UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||
For the quarterly period ended | |||
OR
Commission file number: 001-38335
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to | |
(Exact name of Registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
(Address of Principal Executive Offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (441 ) 295-5950 or (303) 925-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbols | Name of Each Exchange on Which Registered |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes þ No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated Filer | ☐ | Non-Accelerated Filer | ☐ | |
Smaller Reporting Company | Emerging Growth Company | ||||
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | No þ | |
The number of outstanding common shares of Liberty Latin America Ltd. as of April 28, 2020 was: 49,003,226 Class A; 1,934,057 Class B; and 131,601,021 Class C.
LIBERTY LATIN AMERICA LTD.
TABLE OF CONTENTS
Page Number | ||
PART I - FINANCIAL INFORMATION | ||
Item 1. | FINANCIAL STATEMENTS | |
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019 (unaudited) | ||
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited) | ||
Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 (unaudited) | ||
Condensed Consolidated Statements of Equity for the Three Months Ended March 31, 2020 and 2019 (unaudited) | ||
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019 (unaudited) | ||
Notes to Condensed Consolidated Financial Statements (unaudited) | ||
Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | |
Item 4. | CONTROLS AND PROCEDURES | |
PART II - OTHER INFORMATION | ||
Item 1A. | RISK FACTORS | |
Item 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |
Item 6. | EXHIBITS | |
LIBERTY LATIN AMERICA LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
March 31, 2020 | December 31, 2019 | |||||||
in millions | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Trade receivables, net of allowances of $99.2 million and $87.3 million, respectively | ||||||||
Prepaid expenses | ||||||||
Other current assets, net | ||||||||
Total current assets | ||||||||
Goodwill | ||||||||
Property and equipment, net | ||||||||
Restricted cash | ||||||||
Intangible assets subject to amortization, net | ||||||||
Intangible assets not subject to amortization | ||||||||
Other assets, net | ||||||||
Total assets | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
LIBERTY LATIN AMERICA LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS – (Continued)
(unaudited)
March 31, 2020 | December 31, 2019 | |||||||
in millions | ||||||||
LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | $ | ||||||
Current portion of deferred revenue | ||||||||
Current portion of debt and finance lease obligations | ||||||||
Accrued capital expenditures | ||||||||
Accrued interest | ||||||||
Accrued payroll and employee benefits | ||||||||
Other accrued and current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt and finance lease obligations | ||||||||
Deferred tax liabilities | ||||||||
Deferred revenue | ||||||||
Other long-term liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
Liberty Latin America shareholders: | ||||||||
Class A, $0.01 par value; 500,000,000 shares authorized; 49,031,543 and 48,976,205 shares issued and outstanding, respectively, at March 31, 2020 and 48,795,552 shares issued and outstanding at December, 31, 2019 | ||||||||
Class B, $0.01 par value; 50,000,000 shares authorized; 1,934,057 shares issued and outstanding at March 31, 2020 and 1,934,686 shares issued and outstanding at December 31, 2019 | ||||||||
Class C, $0.01 par value; 500,000,000 shares authorized; 131,671,137 and 131,556,162 shares issued and outstanding, respectively, at March 31, 2020 and 131,181,371 shares issued and outstanding at December 31, 2019 | ||||||||
Undesignated preference shares, $0.01 par value; 50,000,000 shares authorized; nil shares issued and outstanding at each period | ||||||||
Treasury shares, at cost; 170,313 and nil shares, respectively | ( | ) | ||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Accumulated other comprehensive loss, net of taxes | ( | ) | ( | ) | ||||
Total Liberty Latin America shareholders | ||||||||
Noncontrolling interests | ||||||||
Total equity | ||||||||
Total liabilities and equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
LIBERTY LATIN AMERICA LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
in millions, except per share amounts | |||||||
Revenue | $ | $ | |||||
Operating costs and expenses (exclusive of depreciation and amortization, shown separately below): | |||||||
Programming and other direct costs of services | |||||||
Other operating | |||||||
Selling, general and administrative (SG&A) | |||||||
Depreciation and amortization | |||||||
Impairment, restructuring and other operating items, net | |||||||
Operating income | |||||||
Non-operating income (expense): | |||||||
Interest expense | ( | ) | ( | ) | |||
