SBA Communications Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; balance-sheet comparisons are against December 31, 2012. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context
SBA owns and operates wireless communications towers, principally in the U.S., and also in Canada, Central America and Brazil. Site leasing is the core business; the company also provides U.S. site-development services. At quarter-end it owned 17,889 tower sites and managed or leased approximately 4,800 other sites.
Financial performance and liquidity
- Revenue: Q3 revenue was $332.1 million, up 39.2% year over year: site leasing $287.5 million (+37.7%) and site development $44.6 million (+49.8%). Nine-month revenue was $969.5 million, up 46.8%.
- Profit and margins: Q3 operating income was $63.9 million versus $41.1 million; operating margin was 19.2% versus 17.2%. Net income was $21.5 million, compared with a $52.7 million loss, and diluted EPS was $0.16 versus a loss of $0.44. The Q3 result included $34.2 million of other income, largely a $27.3 million gain on sale of a Lehman Brothers bankruptcy claim and a $6.9 million unrealized foreign-currency contract gain. For nine months, operating income was $170.2 million versus $116.1 million, but net loss remained $36.7 million versus $128.8 million; diluted loss per share was $0.29 versus $1.11.
- Cash generation: Nine-month operating cash flow was $343.0 million, compared with $237.5 million. Investing cash outflow was $450.8 million and financing cash inflow was $62.8 million. Cash and cash equivalents declined to $189.4 million from $233.1 million; restricted cash was $49.1 million on the balance sheet.
- Debt and liquidity: Total debt principal was $5.692 billion ($5.648 billion carrying value), up from $5.440 billion principal at year-end. Long-term debt was $5.637 billion, with $11.3 million of current maturities. No revolver borrowings were outstanding; reported availability was $770 million, subject to covenants and other borrowing conditions. Management estimated $261.9 million of debt service over the next 12 months and said cash, operating cash flow and revolver capacity should be sufficient to service debt during that period.
- Other metrics: Adjusted EBITDA, a non-GAAP measure, was $203.7 million for Q3 and $587.8 million for nine months, up 39.0% and 43.0%, respectively. Nine-month cash capital expenditures were $451.7 million, including $312.5 million for acquisitions and related earn-outs.
Changes versus comparable periods
- Management attributed leasing growth primarily to acquired and newly built towers, new leases, contractual rent escalators and tenant equipment additions. Acquisitions and builds since 2012 included the Mobilitie, TowerCo and Vivo portfolios.
- Site-development growth reflected higher project volumes, particularly Sprint’s Network Vision deployment.
- Costs also rose: nine-month depreciation, accretion and amortization increased to $400.0 million from $277.1 million; interest expense increased to $185.6 million from $136.7 million. Asset impairment and decommission costs rose to $16.4 million from $2.6 million.
- The company issued $1.33 billion of 2013 Tower Securities at a blended 3.218% rate and used proceeds in part to repay revolving and term-loan borrowings and settle obligations on its 1.875% convertible notes, which matured in May 2013.
Outlook, risks and unusual items
- For the remainder of 2013, management estimated discretionary cash capital expenditures of $423–443 million and non-discretionary expenditures of $3.8–4.8 million, primarily for tower acquisitions, construction, upgrades and ground-lease purchases. It expected to fund these from cash, operating cash flow and revolver borrowings. Subsequent to quarter-end, SBA acquired 10 towers for $11.6 million.
- Management expects long-term leasing growth from wireless network expansion and additional tenant equipment, while noting it expects to continue incurring losses. These are forward-looking statements, not assured outcomes.
- The August 2013 credit amendment raised the maximum debt-to-annualized-borrower-EBITDA maintenance covenant from 6.0x to 6.5x and adjusted other leverage-related terms. The filing does not provide a clear period-end actual ratio in the supplied text.
- Key risks include high leverage and refinancing needs, covenant compliance, wireless-carrier consolidation and customer spending, tenant retention, acquisition integration and valuation, international and foreign-currency exposure, tower-site land rights, permitting and construction execution, and changes in technology or demand.
- Impairment charges reflected tower sites whose projected cash flows were insufficient to recover their carrying values; Q3 charges included costs associated with decommissioning 50 towers, and nine-month charges included 181 towers. A Brazil acquisition currency hedge generated a $6.9 million unrealized gain at quarter-end; it was settled after quarter-end for $14.1 million, and a replacement hedge was entered into.
- Customer concentration is material: Sprint represented 28.2% and AT&T 22.7% of Q3 site-leasing revenue; Ericsson represented 32.2% of Q3 site-development revenue. The five largest customers accounted for 53.9% of gross receivables.
Investor verification points
- Assess how much reported growth reflects acquired towers versus organic leasing, and whether site-development volumes and margins are sustainable.
- Reconcile Q3 earnings to the $34.2 million of other income and assess recurring earnings and cash generation after interest and capital expenditures.
- Review debt maturities, the $261.9 million estimated next-12-month debt service, convertible-note settlement exposure and compliance headroom under the amended 6.5x covenant.
- Compare planned remaining-2013 capital spending with operating cash flow, acquisition commitments and actual revolver use.
- Monitor impairment and decommission costs, customer concentration, foreign-currency exposure, and the final outcomes of acquisition accounting estimates and contingent consideration.