Crown Castle International Corp. — Q2 2016 Form 10-Q Summary
Business context and reporting period
Form 10-Q for the quarter and six months ended June 30, 2016, filed August 4, 2016. The company owns, operates and leases shared wireless infrastructure in the U.S., including approximately 40,000 towers and small-cell networks supported by approximately 17,000 miles of fiber. It operates as a REIT for U.S. federal income tax purposes.
The company changed its operating segments in 2016 to towers and small cells and recast prior-period segment information. Approximately 90% of site rental revenue was derived from AT&T, Sprint, T-Mobile and Verizon Wireless.
Key financial metrics
| Metric | Q2 2016 | Q2 2015 | Change |
|---|---|---|---|
| Net revenues | $962.4 million | $899.4 million | +7% |
| Site rental revenue | $804.6 million | $737.1 million | +9% |
| Network services and other revenue | $157.8 million | $162.3 million | -3% |
| Operating income | $231.2 million | $240.7 million | -4% |
| Net income attributable to common stockholders | $75.1 million | $1.142 billion | -93% |
| Diluted earnings per share | $0.22 | $3.42 | Decrease primarily from 2015 disposal gain |
| Adjusted EBITDA | $549.7 million | $520.9 million | +6% |
| Net cash provided by operating activities | Not separately provided for Q2 | Not separately provided for Q2 |
Q2 consolidated operating margin was approximately 24.0%. Site rental gross margin was approximately 68.6%, and network services and other gross margin was approximately 39.3%. General and administrative expense increased 25% to $91.4 million, primarily due to small-cell growth, the Sunesys acquisition and related expansion.
| Metric | Six months 2016 | Six months 2015 | Change |
|---|---|---|---|
| Net revenues | $1.897 billion | $1.800 billion | +5% |
| Site rental revenue | $1.604 billion | $1.468 billion | +9% |
| Operating income | $442.9 million | $485.6 million | -9% |
| Income from continuing operations | $133.9 million | $278.3 million | -52% |
| Net income attributable to common stockholders | $111.9 million | $1.254 billion | -91% |
| Adjusted EBITDA | $1.089 billion | $1.050 billion | +4% |
| Cash flow from operating activities | $918.2 million | $918.9 million | Essentially flat |
| Capital expenditures | $393.0 million | $420.9 million | -7% |
Liquidity, debt and capital allocation
- Cash and cash equivalents were $202.3 million at June 30, 2016, compared with $178.8 million at December 31, 2015.
- Total debt and other obligations were $12.426 billion, including $100.3 million of current maturities. Approximately 81% of debt was fixed rate; floating-rate debt was approximately $2.4 billion.
- Undrawn availability under the 2016 Revolver was approximately $2.065 billion at June 30, 2016. Management stated that the company was in compliance with its financial covenants.
- Financing activity included a new $2.0 billion Term Loan A and $2.5 billion revolver, issuance of $1.5 billion of senior notes in February 2016 and $1.0 billion of senior notes in May 2016. Proceeds were used for refinancing and debt repayment.
- The company paid $597.8 million of common dividends and $22.0 million of preferred dividends during the first six months. It expected 2016 common dividends of at least $1.2 billion, or $3.54 per share, subject to board approval.
- The company sold 3.8 million common shares under its ATM program for net proceeds of $323.8 million and acquired approximately 0.3 million shares for tax withholding purposes.
Material changes versus the prior comparable period
- Site rental revenue increased 9% in both the quarter and first half, supported by tenant additions, contractual escalations, acquisitions and small-cell construction.
- Small-cell site rental revenue increased 68% in Q2 and 69% in the first half. Small-cell growth reflected the Sunesys acquisition, construction activity and increasing carrier demand.
- Towers site rental revenue increased 4% in both periods, while towers network services and other gross margin declined 18% in Q2 and 25% year to date because of lower activity and changes in work mix.
- Adjusted EBITDA increased despite higher depreciation, amortization, general and administrative expense and lower network-services activity.
- Reported net income declined sharply because the prior-year periods included a roughly $1.0 billion after-tax gain from the sale of CCAL, the company’s former Australian tower subsidiary. CCAL is presented as discontinued operations.
- In April 2016, the company acquired Tower Development Corporation, a portfolio of approximately 330 towers, for approximately $461 million in cash.
Guidance, outlook, risks and unusual items
- Management expected 2016 site rental revenue growth to benefit from tenant additions at levels similar to 2015, partly offset by lease non-renewals associated with customer decommissioning of acquired networks.
- 2016 capital expenditures were expected to equal or exceed 2015 levels, with sustaining capital expenditures of approximately 2% of net revenues. Management expected increased investment in small-cell construction.
- Management expected liquidity sources, including operating cash flow, cash on hand, revolver capacity and ATM equity issuance, to cover expected uses over the following 12 months.
- The 9.8 million shares of mandatory convertible preferred stock were scheduled to convert automatically on November 1, 2016, subject to the stated conversion terms. This could increase common shares outstanding and dilute existing common stockholders.
- Interest-rate exposure remained material. A hypothetical 0.125 percentage-point increase in rates applied to existing floating-rate debt was estimated to increase annual interest expense by approximately $3 million.
- Tower Revenue Notes carry anticipated repayment dates and could accrue approximately 5% additional interest and require excess-cash-flow principal payments if not refinanced by those dates. Management expected to refinance them on or before the anticipated repayment dates.
- Revenue concentration, carrier consolidation, tenant non-renewals, wireless industry investment levels, interest rates, access to capital, REIT qualification and compliance with debt covenants remain key risks.
- The company disclosed ordinary-course claims and contingencies but stated that it did not expect them to have a material adverse effect. No material changes to the risk factors in the 2015 Form 10-K were reported.
- The company adopted the debt issuance cost presentation guidance retrospectively. It expected the future lease accounting standard to have a material impact but was still evaluating the effect.
Important facts for investors to verify
- Reconcile reported GAAP earnings with Adjusted EBITDA and assess the effect of excluding depreciation, interest, refinancing losses and discontinued operations.
- Verify the sustainability of site rental growth, including tenant additions, contractual escalations and non-renewals from decommissioned networks.
- Evaluate the pace and returns of small-cell investment, including the integration and contribution of Sunesys and the TDC tower acquisition.
- Review debt maturities, refinancing assumptions for Tower Revenue Notes, floating-rate exposure and revolver availability.
- Assess dividend coverage against operating cash flow, capital expenditures, debt service and the expected preferred-stock conversion.
- Consider customer concentration and the impact of carrier consolidation or changes in carrier network spending.