Crown Castle International Corp. — Q2 2017 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2017, filed August 7, 2017. Crown Castle owns, operates and leases shared wireless infrastructure in the United States and Puerto Rico, including approximately 40,000 towers and 29,000 route miles of fiber supporting small-cell networks. The company operates Towers and Small Cells segments and qualifies as a REIT for U.S. federal income tax purposes.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Net revenues | $1.038 billion | $962.4 million | +8% |
| Site rental revenue | $868.8 million | $804.6 million | +8% |
| Operating income | $258.5 million | $231.2 million | +12% |
| Operating margin | 24.9% | 24.0% | +0.9 percentage points |
| Net income attributable to common stockholders | $112.1 million | $75.1 million | +49% |
| Diluted EPS | $0.31 | $0.22 | +$0.09 |
| Adjusted EBITDA | $588.5 million | $549.7 million | +7% |
| Adjusted EBITDA margin | 56.7% | 57.1% | Down 0.4 percentage points |
- Small Cells site rental revenue increased 53% to $151.2 million, while Towers site rental revenue increased 2% to $717.6 million.
- Six-month net revenues were $2.054 billion versus $1.897 billion, and net income attributable to common stockholders was $231.3 million versus $111.9 million.
- Six-month Adjusted EBITDA was $1.170 billion, up 7% from $1.089 billion. Adjusted EBITDA is a non-GAAP measure and is not comparable to GAAP net income without considering its exclusions.
- Net cash provided by operating activities for the six months was $934.1 million, compared with $918.2 million in the prior-year period.
- Capital expenditures were $563.4 million, including $527.9 million of discretionary expenditures and approximately $35.5 million of sustaining expenditures.
- Cash and cash equivalents were $199.7 million at June 30, 2017, compared with $567.6 million at December 31, 2016. Restricted cash was $117.9 million.
- Total debt and other obligations were $13.84 billion at June 30, 2017, versus $12.17 billion at year-end 2016. Non-current debt was $13.73 billion, and undrawn revolver availability was approximately $2.1 billion.
- Approximately 18% of debt was floating-rate as of June 30, 2017. A hypothetical 0.125 percentage-point increase in rates would increase annual interest expense by approximately $3 million.
- The company paid common dividends of $0.95 per share in March and June 2017, totaling approximately $696.0 million for the six months.
Material changes versus the prior comparable period
- Growth was driven by carrier tenant additions, contractual escalators, newly constructed small cells and acquisitions, partly offset by tenant lease non-renewals associated with customer decommissioning of acquired networks.
- The FiberNet acquisition, completed January 17, 2017 for approximately $1.5 billion, contributed $71.0 million of revenue during the six months and materially expanded the Small Cells business.
- The Wilcon acquisition closed June 26, 2017 for approximately $600 million in cash. Its preliminary purchase price included approximately $130 million of property and equipment, $130 million of intangible assets and $380 million of goodwill.
- Investing cash outflows increased to $2.674 billion from $876.9 million, primarily because of the FiberNet and Wilcon acquisitions and higher capital expenditures.
- Financing cash flow was positive $1.371 billion, compared with negative $131.2 million in the prior-year period, reflecting new debt and equity financing, partially offset by dividends and debt repayments.
- Interest expense increased 8% for the six months to $276.3 million, primarily because of higher indebtedness associated with acquisitions. Acquisition and integration costs increased to $13.9 million from $8.8 million.
Guidance, outlook, risks and unusual items
- Management expects 2017 site rental revenue growth from tenant additions, the FiberNet and Wilcon acquisitions and contractual escalators, partly offset by anticipated non-renewals related to decommissioned customer networks.
- 2017 capital expenditures are expected to equal or exceed 2016 levels, with continued investment in new small-cell construction. Sustaining capital expenditures are expected to be approximately 2% of full-year net revenues.
- Management expects common dividends over the following 12 months to total at least $3.80 per share, or approximately $1.5 billion, subject to board approval. Mandatory convertible preferred stock dividends were expected to be approximately $113 million.
- After the reporting date, the company announced the proposed approximately $7.1 billion Lightower acquisition, expected to close by year-end 2017, subject to customary and regulatory conditions. The transaction is intended to be funded with July equity financings and the August 2017 senior notes offering.
- July 2017 financings generated approximately $3.8 billion from common stock and $1.6 billion from mandatory convertible preferred stock. The August 2017 senior notes offering generated approximately $1.7 billion. These financings increase equity and debt obligations and may result in future common-stock dilution.
- Key risks include failure or delay in completing the Lightower acquisition, integration difficulties, transaction costs, regulatory approvals, customer concentration, carrier network investment levels, lease non-renewals, interest-rate exposure and compliance with debt covenants.
- If the Lightower transaction is not completed by June 29, 2018, or the merger agreement is terminated earlier in specified circumstances, the August 2017 senior notes may be subject to mandatory redemption at 101% of principal plus accrued interest. The filing states that sufficient funds may not be available for such redemption.
- The company’s legal proceedings and ordinary-course commitments were not expected by management to have a material adverse effect, although ultimate outcomes remain uncertain.
Important facts for investors to verify
- Confirm the final purchase accounting, financing and operating contribution of the FiberNet and Wilcon acquisitions.
- Track completion, regulatory approval, funding and integration of the proposed Lightower acquisition.
- Reconcile Adjusted EBITDA and segment operating profit to GAAP results and assess the effect of acquisition, stock compensation, depreciation and interest costs.
- Monitor leverage, floating-rate debt, debt covenants and potential mandatory redemption obligations.
- Evaluate whether tenant additions and small-cell growth offset customer decommissioning and lease non-renewal activity.
- Assess dividend sustainability in light of operating cash flow, capital expenditures, acquisition funding and mandatory convertible preferred dividends.
- Consider the filing’s disclosure that the new lease accounting standard, effective January 1, 2019, is expected to materially increase reported assets and liabilities.