Business context and reporting period
Liberty Latin America Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2021. It provides fixed, mobile and subsea telecommunications services in more than 20 countries across Latin America and the Caribbean. Reportable segments are C&W Caribbean and Networks, C&W Panama, Liberty Puerto Rico, VTR and Cabletica. VTR and Cabletica became separate reportable segments in 2021.
Comparability with 2020 is significantly affected by the October 2020 AT&T wireless and wireline acquisition in Puerto Rico and the U.S. Virgin Islands, as well as foreign exchange movements and COVID-19 effects.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,168.0 million | $848.9 million | $2,327.9 million | $1,779.9 million |
| Adjusted OIBDA | $464.0 million | $332.6 million | $913.3 million | $696.5 million |
| Operating income (loss) | $160.2 million | $(206.0) million | $338.4 million | $(98.2) million |
| Net earnings (loss) | $1.0 million | $(500.2) million | $90.4 million | $(684.8) million |
| Net earnings (loss) attributable to shareholders | $4.4 million | $(393.0) million | $92.2 million | $(573.7) million |
| Diluted EPS | $0.02 | $(2.12) | $0.39 | $(3.10) |
Adjusted OIBDA is a non-GAAP measure. As a percentage of revenue, it was approximately 39.7% in Q2 2021 versus 39.2% in Q2 2020, and 39.2% for the first half of 2021 versus 39.1% in the prior-year period. Segment margins varied; Liberty Puerto Rico’s and VTR’s first-half margins declined.
- Cash flow: First-half cash from operations was $443.7 million, versus $353.6 million. Capital expenditures were $334.2 million, versus $271.4 million. Adjusted free cash flow, a non-GAAP measure, was $92.7 million, versus $81.2 million.
- Liquidity: Cash and cash equivalents were $1,311.1 million at June 30, 2021, up from $894.2 million at December 31, 2020. Management noted that access to cash held in subsidiary borrowing groups may be limited by legal, tax, ownership and other considerations.
- Debt: Debt and finance lease obligations had a carrying amount of $8,794.3 million, including $164.6 million current. Debt principal before financing costs and other adjustments was $8,933.9 million; the weighted-average stated borrowing rate was 5.1% (6.0% including specified adjustments, but excluding financing costs). Approximately $7,394.7 million of debt maturities were due in 2027 or later.
- Balance sheet: Total assets were $15,497.9 million and total equity was $3,536.0 million at June 30, 2021.
Material changes versus the prior comparable period
- Q2 revenue increased 37.6%, and first-half revenue increased 30.8%. Liberty Puerto Rico drove much of the reported increase because 2021 includes the acquired AT&T operations; management attributed $231.4 million of the Q2 segment revenue increase and $467.0 million for the first half to acquisitions and the related disposition. Organic consolidated revenue increased $67.3 million in Q2 and $47.9 million in the first half.
- Adjusted OIBDA increased 39.5% in Q2 and 31.2% for the first half. Acquisition effects contributed $95.9 million and $179.3 million, respectively, to the comparisons. Organic increases were $67.3 million and $47.9 million.
- GAAP operating and net results improved substantially from 2020, when large impairment charges were recorded. First-half impairment, restructuring and other operating items were $19.2 million, compared with $317.5 million; 2020 included $276.9 million of Q2 impairment charges, primarily goodwill impairment associated with COVID-19 impacts.
- First-half interest expense fell to $260.1 million from $278.6 million, while derivative results swung to a $172.2 million gain from a $161.6 million loss. These derivative and foreign-currency effects are volatile and do not represent dependable recurring income.
- First-half investing cash use rose to $340.9 million from $263.1 million, largely reflecting higher capital spending. Financing cash provided fell to $303.4 million from $587.4 million, including lower derivative-related cash receipts and repayments/refinancing activity.
Outlook, management commentary, risks and unusual items
- Outlook and transactions: The filing gives no quantified consolidated revenue or earnings guidance. Management expected to close the $500 million enterprise-value Telefónica Costa Rica wireless acquisition by mid-August 2021, following regulatory approvals announced August 2. It expected the acquisition to be funded through Cabletica facility commitments, existing liquidity and a noncontrolling-owner equity contribution, with Liberty Latin America retaining an 80% Cabletica interest.
- Integration: Management said AT&T integration was progressing efficiently and expected approximately $20 million of integration-related operating costs in 2021. Integration costs could increase in future quarters.
- COVID-19 and operations: COVID-19 continued to affect B2B and mobile revenue in some markets through restrictions, travel and tourism impacts, and service and payment measures. Management said future impacts remained uncertain. Competition, inflation and foreign-exchange movements could pressure revenue and margins; VTR reported organic revenue declines, while its reported revenue benefited from favorable translation effects.
- Debt and market risks: Management said all borrowing groups were covenant-compliant at quarter-end and did not anticipate material covenant noncompliance affecting liquidity over the next 12 months. It believed resources were sufficient for foreseeable requirements over that period, but warned that refinancing future maturities and accessing external funding on favorable terms were not assured. About 97% of debt was fixed-rate when derivative effects were included. Currency and interest-rate movements can materially affect derivative fair values and earnings.
- Unusual items: First-half debt extinguishment losses were $23.3 million, largely related to Puerto Rico and VTR refinancing and repayments. A $9 million gain on the January 2021 divestiture of Puerto Rico B2B operations was included in operating items. First-half income tax expense was $66.0 million despite pretax income of $156.4 million; the filing cites international rate differences, nondeductible items, withholding taxes and uncertain tax positions among the drivers.
- Contingencies: Four Chilean consumer class actions concerning VTR broadband capacity, service stability and customer-service requirements were joined into one proceeding. VTR said it believed the claims lacked merit and intended to defend them; a loss or reasonable range was not determinable. The filing also describes ordinary-course legal, tax, interconnection, programming and copyright contingencies whose outcomes could affect results, cash flows or financial position.
- Controls: Disclosure controls and procedures remained ineffective at June 30, 2021 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Management described ongoing remediation efforts.
- Commitments: Contractual commitments totaled $9,982.7 million, including debt and leases; projected cash interest was an additional $3,011.6 million. Programming commitments exclude variable contractual increases and may understate expected payments. These amounts are not all balance-sheet liabilities.
Most important facts for investors to verify
- Separate organic growth and segment performance from the AT&T acquisition, disposals and foreign-exchange effects; assess how the acquired Puerto Rico mobile business affects margins and cash generation.
- Review the composition and sustainability of adjusted free cash flow, capital spending needs and cash availability across subsidiary borrowing groups.
- Examine debt maturities, refinancing assumptions, covenant headroom, variable-rate exposure and derivative-related cash obligations.
- Track the Telefónica Costa Rica closing, funding terms, integration costs and any effect on Cabletica ownership or leverage.
- Monitor the VTR class actions, other contingencies, COVID-19 and competitive conditions, and progress in remediating the disclosed control weaknesses.
- Distinguish recurring operating performance from volatile derivative, foreign-currency and tax effects when assessing reported earnings.