Liberty Latin America Ltd. — Q1 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018. Liberty Latin America provides video, broadband, fixed-line, mobile and business communications services through Cable & Wireless (C&W), VTR in Chile and Liberty Puerto Rico. It became an independent public company in December 2017; the 2017 comparison is for the pre-split-off business and was not restated for the split-off or the new revenue standard.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $909.9 million | $910.9 million |
| Operating income | $98.3 million | $134.8 million |
| Net earnings (loss) | $(54.3) million | $10.6 million |
| Net loss attributable to Liberty Latin America shareholders | $(44.5) million; $(0.26) per share | $(5.8) million; $(0.03) per share |
| Adjusted OIBDA | $340.8 million | $347.7 million |
| Cash provided by operating activities | $163.2 million | $75.0 million |
| Capital expenditures | $188.2 million | $124.4 million |
| Adjusted free cash flow | $(45.7) million | $(73.5) million |
Revenue was essentially flat year over year. Operating margin was approximately 10.8%, versus 14.8%; Adjusted OIBDA was approximately 37.5% of revenue, versus 38.2%. Interest expense was $102.5 million, derivative losses were $41.5 million, and the company recorded a $13.0 million loss on debt modification and extinguishment. Income tax expense was $16.8 million despite a pretax loss.
At March 31, 2018, cash and cash equivalents were $510.6 million; total debt and capital lease obligations were $6.419 billion, including $212.3 million current. The balance sheet showed current assets of $1.402 billion and current liabilities of $1.595 billion, a working-capital deficit of about $193 million. Management reported gross-debt and net-debt leverage of 4.8x and 4.5x, respectively, based on annualized quarterly Adjusted OIBDA. Weighted average borrowing cost including derivatives, premiums/discounts and commitment fees was 6.30% (excluding financing costs). Subsidiary facilities had $979.4 million of unused capacity, subject to facility terms; subsidiary cash and borrowing capacity may not be readily available to the parent.
Material changes versus the prior comparable period
- Operating income fell $36.5 million, while net results swung from $10.6 million earnings to a $54.3 million loss. Higher depreciation and amortization, impairment/restructuring charges, interest and derivative losses contributed.
- Adjusted OIBDA declined $6.9 million. C&W rose to $229.1 million from $209.9 million and VTR to $105.0 million from $91.6 million; Liberty Puerto Rico fell to $18.0 million from $51.3 million, primarily due to hurricane disruption. Corporate costs increased to $11.3 million from $5.1 million.
- Cash from operations increased $88.2 million, mainly due to working-capital movements, including a $30 million insurance advance, and lower interest payments. Investing cash use increased as capital expenditures rose, largely for hurricane restoration.
- The company recorded $33.7 million of impairment, restructuring and other operating items, including $25.7 million of restructuring charges, primarily employee severance at C&W.
- Adoption of the new revenue-recognition standard on January 1, 2018 increased Q1 revenue by $0.9 million and interest expense by $4.2 million, and increased the reported net loss by $2.5 million versus the pre-adoption presentation. The transition reduced opening accumulated equity by $7.5 million in total, including noncontrolling interests.
Outlook, commentary, risks and contingencies
- Hurricane recovery: Puerto Rico service restoration continued, with about 560,000 of an estimated 723,100 RGUs restored by March 31. Management estimated roughly $130 million of property and equipment additions would be needed to restore nearly all of the network; about $112 million had been incurred after the hurricanes through quarter-end. It expects hurricane-related adverse effects on Puerto Rico revenue and Adjusted OIBDA through 2018 and beyond. Management did not expect a material hurricane impact on C&W revenue and Adjusted OIBDA during 2018.
- Management did not expect Liberty Puerto Rico to generate positive cash from operations inclusive of capital expenditures until at least the latter half of 2018. It considered available and expected liquidity sources sufficient for the next 12 months, but noted uncertainty around recovery, insurance proceeds and cash generation. A shareholder equity commitment of up to $60 million was established; $45 million had been contributed during 2018, including $20 million after quarter-end.
- The company had $75 million per-occurrence property and business-interruption insurance coverage, generally subject to $15 million self-insurance per occurrence. Management believed the hurricanes would likely constitute at least two occurrences and expected insurance to cover only part of losses.
- Management’s general leverage objective is typically four to five times consolidated Adjusted OIBDA. It expected leverage to decline as hurricane impacts receded, assuming debt remained relatively consistent. All borrowing groups were in covenant compliance at quarter-end; management anticipated no material covenant-compliance-driven liquidity impact over the next 12 months. Refinancing future maturities is not assured.
- A planned acquisition of 80% of Costa Rican cable operator Cabletica was valued at $252 million enterprise value and expected to close in the second half of 2018, subject to regulatory approvals and other conditions; financing was expected from incremental debt and existing liquidity.
- Key risks include competition, regulation, foreign exchange and interest-rate movements, programming-cost inflation, natural disasters, Puerto Rico recovery uncertainty and access to refinancing. The filing describes ordinary-course legal, tax and regulatory contingencies but does not provide a meaningful range of possible losses.
Important facts for investors to verify
- Progress, cost and timing of Puerto Rico and C&W network restoration, customer reconnections, insurance recoveries and remaining equity-commitment funding.
- Whether operating cash flow and Adjusted free cash flow remain adequate after elevated restoration capital spending and working-capital effects.
- Debt maturities, subsidiary-level cash availability, covenant headroom and refinancing needs; most reported debt is at subsidiaries.
- Underlying segment trends excluding foreign-exchange effects, acquisition effects and Puerto Rico hurricane disruption; reported year-over-year comparisons also span the company’s split-off.
- Completion, regulatory approval and financing of the Cabletica transaction, and potential future goodwill impairment sensitivity in C&W and Puerto Rico.