Liberty Latin America Ltd. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report; it also provides fourth-quarter results. Amounts are in U.S. dollars unless stated otherwise.
Business context
Liberty Latin America provides fixed, mobile, broadband, video, telephony, business and wholesale subsea-network services across the Caribbean and Latin America. Its principal segments are C&W, VTR/Cabletica and Liberty Puerto Rico. At year-end, its networks passed approximately 7.16 million homes and served 5.70 million fixed-service RGUs and 3.50 million mobile subscribers.
Key 2018 transactions included acquiring an 80% interest in Costa Rica’s Cabletica on October 1 and the remaining 40% interest in Liberty Puerto Rico on October 17, making Puerto Rico wholly owned.
Financial and operating metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $3,705.7 million | $3,590.0 million |
| Operating income (loss) | $(23.6) million | $(162.9) million |
| Adjusted OIBDA | $1,486.5 million | $1,352.6 million |
| Adjusted OIBDA margin | 40.1% consolidated | 37.7% consolidated |
| Net loss | $(635.8) million | $(798.7) million |
| Net loss attributable to Liberty Latin America shareholders | $(345.2) million | $(778.1) million |
| Net cash provided by operating activities | $816.8 million | $573.2 million |
| Capital expenditures | $776.4 million | $639.3 million |
| Adjusted free cash flow | $18.8 million | $(93.1) million |
Revenue increased 3.2%; management attributed $42 million of the increase to acquisitions and $6 million to foreign-exchange effects. Excluding these effects, revenue rose 1.9%. Adjusted OIBDA increased 9.9%; this non-GAAP measure excludes, among other items, depreciation, share-based compensation, impairment and restructuring charges.
Fourth-quarter revenue was $948.5 million, compared with $850.1 million in the prior-year quarter. Fourth-quarter operating loss was $384.9 million versus $247.4 million, and shareholder-attributable net loss was $233.0 million versus $400.8 million. Fourth-quarter loss per share was $1.30.
At December 31, 2018, cash and cash equivalents were $631.0 million ($642.0 million including restricted cash). Debt and capital lease obligations had a carrying value of $6,682.1 million; debt principal before discounts and financing costs was $6,710.7 million. Management reported gross leverage of 4.2x and net leverage of 3.8x, calculated using annualized Adjusted OIBDA for the two most recent quarters. The hurricane insurance settlements contributed $64 million to fourth-quarter leverage calculations and reduced both ratios by approximately 0.4x. Undrawn borrowing capacity was $1,043 million, held within subsidiary borrowing groups.
Year-end total assets were $13,446.6 million and total equity was $4,123.4 million. Goodwill was $5,133.3 million, including a large impairment charge during the year.
Material changes versus prior periods
- Revenue growth was modest organically; C&W revenue was nearly flat, while VTR/Cabletica revenue benefited from Cabletica and foreign exchange. Puerto Rico’s year-on-year revenue included $11 million of FCC funding.
- C&W residential mobile subscription revenue fell 7.6%, with subscriber and ARPU pressure in Panama and the Bahamas. Management cited intensified competition, including aggressive prepaid-mobile offers in Panama.
- Operating loss improved, but results remained affected by substantial impairment charges. The 2018 annual goodwill test produced a $608 million impairment at C&W’s Panama reporting unit, primarily reflecting competition and prepaid mobile subscriber and ARPU declines. Total impairment charges were $615.7 million in 2018, compared with $677.9 million in 2017.
- Operating cash flow increased by $243.6 million. Investing cash use rose to $980.5 million, including $226.4 million for acquisitions and higher capital expenditures. Adjusted free cash flow was positive but low at $18.8 million.
- Revenue accounting changed in 2018 under the new customer-contract standard; comparative periods were not restated. The standard increased reported 2018 revenue by $8.4 million and interest expense by $19.1 million.
Outlook, commentary, risks and unusual items
- Management expects 2019 property and equipment additions to be approximately 19% of revenue, versus 20.8% in 2018. Actual spending may vary with competition, regulation, operating results, foreign exchange and funding availability.
- Management stated it expects sufficient resources to meet foreseeable liquidity needs and repay or refinance current maturities over the next 12 months. It expects to refinance or extend later maturities; no assurance is given that financing will be available on favorable terms.
- Hurricanes Irma and Maria damaged networks and affected customers in Puerto Rico and C&W markets. Liberty Puerto Rico completed broadband network restoration in the third quarter of 2018. The company settled hurricane insurance claims for $121 million, net of stated self-insurance amounts; it reported $99.8 million of related income-statement effects in 2018 and expected to collect a further $18 million in the first quarter of 2019.
- Competition, pricing pressure, foreign-exchange movements, regulation, programming costs, natural disasters, acquisition integration, debt and refinancing needs, and counterparty risks could affect performance. Regulatory matters include pending or outstanding approvals for the C&W acquisition, proposed network-access rules in some markets, and the required disposal of the company’s TSTT investment. TSTT was impaired by $16 million in 2018 to a carrying value of $77 million; timing and proceeds from a sale remain uncertain.
- Goodwill remained material and subject to further impairment risk. Management noted that declines in reporting-unit valuations or weaker-than-expected results could result in additional significant charges.
- The company reported material weaknesses in internal control over financial reporting, including deficiencies in staffing and expertise, risk assessment, monitoring, information and communication, IT general controls, and process-level controls. Management was implementing remediation plans. The auditor gave an adverse opinion on internal-control effectiveness, but an unqualified opinion on the consolidated financial statements.
- The company paid no cash dividends and stated it had no present intention to do so. Its Class C shares generally have no voting rights; Class A shares have one vote and Class B shares have ten votes per share.
Important facts for investors to verify
- Whether the Panama business stabilizes after the competitive pressures that drove the $608 million goodwill impairment, and whether further impairment is required.
- Whether underlying operating cash flow and Adjusted OIBDA support debt service, planned capital spending and refinancing, given the company’s leverage and substantial later maturities.
- Whether the expected $18 million remaining hurricane insurance proceeds were collected and whether insurance recovery or restoration costs recur.
- Progress in remediating material weaknesses, including auditor reassessment and the effectiveness of controls after Cabletica’s integration.
- Final purchase accounting, operating contribution and integration performance for Cabletica, as well as the financial effects of acquiring full ownership of Liberty Puerto Rico.
- Developments in C&W acquisition approvals, network-access regulation and the required TSTT disposal, including any material conditions, penalties or changes in recoverable value.