Liberty Latin America Ltd. — Q1 2020 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2020, compared with Q1 2019. Liberty Latin America provides fixed, mobile, business and subsea telecommunications services across Latin America and the Caribbean through C&W, VTR/Cabletica and Liberty Puerto Rico.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $931.0 million | $942.7 million |
| Adjusted OIBDA | $363.9 million | $365.8 million |
| Operating income | $107.8 million | $113.3 million |
| Net loss attributable to shareholders | $180.7 million; $0.99 per share | $41.7 million; $0.23 per share |
| Cash from operations | $114.9 million | $187.8 million |
| Capital expenditures | $149.2 million | $159.6 million |
| Adjusted free cash flow (non-GAAP) | $(48.5) million | $48.4 million |
Revenue declined 1.2% reported, but increased 1.9% excluding foreign exchange, acquisition and disposal effects. Adjusted OIBDA fell 0.5%; its consolidated margin was approximately 39.1%, versus 38.8%. Operating margin was approximately 11.6%, versus 12.0%.
- Segment performance: C&W revenue rose 3.3% to $588.6 million and Adjusted OIBDA rose 4.6% to $232.8 million. VTR/Cabletica revenue fell 13.2% to $240.1 million, largely reflecting currency translation; its Adjusted OIBDA declined 12.6% to $93.4 million. Liberty Puerto Rico revenue increased 6.1% to $104.6 million and Adjusted OIBDA increased 5.4% to $50.5 million.
- Drivers of the larger net loss: Foreign-currency transaction losses were $164.3 million, versus gains of $32.2 million a year earlier; interest expense increased to $143.3 million from $115.7 million. Derivative results improved to a $17.4 million gain from a $69.0 million loss, partly offsetting those items.
- Cash flow: Operating cash flow decreased $72.9 million year over year. Net cash used in investing was $147.1 million, compared with $285.5 million, partly because Q1 2019 included the UTS acquisition. Financing provided $455.4 million, including precautionary revolving-credit borrowings.
Balance sheet, debt and liquidity
- At March 31, 2020, cash and cash equivalents were $1.593 billion; restricted cash was $1.276 billion. Of cash and cash equivalents, $562.4 million was held by Liberty Latin America and unrestricted subsidiaries and $1.031 billion by subsidiary borrowing groups. Restricted cash included $1.260 billion held in escrow for the pending AT&T acquisition.
- Total debt and finance lease obligations were approximately $8.978 billion principal ($8.830 billion carrying amount); $281.2 million was current. Weighted-average stated borrowing rate was 5.8%. Unused facility capacity was reported at $649.5 million, subject to facility terms and conditions.
- Management reported leverage of 5.6x consolidated debt to annualized quarterly Adjusted OIBDA, or 4.8x excluding $1.253 billion of incremental Liberty Puerto Rico debt raised for the AT&T acquisition; net debt leverage was 3.8x. All borrowing groups were covenant-compliant at quarter-end.
- Current assets exceeded current liabilities by approximately $906.9 million. Management believed resources were sufficient for foreseeable liquidity needs over the next 12 months, while noting future refinancing needs and no assurance that refinancing would be available on favorable terms.
Material changes, outlook and risks
- Foreign exchange and operating trends: The average Chilean peso exchange rate weakened 21% against the U.S. dollar year over year, reducing reported revenue, particularly at VTR/Cabletica. On an organic basis, broadband and fixed-service growth in parts of the portfolio was offset by competition, weaker mobile revenue in some C&W markets and pressure on VTR/Cabletica fixed-service revenue.
- COVID-19: Management said the pandemic had not materially affected Q1 financial position, results, cash flows or liquidity through March 31. It warned that prolonged disruption could affect customer collections and demand, tourism-related and B2B activity, employees, suppliers, capital spending and liquidity. The company drew $467 million on subsidiary revolvers as a precaution. It identified actions expected to reduce operating and capital costs by approximately $150 million during the remainder of 2020, about half from operating costs; this is an expectation, not formal earnings guidance.
- AT&T acquisition: The proposed all-cash acquisition of AT&T’s Puerto Rico and U.S. Virgin Islands wireless and wireline operations carries a stated enterprise value of $1.95 billion, subject to adjustments. Closing was expected in the second half of 2020, subject to customary conditions and regulatory review. The DOJ issued a Second Request; integration will require significant operating and capital costs.
- Other notable items: The company authorized up to $100 million of share repurchases through March 2022 and repurchased approximately $2 million in Q1. It recorded $19 million of impairment, restructuring and other operating items, including restructuring charges and costs related to the pending acquisition. Management cautioned that sustained market declines or weaker outlooks could require significant goodwill or other long-lived-asset impairment charges.
- Controls and contingencies: Disclosure controls remained ineffective as of March 31 because previously identified material weaknesses had not been remediated. The filing describes ordinary-course legal, tax and regulatory contingencies but does not provide a meaningful potential-loss range. COVID-19 effects, competition, currency and interest-rate movements, regulation, refinancing access and acquisition approvals remain key risks.
Most important facts for investors to verify
- Whether COVID-19 materially changes customer collections, demand, costs, cash flow or the expected $150 million cost reductions after quarter-end.
- Progress, regulatory clearance, financing and closing timing for the $1.95 billion AT&T acquisition, and the resulting leverage and integration costs.
- Debt maturities, covenant headroom, availability and accessibility of subsidiary cash and revolvers, and refinancing assumptions.
- Whether reported operating trends persist, particularly VTR/Cabletica performance after separating Chilean-peso effects from underlying results.
- Remediation and testing of the material weaknesses in internal control over financial reporting, and any subsequent impairment or contingency developments.