Business context and reporting period
Liberty Latin America Ltd. filed its first annual report as an independent public company for the fiscal year ended December 31, 2017. It provides video, broadband, fixed-line telephony, mobile and business communications in 18 countries through Cable & Wireless (C&W), in Chile through VTR, and in Puerto Rico through Liberty Puerto Rico, in which it owns 60%. The company completed its split-off from Liberty Global on December 29, 2017; historical results include the businesses attributed to the company before the split-off.
Comparisons are affected by the May 2016 C&W acquisition, which contributed a full year of results in 2017 but only part of a year in 2016. Hurricanes Irma and Maria severely disrupted Puerto Rico and certain C&W markets.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $3.590 billion | $2.724 billion |
| Adjusted OIBDA | $1.367 billion | $1.076 billion |
| Operating income (loss) | $(148) million | $319 million |
| Net income (loss) | $(799) million | $(404) million |
| Net loss attributable to Liberty Latin America shareholders | $(778) million | $(432) million |
| Net cash from operating activities | $574 million | $468 million |
| Capital expenditures | $639 million | $490 million |
| Adjusted free cash flow | $(92) million | $(0.3) million |
- Reported revenue rose 31.8%, but included $897 million from acquisitions and $26 million from foreign-exchange movements. Excluding acquisitions and FX, revenue declined 2.1%.
- Adjusted OIBDA increased 27.1%; consolidated Adjusted OIBDA margin was approximately 38.1%, versus 39.5% in 2016. Adjusted OIBDA is a non-GAAP measure used by management.
- Revenue growth included residential mobile revenue of $801 million, up 53.6%, and B2B revenue of $1.071 billion, up 63.1%; acquisitions accounted for a substantial part of these increases. Organic residential and B2B trends were mixed.
- Year-end total assets were $13.617 billion and total equity was $4.691 billion. Cash and cash equivalents were $530 million; current liabilities exceeded current assets by approximately $212 million.
- Debt and capital lease obligations had a carrying value of $6.372 billion; debt principal before discounts and financing costs was $6.381 billion. Management reported debt and net-debt leverage of 5.5x and 5.1x, respectively, using annualized fourth-quarter Adjusted OIBDA.
- Property and equipment additions were $777 million, or 21.6% of revenue. Operating cash flow increased, but higher capital spending and financing-related payments contributed to negative adjusted free cash flow.
Material changes versus the prior comparable period
- The company moved from operating income of $319 million to an operating loss of $148 million, principally reflecting impairment, restructuring and other operating items of $708 million, compared with $154 million in 2016.
- The 2017 charges included $660 million of impairment, including $337 million related to hurricane impacts and $318 million from C&W annual goodwill testing, primarily reflecting competition and recovery expectations.
- Liberty Puerto Rico revenue fell $100 million year over year; estimated hurricane-related reductions were $109 million in revenue and $80 million in Adjusted OIBDA. C&W hurricane-related reductions were estimated at $10 million in revenue and $17 million in Adjusted OIBDA.
- Consolidated revenue and Adjusted OIBDA comparisons are not like-for-like because of C&W acquisition timing. Excluding acquisitions and FX, total revenue declined; hurricane damage further affected the underlying comparison.
- Net loss widened despite higher operating cash flow. Interest expense increased to $382 million from $314 million, while derivative losses and debt-refinancing costs also affected non-operating results.
Outlook, risks and unusual items
- Management expected 2018 property and equipment additions to equal 19%–21% of revenue; actual spending could vary. No specific revenue or earnings forecast is provided in the filing.
- Management expected hurricane-related effects on revenue and Adjusted OIBDA to continue through 2018 and beyond. At year-end, Puerto Rico service had been restored to approximately 340,000 of an estimated 738,500 RGUs. Estimated network restoration additions were $130 million in Puerto Rico and $50 million in affected C&W markets.
- Liberty Puerto Rico was not expected to generate positive cash from operations after capital expenditures until at least the second half of 2018. Its lenders waived leverage-covenant compliance through December 31, 2018 and increased the first-lien leverage threshold beginning in 2019. Shareholders committed up to $60 million for potential liquidity needs through 2018; Liberty Latin America’s stated share is $36 million.
- Management said consolidated resources were sufficient for foreseeable liquidity needs over the next 12 months despite negative working capital, while noting refinancing uncertainty, restricted access to subsidiary cash and storm-related liquidity pressure. Unused borrowing capacity was reported at $938 million, subject to facility terms and conditions.
- Key risks include competition and pricing pressure; regulatory changes, license renewals and possible mandated network access; foreign-exchange and interest-rate exposure; substantial leverage; hurricane recovery and insurance uncertainty; and tax, legal and acquisition contingencies. The company reported $305 million of liabilities for uncertain tax positions.
- Insurance coverage is limited to $75 million per occurrence and generally subject to $15 million self-insurance per occurrence; management expected recoveries to cover only part of hurricane losses. Further impairment charges were possible.
- After year-end, C&W refinanced a term loan with a $1.875 billion facility due 2026. The company also agreed to acquire 80% of Costa Rica’s Cabletica for an enterprise value of approximately $250 million, with closing expected in the second half of 2018 subject to approvals.
- The company had no present intention to pay cash dividends. Its disclosure controls were considered effective, but it had not yet completed a management assessment or auditor attestation of internal control over financial reporting under the new-public-company transition provisions.
Most important facts for investors to verify
- Whether Puerto Rico and affected C&W network restoration, customer reconnections, insurance recoveries and cash generation track management’s estimates.
- Liberty Puerto Rico’s ability to meet liquidity needs and comply with leverage covenants after temporary relief expires, including the timing and funding of shareholder support.
- Underlying revenue, subscriber and margin trends excluding the C&W acquisition, FX movements and hurricane effects.
- The drivers and assumptions behind the $660 million impairment charge and the potential for additional impairment.
- Debt maturities, refinancing costs, restricted subsidiary cash and the sustainability of capital spending given negative adjusted free cash flow.
- Regulatory approvals and conditions, the TSTT investment disposal deadline, and the closing and financing of the Cabletica acquisition.