Business context and reporting period
Liberty Latin America Ltd. provides fixed, mobile, business-to-business and subsea telecommunications services across more than 20 countries, primarily in Latin America and the Caribbean. This Form 10-Q reports the quarter and nine months ended September 30, 2020; amounts below are in U.S. dollars, millions, unless stated otherwise. Results exclude the AT&T Puerto Rico and U.S. Virgin Islands operations, acquired on October 31, 2020.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | 2020: $887.5; 2019: $966.8 | 2020: $2,667.4; 2019: $2,892.4 |
| Adjusted OIBDA (non-GAAP) | 2020: $360.2; 2019: $379.7 | 2020: $1,056.7; 2019: $1,132.9 |
| Adjusted OIBDA margin | 2020: 40.6%; 2019: 39.3% | 2020: 39.6%; 2019: 39.2% |
| Operating income (loss) | 2020: $86.6; 2019: $(69.7) | 2020: $(11.6); 2019: $187.1 |
| Net loss attributable to Liberty Latin America shareholders | 2020: $(84.6); 2019: $35.3 | 2020: $(658.3); 2019: $(122.4) |
| Basic and diluted earnings (loss) per share | 2020: $(0.46); 2019: $0.19 | 2020: $(3.59); 2019: $(0.66) |
| Operating cash flow | Not presented separately | 2020: $491.0; 2019: $590.4 |
| Capital expenditures | Not presented separately | 2020: $418.3; 2019: $432.0 |
| Adjusted free cash flow (non-GAAP) | Not presented separately | 2020: $59.2; 2019: $120.0 |
At September 30, 2020, cash and cash equivalents were $1,611.9, restricted cash was $1,369.9 on the balance sheet, and total debt and finance lease obligations had a carrying value of $8,459.8 (principal before discounts and financing costs: $8,599.3). Current debt and finance lease obligations were $284.4. The weighted-average stated borrowing rate was 5.2%; including specified derivative and other effects but excluding financing costs, management reported a 6.2% weighted-average rate. Reported cash includes $1,353 of restricted proceeds held in escrow for the AT&T acquisition. Unused borrowing capacity was $1,063.2, subject to facility conditions and subsidiary-level restrictions.
Material changes versus the prior comparable periods
- Third-quarter revenue declined 8.2%; nine-month revenue declined 7.8%. Excluding foreign exchange, acquisitions and disposals, revenue fell 3.5% in the quarter and 3.1% year to date. Nine-month foreign exchange reduced reported revenue by $126.
- Quarterly Adjusted OIBDA fell 5.1%, while its margin improved to 40.6% from 39.3%. Nine-month Adjusted OIBDA declined 6.7%; reported segment results were affected by currency translation and COVID-19.
- Revenue weakened most in C&W and VTR/Cabletica, while Liberty Puerto Rico grew. COVID-19 pressures included lower mobile recharge and roaming, B2B discounts and delayed projects, and customer payment delays. VTR also reported elevated third-quarter RGU churn after broadband capacity challenges. Broadband demand supported growth in Liberty Puerto Rico and some fixed broadband markets.
- Nine-month operating cash flow decreased by $99.4. Management attributed the decline principally to lower Adjusted OIBDA at C&W and VTR/Cabletica and lower derivative-related cash flows, partly offset by lower tax payments. Adjusted free cash flow declined by $60.8.
- Nine-month interest expense increased by $49 to $408.5. Derivative losses were $239.7 versus $96.6, foreign currency transaction losses were $115.1 versus $98.1, and debt modification and extinguishment losses were $45.1 versus $13.0.
Outlook, management commentary, risks and unusual items
- Management said it was on track through September to achieve approximately $150 of identified COVID-related operating and capital cost savings, but planned reinvestment in customer service and selected investment meant expected net savings would be less than $150. The filing gives no specific revenue or earnings guidance.
- COVID-19 caused discounts, suspended or delayed services and projects, increased collection risks, reduced travel-related revenue, and disrupted customer and network activity. The duration and financial impact remained uncertain.
- The company recorded $276 of C&W goodwill impairment during the first half of 2020, primarily reflecting COVID-19’s economic effects. It reported no new impairment indicators in the third quarter, but warned future impairment charges could be significant if operating assumptions or market values deteriorate.
- The AT&T acquisition closed October 31, 2020 for approximately $1.9 billion, subject to final working-capital adjustments. Financing included debt proceeds and available liquidity; integration costs are expected, and regulatory conditions require disposal of certain existing Puerto Rico B2B assets. The filing does not provide pro forma results for the acquired business.
- A planned acquisition of Telefónica’s Costa Rican wireless operations has an enterprise value of $500 and was expected to close in the first half of 2021, subject to approvals and other conditions. The $350 gross proceeds from a fully subscribed September rights offering were intended partly to fund acquisitions, including this transaction.
- Three Chilean consumer class actions concerning VTR broadband service and capacity were disclosed, with a fourth complaint reported after quarter-end. The company disputes the allegations; potential liability or a reasonable loss range was not determinable.
- Management reported material weaknesses in internal control over financial reporting remained unremediated, and disclosure controls and procedures were therefore ineffective at September 30, 2020. Remediation and systems-related control updates were ongoing.
- Other notable items include $331.5 of nine-month impairment, restructuring and other operating charges, including goodwill impairment and AT&T-related acquisition costs. The nine-month tax benefit included discrete benefits from reductions in uncertain tax positions; tax benefits and derivative and currency results may be volatile.
Most important facts for investors to verify
- AT&T acquisition funding, integration costs, required Puerto Rico asset disposals, and the eventual contribution of the acquired operations to results and cash flow.
- How much of reported cash is restricted or held in subsidiaries, the availability of borrowing capacity, and the company’s ability to service or refinance substantial debt maturities.
- COVID-19 effects on VTR churn and service quality, customer collections, roaming and B2B revenue, and whether planned reinvestment further limits cost savings.
- Goodwill impairment assumptions and exposure to further write-downs, particularly in C&W.
- Developments and potential financial exposure in the VTR class actions and other legal, tax and regulatory contingencies.
- Progress in remediating the disclosed internal-control material weaknesses.
Adjusted OIBDA and adjusted free cash flow are non-GAAP measures; they should be considered alongside, not as substitutes for, GAAP results and cash flows.