Liberty Latin America Ltd. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The fourth quarter ended December 31, 2019. Amounts are in U.S. dollars unless noted.
Business context
Liberty Latin America provides residential and business telecommunications services—including broadband, video, fixed-line and mobile services—and wholesale subsea and terrestrial network capacity. Its operations span more than 20 countries, primarily in Latin America and the Caribbean, through C&W, VTR/Cabletica and Liberty Puerto Rico. At year-end, it reported 6.05 million fixed-service RGUs and 3.66 million mobile subscribers.
Key financial results
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $3.867 billion | $3.706 billion |
| Adjusted OIBDA (non-GAAP) | $1.541 billion | $1.487 billion |
| Operating income (loss) | $354 million | ($24 million) |
| Net loss | ($182 million) | ($636 million) |
| Net loss attributable to Liberty Latin America shareholders | ($80 million) | ($345 million) |
| Net cash provided by operating activities | $918 million | $817 million |
| Capital expenditures | $589 million | $776 million |
| Adjusted free cash flow (non-GAAP) | $223 million | $19 million |
Consolidated Adjusted OIBDA margin was approximately 39.9%, versus 40.1% in 2018. Total property and equipment additions, including vendor-financed and leased assets, were $722 million, or 18.7% of revenue. Interest expense was $499 million, up from $444 million. The company recorded a $98 million income tax benefit, compared with $51 million of tax expense in 2018.
At December 31, 2019, cash and cash equivalents were $1.184 billion and restricted cash was $1.272 billion, most of it escrowed for the pending AT&T transaction. Current assets were $2.055 billion and current liabilities were $1.576 billion. Debt and finance lease obligations totaled $8.370 billion on the balance sheet; principal debt and lease obligations were approximately $8.516 billion. Management reported leverage of 5.3x, or 4.5x excluding $1.253 billion of incremental debt raised for the pending acquisition; net leverage was 3.8x. Borrowing groups were in covenant compliance, and management said it expected to meet liquidity needs over the next 12 months.
Changes versus the prior comparable period
- Revenue increased 4.4% as reported. Excluding foreign-exchange effects and acquisitions and a disposal, revenue increased 2.4% organically. Acquisitions and the disposal added an estimated net $185 million, while foreign exchange reduced revenue by $111 million.
- Adjusted OIBDA increased 3.7%. Segment margins improved at C&W (40.2% versus 39.2%) and were broadly stable at VTR/Cabletica (40.4% versus 40.3%). Liberty Puerto Rico’s margin fell to 49.3% from 58.3%, largely because 2018 included hurricane-insurance recoveries and FCC funding.
- Operating income improved substantially as impairment, restructuring and other operating charges fell to $259 million from $641 million. Goodwill impairment was $182 million in 2019, versus $608 million in 2018, both primarily relating to Panama.
- Operating cash flow rose $101 million, while investing cash outflow narrowed to $635 million from $981 million, including lower capital expenditures and proceeds from the Seychelles disposal. Financing cash inflow increased to $1.540 billion, reflecting significant new borrowing.
- For Q4 2019, revenue was $975 million, operating income was $167 million and net income attributable to shareholders was $42 million. Q4 2018 revenue was $949 million, operating loss was $385 million and attributable net loss was $233 million; the prior-year quarter included significant impairment charges.
Outlook, management commentary, risks and unusual items
- Management expected 2020 property and equipment additions to be approximately 18% of revenue. This is an expectation, not a full-year earnings or revenue guidance range.
- The proposed all-cash acquisition of AT&T’s wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands was valued at approximately $1.95 billion, subject to adjustments and regulatory approvals. The company expected closing in Q2 2020; a DOJ second request issued in January 2020 extended the U.S. antitrust review period. Financing included $1.2 billion of senior secured notes and a $1.0 billion credit facility, with substantial proceeds held in escrow. If the acquisition did not close by the contractual long-stop date, specified debt repayment or redemption provisions applied.
- Hurricane Dorian damaged parts of the Bahamas. The company recorded a $16 million impairment and estimated 2019 revenue and Adjusted OIBDA impacts of $9 million and $12 million, respectively. Its weather derivative did not trigger a payment. Restoration was substantially complete in Grand Bahama and continuing in Abaco.
- Competition and currency movements weighed on results. Panama faced intense prepaid-mobile competition and further goodwill impairment; Chile experienced stronger fixed-network competition and civil unrest. The Chilean peso weakened against the U.S. dollar, contributing to a $113 million foreign-currency transaction loss. Results also included a $17 million net derivative loss, compared with a $95 million gain in 2018.
- Key risks include high leverage and refinancing needs, foreign-exchange and interest-rate exposure, intense competition, regulatory changes and network-access obligations, natural disasters, programming costs, cybersecurity and data privacy, and the ability to integrate acquisitions. The company reported that 97% of its debt was fixed-rate after derivatives; a hypothetical 50-basis-point increase in variable rates would increase annual interest expense by approximately $16 million before derivative effects.
- Material legal and regulatory matters include disputes concerning VTR’s programming arrangements and channel changes in Chile, challenges to proposed infrastructure-sharing rules in Jamaica, pending or expired operating-license renewals in certain markets, and the required disposal of C&W’s 49% investment in TSTT. The company said it could not meaningfully estimate potential losses for certain contingencies.
- Management and the auditor reported material weaknesses in internal control over financial reporting as of year-end, including deficiencies in staffing, risk assessment, monitoring, information technology controls and transaction-level controls. The auditor issued an adverse opinion on internal control effectiveness, while giving an unqualified opinion on the consolidated financial statements. Some 2019 misstatements were immaterial; remediation was ongoing and management could not estimate when it would be complete.
- The company paid no cash dividends and stated it had no present intention to do so. Class C shares generally have no voting rights; Class B shares have ten votes per share.
Important facts for investors to verify
- Whether the AT&T acquisition closed, its final purchase price and financing, and the resulting leverage, liquidity and integration costs.
- Whether internal-control material weaknesses are remediated, and whether subsequent filings disclose restatements or additional control deficiencies.
- Whether organic revenue, subscriber trends and Adjusted OIBDA improved after adjusting for acquisitions, disposals and currency movements.
- Cash available to the parent versus cash held within borrowing groups or restricted for specific purposes, alongside upcoming debt maturities and covenant headroom.
- Actual 2020 capital spending and the financial effects of competition, foreign exchange, regulatory actions, litigation and hurricane-related restoration.