ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
B. LIQUIDITY Liquidity Sources
The main source of our corporate liquidity is cash provided by operating activities and long-term debt through the capital markets as well as long-term and short-term loans through bank facilities. We aim to maintain a strong financial position and have enough liquidity for our operations and to support our growth. We seek to keep optimizing our balance sheet and financing capabilities.
We divide our liquidity sources into internal and external liquidity.
A. Internal Liquidity Sources
To fulfill our obligations we rely primarily on our internal liquidity. As of December 31, 2019, we had Rp18,241 billion (US$1,314 million) in cash and cash equivalents available, an increase of Rp806 billion, or 4.6%, from Rp17,435 billion as of December 31, 2018.
Cash receipts from revenues comprised primarily cash receipts from revenues from customer, which amounted to Rp135,372 billion (US$9,751 million) in 2019, and are used for payment of operating expenses, acquisition of property and equipment, intangible assets, long-term investment and business, placement in time deposits, payment of cash dividends and repayment of loans and other borrowings.
Our internal liquidity strength is reflected in our current ratio, which we calculate as current assets divided by current liabilities. As of December 31, 2019, our current ratio was 0.67 compared to 0.93 as of December 31, 2018.
B. External Liquidity Sources
Our primary external sources of liquidity are short and long-term bank loans, bonds and notes, other borrowings and two-step loans. We had external liquidity from loans and other borrowings of Rp66,957 billion as of December 31, 2019.
External Liquidity Sources
As of December 31, 2019, we had undrawn loan facilities which included the following sources of unused liquidity:
• BNI loan facility in the amount of Rp4,949 billion;
• Bank Mandiri loan facility in the amount of Rp2,119 billion;
• Bank BRI loan facility in the amount of Rp1,300 billion;
• BCA loan facility in the amount of Rp693 billion;
• DBS Bank loan facility in the amount of Rp992 billion;
• ANZ Bank loan facility in the amount of Rp60 billion;
• MUFG Bank loan facility in the amount of Rp761 billion;
• Bank CIMB Niaga loan facility in the amount of Rp132 billion;
• Bank BTPN loan facility in the amount of Rp231 billion;
• HSBC Bank loan facility in the amount of Rp671 billion; and
• PT Sarana Multi Infrastruktur loan facility in the amount of Rp1,206 billion.
Cash Flows
The following table sets out information concerning our consolidated cash flows, as set out in (and prepared on the same basis as) our Consolidated Financial Statements:
Years Ended December 31,
2017 2018 2019
(Rp billion) (Rp billion) (Rp billion) (US$ million)
Net cash flows:
provided by operating activities 49,405 45,671 58,966 4,247
used in investing activities (33,007) (35,090) (35,875) (2,585)
used in financing activities (21,052) (18,458) (22,175) (1,596)
Net increase in cash and cash equivalents (4,654) (7,877) 916 66
Effect of exchange rate changes on cash and cash equivalents 32 171 (109) (8) Allowance for expected credit losses on cash and cash equivalents — (4) (1) (0) Cash and cash equivalents at beginning of year 29,767 25,145 17,435 1,256
Cash and cash equivalents at end of year 25,145 17,435 18,241 1,314
Year ended December 31, 2019 compared to year ended December 31, 2018
As of December 31, 2019, total cash and cash equivalent amounted to Rp18,241 billion, an increase of Rp806 billion, or 4.6%, from Rp17,435 billion as of December 31, 2018.
In 2019, operating activity accounted for the largest cash receipts which amounted to Rp138,761 billion, or 82.2%
of total cash receipts, followed by financing activity which amounted to Rp26,583 billion, or 15.8% of total cash receipts, and investing activity which amounted to Rp3,333 billion, or 2.0% of total cash receipts. In total, cash receipts increased by Rp848 billion, or 0.5%, compared to 2018.
