Crown Castle International Corp. — Form 10-Q Summary
Business context and reporting period
Filed November 7, 2014, for the quarter and nine months ended September 30, 2014. Crown Castle owns, operates and leases shared wireless infrastructure, primarily towers, with additional small-cell networks and network services. CCUSA generated approximately 95% of third-quarter site-rental revenue; CCAL represents the Australian operations. The company began operating as a REIT for U.S. federal income tax purposes on January 1, 2014.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|
| Site rental revenue | $751.9m | $620.8m | $2,245.4m | $1,853.0m |
| Network services and other revenue | $178.1m | $128.2m | $476.9m | $370.9m |
| Total revenue | $930.0m | $749.0m | $2,722.3m | $2,224.0m |
| Operating income | $250.3m | $222.8m | $732.0m | $687.9m |
| Operating margin | 26.9% | 29.8% | 26.9% | 30.9% |
| Adjusted EBITDA | $533.0m | $440.6m | $1,590.6m | $1,325.7m |
| Adjusted EBITDA margin | 57.3% | 58.8% | 58.4% | 59.6% |
| Net income | $108.0m | $46.5m | $246.2m | $116.6m |
| Net income attributable to common stockholders | $95.9m | $45.8m | $209.5m | $113.7m |
| Diluted EPS | $0.29 | $0.16 | $0.63 | $0.39 |
- Revenue increased 24% in the quarter and 22% for the nine-month period. Site-rental revenue increased 21% in both comparisons.
- Adjusted EBITDA increased 21% for the quarter and 20% for the nine-month period, while margins declined because of the lower average tenancy of towers acquired from AT&T and increased operating costs.
- Net income benefited materially from REIT status and the resulting reduction in income-tax expense. The nine-month 2014 tax provision was $0.1m versus $88.3m in 2013; the quarter included a $0.5m provision versus a $34.0m provision in the prior-year quarter.
- Interest expense was $141.3m in Q3 and $432.2m for nine months, down 1% and 3%, respectively, from the comparable periods.
Cash flow, liquidity and capital structure
| Metric | 9M 2014 | 9M 2013 |
|---|
| Cash flow from operating activities | $1,192.2m | $838.9m |
| Capital expenditures | $513.6m | $385.5m |
| Acquisitions, net of cash acquired | $179.9m | $55.1m |
| Cash flow from investing activities | $(690.7)m | $(433.0)m |
| Cash flow from financing activities | $(479.0)m | $(625.0)m |
| Ending cash and equivalents | $238.6m | $218.6m |
- At September 30, 2014, total debt and other obligations were $11.6 billion, including $3.8 billion of variable-rate debt and approximately 67% fixed-rate debt. Total equity was $6.9 billion.
- Undrawn availability under the $1.5 billion revolving credit facility was approximately $1.1 billion at September 30; as of November 3, availability was approximately $1.2 billion with $326 million outstanding.
- The company reported compliance with its debt covenants and stated that it expected to remain compliant. Debt fair value was $11.9 billion versus $11.6 billion carrying value.
- During the nine months, the company issued $850.0 million of 4.875% senior notes due 2022, repaid $300.0 million of tower revenue notes and redeemed its $500.0 million of 7.125% senior notes. These transactions produced a $44.6 million loss on retirement of long-term obligations.
- Common dividends of $0.35 per share totaled approximately $351.5 million for the first nine months. Preferred dividends totaled approximately $33.0 million.
Material changes versus the prior comparable period
- The December 2013 AT&T tower acquisition was the principal growth driver. It represented approximately 23% of the company’s towers at September 30, 2014 and contributed approximately 15% of site-rental revenue growth based on initial run rates.
- Excluding straight-line accounting, management attributed nine-month site-rental growth approximately to the AT&T acquisition, new tenant additions and amendments, cash escalations, and a partial offset from contract non-renewals.
- Capital expenditures increased $128.1 million, or 33%, primarily because of wireless infrastructure improvements, new small-cell builds and other discretionary investments.
- Acquisition and integration costs increased to $28.9 million from $13.2 million for the nine-month period.
- Common shares outstanding were 333.9 million at September 30, 2014 versus 334.1 million at year-end 2013. The company also had 9.8 million shares of 4.50% mandatory convertible preferred stock outstanding.
Guidance, outlook, risks and unusual items
- Management expected 2014 site-rental growth to continue benefiting from the AT&T acquisition. For 2015, it expected tenant additions to remain similar to 2014 levels, partially offset by higher non-renewals.
- Sprint’s iDEN decommissioning was expected to reduce site-rental revenue by approximately $30 million in 2014 and $60 million to $70 million in 2015. Acquired-network decommissioning was expected to reduce 2015 site-rental revenue by approximately $35 million to $45 million, with additional potential non-renewals primarily between 2015 and 2018.
- Sustaining capital expenditures were expected to be approximately 2% of revenue in 2014 and 2015; total capital expenditures were expected to remain at or above current levels.
- In October 2014, the board increased the annualized common dividend from $1.40 to $3.28 per share, beginning with a $0.82 quarterly dividend payable December 31, 2014. Management expected annual common-dividend cash payments of approximately $1.1 billion.
- The company expected cash on hand, operating cash flow and revolver availability to cover the next 12 months of debt service, dividends, preferred dividends and capital expenditures. It identified $513.7 million of debt with anticipated, but not contractual, repayment dates in 2015.
- An IRS private letter ruling supported treating the real-property portion of small cells as REIT assets. Subject to evaluation and board approval, the company expected to include at least part of its small-cell business in the REIT during 2015 and potentially derecognize related deferred tax liabilities.
- Approximately 90% of nine-month revenue came from AT&T, Sprint, T-Mobile and Verizon Wireless. Customer consolidation, network decommissioning, contract non-renewals and carrier financial weakness therefore represent significant concentration risks.
- The company stated that ordinary-course claims, lawsuits, performance guarantees and other contingencies were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Investor verification points
- Reconcile reported growth with the AT&T acquisition contribution and evaluate the effect of its lower average tenancy on future margins.
- Track Sprint iDEN and acquired-network decommissioning against the estimated 2015 revenue reductions and the projected 2015–2018 timing.
- Assess whether operating cash flow can sustain the increased approximately $1.1 billion annual common-dividend commitment while maintaining planned capital expenditures and debt refinancing capacity.
- Review refinancing needs and anticipated repayment dates for tower revenue notes and other debt, including exposure to variable interest rates.
- Monitor customer concentration, contract renewals, carrier consolidation and the company’s ability to maintain REIT qualification and complete the proposed small-cell restructuring.
- Distinguish Adjusted EBITDA from GAAP operating income and cash flow; the filing states that Adjusted EBITDA is a non-GAAP measure that may not be comparable with other companies.