Realized and unrealized gains (losses) on derivative instruments, net | ( | ) | |||||
Foreign currency transaction gains (losses), net | ( | ) | |||||
Losses on debt modification and extinguishment | ( | ) | |||||
Other income, net | |||||||
( | ) | ( | ) | ||||
Loss before income taxes | ( | ) | ( | ) | |||
Income tax expense | ( | ) | ( | ) | |||
Net loss | ( | ) | ( | ) | |||
Net loss (earnings) attributable to noncontrolling interests | ( | ) | |||||
Net loss attributable to Liberty Latin America shareholders | $ | ( | ) | $ | ( | ) | |
Basic and diluted net loss per share attributable to Liberty Latin America shareholders | $ | ( | ) | $ | ( | ) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
LIBERTY LATIN AMERICA LTD.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
in millions | |||||||
Net loss | $ | ( | ) | $ | ( | ) | |
Other comprehensive earnings (loss), net of taxes: | |||||||
Foreign currency translation adjustments | ( | ) | |||||
Reclassification adjustments included in net loss | ( | ) | ( | ) | |||
Pension-related adjustments and other, net | ( | ) | |||||
Other comprehensive earnings (loss) | ( | ) | |||||
Comprehensive loss | ( | ) | ( | ) | |||
Comprehensive loss (earnings) attributable to noncontrolling interests | ( | ) | |||||
Comprehensive loss attributable to Liberty Latin America shareholders | $ | ( | ) | $ | ( | ) | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
LIBERTY LATIN AMERICA LTD.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited)
Liberty Latin America shareholders | Non-controlling interests | Total equity | |||||||||||||||||||||||||||||||||||||
Common shares | Treasury Stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss, net of taxes | Total Liberty Latin America shareholders | ||||||||||||||||||||||||||||||||||
Class A | Class B | Class C | |||||||||||||||||||||||||||||||||||||
in millions | |||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2019 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
Other comprehensive earnings | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
Impact of the UTS Acquisition | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Shared-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
Balance at January 1, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||||
Accounting change (note 2) | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||||
Balance at January 1, 2020, as adjusted for accounting change | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | — | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||
Repurchase of Liberty Latin America common shares | — | — | — | ( | ) | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||||||
Shared-based compensation | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
UTS NCI Acquisition | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Other | — | — | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
LIBERTY LATIN AMERICA LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
in millions | |||||||
Cash flows from operating activities: | |||||||
Net loss | $ | ( | ) | $ | ( | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | |||||||
Share-based compensation expense | |||||||
Depreciation and amortization | |||||||
Impairment | |||||||
Amortization of debt financing costs, premiums and discounts, net | |||||||
Realized and unrealized losses (gains) on derivative instruments, net | ( | ) | |||||
Foreign currency transaction losses (gains), net | ( | ) | |||||
Loss on debt modification and extinguishment | |||||||
Deferred income tax benefit | ( | ) | ( | ) | |||
Changes in operating assets and liabilities, net of the effect of an acquisition | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
Cash flows from investing activities: | |||||||
Capital expenditures | ( | ) | ( | ) | |||
Cash paid in connection with an acquisition, net of cash acquired | ( | ) | |||||
Recovery on damaged or destroyed property and equipment | |||||||
Other investing activities, net | |||||||
Net cash used by investing activities | ( | ) | ( | ) | |||
Cash flows from financing activities: | |||||||
Borrowings of debt | |||||||
Payments of principal amounts of debt and finance lease obligations | ( | ) | ( | ) | |||
Payment of financing costs and debt premiums | ( | ) | |||||
Repurchase of Liberty Latin America Shares | ( | ) | |||||
Distributions to noncontrolling interest owners | ( | ) | |||||
Other financing activities, net | ( | ) | ( | ) | |||
Net cash provided by financing activities | |||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ) | |||||
Net increase (decrease) in cash, cash equivalents and restricted cash | ( | ) | |||||
Cash, cash equivalents and restricted cash: | |||||||
Beginning of period | |||||||
End of period | $ | $ | |||||
Cash paid for interest | $ | $ | |||||
Net cash paid for taxes | $ | $ | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements
March 31, 2020
(unaudited)
