SBA Communications Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods. Unless stated otherwise, amounts are in millions of dollars.
Business context
SBA owns and operates wireless communications towers, primarily in the United States, and also operates in Canada, Costa Rica, El Salvador and Panama. Site leasing is the core business: it represented 88.0% of Q3 revenue and 87.7% of nine-month revenue. The company owned 9,762 tower sites at quarter-end, up from 9,111 at December 31, 2010.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Total revenue | $175.5 | $158.6 | $514.4 | $461.1 |
| Operating income | $27.6 | $20.7 | $78.7 | $57.6 |
| Operating margin | 15.7% | 13.0% | 15.3% | 12.5% |
| Net loss attributable to SBA | $(33.3) | $(34.5) | $(97.4) | $(155.5) |
| Adjusted EBITDA (non-GAAP) | $112.5 | $97.7 | $327.6 | $284.6 |
- Q3 site leasing revenue rose 13.9% to $154.5; consulting revenue fell 5.6% to $4.4 and construction revenue fell 9.1% to $16.6. Nine-month site leasing revenue increased 14.1% to $451.2.
- Operating cash flow for the first nine months was $186.4, versus $142.8 in 2010. Investing activities used $307.3, including $209.4 for acquisitions and related earn-outs and $96.7 for capital expenditures. Financing activities provided $236.1.
- Cash and cash equivalents were $179.3 at September 30, compared with $64.3 at year-end 2010. Restricted cash was $24.7 current, with total restricted cash of $36.2 including amounts classified as noncurrent. The company also had $500.0 available under its revolving credit facility.
- Total debt carrying value was $3,339.2, including $5.0 current; principal obligations were approximately $3,513.8. Long-term debt increased from $2,827.5 at year-end, primarily reflecting the new term loan. Shareholders’ equity declined to $6.3 from $317.1, including the effects of the period’s net loss and $225.1 of share repurchases.
Changes versus the prior comparable period
- Revenue growth was led by acquired and constructed towers, new tenant leases, contractual rent escalators and lease amendments. Site leasing segment operating profit increased $15.2 in Q3 and $47.3 year to date.
- Operating income improved, but net losses persisted because interest costs and depreciation, accretion and amortization remained substantial. Nine-month net loss improved by $58.1, also reflecting a much smaller debt-extinguishment loss than in 2010.
- Interest expense increased to $42.3 in Q3 and $118.6 year to date, partly due to the $500.0 term loan issued in June. Depreciation, accretion and amortization rose 12.1% in Q3 and 11.5% year to date.
- Site development revenue declined in both consulting and construction, attributed to lower work volume. The company recorded $1.4 of tower-asset impairment in the first nine months; no impairment was recorded in 2010.
Outlook, risks and unusual items
- Management expected remaining-2011 discretionary cash capital expenditures of $145–$155, primarily for tower construction, acquisitions, augmentations and ground-lease purchases; expected nondiscretionary maintenance and general corporate cash expenditures were $3.5–$4.5. Management said cash on hand and operating cash flows should be sufficient to service debt for the next 12 months.
- In June 2011, SBA amended its credit agreement, extending the revolver and adding a $500.0 secured term loan, maturing in 2018. The $500.0 revolver matures in 2016. The company reported compliance with financial covenants at September 30; terms include leverage and interest-coverage tests.
- Debt includes $535.0 principal of 1.875% convertible notes due 2013, $500.0 of 4.0% convertible notes due 2014, $750.0 of senior notes due 2016 and 2019, and $1,230.0 of tower securities. The company disclosed that the hedge for 55% of the shares potentially issuable on conversion of the 1.875% notes was terminated following the Lehman Derivatives bankruptcy, leaving potential dilution or cash-settlement exposure.
- Customer concentration is material: AT&T, Sprint, Verizon and T-Mobile together accounted for 75.7% of Q3 site leasing revenue. The filing identifies wireless-industry spending and consolidation, tenant retention, acquisition competition, international operating risks, interest rates, covenant compliance and potential technology changes among key risks.
- The company repurchased 5.9 million shares for $225.1 during the first nine months and had $150.0 remaining under its $300.0 authorization. Acquisition earn-out obligations could reach $6.9; $4.5 was accrued. Subsequent to quarter-end, SBA acquired 17 towers for $9.5 cash.
Important facts for investors to verify
- Whether site leasing growth and tower additions continue to offset weaker site-development activity and rising operating costs.
- Debt-service needs, floating-rate exposure, covenant headroom and refinancing or conversion exposure, especially the 2013 convertible notes.
- Whether the planned remaining-2011 capital spending and share repurchases can be funded without materially pressuring liquidity or leverage.
- Tenant concentration and the potential impact of carrier consolidation or changes in wireless providers’ network investment.
- The assumptions behind impairment estimates, construction contract cost estimates and acquisition earn-out valuations.