirement. The 2012 tax benefit included reversal of valuation allowances.
- September 30 cash and cash equivalents were $218.6 million, compared with $441.4 million at December 31, 2012. Restricted cash was $157.7 million.
- Total debt and other obligations were $10.775 billion, including $3.088 billion of floating-rate bank debt. Approximately 71% of debt had fixed-rate coupons, and the company reported no covenant violations.
- Total equity was $2.997 billion and total assets were $15.568 billion at September 30, 2013.
Material changes versus the prior comparable period
- Revenue growth was driven by new tenant additions, LTE-related network upgrades, contract renewals and escalations, acquisitions and higher network-services activity. The T-Mobile acquisition contributed approximately $66.5 million of Q3 revenue but reduced Q3 net income by approximately $5.2 million, excluding acquisition financing interest.
- For the first nine months, the 2012 acquisitions increased reported revenue by approximately $266.1 million and reduced net income by approximately $14.7 million, inclusive of debt assumed in the WCP acquisition but excluding acquisition financing interest.
- Adjusted EBITDA increased 10% in Q3 and 16% for the first nine months. Depreciation, amortization and accretion increased 26% in Q3 and 28% for the first nine months, primarily from acquired assets and intangibles.
- Operating cash flow increased 60% year over year to $838.9 million. Capital expenditures rose to $385.5 million from $283.4 million, while acquisition spending declined to $55.1 million from $1.236 billion.
- The company repaid or redeemed the remaining 9% Senior Notes and 7.75% Secured Notes, refinanced its Tranche B Term Loans and borrowed $800 million of incremental Tranche B loans to repay part of its revolver.
Guidance, outlook, commentary and risks
- Management expected continued carrier investment in coverage and capacity, including LTE, smartphones, mobile internet applications and next-generation technologies.
- Management expected 2014 site-rental growth to benefit from acquisitions, including the proposed AT&T transaction, but anticipated Sprint iDEN decommissioning-related non-renewals to reduce consolidated site-rental revenue by approximately 1% in 2014 and approximately 2% thereafter.
- Management expected 2014 sustaining capital expenditures of approximately 2% of revenue and total 2014 capital expenditures in excess of $500 million.
- In October 2013, Crown Castle agreed to acquire rights to approximately 9,700 AT&T towers for $4.85 billion in cash, expected to close in Q4 2013. The transaction includes a 28-year weighted-average prepaid lease for approximately 9,060 towers and the purchase of approximately 640 towers. Future purchase options could require approximately $4.2 billion between 2032 and 2048.
- October equity financings generated approximately $3.0 billion from common stock and $949.6 million from 4.50% mandatory convertible preferred stock. These proceeds were intended to partially fund the AT&T transaction.
- The company expected, subject to completion and financing of the AT&T transaction, to begin a quarterly common-stock dividend of $0.35 per share in Q1 2014. Management estimated approximately $470 million of annual common dividends and $45 million of preferred dividends based on then-current shares.
- The company began steps to elect REIT status effective January 1, 2014. A future non-cash tax charge of approximately $130 million to $160 million was expected upon derecognition of certain deferred tax assets and liabilities. REIT qualification, required distributions, tax rules, debt covenants and the use of taxable REIT subsidiaries remain material uncertainties.
- Major customers represented 89% of nine-month revenue: Sprint 28%, T-Mobile 23%, AT&T 22% and Verizon Wireless 16%. This concentration increases exposure to customer consolidation, contract non-renewal and carrier credit risk.
- Interest-rate exposure remains material: a hypothetical 0.125 percentage-point increase would raise annual interest expense by approximately $1 million after giving effect to the LIBOR floor, or approximately $4 million without the floor.
Investor verification checklist
- Verify closing, final consideration and financing of the proposed AT&T transaction, including the number of towers transferred and integration costs.
- Verify completion and tax/accounting consequences of the planned REIT conversion, including the estimated $130 million to $160 million non-cash tax charge.
- Review debt maturities and refinancing requirements, particularly anticipated repayment dates for securitized debt beginning in 2015 and related potential interest-rate increases.
- Reconcile Adjusted EBITDA to GAAP results and assess the effect of acquisition-related costs, depreciation, interest and debt-retirement losses.
- Monitor customer concentration, Sprint iDEN decommissioning, carrier consolidations and contract non-renewals.
- Confirm the board’s declaration and funding of proposed common and preferred dividends and the effect of required REIT distributions on leverage and future investment capacity.