(1) | Basis of Presentation |
Liberty Latin America Ltd. (Liberty Latin America) is a registered company in Bermuda that primarily includes (i) Cable & Wireless Communications Limited (C&W) and its subsidiaries, (ii) VTR Finance B.V. (VTR Finance) and its subsidiaries, which include VTR.com SpA (VTR), (iii) Leo Cable LP (Leo Cable) and its subsidiaries, which includes Liberty Cablevision of Puerto Rico LLC (LCPR), collectively “Liberty Puerto Rico”, and (iv) LBT CT Communications, S.A. (a less than wholly-owned entity) and its subsidiary, Cabletica S.A. (Cabletica). C&W owns less than 100% of certain of its consolidated subsidiaries, including The Bahamas Telecommunications Company Limited (C&W Bahamas), Cable & Wireless Jamaica Limited (C&W Jamaica), and Cable & Wireless Panama, S.A. (C&W Panama). For information regarding the percentages of certain of our less than wholly-owned consolidated subsidiaries, see Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Overview.
We are an international provider of fixed, mobile and subsea telecommunications services. We provide residential and business-to-business (B2B) services in (i) over 20 countries, primarily in Latin America and the Caribbean, through C&W, (ii) Chile and Costa Rica, through VTR/Cabletica, and (iii) Puerto Rico, through Liberty Puerto Rico. Through our “Networks & LatAm” business, C&W also provides (i) B2B services in certain other countries in Latin America and the Caribbean and (ii) wholesale communication services over its subsea and terrestrial fiber optic cable networks that connect over 40 markets in that region.
In these notes, the terms “we,” “our,” “our company” and “us” may refer, as the context requires, to Liberty Latin America or collectively to Liberty Latin America and its subsidiaries. Unless otherwise indicated, ownership percentages and convenience translations into United States (U.S.) dollars are calculated as of March 31, 2020.
The accompanying condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (U.S. GAAP) and with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information required by U.S. GAAP or Securities and Exchange Commission rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results of operations for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in our 2019 Annual Report on Form 10-K (the 2019 Form 10-K).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used in accounting for, among other things, the valuation of acquisition-related assets and liabilities, expected credit losses, programming and copyright expenses, deferred income taxes and related valuation allowances, loss contingencies, fair value measurements, impairment assessments, capitalization of internal costs associated with construction and installation activities, useful lives of long-lived assets and actuarial liabilities associated with certain benefit plans. Actual results could differ from those estimates.
(2) | Accounting Changes and Recent Accounting Pronouncements |
Accounting Changes
ASU 2018-15
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software—Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (ASU 2018-15). ASU 2018-15 provides additional guidance on ASU No. 2015-05, Intangibles—Goodwill and Other—Internal-Use Software—Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
7
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The guidance (i) provides criteria for determining which implementation costs to capitalize as an asset related to the service contract and which costs to expense, (ii) requires an entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and (iii) clarifies the presentation requirements for reporting such costs in the entity’s financial statements. We adopted ASU 2018-15 effective January 1, 2020 on a prospective basis for all implementation costs incurred after the date of adoption and it is not expected to have a material impact on our condensed consolidated financial statements.
ASU 2016-13
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses—Measurement of Credit Losses on Financial Instruments (ASU 2016-13), as amended by (i) ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which amended certain effective dates, and (ii) ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses, which clarifies guidance around how to report expected recoveries. ASU 2016-13 replaces the incurred loss impairment methodology for recognizing credit losses with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. We are required to use a forward-looking expected credit loss model for accounts receivables, loans and other financial instruments. We adopted ASU 2016-13 effective January 1, 2020 using a modified retrospective approach through a cumulative-effect adjustment to retained earnings to align our credit loss methodology with the new standard. The comparative information has not been restated and continues to be reported under the accounting standards in effect for that period.