In 2019, cash used for operating activities amounted to Rp79,795 billion, or 47.6% of total cash disbursements, followed by financing activities which amounted to Rp48,758 billion, or 29.0% of total cash disbursements, and investing activities which amounted to Rp39,208 billion, or 23.4% of total cash disbursements. Compared to 2018, cash disbursements decreased by Rp7,945 billion, or 4.5%.
Cash Flows from Operating Activities
Net cash provided by operating activities in 2019 was Rp58,966 billion (US$4,247 million), compared to Rp45,671 billion in 2018, representing an increase of Rp13,295 billion, or 29.1%.
Cash receipts from operating activities in 2019 amounted to Rp138,761 billion, an increase of Rp7,292 billion, or 5.5%, compared to 2018. The cash receipts originated from:
• cash receipts from customers and other operators of Rp135,372 billion;
• cash receipts from tax refund of Rp1,446 billion;
• cash receipts from finance income of Rp1,093 billion; and
• cash receipts from other – net of Rp850 billion.
Cash disbursements from operating activities in 2019 amounted to Rp79,795 billion, a decrease of Rp6,003 billion, or 7.0%, compared to 2018. The cash disbursements were used for:
• cash payments for expenses of Rp47,499 billion;
• cash payments to employees of Rp11,370 billion;
• cash payments for corporate and final income taxes of Rp10,348 billion
• cash payments for finance costs of Rp4,358 billion;
• cash payments for short-term lease and low-value assets of Rp5,359 billion; and
• cash payments for Value Added Taxes-net of Rp861 billion.
Cash Flows used in Investing Activities
Net cash flows used in investing activities in 2019 was Rp35,875 billion (US$2,585 million), compared to Rp35,090 billion in 2018, representing a decrease of Rp785 billion, or 2.2%.
Cash receipts from investing activities amounted to Rp3,333 billion, an increase of Rp2,371 billion, or 246.5%, compared to 2018. The cash receipts originated from:
• proceeds from sale of property and equipment of Rp1,496 billion;
• proceeds from other current financial assets - net of Rp1,147 billion;
• proceeds from insurance claims of Rp197 billion;
• increase in advance and other assets - net of Rp87 billion; and
• dividend received from associated companies of Rp11 billion.
Cash disbursements from investing activities in 2019 amounted to Rp39,208 billion, an increase of Rp3,156 billion, or 8.8%, compared to 2018. The cash disbursements were used for:
• purchases of property and equipment of Rp35,302 billion;
• purchases of intangible assets of Rp2,008 billion;
• acquisition of businesses, net of acquired cash of Rp1,166 billion; and
• additional contribution on long-term investments of Rp732 billion.
Cash Flows used in Financing Activities
Net cash flows used in financing activities in 2019 was Rp22,175 billion (US$1,596 million), compared to Rp18,458 billion in 2018, representing a decrease of Rp3,717 billion, or 20.1%.
Cash receipts from financing activities amounted to Rp26,583 billion in 2019, a decrease of Rp8,815 billion, or 24.9%, compared to 2018. The cash receipts originated from:
• proceeds from loans and other borrowings of Rp26,524 billion; and
• capital contribution of non-controlling interest of subsidiaries of Rp59 billion.
Cash disbursements from financing activities amounted to Rp48,758 billion in 2019, a decrease of Rp5,098 billion, or 9.5%, compared to 2018. The cash disbursements were used for:
• repayments of loans and other borrowings of Rp18,176 billion;
• cash dividends paid to the Company's stockholders of Rp16,229 billion;
• cash dividends paid to non-controlling interests of subsidiaries of Rp9,618 billion; and
• payments of principal portion of lease liabilities of Rp4,735 billion.
Year ended December 31, 2018 compared to year ended December 31, 2017
As of December 31, 2018, total cash and cash equivalent amounted to Rp17,435 billion, a decrease of Rp7,710 billion, or 30.7%, from Rp25,145 billion as of December 31, 2017.
