Liberty Latin America Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Figures are in U.S. dollars; financial statement amounts are in millions unless otherwise stated. The company provides fixed, mobile, business and subsea telecommunications services across Latin America and the Caribbean.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $848.9 | $982.9 | $1,779.9 | $1,925.6 |
| Operating income (loss) | $(206.0) | $143.5 | $(98.2) | $256.8 |
| Net loss | $(500.2) | $(111.2) | $(684.8) | $(152.4) |
| Net loss attributable to Liberty Latin America shareholders | $(393.0) | $(116.0) | $(573.7) | $(157.7) |
| Basic and diluted loss per share | $(2.15) | $(0.64) | $(3.15) | $(0.87) |
| Adjusted OIBDA | $332.6 | $387.4 | $696.5 | $753.2 |
- Revenue and operating trends: Q2 revenue fell 13.6% year over year; six-month revenue declined 7.6%. Q2 Adjusted OIBDA fell 14.1%; six-month Adjusted OIBDA fell 7.5%. Q2 Adjusted OIBDA margin was approximately 39.2%, versus 39.4% a year earlier; six-month margin was approximately 39.1% in both periods.
- Cash flow: Six-month operating cash flow was $353.6, down from $431.4. Capital expenditures were $271.4, versus $295.4. Company-defined adjusted free cash flow was $81.2, compared with $116.4.
- Liquidity and debt: June 30 cash and cash equivalents were $1,752.4; restricted cash was $1,369.8 on the balance sheet. Debt and finance lease obligations had a carrying amount of $8,841.0, versus $8,370.0 at year-end 2019; principal debt before discounts and financing costs was $8,980.8. Unused borrowing capacity was $765.3. The reported weighted-average stated borrowing rate was 5.34%.
- Balance sheet: Total assets were $14,774.5 and total equity was $3,279.9, compared with $14,937.5 and $3,979.9, respectively, at December 31, 2019.
Material changes versus prior periods
- COVID-19-related restrictions affected C&W and VTR/Cabletica through customer discounts, paused managed-service projects, delayed payments, increased churn, lower prepaid mobile recharges and reduced roaming. Consolidated Q2 revenue declines were concentrated in C&W and VTR/Cabletica; Liberty Puerto Rico revenue increased 5.1%.
- Six-month revenue was also affected by foreign exchange and portfolio changes. Management estimated organic revenue declines, excluding foreign exchange and acquisitions/disposals, of 7.4% for Q2 and 2.8% for the first half.
- Impairment, restructuring and other operating items rose to $298.7 in Q2 and $317.5 for the first half, from $6.5 and $27.0, respectively. The 2020 charges included goodwill impairments largely attributed to COVID-19 impacts in C&W, restructuring and pending-acquisition costs.
- Interest expense increased to $135.3 in Q2 and $278.6 for the first half. Derivative losses were $179.0 and $161.6, respectively; first-half foreign-currency transaction losses were $145.2.
- Goodwill declined to $4,502.3 from $4,906.4, including $276.0 of first-half impairment charges. The company cautioned that further impairment could be required if adverse conditions persist or worsen.
Outlook, risks and unusual items
- Management identified approximately $150 million of expected 2020 reductions in certain Adjusted OIBDA-related fixed operating and capital costs, about half of which relates to operating costs; it said the initiatives were on track at June 30. The filing provides no specific revenue or earnings guidance.
- The company expected its $1.95 billion AT&T Puerto Rico and U.S. Virgin Islands acquisition to close in Q4 2020, subject to regulatory and other conditions. The DOJ had issued a second information request. About $1.353 billion of restricted cash was held in escrow for the transaction.
- On July 30, 2020, the company agreed to acquire Telefónica’s Costa Rica wireless operations for an enterprise value of $500 million, with closing expected in the first half of 2021, subject to conditions and regulatory approval.
- After quarter-end, VTR entities issued $1.15 billion of 2028 notes and used proceeds, together with derivative-settlement proceeds and cash, to redeem $1.26 billion of VTR Finance notes. The refinancing is a subsequent event, not a June 30 balance-sheet transaction.
- Management cited continuing uncertainty from the pandemic, competition, currency and interest-rate movements, regulation, customer collections, and access to financing. It said borrowing groups were covenant-compliant at June 30 and that liquidity was sufficient for foreseeable needs over the next 12 months, while noting that future refinancing is not assured.
- Disclosure controls and procedures remained ineffective at June 30 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Remediation work was continuing.
- Other notable items: a $18 million discrete tax benefit from closing certain tax audits; $9.5 million spent on share repurchases in the first half under a $100 million authorization; and $420 million of unfulfilled long-term capacity-contract obligations, generally to be recognized as revenue over an average remaining life of seven years.
Important facts for investors to verify
- Whether COVID-19-related revenue, churn, collections and bad-debt pressures persist, and whether the targeted 2020 cost savings are achieved.
- The drivers of the sharp increase in impairment charges and the likelihood or potential size of additional goodwill impairment.
- Post-quarter VTR refinancing details, remaining debt maturities, borrowing capacity and the availability of cash held within subsidiary borrowing groups.
- Regulatory progress, financing and integration costs for the AT&T acquisition, and approval and closing conditions for the Telefónica Costa Rica transaction.
- Progress and testing of remediation plans for the disclosed material weaknesses in internal control.