Under the new model, we segment our receivables, unbilled revenue and contract assets based on days past due and record an allowance for current expected credit losses using average rates applied against each account’s applicable aggregate balance for each aging bucket. We establish the average rates based on consideration of the actual credit loss experience over the prior 12-month period, recent collection trends, current economic conditions and reasonable expectations of future payment delinquency.
The cumulative effect of the changes to our condensed consolidated balance sheet as of January 1, 2020 was not material.
As of March 31, 2020, the impact of COVID-19, as defined and further described in note 8, has not had a material impact on our results of operations, financial position or cash flows. We will continue to actively monitor the impact of COVID-19 on our expected credit losses.
Recent Accounting Pronouncements
ASU 2018-14
In August 2018, the FASB issued ASU No. 2018-14, Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14), which removes and modifies certain existing disclosure requirements and adds new disclosure requirements related to employer sponsored defined benefit pension or other postretirement plans. ASU 2018-14 is effective for annual reporting periods after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. We are currently evaluating the effect that ASU 2018-14 will have on our disclosures.
ASU 2019-12
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which (i) simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocations and calculating income taxes in interim periods, and (ii) reduces the complexity in certain areas of existing tax guidance, including the recognition of deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual reporting periods after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. Although we are currently evaluating the effect that ASU 2019-12 will have on our consolidated financial statements, we do not expect it will have a material impact.
ASU 2020-04
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides optional guidance for a limited time to ease the potential
8
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
accounting burden associated with transitioning away from reference rates, such as the London Inter-Bank Offered Rate (LIBOR), which regulators in the United Kingdom (U.K.) have announced will be phased out by the end of 2021. The expedients and exceptions provided by ASU 2020-04 are for the application of U.S. GAAP to contracts, hedging relationships and other transactions affected by the rate reform, and will not be available after December 31, 2022, other than for certain hedging relationships entered into before December 31, 2022. We do not currently expect that the phase out of LIBOR will have a material impact on our consolidated financial statements.
(3) | Summary of Significant Accounting Policies |
The following accounting policy reflects an update to the Summary of Significant Accounting Policies included in our 2019 Form 10-K resulting from the adoption of ASU 2016-13:
Trade Receivables
Our trade receivables are reported net of an allowance for credit losses. The allowance is established using our best estimates of current expected credit losses based upon, among other things, actual credit loss experience over the prior 12-month period, recent collection trends, prevailing and anticipated economic conditions and specific customer credit risk. Receivables outstanding greater than 30 days are considered past due and we generally write-off receivables after they become past due for 365 days, with the exception of certain amounts due from a single government. Concentration of credit risk with respect to trade receivables is limited due to the large number of customers and their dispersion across many different countries, with the exception of certain amounts due from a single government.
Changes in the allowance for credit losses are set forth below:
January 1, 2020 | Provision for expected losses | Write-offs | Foreign currency translation adjustments and other | March 31, 2020 | |||||||||||||||
in millions | |||||||||||||||||||
C&W | $ | $ | $ | ( | ) | $ | $ | ||||||||||||
VTR/Cabletica | ( | ) | ( | ) | |||||||||||||||
Liberty Puerto Rico | ( | ) | |||||||||||||||||
Total | $ | $ | $ | ( | ) | $ | $ | ||||||||||||
(4) | Acquisitions |
Pending Acquisition
On October 9, 2019, Leo Cable and Liberty Latin America entered into a stock purchase agreement with certain subsidiaries of AT&T Inc. (AT&T) to acquire AT&T’s wireless and wireline operations in Puerto Rico and the U.S. Virgin Islands (the AT&T Acquisition) in an all-cash transaction. The AT&T Acquisition companies provide consumer mobile and B2B services in Puerto Rico and the U.S. Virgin Islands, excluding DirecTV customers. The AT&T Acquisition is valued at an enterprise value of $1,950 million on a cash- and debt-free basis, subject to certain adjustments. We intend to finance this acquisition, including related fees and expenses, through a combination of net proceeds from the 2027 LPR Senior Secured Notes, the 2026 SPV Credit Facility and available liquidity. For further information about our debt and available liquidity, see note 9.