In 2018, operating activity accounted for the largest cash receipts which amounted to Rp131,469 billion, or 78.3%
of total cash receipts, followed by financing activity which amounted to Rp35,398 billion, or 21.1% of total cash receipts, and investing activity which amounted to Rp962 billion, or 0.6% of total cash receipts. In total, cash receipts increased by
activities which amounted to Rp36,052 billion, or 20.5% of total cash disbursements. Compared to 2017, cash disbursements increased by Rp29,614 billion, or 20.3%.
Cash Flows from Operating Activities
Net cash provided by operating activities in 2018 was Rp45,671 billion, compared to Rp49,405 billion in 2017, representing a decrease of Rp3,734 billion, or 7.6%.
Cash receipts from operating activities amounted to Rp131,469 billion, an increase of Rp3,800 billion, or 3.0%, compared to 2017. The cash receipts originated from:
• cash receipts from customers and other operators of Rp127,855 billion;
• cash receipts from tax refund of Rp2,578 billion; and
• cash receipts from finance income of Rp1,036 billion.
Cash disbursements from operating activities amounted to Rp85,798 billion, an increase of Rp7,534 billion, or 9.6%, compared to 2017. The cash disbursements were used for:
• cash payments for expenses of Rp54,099 billion;
• cash payments to employees of Rp12,657 billion;
• cash payments for corporate and final income taxes of Rp10,375 billion
• cash payments for finance costs of Rp3,735 billion;
• cash payments for Value Added Taxes - net of Rp3,434billion; and
• cash payments for others – net of Rp1,498 billion.
Cash Flows used in Investing Activities
Net cash flows used in investing activities in 2018 was Rp35,090 billion, compared to Rp33,007 billion in 2017, representing a decrease of Rp2,083 billion, or 6.3%.
Cash receipts from investing activities amounted to Rp962 billion, a decrease of Rp588 billion, or 37.9%, compared to 2017. The cash receipts originated from:
• proceeds from sale of property and equipment of Rp629 billion;
• placement in other current financial assets - net of Rp171 billion;
• proceeds from insurance claims of Rp153 billion; and
• dividend received from associated companies of Rp9 billion.
Cash disbursements from investing activities amounted to Rp36,052 billion, an increase of Rp1,495 billion, or 4.3%, compared to 2017. The cash disbursements were used for:
• purchases of property and equipment of Rp31,562 billion;
• decrease in advance and other assets - net of Rp761 billion;
• acquisition of businesses, net of acquired cash of Rp420 billion;
• additional contribution on long-term investments of Rp337 billion; and Cash Flows used in Financing Activities
Net cash flows used in financing activities in 2018 amounted to Rp18,458 billion, compared to Rp21,052 billion in 2017, representing an increase of Rp2,594 billion, or 12.3%.
Cash receipts from financing activities amounted to Rp35,398 billion, an increase of Rp23,179 billion, or 189.7%, compared to 2017. The cash receipts originated from:
• proceeds from loans and other borrowings of Rp35,364 billion; and
• capital contribution of non-controlling interest of subsidiaries of Rp34 billion.
Cash disbursements from financing activities amounted to Rp53,856 billion, an increase of Rp20,585 billion, or 61.9%, compared to 2017. The cash disbursements were used for:
• cash dividends paid to the Company's stockholders of Rp16,609 billion;
• repayments of loans and other borrowings of Rp27,113 billion; and
• cash dividends paid to non-controlling interests of subsidiaries of Rp10,134 billion.
Current Assets
As of December 31, 2019, our current assets were Rp40,917 billion (US$2,946 million) compared to Rp42,843 billion as of December 31, 2018, a decrease of Rp1,926 billion, or 4.5%. This decrease was primarily due to:
• a decrease in other current assets of Rp1,778 billion, or 24.4%, from Rp7,280 billion as of December 31, 2018 to Rp5,502 billion as of December 31, 2019, primarily due to a decrease in advances by Rp1,156 billion and prepaid rental of Rp754 billion;
• a decrease in contract assets by Rp931 billion or 59.7% from Rp1,560 billion as of December 31, 2018 to Rp629 billion as of December 31, 2019, primarily due to a decrease in Telkomsel's contract assets amounting to Rp1,298 billion. The decrease was offset by an increase in Telkom's other contract assets of Rp366 billion;
• a decrease in other current financial assets by Rp760 billion, or 57.8% from Rp1,314 billion as of December 31, 2018 to Rp554 billion as of December 31, 2019, primarily due to a decrease in our investments in mutual funds of Rp399 billion and current financial assets other than investments in mutual funds of Rp379 billion.
