SBA Communications Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Business context
SBA owns and operates wireless communications sites, principally in the United States, with international operations including Brazil and Canada. Site leasing is the core business; it generated 96.8% of segment operating profit in the first half of 2015. At quarter-end, the company owned 24,808 sites and managed or leased approximately 5,500 actual or potential sites.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $410.7 | $383.4 | $820.8 | $729.0 |
| Operating income | $98.2 | $83.3 | $187.2 | $150.5 |
| Operating margin | 23.9% | 21.7% | 22.8% | 20.6% |
| Net income (loss) | $28.3 | $(9.5) | $(50.7) | $(8.1) |
| Diluted earnings (loss) per share | $0.22 | $(0.07) | $(0.39) | $(0.06) |
| Adjusted EBITDA (non-GAAP) | $274.3 | $251.1 | $545.3 | $477.7 |
Q2 revenue rose 7.1%, led by domestic and international site leasing; site development revenue declined 6.3%. First-half revenue increased 12.6%. Management attributed leasing growth to acquired and newly built towers, new leases, contractual rent escalators, and amendments for added tenant equipment. Foreign exchange reduced reported revenue growth by $11.1 million in Q2 and $14.7 million in the first half. Adjusted EBITDA increased 9.2% in Q2 and 14.1% in the first half; it is a non-GAAP measure and is not a substitute for GAAP results.
Cash flow and investment: First-half operating cash flow was $375.5 million, versus $334.9 million. Investing used $436.6 million, including $323.1 million of acquisitions and $118.4 million of capital expenditures. Financing provided $93.8 million; cash and cash equivalents ended at $69.8 million, up from $39.4 million at year-end 2014.
Debt and liquidity: Total debt principal was $8.27 billion at June 30, compared with $7.87 billion at December 31, 2014; carrying value was $8.26 billion. Cash was $69.8 million, while restricted cash of $47.1 million was largely held for securitization and other obligations. Current assets were $344.5 million and current liabilities $314.1 million. The $1.0 billion revolving facility had $40 million drawn at quarter-end; $130 million was borrowed after quarter-end, bringing the balance to $170 million as of the filing. The company reported covenant compliance and estimated next-12-month debt service of $363.1 million.
Material changes versus the prior period
- Q2 net income improved from a $9.5 million loss to $28.3 million income, reflecting stronger segment operating profit and a $15.7 million foreign-exchange gain on remeasurement of an intercompany loan.
- The first-half net loss widened to $50.7 million. Other expense included a $68.3 million foreign-exchange loss on that loan; the prior-year period included a $17.9 million gain on foreign-currency hedges. First-half interest expense increased $19.0 million year over year.
- First-half site leasing revenue benefited from the Oi S.A. tower acquisitions and other portfolio growth, partly offset by currency effects. International leasing revenue increased 41.7%, although foreign exchange was a significant headwind.
- Depreciation, accretion, and amortization rose 9.4% in the first half, to $334.2 million, mainly due to acquired and built towers.
- The company borrowed $500 million under a new 2022 term loan, refinanced and expanded its revolving facility to $1.0 billion, paid $150.9 million to settle remaining warrants, and repurchased $150.0 million of stock in Q2. It also authorized a new $1.0 billion repurchase program.
Outlook, commentary, and risks
- Management expects long-term site leasing growth from increased wireless data use, network expansion, new tenants, and equipment upgrades; these are forward-looking expectations, not guaranteed results.
- For 2015, the company expected $30–$35 million in non-discretionary cash capital expenditures and $580–$600 million in discretionary expenditures, including acquisitions, construction, augmentations, and ground-lease purchases. Funding was expected from cash, operating cash flow, and borrowings or other financings.
- Management believed cash, operating cash flow, revolving capacity, and future financing would be sufficient for debt service over the next 12 months. Actual liquidity depends on operating performance, spending, and access to financing.
- Key stated risks include wireless-carrier consolidation or reduced network spending, tenant retention and leasing demand, acquisition integration and pricing, land rights and permitting, covenant compliance and refinancing, foreign currency and international-market exposure, and interest-rate changes on floating-rate debt.
- Currency exposure was material: 11.8% of first-half revenue and 13.0% of operating expenses were denominated in foreign currencies. Management estimated that a 10% adverse move in the Brazilian real would change first-half revenue and operating results by approximately 1%; a 10% move in exchange rates on unsettled intercompany debt could produce approximately $45.5 million of unrealized gain or loss.
- Other unusual items included $10.8 million of first-half impairment and decommission costs, including $1.2 million of costs associated with the former headquarters. The company reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether leasing growth and Adjusted EBITDA gains persist after separating organic growth, acquisitions, and foreign-exchange effects.
- How the $68.3 million intercompany-loan currency loss, and sensitivity to further currency moves, affect reported earnings and equity.
- Debt-service capacity and covenant headroom given $8.27 billion of debt, variable-rate exposure, and post-quarter revolving borrowings.
- Whether planned 2015 capital spending and the expanded share-repurchase program can be funded without weakening liquidity or increasing leverage materially.
- Whether international acquisition performance, tenant demand, ground-lease economics, and site-development activity meet management’s expectations.