The transaction is subject to customary closing conditions, including reviews by the United States Federal Communications Commission (FCC) and the Department of Justice (DOJ). We currently expect the transaction to close in the second half of 2020.
AT&T will provide ongoing support to the companies associated with the AT&T Acquisition under a transition services agreement (the AT&T TSA) for a period up to 36 months following the closing date of the acquisition. Services under the AT&T TSA include, but are not limited to, (i) wireless core, (ii) technology development, (iii) global technology operations, (iv) wireless engineering, (v) network infrastructure, (vi) supply chain and (vii) finance and sales operations. We may terminate any services under the AT&T TSA upon sixty business days’ notice to AT&T in accordance with the terms and conditions of the AT&T TSA.
9
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
2019 Acquisition
UTS. Effective March 31, 2019, we completed the acquisition of an 87.5 % interest in United Telecommunication Services N.V. (UTS) for an initial cash purchase price of $162 million, which was subject to certain potential post-closing adjustments, based on an enterprise value of $189 million (the UTS Acquisition). As noted below, during the first quarter of 2020, the purchase price was reduced by $6 million related to certain post-closing working capital adjustments. During the third quarter of 2019, we increased our ownership interest in UTS from 87.5 % to 100 %. UTS provides fixed and mobile services to the island nations of Curaçao, St. Maarten, St. Martin, Bonaire, St. Barths, St. Eustatius and Saba. The UTS Acquisition was funded through a $170 million draw on the C&W Revolving Credit Facility, as defined in note 9.
We have accounted for the UTS Acquisition as a business combination using the acquisition method of accounting, whereby the total purchase price was allocated to the acquired identifiable net assets of UTS based on assessments of their respective fair values, and the excess of the purchase price over the fair values of these identifiable net assets was allocated to goodwill. A summary of the purchase price and opening balance sheet of UTS at the effective March 31, 2019 acquisition date is presented in the following table. The opening balance sheet presented below reflects our final purchase price allocation (in millions):
Cash | $ | ||
Trade receivables | |||
Other current assets | |||
Property and equipment | |||
Goodwill (a) | |||
Intangible assets subject to amortization | |||
Other assets | |||
Accounts payable | ( | ) | |
Other accrued and current liabilities | ( | ) | |
Other long-term liabilities | ( | ) | |
Noncontrolling interest (b) | ( | ) | |
Total purchase price (c) (d) | $ | ||
(a) | The goodwill recognized in connection with the UTS Acquisition is primarily attributable to (i) the ability to take advantage of UTS’s existing broadband communications and mobile networks to gain immediate access to potential customers, and (ii) synergies that are expected to be achieved through the integration of UTS with C&W’s existing business in Curacao. |
(b) | Amount represents the estimated aggregate fair value of the noncontrolling interest in UTS as of March 31, 2019. |
(c) | Excludes $ |
(d) | Pursuant to the purchase agreement, which permits certain post-closing working capital adjustments, the UTS Acquisition purchase price was reduced by $ |
(5) | Derivative Instruments |
In general, we seek to enter into derivative instruments to protect against (i) increases in the interest rates on our variable-rate debt and (ii) foreign currency movements, particularly with respect to borrowings that are denominated in a currency other than the functional currency of the borrowing entity. In this regard, through our subsidiaries, we have entered into various derivative instruments to manage interest rate exposure and foreign currency exposure with respect to the U.S. dollar ($), the Chilean peso (CLP), the Colombian peso (COP) and the Jamaican dollar (JMD). With the exception of certain foreign currency forward contracts, we do not apply hedge accounting to our derivative instruments. Accordingly, changes in the fair values of most of our derivative instruments are recorded in realized and unrealized gains or losses on derivative instruments in our condensed consolidated statements of operations.
