Business context and reporting period
Liberty Latin America Ltd. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2019. The company provides fixed, mobile, business-to-business and wholesale subsea telecommunications services across Latin America and the Caribbean, including through C&W, VTR/Cabletica and Liberty Puerto Rico. Results include the March 2019 acquisition of an 87.5% interest in UTS; year-over-year comparisons also reflect the 2018 Cabletica acquisition and Puerto Rico’s recovery from 2017 hurricanes.
Financial performance and position
Amounts are in U.S. dollars unless stated otherwise. Quarter comparisons are against Q2 2018; first-half comparisons are against the six months ended June 30, 2018.
- Revenue: Q2 revenue was $982.9 million, up 6.6%; first-half revenue was $1,925.6 million, up 5.1%. Excluding acquisition and foreign-exchange effects, management reported growth of 2.8% and 3.2%, respectively. Q2 growth included recovery in Puerto Rico and UTS; currency movements reduced reported revenue.
- Operating profit and margins: Operating income was $143.5 million in Q2 versus $124.2 million, and $256.8 million for the first half versus $222.5 million. Adjusted OIBDA, a non-GAAP measure, was $387.4 million in Q2, up 9.6%, and $753.2 million for the first half, up 8.5%. Consolidated Adjusted OIBDA margin was approximately 39.4% for Q2 versus 38.3%, and 39.1% for the first half versus 37.9%.
- Net results: Net loss was $111.2 million in Q2 versus $27.5 million; the loss attributable to Liberty Latin America shareholders was $116.0 million, or $0.64 per share, versus $42.2 million, or $0.25 per share. First-half net loss was $152.4 million versus $81.8 million; shareholder-attributable loss was $157.7 million, or $0.87 per share, versus $86.7 million, or $0.51 per share. Higher interest expense and derivative losses weighed on results.
- Cash flow and investment: First-half operating cash flow was $431.4 million versus $398.0 million. Investing cash outflow was $421.4 million, including $160.4 million net cash paid for UTS; capital expenditures were $295.4 million versus $425.1 million. Financing cash inflow was $320.4 million. Adjusted free cash flow, a non-GAAP measure, was $116.4 million versus negative $59.5 million.
- Liquidity and debt: June 30 cash and cash equivalents were $957.4 million, compared with $631.0 million at year-end 2018; total current assets were $1,979.2 million and current liabilities $1,625.3 million. Debt principal was $7,162.9 million, with $10.6 million of finance lease obligations; the balance-sheet carrying amount of debt and finance leases was $7,033.0 million. Management reported gross and net leverage ratios of 4.8x and 4.1x, respectively. Unused borrowing capacity was $1,056.3 million, subject to facility terms. All borrowing groups were in covenant compliance at quarter-end.
Material changes versus the prior comparable period
- Revenue and Adjusted OIBDA increased, with particularly strong year-over-year improvement in Liberty Puerto Rico as operations recovered from hurricane damage. Reported growth also reflects acquisitions; foreign exchange reduced revenue.
- Q2 derivative instruments produced a net loss of $79.0 million, compared with a gain of $115.1 million in Q2 2018. First-half derivative loss was $148.0 million, compared with a gain of $73.6 million. These fair-value movements are volatile and may be non-cash until settlement.
- Interest expense rose to $119.8 million in Q2 from $109.4 million, and to $235.5 million for the first half from $211.9 million, primarily due to higher average debt and interest rates. Debt modification and extinguishment losses included $9.5 million in both the quarter and first half.
- In June, the company issued $403 million principal amount of 2.0% convertible notes due 2024 and purchased capped calls for $45.6 million. C&W also issued senior notes and used proceeds to refinance and redeem debt.
Outlook, risks and unusual items
- No specific revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management said it believes resources are sufficient for current debt maturities and foreseeable liquidity needs over the next 12 months, but expects to refinance or extend maturities in later years and gives no assurance that refinancing will be available on favorable terms.
- Management highlighted competition, economic and regulatory conditions, foreign-exchange and interest-rate movements, inflation, programming costs, technology change, customer growth and retention, and access to financing as risks. The company reported that 97% of total debt was at fixed interest rates after giving effect to interest-rate caps and derivatives.
- Management warned that adverse performance or other factors could require significant goodwill impairment, particularly for C&W’s Panamanian reporting unit, which carried $976 million of goodwill at June 30.
- Legal, tax, regulatory, interconnection, programming and copyright matters remain contingencies. The company said it cannot provide a meaningful range of potential losses for certain matters. It reported $314 million of uncertain tax positions at quarter-end and expected to reduce these by approximately $240 million in Q3 2019 following the closure of certain tax assessments.
- Subsequent events: in July 2019, C&W issued an additional $220 million of 2027 notes, with proceeds primarily intended to redeem the remaining $210 million principal of 2022 notes. The remaining 2022 notes were called for redemption and scheduled to be repaid in August 2019.
- Disclosure controls and procedures remained ineffective as of June 30, 2019 because previously identified material weaknesses in internal control over financial reporting had not yet been remediated. Management nevertheless concluded the interim financial statements fairly present the company’s financial position, results and cash flows in all material respects.
Important facts for investors to verify
- Whether reported growth in revenue and Adjusted OIBDA is sustained organically after separating acquisition, currency and Puerto Rico recovery effects.
- The cash-flow impact of debt service, capital investment, acquisition spending and the company’s non-GAAP adjusted free cash flow adjustments.
- Refinancing plans, subsidiary-level access to cash, borrowing capacity conditions and future maturity concentrations.
- The sensitivity of earnings and derivative values to foreign-exchange and interest-rate movements, and the potential for goodwill impairment, particularly in Panama.
- Progress remediating internal-control material weaknesses, and developments in tax assessments and other contingencies.