Crown Castle International Corp. — 2Q 2020 Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2020; filed July 31, 2020. The company owns, operates and leases shared U.S. communications infrastructure, including approximately 40,000 towers and 80,000 route miles of fiber supporting small cells and fiber solutions. It operates as a REIT with Towers and Fiber segments. The 2019 comparable periods were restated primarily for tower-installation revenue recognition.
Financial performance and position
| Metric | 2Q 2020 | 2Q 2019 | Change |
|---|---|---|---|
| Net revenue | $1.440 billion | $1.447 billion | Down 1% |
| Site rental revenue | $1.319 billion | $1.263 billion | Up 4% |
| Operating income | $383 million | $389 million | Down 2% |
| Net income attributable to CCIC stockholders | $200 million | $216 million | Down 7% |
| Net income attributable to common stockholders per diluted share | $0.41 | $0.45 | Down 9% |
| Adjusted EBITDA | $831 million | $827 million | Up $4 million |
- Towers site rental revenue increased 3% to $868 million; Fiber site rental revenue increased 7% to $451 million.
- Towers services and other gross margin declined 73% to $13 million, reflecting lower and variable carrier network-enhancement activity.
- Six-month net revenue was $2.861 billion versus $2.855 billion; net income attributable to CCIC stockholders was $386 million versus $409 million; diluted earnings per share were $0.79 versus $0.84; and Adjusted EBITDA was $1.645 billion versus $1.632 billion.
- Six-month net cash provided by operating activities was $1.409 billion, up 15% from $1.227 billion. Capital expenditures were $861 million, including $817 million of discretionary spending, and cash used in investing activities was $890 million.
- Cash, cash equivalents and restricted cash totaled $2.673 billion at June 30, 2020, including $2.514 billion of cash and cash equivalents.
- Total debt and other obligations were $21.113 billion, including $21.014 billion classified as long term. Total equity was $9.826 billion.
- The company paid $1.20 per common share in each of the first two quarters and declared six-month common dividends of $2.40 per share. Preferred dividends declared were $34.375 per preferred share.
Material changes versus the prior comparable period
- Recurring site rental revenue grew, supported by tenant additions, contractual escalations, renewals and demand for small cells and fiber solutions. Site rental revenue represented 92% of second-quarter consolidated revenue.
- Services and other revenue declined to $121 million from $184 million in the second quarter and to $232 million from $350 million for the six-month period.
- SG&A increased 6% in the second quarter and 10% for the six-month period. Depreciation, amortization and accretion increased 2%, while interest expense increased 5% in both comparison periods.
- Operating cash flow improved despite lower net income, partly due to working-capital changes, including a $157 million decrease in receivables during the first six months of 2020 versus an $89 million increase in 2019.
- The company issued $1.25 billion of senior notes in April and $2.5 billion in June 2020. In July 2020, it used the June offering proceeds and cash to redeem specified 2021 and 2022 notes, resulting in a $95 million loss on debt retirement expected in third-quarter 2020 results.
- At June 30, 2020, the company had $5.0 billion of undrawn revolver availability and no commercial paper outstanding. After the July debt redemption, management reported approximately $183 million of cash, cash equivalents and restricted cash, $4.967 billion of revolver availability and $18.717 billion of debt and other long-term obligations.
Guidance, outlook, risks and unusual items
- Management expected 2020 site rental revenue to increase from tenant additions and anticipated continued demand from wireless carriers and fiber-solutions customers. Sustaining capital expenditures were expected to remain approximately 2% of revenue, with continued significant discretionary investment in small cells and fiber.
- Management expected common dividends over the following 12 months to total at least $4.80 per share, or approximately $2.0 billion, subject to board declarations. It expected liquidity sources to cover anticipated dividends, capital expenditures and debt service.
- The company stated that COVID-19 had not materially affected its financial position, results or cash flows through June 30, 2020, but warned that the pandemic could materially affect future demand, operations, permitting, suppliers, cost of capital and access to financing.
- Approximately 77% of six-month site rental revenue came from T-Mobile, including former Sprint revenue, AT&T and Verizon Wireless. T-Mobile and Sprint completed their merger on April 1, 2020.
- The company disclosed an SEC investigation concerning historical capitalization and expense policies for tenant upgrades and installations. It cannot predict the investigation’s timing, scope or outcome.
- Shareholder securities-class-action lawsuits, derivative lawsuits and litigation related to a 2019 gas-leak explosion near Durham, North Carolina, remained outstanding. The company could not estimate potential losses for these matters.
- Disclosure controls were deemed ineffective because of a material weakness in internal control over financial reporting related to accounting for tower-installation services. Management was implementing remediation measures.
- The 6.875% mandatory convertible preferred stock was scheduled to automatically convert into common stock on August 1, 2020 unless converted earlier. The filing stated that each preferred share could convert into approximately 8.8043 to 10.5651 common shares, subject to adjustments.
- REIT status, required distributions, NOL utilization, tenant non-renewals, reliance on major customers, debt refinancing, tower revenue-note repayment assumptions and the company’s ability to maintain covenants remain important considerations.
Most important facts for investors to verify
- Reconcile reported 2019 comparisons to the restated figures and understand the effect of the tower-installation revenue-recognition correction.
- Assess recurring site rental growth separately from the sharp decline in variable services revenue.
- Review leverage, debt maturities, floating-rate exposure, tower revenue-note anticipated repayment dates and the July 2020 refinancing effects.
- Evaluate whether operating cash flow can support approximately $2.0 billion of expected common dividends, capital expenditures and debt service.
- Monitor COVID-19 effects on tenant activity, construction, permitting, supply chains and capital markets.
- Track the SEC investigation, shareholder and derivative litigation, Durham lawsuits and remediation of the internal-control material weakness.
- Confirm the impact of the August 2020 preferred-stock conversion on common-share dilution and future preferred-dividend obligations.