The decrease was offset by an increase in the escrow account of Rp23 billion;
• a decrease in contract costs by Rp390 billion or 42.2% from Rp924 billion as of December 31, 2018 to Rp534 billion as of December 31, 2019, primarily due to a decrease in costs to fulfill of our contracts of Rp385 billion; and
This decrease was partially offset by:
• an increase in trade and other receivables by Rp1,344 billion, or 13.5%, from Rp9,928 billion as of December 31, 2018 to Rp11,272 billion as of December 31, 2019, due to an increase in trade receivables from third parties; and
• an increase in our cash and cash equivalents of Rp806 billion, or 4.6%, from Rp17,435 billion as of December 31, 2018 to Rp18,241 billion as of December 31, 2019, primarily due to an increase in time deposits of Rp631 billion.
Current Liabilities
As of December 31, 2019, our current liabilities were Rp61,349 billion (US$4,419 million) compared to Rp46,322 billion as of December 31, 2018, an increase of Rp15,027 billion, or 32.4%. The increase was primarily due to:
• an increase in short-term bank loans and current maturities of long-term liabilities of Rp11,775 billion, or 113.9%, from Rp10,339 billion as of December 31, 2018 to Rp22,114 billion as of December 31, 2019, primarily due to an increase in short-term bank loans of Rp4,662 billion and an increase in current maturities of long-term liabilities of Rp7,113 billion. We primarily increased our short-term bank loans to have additional funds to use for working capital purposes, as necessary. The increase in current maturities of long term liabilities is primarily due to an increase in lease liabilities of Rp4,663 billion and bonds and notes with maturity dates falling in 2020. Bonds and notes with maturity dates falling in 2020 are Telkom Bonds 2010 Series B (with an original principal value of Rp1,995 billion), MTN I Telkom 2018 Series B (with an original principal value of Rp200 billion) and MTN Syariah Ijarah I Telkom 2018 Series B (with an original principal value of Rp296 billion);
• an increase in contract liabilities of Rp2,178 billion, or 41.5%, from Rp5,252 billion as of December 31, 2018 to Rp7,430 billion as of December 31, 2019, primarily due to an increase in others and in prepaid pulse reload vouchers of Rp1,330 billion and Rp837 billion, respectively;
• an increase in current income tax liabilities of Rp1,141 billion, or 282.4%, from Rp404 billion as of December 31, 2018 to Rp1,545 billion as of December 31, 2019, due to an increase in corporate income tax by Rp1,059 billion; and
• an increase in other tax liabilities of Rp1,110 billion, or 143.0%, from Rp776 billion as of December 31, 2018 to Rp1,886 billion as of December 31, 2019, due to an increase in VAT payable from subsidiaries by Rp866 billion.
This increase was partially offset by:
• a decrease in trade and other payable of Rp890 billion, or 5.8%, from Rp15,214 billion as of December 31, 2018 to Rp14,324 billion as of December 31, 2019 due to a decrease in trade payables to third parties; and
• a decrease in advances from customers of Rp279 billion, or 17.8%, from Rp1,568 billion as of December 31, 2018 to Rp1,289 billion as of December 31, 2019, primarily due to a decrease in incidental deposits from customers of Telkomsel amounting to Rp236 billion.
Working Capital
As of December 31, 2019, our working capital, defined as the difference between current assets and current liabilities as of the same date, decreased by Rp16,953 billion compared to our working capital as of December 31, 2018.
