SBA Communications Corporation — Q3 2018 Form 10-Q
Business context and reporting period
Reporting period: three and nine months ended September 30, 2018. SBA owns and operates wireless communications sites, primarily in the United States and Brazil, and also provides U.S. site-development services. Site leasing generated approximately 94% of revenue and 98.2% of segment operating profit for the first nine months. The company reported 29,357 owned towers at quarter-end.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $467.2 million | $433.9 million | $1,381.8 million | $1,284.6 million |
| Operating income | $138.0 million | $117.0 million | $393.8 million | $339.4 million |
| Net income (loss) | $16.1 million | $49.2 million | $(9.7) million | $96.0 million |
| Adjusted EBITDA | $328.1 million | $303.1 million | $965.8 million | $894.1 million |
| Cash from operating activities | — | $624.1 million | $591.5 million |
Revenue increased 7.7% in Q3 and 7.6% for the nine-month period. Q3 operating margin was approximately 29.5%, compared with 27.0%; net margin was 3.5%, compared with 11.3%. Nine-month operating margin was approximately 28.5%, versus 26.4%; net margin was approximately negative 0.7%, versus positive 7.5%. Adjusted EBITDA increased 8.2% in Q3 and 8.0% year over year for the nine months on reported figures; management cited constant-currency growth of 10.7% and 9.3%, respectively.
At September 30, cash and cash equivalents were $136.2 million, with $24.7 million of restricted cash. Current assets were $327.7 million and current liabilities $265.5 million. Debt principal was $9.829 billion; the balance sheet reported $9.710 billion of long-term debt, net of current maturities, plus $24.0 million current maturities. The company reported $95.7 million of Q3 interest expense and $278.3 million for the nine months. It expected $408.6 million of debt service over the following 12 months and said cash, operating cash flow, and available revolver capacity should be sufficient. The $1.25 billion revolving facility had $120 million drawn at quarter-end; $95 million more was borrowed after quarter-end.
Nine-month investing cash outflow was $520.3 million, including $403.8 million of acquisitions and $105.0 million of capital expenditures. The company repurchased 2.8 million shares for $453.5 million during the nine months. Total assets were $7.214 billion and shareholders’ deficit was $3.145 billion at quarter-end.
Material changes versus the prior comparable period
- Q3 site-leasing revenue grew in both domestic and international markets, supported by acquisitions, new builds, organic leasing activity, amendments, and contractual escalators. Site-development revenue rose with increased carrier activity.
- Q3 net income declined despite higher operating income, primarily because of higher interest expense and foreign-exchange effects. Other expense included a $25.9 million loss on remeasurement of U.S.-dollar intercompany loans with a Brazilian subsidiary; the prior-year quarter included an $18.4 million gain.
- The nine-month net loss included a $113.1 million intercompany-loan remeasurement loss, compared with an $11.6 million gain in 2017, and a $14.4 million debt-extinguishment loss. These items and increased interest expense outweighed operating-income growth.
- In April, SBA refinanced its 2014 and 2015 term loans with a new $2.4 billion term loan maturing in 2025, increased revolving commitments to $1.25 billion, and extended the revolver maturity to 2023. The new term loan carried a 4.25% rate at quarter-end.
- Foreign currency translation reduced nine-month comprehensive income by $149.1 million. The Argentine subsidiary moved to highly inflationary accounting effective July 1; management said the effect was not material.
Outlook, risks, contingencies, and unusual items
- Management expected organic site-leasing revenue growth per tower in both domestic and international segments during the remainder of 2018 to exceed 2017 levels, partly due to carrier spectrum deployments.
- For 2018, management estimated non-discretionary cash capital expenditures of $33–$38 million and discretionary expenditures of $580–$590 million, funded through cash, operations, and borrowings or new financings.
- Management identified wireless-carrier consolidation, including the proposed Sprint–T-Mobile merger, as a potential leasing risk. Other cited risks include foreign-exchange and country exposure, acquisitions and integration, rising interest rates and refinancing, tower demand, technology changes, land rights, and REIT and tax compliance.
- A 10% adverse move in the Brazilian real was estimated to reduce nine-month revenue and operating income by approximately 1.1% and 0.5%, respectively. A 10% move in exchange rates affecting unsettled intercompany debt could have produced approximately $53 million of unrealized gain or loss.
- The company expected adoption of the new lease-accounting standard in 2019 to materially increase balance-sheet assets and liabilities for ground leases, but did not expect a material income-statement or liquidity effect, or an effect on debt-covenant compliance.
- Management stated that disclosure controls and procedures were effective as of September 30, 2018. The filing reported compliance with credit-agreement and tower-securitization covenants.
Important facts for investors to verify
- Whether underlying organic leasing growth and carrier activity support management’s outlook, apart from acquired towers, currency movements, and pass-through revenue.
- The drivers and potential recurrence of Brazilian-real and intercompany-loan remeasurement losses, and the sensitivity of earnings and equity to exchange rates.
- Debt-service capacity, refinancing exposure, floating-rate interest costs, covenant headroom, and revolver availability after subsequent borrowings.
- Returns on acquisition and discretionary capital spending, including the planned 2018 expenditure range and ongoing share repurchases.
- Potential effects of wireless-carrier consolidation, ground-lease obligations, and 2019 lease-accounting adoption.