SBA Communications Corporation — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. SBA owns and operates wireless communications towers, primarily in the United States. Site leasing is its core business; it generated 85.3% of Q2 revenue and 97.3% of Q2 segment operating profit.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages. Comparisons are with the prior-year period.
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Total revenue | $154.5 | $136.2 | $302.5 | $271.2 |
| Operating income | $20.0 | $13.6 | $36.9 | $27.9 |
| Net loss attributable to SBA | $(83.7) | $(29.4) | $(121.0) | $(47.3) |
| Loss per share, basic and diluted | $(0.72) | $(0.25) | $(1.04) | $(0.40) |
| Adjusted EBITDA (non-GAAP; Q2 only) | $95.5 | $83.2 | Not clearly provided | Not clearly provided |
- Q2 revenue grew 13.5%; site leasing revenue increased 12.3% and site development construction revenue increased 24.8%. Six-month revenue grew 11.5%.
- Calculated operating margin was approximately 13.0% in Q2 2010, versus 10.0% in Q2 2009; for the first half it was approximately 12.2%, versus 10.3%.
- Q2 operating income rose 47.3%, while the net loss widened substantially, chiefly because of a $48.9 million debt-extinguishment loss and higher interest and non-cash interest expense.
- Six-month operating cash flow was $98.1 million, down from $107.4 million. Investing used $171.0 million, including acquisitions and capital expenditures; financing provided $139.5 million. Cash increased $66.6 million to $227.9 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $227.9 million; restricted cash was $28.1 million and short-term investments were $4.2 million. Total assets were $3.434 billion.
- Total debt was $2.807 billion, compared with $2.489 billion at December 31, 2009. This includes $29.6 million in current maturities; long-term debt was $2.778 billion. Debt principal and carrying values differ, notably for convertible notes.
- The April refinancing replaced the remaining $938.6 million of 2006 CMBS Certificates with $1.23 billion of tower securities, bearing coupon rates of 4.254% and 5.101% (weighted average 4.6%). Proceeds also funded $38.5 million of prepayment consideration, accrued interest and fees; remaining proceeds were for general corporate purposes.
- The new tower securities are secured by tower-related assets and cash flows. Their anticipated repayment dates are 2015 and 2017; final maturities are 2040 and 2042. Failure to repay by anticipated dates can trigger higher interest rates. Cash-flow controls also apply if debt-service coverage falls to specified thresholds.
- A $500 million revolving credit facility was available with no borrowings at quarter-end. The company reported compliance with its financial covenants. It said cash on hand and operating cash flows should be sufficient for debt service over the next 12 months.
- $30.4 million principal on 0.375% convertible notes is due December 1, 2010. Management intended to use proceeds from the 2009 Senior Notes to repurchase or repay the remaining notes.
Material changes and capital allocation
- The company owned 8,588 towers at June 30, up from 8,324 at year-end; it acquired 221 completed towers during the first half, including 102 in Panama in Q2, and constructed 45 towers. After quarter-end it acquired 29 more towers for approximately $12.9 million.
- First-half tower acquisitions and related earn-outs used $112.0 million of cash. The company also invested approximately $32.3 million in Extenet Systems, including cash and contribution of its existing DAS business.
- During the first half, SBA repurchased and retired 2.90 million shares for $97.1 million. Approximately $151.3 million remained under the $250 million repurchase authorization at quarter-end.
- Shareholders’ equity declined to $397.8 million from $599.9 million at year-end, reflecting the net loss and share repurchases, among other changes.
Outlook, commentary and risks
- Management expects long-term site leasing growth from network expansion, additional tenant equipment and contractual rent escalators, which typically average 3%–4% annually. It describes leasing revenue as recurring and tower operating costs as relatively predictable; these are forward-looking expectations, not guarantees.
- For 2010, management estimated non-discretionary maintenance and general capital expenditures of $9–$11 million and discretionary expenditures of $305–$325 million, principally for tower construction, acquisitions, augmentations and ground-lease purchases. Funding was expected from cash, operating cash flow and the revolver. No earnings or revenue guidance is provided in the supplied filing text.
- Customer and project concentration are material: AT&T, Sprint, Verizon and T-Mobile each accounted for at least 10% of site leasing revenue in Q2. Five customers represented 53.4% of gross receivables at quarter-end; five customers represented 85.2% of net unbilled contract assets.
- Key risks cited include tenant demand and carrier capital spending, lease retention and industry consolidation, covenant compliance and refinancing conditions, acquisition execution and international risks, zoning and permitting, new technologies, inflation under fixed-price leases, and uninsured or underinsured damage. Construction revenue depends on project timing and cost estimates.
- The company recorded a full valuation allowance against net operating loss carryforwards because management did not consider future taxable income sufficiently likely. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Verify the recurring operating trend separately from the one-time $48.9 million refinancing-related debt-extinguishment loss, and assess the impact of rising cash and non-cash interest costs.
- Review the tower securities’ coverage tests, restricted-cash mechanics, anticipated repayment dates, step-up interest terms and collateral scope.
- Assess whether operating cash flow can support the planned $305–$325 million discretionary 2010 capital program, debt service and any further share repurchases.
- Track the December 2010 convertible-note maturity and the company’s plan to repay or refinance it.
- Monitor wireless-carrier concentration, receivables and unbilled contract assets, as well as progress and returns from acquisitions and international expansion.