Crown Castle International Corp. — Q2 2015 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2015; filed August 7, 2015. Crown Castle owns, operates and leases shared wireless infrastructure, primarily U.S. towers and small-cell networks. Following the May 2015 sale of its Australian subsidiary, CCAL, the company operates principally through its U.S. business and reports CCAL as discontinued operations.
Financial performance and key metrics
| Metric | Q2 2015 | Q2 2014 | Change |
|---|---|---|---|
| Net revenues | $899.4 million | $878.2 million | +2% |
| Site rental revenue | $737.1 million | $710.8 million | +4% |
| Network services and other revenue | $162.3 million | $167.5 million | -3% |
| Operating income | $240.7 million | $217.2 million | +11% |
| Operating margin | 26.8% | 24.7% | +210 bps |
| Adjusted EBITDA | $520.9 million | $509.5 million | +2% |
| Adjusted EBITDA margin | 57.9% | 58.0% | Approximately flat |
| Income from continuing operations | $166.5 million | $25.3 million | Significant increase |
| Net income attributable to common stockholders | $1.142 billion | $23.0 million | Primarily due to CCAL sale gain |
| Diluted earnings per share | $3.42 | $0.07 | Primarily due to CCAL sale gain |
First-half results: Revenue was $1.800 billion, up 5%; operating income was $485.6 million, up 6%; Adjusted EBITDA was $1.050 billion, up 3%; and income from continuing operations was $278.3 million versus $118.5 million in the prior-year period. Adjusted EBITDA margins were approximately 58.3% in the first half of 2015 versus 59.2% in the first half of 2014.
Cash flow, capital allocation, debt and liquidity
- Net cash provided by operating activities from continuing operations was $918.9 million for the first six months, up $195.9 million, or 27%, year over year.
- Capital expenditures were $420.9 million, including $376.8 million of discretionary spending and $44.1 million of sustaining expenditures. Wireless infrastructure construction and improvements were $325.0 million.
- Cash dividends paid during the first half totaled $547.4 million on common stock and $22.0 million on preferred stock. Management expected 2015 common dividends of approximately $1.1 billion, or $3.28 per share, subject to board approval.
- At June 30, 2015, cash and cash equivalents were $338.6 million, total debt and other obligations were $11.1 billion, and total equity was $7.4 billion.
- The company had approximately $2.2 billion of undrawn revolver availability at June 30, 2015. Approximately 74% of debt was fixed rate, and management stated that debt-service coverage and leverage ratios were within applicable covenants.
- During the quarter, the company issued $1.0 billion of May 2015 Tower Revenue Notes and used proceeds, together with CCAL-sale proceeds, to repay $250.0 million of August 2010 Tower Revenue Notes, all WCP Securitized Notes, and portions of its credit-facility borrowings.
- After quarter-end, the company used $835 million of revolver borrowings and cash on hand to fund the approximately $1.0 billion Sunesys acquisition. As of August 5, 2015, revolver availability was approximately $1.4 billion.
Material changes versus the prior comparable period
- Site rental revenue increased 3% in the first half, reflecting approximately 6% growth from new leasing activity and 3% growth from cash escalations, partly offset by an approximately 4% decline from tenant non-renewals.
- Network services and other revenue increased 13% in the first half, while related gross margin increased 28%, benefiting from carrier network enhancements, including LTE upgrades, and portfolio expansion.
- General and administrative expense increased 21% in the first half, and increased to 8% of revenue from 7%, reflecting portfolio expansion, small-cell activity and network-services growth.
- Interest expense and amortization of deferred financing costs declined 8% in the first half, primarily due to lower amortization of interest-rate swaps and refinancing activity.
- Acquisition and integration costs decreased to $4.4 million from $24.8 million in the first half of 2014.
- CCAL was sold on May 28, 2015, generating a $981.5 million after-tax gain and approximately $1.1 billion of net cash proceeds at closing. CCAL results were reclassified to discontinued operations.
Guidance, outlook, risks and unusual items
- Management expected 2015 site-rental growth to benefit from tenant additions at levels similar to 2014, partly offset by increased non-renewals associated with Sprint's legacy Nextel iDEN shutdown and decommissioning of former Leap Wireless, MetroPCS and Clearwire networks, primarily during 2015 through 2018.
- Management expected sustaining capital expenditures to be slightly above 2% of revenue in 2015 because of office-facility expansion and expected discretionary capital spending at or above current levels due to increased small-cell construction.
- The company expected cash on hand, operating cash flow and revolver capacity to fund the next 12 months of debt service, dividends and capital expenditures. This assessment precedes the post-quarter-end Sunesys borrowing.
- The company expects to remain a REIT and generally pay minimal cash income taxes because of its REIT status and net operating loss carryforwards. It expected to use approximately $1.0 billion of its approximately $2.0 billion NOL carryforward to offset the tax gain on the CCAL sale.
- A significant portion of 2015 common dividends was expected to be characterized as capital-gains distributions because of the CCAL sale.
- The company had a $124 million installment receivable from the CCAL buyer due in January 2016, supported by an irrevocable letter of credit and hedged with a foreign-currency swap.
- Management stated that ordinary-course legal proceedings and contingencies were not expected to have a material adverse effect. No material changes were reported to the risk factors in the 2014 Form 10-K.
- Debt-related risks include approximately $2.9 billion of floating-rate debt at June 30, 2015, refinancing requirements for long-dated Tower Revenue Notes, restrictive covenants and increased leverage following the Sunesys acquisition.
Most important facts for investors to verify
- Separate recurring U.S. site-rental growth from temporary or variable network-services activity and assess the effect of tenant non-renewals.
- Recalculate leverage, interest coverage and revolver availability after the $835 million Sunesys borrowing and approximately $1.0 billion acquisition.
- Review the contractual and anticipated repayment dates of Tower Revenue Notes, including the potential approximately 5% additional interest rate and cash-sweep provisions if not refinanced.
- Confirm receipt and tax treatment of the approximately $124 million CCAL installment payment and the expected capital-gains characterization of 2015 dividends.
- Evaluate whether the $981.5 million CCAL disposal gain and $59.8 million foreign-currency-swap gain are excluded when assessing sustainable earnings.
- Monitor the pace and returns of small-cell and other discretionary capital expenditures, which increased materially year over year.