SBA Communications Corporation — Q1 2014 Form 10-Q
Business context and period. For the three months ended March 31, 2014, SBA owned 22,263 towers and operated primarily in site leasing, with additional site development services. Site leasing generated 89.5% of revenue and 96.5% of segment operating profit. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Site leasing revenue | $309.3 | $273.5 | +13.1% |
| Site development revenue | $36.2 | $39.6 | -8.4% |
| Total revenue | $345.6 | $313.1 | +10.4% |
| Operating income | $67.1 | $56.8 | +18.3% |
| Net income (loss) | $1.4 | $(22.4) | Improved $23.8 |
| Adjusted EBITDA | $226.7 | $187.7 | +$38.9; +20.7% |
| Operating cash flow | $179.0 | $94.2 | +$84.7 |
Operating margin was approximately 19.4%, versus 18.1% a year earlier. Adjusted EBITDA and segment operating profit are non-GAAP measures. Cash used in investing was $964.9 million, chiefly reflecting acquisitions; cash provided by financing was $968.8 million. Cash and cash equivalents were $322.9 million at quarter-end, up from $122.1 million at year-end 2013.
At March 31, total debt principal was $6.90 billion (carrying value $6.87 billion), up from $5.91 billion principal at December 31. Current maturities were $503.8 million. The company reported $675 million available under its $770 million revolving facility, with no revolver borrowings outstanding. Total assets were $7.79 billion and shareholders’ equity was $396.2 million.
Material changes and significant items
- Revenue growth was driven by acquired and newly built towers, organic leasing, contractual rent escalators, and lease amendments. Site development revenue declined mainly because carrier work timing and Sprint activity differed from the prior-year period.
- On March 31, SBA acquired 2,007 towers in Brazil from Oi S.A. for $673.9 million, funded with cash and borrowings. It also acquired 181 completed towers during the quarter. The Oi purchase-price allocation was preliminary.
- The company closed a $1.5 billion secured term loan maturing in 2021. Proceeds funded the Oi acquisition and repaid the remaining 2011 and 2012-2 term loans and $390 million outstanding on the revolver. Debt refinancing and acquisition-related costs contributed to financing and acquisition expenses.
- Other income included a $17.9 million realized gain on foreign-exchange contracts used to hedge the Oi purchase. This nonrecurring gain materially supported the improvement in pretax results. Depreciation, accretion and amortization rose 15.0% to $144.4 million.
- The $4.0% convertible notes, with approximately $499.9 million principal outstanding and an October 2014 maturity, were convertible during the quarter. SBA elected to settle principal in cash and additional conversion value in shares; it received $121.3 million of further conversion notices after quarter-end.
Outlook, risks and contingencies
- Management expected 2014 non-discretionary cash capital expenditures of $24–$29 million and discretionary expenditures of $1.16–$1.19 billion, primarily for tower builds, acquisitions, upgrades and ground-lease purchases. Funding was expected from cash, operating cash flow and revolver capacity.
- Management believed cash, operating cash flow and available revolver capacity would be sufficient to service debt over the next 12 months. Estimated debt service for that period was $800.9 million, including the convertible notes.
- Management expects long-term leasing growth from wireless data demand, network expansion, new tenants and lease amendments, but these are forward-looking expectations, not guarantees.
- Key risks include customer consolidation and spending changes, acquisition integration and returns, financing and covenant compliance, interest-rate exposure on floating-rate debt, foreign currency and international-market risks, land rights and lease costs, construction and permitting, competition for acquisitions, and technology changes that could reduce tower demand.
- Site leasing is concentrated: AT&T represented 25.1%, Sprint 24.2%, T-Mobile 17.6% and Verizon Wireless 12.3% of site leasing revenue. Five customers accounted for 39.3% of gross receivables at quarter-end.
- Acquisition earnouts had an estimated fair value of $26.9 million, with a maximum potential obligation of $38.6 million. The quarter included $3.6 million in impairment and decommission costs. The filing also disclosed immaterial errors in prior lease-income schedule information, with no impact on reported financial statements.
Important facts for investors to verify
- Whether the Oi tower acquisition delivers the expected leasing revenue and cash returns, and whether its purchase-price allocation changes.
- How the company addresses the October 2014 convertible-note maturity and the related post-quarter conversion notices.
- Whether planned 2014 discretionary capital spending and acquisition activity can be funded without weakening leverage, liquidity or covenant headroom.
- Whether leasing growth offsets customer concentration, rising depreciation and amortization, and higher interest costs.
- Whether the $17.9 million foreign-exchange gain is clearly separated from recurring operating performance in evaluating earnings.