As at December 31, 2019, our current assets were lower than our current liabilities, resulting in a current ratio, defined as our current assets divided by our current liabilities, was 0.67 as of December 31, 2019. We closely monitor our working capital and generally try to lower it to maintain it at an optimal level so that we may manage our working capital efficiently, without restricting our ability to meet our current liabilities. This decrease in working capital was primarily due to:
• a decrease in current assets of Rp1,926 billion, or 4.5% from Rp42,843 billion as of December 31, 2018 to Rp40,917 billion as of December 31, 2019. See"— Current Assets."
• an increase in current liabilities of Rp15,027 billion, or 32.4% from Rp46,322 billion as of December 31, 2018 to Rp61,349 billion as of December 31, 2019. See"—Current Liabilities."
We believe that our available cash, working capital, cash generated by future operations, and borrowings from banks and other financial institutions are sufficient for our present requirements. We expect that our working capital requirements will continue to be addressed by various funding sources, including cash from operating activities, bank loans and potential offerings of debt securities in the capital markets.
Capital Structure
Our capital structure as of December 31, 2019 is described as follows:
Amount Portion (Rp billion) (%)
Short-term debt 8,705 5.2
Long-term debt 58,252 34.9
Total debt 66,957 40.1
Equity attributable to owners of the parent company 99,796 59.8
Total 166,753 100.0
As of December 31, 2019, our net debt to equity ratio was 0.49 and our debt service coverage ratio was 3.1 times, indicating our strong ability to meet our debt obligations. Our debt levels are primarily driven by our plans to develop our existing and new strategic businesses. In determining our optimum debt levels, we also consider our debt ratios with reference to regional peers in the telecommunications industry.
For further information on our Company's management policies related to capital, see Note 36 to our Consolidated Financial Statements.
Indebtedness
Consolidated total indebtedness (consisting of short-term bank loans, long-term liabilities, current maturities of long-term liabilities and other borrowings) as of December 31, 2017, 2018 and 2019 were as follows:
As of December 31,
2017 2018 2019
(Rp billion) (Rp billion) (Rp billion) (US$ million)
Indonesian Rupiah 33,623 41,722 65,085 4,687
(1) The amounts as of December 31, 2017, 2018 and 2019 translated into Rupiah at Rp13,567.5, Rp14,380, and Rp13,882.5 = US$1, respectively, being the Reuters average rates for U.S. Dollar at each of those dates.
(2) The amounts as of December 31, 2017, 2018 and 2019 translated into Rupiah at Rp120.52, Rp130.63, and Rp127.79 = Yen 1, respectively, being the Reuters average rates for Yen at each of those dates.
(3) The amount as of December 31, 2017, 2018 and 2019 translated into Rupiah at Rp3,352.07, Rp3,476.39, and Rp3,391.77 = Ringgit 1, being the Reuters average rates for Ringgit.
Of our total indebtedness, as of December 31, 2019, Rp22,114 billion, Rp21,720 billion, Rp13,427 billion, and Rp9,696 billion were scheduled for repayment in 2020, 2021-2022, 2023-2024 and thereafter, respectively.
For further information on our Company's indebtedness, see Notes 19 and 20 to our Consolidated Financial Statements.
Capital Expenditures
In 2019, we incurred capital expenditures of Rp36,485 billion (US$2,628 million). Our capital expenditures are grouped into the following categories for planning purposes:
• Broadband services, which consist of mobile (4G) and fixed broadband access;
• Network infrastructure, which consists of core transmission network, metro-ethernet and Regional Metro Junction ("RMJ") and IP backbone;
• Data centers, IT, applications and content, as well as service node; and
• Capital expenditure supports, such as capital expenditure for the construction or maintenance of telecommunication towers.