10
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
The following table provides details of the fair values of our derivative instrument assets and liabilities:
March 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
Current (a) | Long-term (a) | Total | Current (a) | Long-term (a) | Total | ||||||||||||||||||
in millions | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Cross-currency and interest rate derivative contracts (b) | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Liabilities: | |||||||||||||||||||||||
Cross-currency and interest rate derivative contracts (b) | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Foreign currency forward contracts | |||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||
(a) | Our current derivative assets, current derivative liabilities, long-term derivative assets and long-term derivative liabilities are included in other current assets, net, other accrued and current liabilities, other assets, net, and other long-term liabilities, respectively, in our condensed consolidated balance sheets. |
(b) | We consider credit risk relating to our and our counterparties’ nonperformance in the fair value assessment of our derivative instruments. In all cases, the adjustments take into account offsetting liability or asset positions within each of our primary borrowing groups (see note 9). The changes in the credit risk valuation adjustments associated with our cross-currency and interest rate derivative contracts resulted in net gains of $ |
The derivative assets set forth in the table above exclude our Weather Derivatives, as defined below, as they are not accounted for at fair value. The Weather Derivatives are included in other current assets, net, in our condensed consolidated balance sheet.
The details of our realized and unrealized gains (losses) on derivative instruments, net, are as follows:
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
in millions | |||||||
Cross-currency and interest rate derivative contracts | $ | $ | ( | ) | |||
Foreign currency forward contracts and other (a) | |||||||
Total | $ | $ | ( | ) | |||
(a) | The amount for the 2020 period includes $ |
11
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
The following table sets forth the classification of the net cash inflows of our derivative instruments:
Three months ended March 31, | |||||||
2020 | 2019 | ||||||
in millions | |||||||
Operating activities | $ | $ | |||||
Investing activities | |||||||
Financing activities | ( | ) | ( | ) | |||
Total | $ | $ | |||||
Counterparty Credit Risk
We are exposed to the risk that the counterparties to the derivative instruments of our borrowing groups will default on their obligations to us. We manage these credit risks through the evaluation and monitoring of the creditworthiness of, and concentration of risk with, the respective counterparties. In this regard, credit risk associated with our derivative instruments is spread across a relatively broad counterparty base of banks and financial institutions. Collateral has not been posted by either party under the derivative instruments of our borrowing groups. At March 31, 2020, our exposure to counterparty credit risk included derivative assets with an aggregate fair value of $297 million.
Each of our borrowing groups has entered into derivative instruments under agreements with each counterparty that contain master netting arrangements that are applicable in the event of early termination by either party to such derivative instrument. The master netting arrangements under each of these master agreements are limited to the derivative instruments governed by the relevant master agreement within each individual borrowing group and are independent of similar arrangements of our other subsidiary borrowing groups.
Details of our Derivative Instruments
Cross-currency Derivative Contracts
As noted above, we are exposed to foreign currency exchange rate risk in situations where our debt is denominated in a currency other than the functional currency of the operations whose cash flows support our ability to service, repay or refinance such debt. Although we generally seek to match the denomination of our borrowings with the functional currency of the operations that are supporting the respective borrowings, market conditions or other factors may cause us to enter into borrowing arrangements that are not denominated in the functional currency of the underlying operations (unmatched debt). Our policy is generally to provide for an economic hedge against foreign currency exchange rate movements, whenever possible and when cost effective to do so, by using derivative instruments to synthetically convert unmatched debt into the applicable underlying currency. The following table sets forth the total notional amounts and the related weighted average remaining contractual lives of our cross-currency swap contracts at March 31, 2020:
Borrowing group | Notional amount due from counterparty | Notional amount due to counterparty | Weighted average remaining life | |||||||
in millions | in years | |||||||||
C&W | $ | JMD | ||||||||
$ | COP | |||||||||
VTR Finance | $ | CLP | ||||||||
12
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
Interest Rate Derivative Contracts
Interest Rate Swaps
