Liberty Latin America Ltd. — Q2 2018 Form 10-Q
Business context and period: Quarterly period ended June 30, 2018; amounts are in U.S. dollars. Liberty Latin America provides video, broadband, fixed-line, mobile and business communications services across the Caribbean and Latin America, including Chile and Puerto Rico. The company became independent of Liberty Global in December 2017, so 2017 comparisons precede the split-off.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $922.1 million | $920.9 million | $1,832.0 million | $1,831.8 million |
| Operating income | $124.2 million | $155.4 million | $222.5 million | $290.2 million |
| Net loss attributable to shareholders | $42.2 million | $28.2 million | $86.7 million | $34.0 million |
| Adjusted OIBDA | $353.4 million | $361.7 million | $694.2 million | $709.4 million |
| Operating cash flow | — | $398.0 million | $298.6 million | |
| Capital expenditures | — | $425.1 million | $248.3 million | |
| Adjusted free cash flow | — | $(59.5) million | $21.9 million |
- Q2 operating margin was approximately 13.5%, down from 16.9%; consolidated Adjusted OIBDA margin was approximately 38.3%, versus 39.3%.
- At June 30, cash and cash equivalents were $738.0 million (plus $12 million restricted cash). Debt and capital lease obligations totaled $6,652.9 million carrying value, including $395.3 million current. Current liabilities exceeded current assets by $153.5 million.
- Management reported gross debt leverage of 4.8x and net debt leverage of 4.2x annualized quarterly Adjusted OIBDA. Borrowing groups were in covenant compliance, and management said it expected sufficient resources for the next 12 months.
Material changes and drivers
- Revenue was nearly flat year over year. For the first half, management cited $41 million of favorable foreign-exchange impact and $10 million from the C&W carve-out acquisition; excluding these effects, revenue declined $50 million, or 2.7%.
- VTR revenue rose 12.6% in Q2, including foreign-exchange effects; C&W revenue was broadly flat. Liberty Puerto Rico revenue fell 25.9%, principally due to Hurricanes Irma and Maria.
- Q2 Adjusted OIBDA declined 2.3%. VTR improved, but Puerto Rico’s Adjusted OIBDA fell 33.6%; corporate costs also increased. First-half Adjusted OIBDA declined 2.1%.
- Higher depreciation and amortization, SG&A, and interest expense weighed on operating results. Q2 included $115.1 million of derivative gains, partly offset by $120.6 million of foreign-currency transaction losses. First-half foreign-currency transaction losses were $104.7 million.
- Operating cash flow increased, but higher network-restoration investment drove capital expenditures to $425.1 million and adjusted free cash flow to negative $59.5 million. Capital expenditures included hurricane restoration work.
Outlook, risks and unusual items
- No formal earnings guidance is stated in the filing text. Management expected Puerto Rico’s hurricane-related revenue and Adjusted OIBDA effects to persist through 2018 and beyond. It expected Puerto Rico restoration to be substantially completed by the end of August 2018; positive cash generation after capital expenditures was not expected until at least the latter half of 2018.
- Puerto Rico had received $45 million of a shareholder equity commitment of up to $60 million, leaving up to $15 million available through year-end 2018. Management also cited insurance proceeds and operating cash as potential liquidity sources. Insurance recovery is expected to cover only part of hurricane losses; timing and final amounts remain uncertain.
- C&W estimated about $50 million of property and equipment additions would be needed to restore nearly all hurricane-damaged networks; approximately $33 million had been incurred through June 30. Management did not expect a material 2018 hurricane impact on C&W revenue and Adjusted OIBDA.
- The proposed acquisition of 80% of Costa Rican operator Cabletica, valued at approximately $252 million enterprise value, was subject to regulatory approvals and expected to close in the second half of 2018. Planned funding included $130 million of incremental Cabletica debt and existing cash.
- A material weakness in IT general controls made disclosure controls and procedures ineffective as of June 30. The company said the weakness had not caused a material misstatement in the reported statements and began remediation in Q3 2018.
- Key risks include hurricane recovery and insurance uncertainty, competition, foreign-exchange and interest-rate exposure, refinancing and leverage, regulation, and litigation or tax contingencies. The filing reports $304 million of uncertain tax positions; timing and amount of any payments could not be reasonably estimated.
- Revenue-standard adoption increased first-half revenue by $2.9 million and net loss by $5.2 million versus the amounts before adoption. Tax expense and effective tax rates were volatile; the six-month effective rate was negative 249.6% on a pretax loss.
Important facts for investors to verify
- Progress and effectiveness of IT-control remediation, including whether the material weakness is resolved.
- Puerto Rico and C&W restoration milestones, subscriber reconnections, remaining capital needs, insurance recoveries and Puerto Rico liquidity.
- Underlying revenue and Adjusted OIBDA trends excluding foreign exchange, acquisitions and hurricane effects.
- Debt maturities, refinancing access, leverage and covenant compliance, as well as cash availability across subsidiary borrowing groups.
- Regulatory approval, financing and closing status of the Cabletica acquisition.