Business context and reporting period
Liberty Latin America Ltd. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. It provides video, broadband, fixed-line, mobile and business communications services across Latin America and the Caribbean, including through C&W, VTR in Chile and Liberty Puerto Rico. The 2017 comparison predates the December 2017 split-off from Liberty Global and is presented on a consolidated basis.
Financial performance and position
- Revenue: Q3 revenue was $925.2 million, up 1.9% year over year; nine-month revenue was $2.757 billion, up 0.6%. Excluding foreign-exchange and acquisition effects, management reported Q3 organic growth of 3.3% and a nine-month organic decline of 0.7%.
- Profitability: Q3 operating income was $138.8 million versus an operating loss of $205.7 million in 2017; nine-month operating income was $361.3 million versus $84.5 million. Net loss attributable to Liberty Latin America shareholders was $25.5 million in Q3 and $112.2 million for nine months; diluted loss per share was $0.15 and $0.65, respectively.
- Adjusted OIBDA: This non-GAAP measure was $364.0 million in Q3, up 3.4%, and $1.058 billion for nine months, down 0.3%. Q3 segment margins were C&W 39.0%, VTR 40.7% and Liberty Puerto Rico 50.2%; Puerto Rico’s result included an $11 million FCC payment.
- Cash flow and capital spending: Nine-month operating cash flow was $608.7 million, compared with $392.3 million. Capital expenditures were $593.0 million, up from $447.5 million; adjusted free cash flow, a company-defined non-GAAP measure, was negative $25.7 million versus negative $87.6 million. Cash paid for interest was $347.7 million and taxes $112.4 million.
- Liquidity: September 30 cash and equivalents were $525.1 million, with a further $261.8 million restricted; $252 million of restricted cash was held in escrow for the Cabletica acquisition. Total current liabilities of $1.793 billion exceeded current assets of $1.701 billion. The company reported $990.7 million of unused borrowing capacity, subject to facility conditions, and said it expected sufficient resources for the next 12 months.
- Debt: Debt and capital lease obligations had a carrying amount of $6.630 billion; principal debt before discounts and financing costs was $6.648 billion. The weighted-average stated debt rate was 6.22% (6.3% including specified derivative and other effects). Management reported 4.6x debt and 4.1x net debt to annualized Q3 Adjusted OIBDA; all borrowing groups were covenant-compliant at quarter-end.
Material changes versus the prior comparable period
- Q3 revenue was slightly higher, while nine-month revenue was nearly flat. VTR’s nine-month revenue grew 9.6%, while Puerto Rico revenue fell 20.4%, primarily reflecting hurricane effects; C&W revenue increased 0.8%.
- The sharp improvement in operating income and net loss versus 2017 chiefly reflects the prior-year $343 million hurricane-related impairment charge. 2018 impairment, restructuring and other operating items were $8.8 million in Q3 and $55.4 million year to date, versus $354.9 million and $378.7 million in 2017.
- Nine-month Adjusted OIBDA was broadly flat: higher results at C&W and VTR were offset by a decline at Liberty Puerto Rico and higher corporate costs. Corporate SG&A rose as the company incurred standalone public-company expenses following the split-off.
- Interest expense increased to $322.1 million for nine months from $289.8 million. Foreign-currency transaction losses were $121.1 million, partly offset by $82.5 million of derivative gains; both can be volatile and substantially affect reported earnings.
- Capital spending rose amid hurricane restoration. Puerto Rico’s network restoration was complete by quarter-end; its service base remained below the pre-hurricane level. C&W was still restoring fixed-line service in the British Virgin Islands and Dominica.
Outlook, commentary, risks and unusual items
- The filing gives no specific consolidated revenue, earnings or cash-flow guidance. Management described competition, subscriber and ARPU trends, FX, interest rates, regulatory conditions, programming costs and capital access as factors that could affect results. It expected no material hurricane impact on C&W revenue or Adjusted OIBDA for the remainder of 2018.
- Puerto Rico’s recovery and liquidity remain important: the company had provided $27 million of a shareholder commitment, Searchlight contributed $18 million, and up to $15 million remained available through December 31, 2018. Management expected available and potential sources, including insurance proceeds and operating cash, to cover Puerto Rico’s needs for the next 12 months, but noted uncertainty over the amount and timing of insurance recoveries.
- The company had received $50 million in net insurance advances, which were recorded in other accrued and current liabilities pending settlement. It recognized $11 million of FCC hurricane-recovery funding as Q3 revenue. Puerto Rico’s Q3 Adjusted OIBDA margin benefited from this grant.
- A $16 million impairment was recorded on the TSTT investment; the company is required to dispose of that investment by December 31, 2018 and said recovery of its carrying value is uncertain. Management also warned that adverse operating or market developments could require additional goodwill impairment.
- After quarter-end, Liberty Latin America completed the $226 million acquisition of an 80% interest in Cabletica and acquired the remaining 40% of Liberty Puerto Rico for 9.5 million Class C shares. It also issued $500 million of 7.5% C&W senior notes, tendered for part of the 2019 notes, and redeemed portions of Sable and VTR notes.
- Control issue: Management concluded disclosure controls were ineffective at September 30 because of a material weakness in IT general controls, involving program changes, user access and monitoring. The affected systems support order-to-cash, procure-to-pay, hire-to-pay and financial reporting. No material misstatement was identified for the reported period; remediation had begun.
- Other exposures include regulatory, tax, legal, interconnection and programming disputes, as well as currency, interest-rate, counterparty, cybersecurity and natural-disaster risks. The filing says potential losses from certain contingencies cannot be meaningfully estimated.
Important facts for investors to verify
- Whether revenue and subscriber trends improve organically, especially in Puerto Rico, and how much reported growth depends on FX, acquisitions or nonrecurring FCC funding.
- Progress and cost of hurricane restoration, timing and final amount of insurance recoveries, and Puerto Rico’s ability to sustain positive cash flow after capital expenditures.
- Debt refinancing needs, covenant headroom, borrowing availability and cash actually accessible to the parent given restricted cash and subsidiary-level limitations.
- Whether the IT-control material weakness is remediated and whether subsequent filings identify control deficiencies or financial-reporting errors.
- Performance and integration of Cabletica, the financing and share dilution associated with the Puerto Rico minority-interest acquisition, and the outcome of the required TSTT divestiture.