As noted above, we enter into interest rate swaps to protect against increases in the interest rates on our variable-rate debt. Pursuant to these derivative instruments, we typically pay fixed interest rates and receive variable interest rates on specified notional amounts. The following table sets forth the total U.S. dollar equivalents of the notional amounts and the related weighted average remaining contractual lives of our interest rate swap contracts at March 31, 2020:
Borrowing group | Notional amount due from counterparty | Weighted average remaining life | ||||
in millions | in years | |||||
C&W (a) | $ | |||||
VTR Finance | $ | |||||
Liberty Puerto Rico | $ | |||||
Cabletica | $ | |||||
(a) | Includes forward-starting derivative instruments. |
Basis Swaps
Basis swaps involve the exchange of attributes used to calculate our floating interest rates, including (i) the benchmark rate, (ii) the underlying currency and/or (iii) the borrowing period. We typically enter into these swaps to optimize our interest rate profile based on our current evaluations of yield curves, our risk management policies and other factors. The following table sets forth the total U.S. dollar equivalents of the notional amounts and the related weighted average remaining contractual lives of our basis swap contracts at March 31, 2020:
Borrowing group | Notional amount due from counterparty | Weighted average remaining life | ||||
in millions | in years | |||||
C&W | $ | |||||
Liberty Puerto Rico | $ | |||||
Foreign Currency Forwards Contracts
We enter into foreign currency forward contracts with respect to non-functional currency exposure. At March 31, 2020, our foreign currency forward contracts had total notional amounts due from and to counterparties of $90 million and CLP 64 billion, respectively, with a weighted average remaining contractual life of 0.3 years. All of our foreign currency forward contracts are held by our VTR Finance borrowing group.
(6) | Fair Value Measurements |
General
We use the fair value method to account for most of our derivative instruments and the available-for-sale method to account for our investment in U.K. Government Gilts. The reported fair values of our derivative instruments as of March 31, 2020 likely will not represent the value that will be paid or received upon the ultimate settlement or disposition of these assets and liabilities, as we expect that the values realized generally will be based on market conditions at the time of settlement, which may occur at the maturity of the derivative instrument or at the time of the repayment or refinancing of the underlying debt instrument.
13
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
U.S. GAAP provides for a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
Recurring Fair Value Measurements
Derivatives
In order to manage our interest rate and foreign currency exchange risk, we have entered into various derivative instruments, as further described in note 5. The recurring fair value measurements of these derivative instruments are determined using discounted cash flow models. Most of the inputs to these discounted cash flow models consist of, or are derived from, observable Level 2 data for substantially the full term of these derivative instruments. This observable data mostly includes interest rate futures and swap rates, which are retrieved or derived from available market data. Although we may extrapolate or interpolate this data, we do not otherwise alter this data in performing our valuations. We incorporate a credit risk valuation adjustment in our fair value measurements to estimate the impact of both our own nonperformance risk and the nonperformance risk of our counterparties. Our and our counterparties’ credit spreads represent our most significant Level 3 inputs, and these inputs are used to derive the credit risk valuation adjustments with respect to these instruments. Notwithstanding the impact of COVID-19 on our credit risk, we generally would not expect changes in our or our counterparties’ credit spreads to have a significant impact on the valuations of these instruments. As a result, we have determined that these valuations continue to fall under Level 2 of the fair value hierarchy. Our credit risk valuation adjustments with respect to our cross-currency and interest rate derivative contracts are quantified and further explained in note 5. Due to the lack of Level 2 inputs for the valuation of the U.S. dollar to the Jamaican dollar cross-currency swaps (the Sable Currency Swaps) held by Sable International Finance Limited (Sable), a wholly-owned subsidiary of C&W, we believe this valuation falls under Level 3 of the fair value hierarchy. The Sable Currency Swaps are our only Level 3 financial instruments. The fair values of the Sable Currency Swaps at March 31, 2020 and December 31, 2019 were $20 million and $30 million, respectively, which are included in other long-term liabilities in our condensed consolidated balance sheets. The change in the fair values of the Sable Currency Swaps resulted in net gains of $10 million and $1 million during the three months ended March 31, 2020 and 2019, respectively, which are reflected in realized and unrealized gains (losses) on derivative instruments, net, in our condensed consolidated statements of operations.
