01—Abstract
Summary
Summary of the 10-K filed March 10, 2020. Cited figures are marked; the original filing is the authoritative source.
Crown Castle's 2019 10-K, filed March 10, 2020, is dominated by a restatement and a material weakness rather than by operating news.
The company identified errors in how it recognized revenue on tower installation services. A portion of the transaction price, tied to permanent improvements recorded as fixed assets, is a lease component that should be recognized ratably as site rental revenue rather than upfront as services revenue. As a result, 2018 and 2017 net income fell by about $48 milliona and $59 million, and the cumulative reduction through September 30, 2019 was about $516 million.
The errors do not affect operating cash flows, but the Audit Committee has concluded that previously issued 2016–2018 financials and 2018–Q3 2019 quarterly data should no longer be relied upon. The company also disclosed an ineffective internal control over financial reporting as of December 31, 2019, an ongoing SEC investigation tied to its services-business capitalization policies, and putative securities class actions covering February 2018 to February 2020. Underlying operations remained strong.
2019 net revenues were $5.76 billionb, up 7%. Site rental revenues grew 6% to $5.09 billion, and Fiber site rental revenue grew 7% to $1.70 billion. Adjusted EBITDA rose 7% to $3.30 billion, and operating cash flow reached $2.70 billion.
Net income attributable to common stockholders was $747 millionc, or $1.79 diluted EPS, up from $1.23 restated for 2018. Leverage was about 5.4x against a 6.50x covenant, and the company expects to pay at least $4.80 per share in dividends over the next twelve months, an increase of about 7% from the $1.125 quarterly rate in 2019 to $1.20. For investors, the central question is whether the restatement reflects a one-time accounting correction or a deeper control and governance problem.
The reported economic earnings base, cash flows, and tenant concentration (about 75%d of site rental revenue from four carriers) are largely unchanged. The key risks are legal and regulatory exposure, the remediation of the control weakness, and the pending T-Mobile/Sprint merger, which the company says has already caused a demand slowdown.
02—Key points
Key Highlights
- Restatement: 2017 and 2018 net income reduced by about $59 million and $48 million, respectively; cumulative reduction of about $516 million through Q3 2019. Prior financials from 2016 onward should no longer be relied upon.
- Material weakness: Management and PwC concluded internal control over financial reporting was not effective as of December 31, 2019, related to tower installation services revenue and capex accounting.
- Revenue growth: 2019 net revenues of $5.76 billion (+7%); site rental revenues of $5.09 billion (+6%); Fiber site rental revenues of $1.70 billion (+7%).
- Profitability and cash flow: Adjusted EBITDA of $3.30 billion (+7%); operating cash flow of $2.70 billion; diluted EPS of $1.79 versus $1.23 restated for 2018.
- Legal and regulatory exposure: An SEC subpoena and ongoing investigation, plus putative securities class actions covering February 2018 to February 2020, with the outcome unpredictable.
- Tenant concentration and merger risk: Four largest tenants account for about 75% of site rental revenue; T-Mobile and Sprint's pending merger has already caused a demand slowdown.
- Capital returns and balance sheet: Quarterly common dividend raised to $1.20 (+7%); at least $4.80/share expected over the next 12 months; leverage about 5.4x versus a 6.50x covenant; total debt about $18.1 billion.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2019, Crown Castle Inc. kept $0.15.
- Revenue$5.76B100.0%
- Cost of revenue−$524.0M9.1%
- Gross profit$5.24B90.9%
- Operating costs−$3.68B63.9%
- Operating income$1.56B27.1%
- Interest, other & tax−$699.0M12.1%
- Net income$860.0M14.9%
Where FY2019 revenue went
$5.76B- Other operating costs: $3.07B, 53% of revenue
- Net income: $860.0M, 15% of revenue
- Interest, other & tax: $699.0M, 12% of revenue
- Cost of revenue: $524.0M, 9.1% of revenue
- SG&A: $614.0M, 11% of revenue
Kept 15% as net income
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2019filed March 10, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $5.76B$5.37B | +7.3% |
| Cost of Revenue | $524.00M$434.00M | +20.7% |
| Gross Profit | $5.24B$4.94B | +6.1% |
| SG&A Expenses | $614.00M$563.00M | +9.1% |
| Operating Expenses | $4.20B$3.99B | +5.4% |
| Operating Income | $1.56B$1.38B | +12.7% |
| Interest Expense | $683.00M$642.00M | +6.4% |
| Net Income | $860.00M$622.00M | +38.3% |
| EPS (Basic) | $1.80$1.23 | +46.3% |
| EPS (Diluted) | $1.79$1.23 | +45.5% |
| Shares Outstanding (Basic) | 416.00M413.00M | +0.7% |
| Shares Outstanding (Diluted) | 418.00M415.00M | +0.7% |
05—Questions
Frequently Asked Questions
Why did Crown Castle restate its financial statements?
The company found that it had recognized the full price of tower installation services as services revenue when the work was completed. Part of that price, specifically the amounts for permanent improvements recorded as fixed assets, is a lease component. It should be recognized as site rental revenue ratably over the estimated lease term. The restatement covers 2016 through 2018 and the first three quarters of 2019. It reduced net income but does not affect cash flows or business operations.
Does the restatement change Crown Castle's cash flow or underlying business?
No. The filing states that the historical errors do not affect business operations or net cash flows. The adjustments shift revenue timing between services and site rental revenue, and between periods, rather than changing the cash the company collects. Operating cash flow was $2.70 billion in 2019, up from $2.50 billion in 2018 as restated.
What does the material weakness mean for investors?
Management and the auditor concluded that internal control over financial reporting was not effective as of December 31, 2019. The weakness relates to controls over identifying lease components in tower installation contracts and verifying capital expenditures for permanent improvements. Management has a remediation plan that includes revised policies, process improvements, and training. Until remediation is validated, investors face greater risk of further misstatement, possible governmental inquiries, and a reduced ability to access capital markets.
Is the dividend safe after the restatement?
The company raised its quarterly common dividend to $1.20 per share in October 2019 and expects dividends of at least $4.80 per share over the next twelve months, or about $2.0 billion in aggregate. Dividends remain subject to board declaration. The filing also notes that the REIT distribution requirement and debt covenants may limit payments, and that a failure to pay preferred dividends could restrict common dividends. Preferred stock is expected to convert to common stock on August 1, 2020.
What are the biggest risks from the pending T-Mobile and Sprint merger?
T-Mobile and Sprint together account for about 35% of consolidated site rental revenue in 2019, with T-Mobile at about 21% and Sprint at about 14%. The company says uncertainty around the merger has already caused a slowdown in demand. Integration could lead to overlapping networks, tenant consolidation, and contract non-renewals, and could trigger impairment reviews. The company cannot predict how demand will be affected whether or not the deal closes.
06—Continue