Of our Rp36,485 billion capital expenditure in 2019, Telkom, as parent company, incurred capital expenditures of Rp16,956 billion (US$1,221 million), Telkomsel incurred capital expenditures of Rp11,849 billion (US$854 million) and our other subsidiaries incurred capital expenditures of Rp7,680 billion (US$553 million). The following table set forth our capital expenditure breakdown between Telkom as a parent company, Telkomsel and our other subsidiaries for the periods indicated.
Years Ended December 31,
2017 2018 2019
(Rp billion) (Rp billion) (Rp billion) (US$ million)
Telkom (parent company) 11,572 13,186 16,956 1,221
Subsidiaries
Telkomsel 15,080 13,885 11,849 854
Others 6,502 6,549 7,680 553
Subtotal for subsidiaries 21,582 20,434 19,529 1,407
Total for Telkom Group 33,154 33,620 36,485 2,628
Material Commitments for Capital Expenditures
As of December 31, 2019, we had material commitments for capital expenditures under contractual arrangements totaling Rp10,648 billion (US$767 million), principally relating to procurement and installation of data, internet and information technology, cellular, transmission equipment and cable network in Indonesia. We also have capital expenditure planned for investments outside Indonesia, in particular, in relation to Telin.
The following table sets forth information on our committed capital expenditures under contractual arrangements as of December 31, 2019.
Currencies Amounts in Foreign Currencies Equivalent in Rupiah
(in millions) (in billions)
Rupiah — 9,412
U.S. Dollar 87.78 1,219
Euro 1.06 16
HK$ 0.77 1
Total 10,648
For a more detailed discussion regarding our material commitments for capital expenditures, see Note 34a to our Consolidated Financial Statements.
Source of Funds
We have historically funded our capital expenditures primarily with cash generated from operations. In 2020, we expect that our capital expenditure to revenue ratio will be approximately 25%. We expect that the most significant proportions of capital expenditure will be allocated to the development of infrastructure to support broadband services, both for mobile and fixed line broadband services. A portion of our capital expenditure is allocated to our subsidiaries, primarily to Telkomsel. We expect to fund the above commitments with our internal and external source of funds.
The realization and use of future capital expenditures may differ from the amounts indicated above due to various factors, including but not limited to changes in the Indonesian and global economy, the Rupiah/U.S. Dollar or other applicable foreign exchange rates, the availability of supply or vendor or other financing on terms acceptable to us, and also any technical or other problems in the implementation.
Critical Accounting Policies, Estimates and Judgments
For a complete discussion of our critical accounting policies, estimates and judgments, see Note 2.ac to our Consolidated Financial Statements.
New Standards and Interpretations
We have applied IFRS 16 (Leases) ("IFRS 16") on January 1, 2019, we have also applied IFRS 9 (Financial Instruments) ("IFRS 9") on January 1, 2018, and we adopted IFRS 15 (Revenue from Contracts with Customers) ("IFRS 15") on January 1, 2018, using the modified retrospective approach. Previous financial periods, in particular the financial years ended December 31, 2017, have not been restated following these changes in accounting policies. See Note 2.aa to the Consolidated Financial Statements included in this Form 20-F. As a result, our Consolidated Financial Statements as of and for the year ended December 31, 2017 are not directly and fully comparable to our consolidated financial statements as of and for the years ended December 31, 2018 and 2019. See "— Operating and Financial Review and Prospects."
IFRS 16 sets out a comprehensive model for identification of lease agreements and their treatment in the financial statements of both lessees and lessors. IFRS 16 introduces a control model for the identification of leases, distinguishing between leases and service contracts on the basis of whether there is an identified asset controlled by the customer.
IFRS 16 supersedes a number of existing standards and interpretations, including IAS 17 (Leases), IFRIC 4 (Determining whether an Arrangement contains a Lease), SIC 15 (Operating Leases - Incentives), and SIC 27 (Evaluating the Substance of Transactions Involving the Legal Form of a Lease). We elected to apply IFRS 16 by using the modified retrospective approach. Therefore, we recognize the cumulative effect of adopting IFRS 16 as an adjustment to the opening