Available-for-sale Investments
Our investment in U.K. Government Gilts falls under Level 1 of the fair value hierarchy. At March 31, 2020 and December 31, 2019, the carrying values of our investment in U.K. Government Gilts, which are included in other assets, net, in our condensed consolidated balance sheets, were $35 million and $37 million, respectively.
Nonrecurring Fair Value Measurements
Fair value measurements are also used for purposes of nonrecurring valuations performed in connection with acquisition accounting and impairment assessments.
Acquisition Accounting
The nonrecurring valuations associated with acquisition accounting, which use significant unobservable inputs and therefore fall under Level 3 of the fair value hierarchy, primarily include the valuation of customer relationships and property and equipment, as further described below:
• | Customer relationships. The valuation of customer relationships is primarily based on an excess earnings methodology, which is a form of a discounted cash flow analysis. The excess earnings methodology for customer relationship intangible assets requires us to estimate the specific cash flows expected from the acquired customer relationships, considering such factors as estimated customer life, the revenue expected to be generated over the life of the customer relationships, contributory asset charges and other factors. |
• | Property and equipment. Property and equipment is typically valued using a replacement or reproduction cost approach, considering factors such as current prices of the same or similar equipment, the age of the equipment and economic obsolescence. |
14
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
During the three months ended March 31, 2020, we performed a nonrecurring valuation related to the acquisition accounting for the UTS Acquisition. The weighted average discount rate used in the final valuation of the customer relationships acquired as a result of the UTS Acquisition was approximately 13.5 %.
(7) | Insurance Recoveries |
In September 2017, Hurricanes Irma and Maria impacted a number of our markets in the Caribbean, resulting in varying degrees of damage to homes, businesses and infrastructure in these markets. In October 2016, our operations in the Bahamas, which is part of our C&W segment, were significantly impacted by Hurricane Matthew.
(8) | Long-lived Assets |
Goodwill
Changes in the carrying amount of our goodwill are set forth below:
January 1, 2020 | Acquisitions and related adjustments | Foreign currency translation adjustments | March 31, 2020 | ||||||||||||
in millions | |||||||||||||||
C&W | $ | $ | ( | ) | $ | ( | ) | $ | |||||||
VTR/Cabletica | ( | ) | |||||||||||||
Liberty Puerto Rico | |||||||||||||||
Total | $ | $ | ( | ) | $ | ( | ) | $ | |||||||
During the first quarter of 2020, the World Health Organization declared the outbreak of a novel strain of Coronavirus (COVID-19) a “pandemic,” pointing to the sustained risk of further global spread. Through the first quarter of 2020, the impacts of COVID-19 did not have a significant impact on our operating results or cash flows. Notwithstanding the lack of a significant impact of COVID-19 on our first quarter results, as of March 31, 2020, we did evaluate whether the facts and circumstances and available information result in the need for an impairment assessment for any of our long-lived assets, including goodwill, and concluded no assessment was required. COVID-19 has resulted in systemic disruption of the worldwide equity markets, and the market values of our publicly-traded equity declined significantly beginning in late February. If, among other factors, (i) our equity values were to remain at these declined levels for a sustained period or were to decline further or (ii) the adverse impacts stemming from COVID-19, competition, economic, regulatory or other factors, including macro-economic and demographic trends, were to cause our results of operations or cash flows to be worse than anticipated, we could conclude in future periods that impairment charges are required in order to reduce the carrying values of goodwill. Any such impairment charges could be significant.
Our accumulated goodwill impairments were $1,348 million at March 31, 2020 and December 31, 2019.
15
Liberty Latin America Ltd.
Notes to Condensed Consolidated Financial Statements – (Continued)
March 31, 2020
(unaudited)
Property and Equipment, Net
The details of our property and equipment and the related accumulated depreciation are set forth below:
March 31, 2020 | December 31, 2019 | ||||||
in millions | |||||||
Distribution systems | $ | $ | |||||
Customer premises equipment (CPE) | |||||||
Support equipment, buildings and land | |||||||
Accumulated depreciation | ( | ) | ( | ) | |||
Total | $ | $ | |||||