Liberty Latin America Ltd. — Q3 2019 Form 10-Q
Business and period: International fixed, mobile, broadband, video, business-to-business and subsea telecommunications provider operating across Latin America and the Caribbean, Chile, Costa Rica and Puerto Rico. This unaudited report covers the three and nine months ended September 30, 2019; amounts are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q3 2019 | Nine months 2019 | Comparison |
|---|---|---|---|
| Revenue | $966.8 million | $2,892.4 million | Up 4.5% and 4.9%, respectively |
| Adjusted OIBDA | $379.7 million | $1,132.9 million | Up 4.3% and 7.1%, respectively; non-GAAP measure |
| Operating income (loss) | $(69.7) million | $187.1 million | Q3 2018 income was $138.8 million; nine-month 2018 income was $361.3 million |
| Net loss, consolidated | $(69.7) million | $(222.1) million | Prior-year losses were $(18.8) million and $(100.6) million |
| Net earnings (loss) attributable to Liberty Latin America shareholders | $35.3 million; $0.19 per share | $(122.4) million; $(0.67) per share | Q3 2018 was a $25.5 million loss; nine-month 2018 was a $112.2 million loss |
| Cash from operating activities | Not presented quarterly | $590.4 million | Down from $608.7 million |
| Adjusted free cash flow | Not presented quarterly | $120.0 million | Compared with $(25.7) million; non-GAAP measure |
- Margins and costs: Segment Adjusted OIBDA margins in Q3 were 39.6% for C&W, 40.4% for VTR/Cabletica and 48.7% for Liberty Puerto Rico. Consolidated depreciation and amortization was $226.0 million in Q3 and $665.3 million year to date. SG&A rose 8.9% in Q3 and 7.3% year to date.
- Cash and liquidity: September 30 cash and cash equivalents were $1,004.1 million, versus $631.0 million at year-end 2018. Nine-month investing cash outflow was $556.9 million and financing inflow was $350.4 million. Reported cash, cash equivalents and restricted cash at period-end totaled $1,020.5 million. Unused borrowing capacity was $1,036.8 million, subject to facility terms and conditions.
- Debt: Principal debt and finance lease obligations totaled approximately $7,219 million; carrying value was $7,087.9 million. Management reported 4.6x consolidated debt and 4.0x net debt relative to annualized Adjusted OIBDA. Weighted-average borrowing cost, including derivative effects and certain other items, was 6.4%. The company said borrowing groups were covenant-compliant.
- Capital spending: Nine-month cash capital expenditures were $432.0 million, down from $593.0 million. Property and equipment additions, including vendor-financed and leased assets, were $492.1 million.
Material changes and drivers
- Revenue increased, but reported growth included acquisitions and currency effects. Excluding those effects, revenue declined 0.6% in Q3 and increased 1.9% for the first nine months.
- Q3 operating results were substantially affected by $208.3 million of impairment, restructuring and other operating items, including a $181.9 million goodwill impairment in Panama and $14 million of Hurricane Dorian-related asset impairment. The Panama charge followed subscriber losses and weaker prepaid mobile performance amid competition.
- Q3 consolidated net loss included a $182.4 million income tax benefit. This included a discrete $185 million benefit after tax assessments were closed and uncertain tax positions were reduced. Q3 shareholder-attributable earnings were positive largely because of the allocation of losses to noncontrolling interests; consolidated results remained a loss.
- Foreign-currency transaction losses were $110.8 million in Q3, compared with $16.4 million a year earlier. Derivative results were a $51.4 million gain in Q3, but a $96.6 million loss for the nine-month period, adding volatility to reported earnings.
- Acquisitions affected comparability: Cabletica was acquired in October 2018 and UTS in March 2019. UTS contributed $31 million of Q3 revenue and $64 million for the nine-month period.
Outlook, risks and unusual items
- Outlook: The filing provides no explicit consolidated revenue, earnings or cash-flow guidance. Management said it expects significant interest expense to continue and anticipates refinancing or extending maturities as debt comes due in later years.
- Hurricane Dorian: The storm reduced C&W Q3 revenue and Adjusted OIBDA by estimated $5 million and $8 million, respectively. Management expected impacts to continue through the rest of 2019 and beyond, estimated up to $25 million of network restoration additions, and expected restoration work to continue into 2020. The weather derivative did not meet its deductible threshold, so no payment was expected.
- AT&T transaction: On October 9, 2019, the company agreed to acquire AT&T’s wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands for an enterprise value of $1.95 billion, subject to adjustments and regulatory and other closing conditions. Management expected closing in Q2 2020. Subsequent financing included a $1.2 billion 6.75% secured note issue and a $1.0 billion term loan facility, with proceeds intended to fund the acquisition and related purposes. Failure to complete the transaction could entail costs and market or reputational consequences.
- Other risks: The filing highlights intense competition, foreign-exchange and interest-rate exposure, regulation, programming costs, execution and integration risks, natural disasters, and uncertainty in litigation and tax matters. It states that the company cannot provide a meaningful range of potential losses for certain contingencies.
- Controls: Management concluded disclosure controls remained ineffective as of September 30, 2019 because previously identified material weaknesses in internal control over financial reporting had not been remediated. Remediation was ongoing, with no estimated completion date.
- Other unusual items: The company closed its Seychelles operation disposition on November 5, 2019, at an enterprise value of $104 million. It also reported approximately $465 million of unfulfilled subsea and other long-term capacity-contract obligations, generally to be recognized as revenue over an average remaining life of seven years.
Investor verification priorities
- Reconcile consolidated net loss to shareholder-attributable earnings, including the noncontrolling-interest allocation and the discrete tax benefit.
- Assess whether Panama’s subscriber and operating trends stabilize after the goodwill impairment, and whether further impairments become necessary.
- Track Dorian restoration costs, subscriber reconnections, revenue effects and any insurance recovery.
- Verify the AT&T deal’s regulatory approvals, closing timetable, final purchase price, funding costs and integration assumptions.
- Review debt maturities, covenant headroom, subsidiary cash accessibility and refinancing needs alongside leverage and cash-flow trends.
- Monitor remediation and testing of the disclosed material weaknesses in internal controls.