Business Context and Reporting Period
Liberty Media Corporation’s Form 10-K covers the fiscal year ended December 31, 2018, filed February 28, 2019. Liberty operates through three tracking-stock groups: Liberty SiriusXM, Liberty Braves and Liberty Formula One. Principal assets include consolidated Sirius XM Holdings, Formula 1 and Braves Holdings, plus an equity-method investment in Live Nation.
Tracking stocks are not separate legal entities. Holders remain shareholders of Liberty as a whole, have no direct ownership of the underlying businesses and remain subject to risks and liabilities across all groups.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $8.040 billion | $7.594 billion | +5.9% |
| Operating income | $1.511 billion | $1.394 billion | +8.4% |
| Adjusted OIBDA | $2.677 billion | $2.493 billion | +7.4% |
| Net earnings | $865 million | $1.890 billion | -54.2% |
| Net earnings attributable to Liberty stockholders | $531 million | $1.354 billion | -60.8% |
| Cash flow from operating activities | $2.156 billion | $1.732 billion | +$424 million |
| Capital expenditures | $403 million | $517 million | -$114 million |
| Total debt principal | $13.421 billion | $13.954 billion | -$533 million |
| Cash and cash equivalents | $358 million | $1.029 billion | -$671 million |
Calculated consolidated margins were approximately 18.8% for operating income, 33.3% for Adjusted OIBDA and 10.8% for net earnings. Adjusted OIBDA is a non-GAAP measure and excludes depreciation and amortization, stock-based compensation, separately reported litigation settlements, and restructuring or impairment charges.
Segment performance
- Sirius XM: Revenue was $5.771 billion, up from $5.425 billion; Adjusted OIBDA was $2.230 billion, up from $2.109 billion; operating income was $1.659 billion. Sirius XM had approximately 34.0 million subscribers, including 28.9 million self-pay subscribers, at year-end.
- Formula 1: Revenue was $1.827 billion, up from $1.783 billion on a comparable pro forma basis; Adjusted OIBDA was $400 million, down from $438 million; operating loss was $68 million. The 2018 calendar included 21 events.
- Braves Holdings: Revenue was $442 million, up from $386 million; Adjusted OIBDA was $94 million, up from $7 million; operating income was $8 million versus a $106 million loss. Improvement reflected stronger baseball results, playoff revenue and growth at The Battery Atlanta.
Material Changes Versus the Prior Comparable Period
- Consolidated revenue increased $446 million, led by Sirius XM growth of $346 million, Braves Holdings growth of $56 million and Formula 1 growth of $44 million.
- Operating income increased $117 million. Braves Holdings returned to operating profitability, while Sirius XM operating income increased $71 million. Formula 1 operating income declined because of higher operating costs and depreciation and amortization.
- Net earnings declined primarily because 2017 benefited from a $1.063 billion income-tax benefit, including the Tax Cuts and Jobs Act, while 2018 recorded $176 million of income-tax expense. Liberty also reported lower equity-method earnings and other period-to-period effects.
- Adjusted OIBDA increased $184 million, led by $120 million of growth in the Liberty SiriusXM Group and $86 million of growth in the Braves Group, partly offset by a $22 million decline in the Formula One Group.
- Operating cash flow rose to $2.156 billion. Investing cash use improved substantially because 2017 included $1.647 billion of cash paid for the Formula 1 acquisition.
- Liberty repurchased 10.8 million Series C Liberty SiriusXM shares for $466 million during 2018. No Liberty cash dividends were paid or currently planned.
- Liberty adopted ASC 606 revenue recognition in 2018 using the modified retrospective method. The filing states that the adoption increased opening retained earnings by $41 million and had limited effect on 2018 net earnings.
Debt, Liquidity and Other Financial Considerations
- Consolidated debt principal was $13.421 billion, consisting primarily of Sirius XM debt of $7.944 billion, Formula One Group debt of $4.983 billion and Braves Group debt of $494 million.
- Corporate-level debt was approximately $3.1 billion, excluding debt at operating subsidiaries. Liberty’s ability to access subsidiary cash is constrained by noncontrolling interests, debt covenants and other contractual restrictions.
- At year-end, group cash balances were approximately $91 million for Liberty SiriusXM, $107 million for the Braves Group and $160 million for the Formula One Group. The Formula One Group also had $228 million of unencumbered marketable equity securities.
- Availability was $750 million under the $1.35 billion margin loan due 2020, $600 million under the Live Nation Margin Loan and $1.311 billion under Sirius XM’s revolving credit facility.
- Management stated that available liquidity was sufficient for projected uses, including debt service, Sirius XM satellite construction, Formula 1 investment and Braves Holdings’ mixed-use development and spring-training facility.
- Consolidated contractual obligations totaled $19.784 billion, including $13.421 billion of debt principal, $4.004 billion of interest payments, $1.230 billion of programming and royalty fees, $433 million of operating leases and $165 million of guaranteed Braves player and coach contracts.
Guidance, Outlook, Commentary and Risks
The filing does not provide formal consolidated revenue or earnings guidance. Management’s stated priorities include growing Sirius XM subscribers and digital services, expanding Formula 1’s event calendar and digital monetization, improving fan engagement, and realizing further revenue from The Battery Atlanta.
- Sirius XM launched an enhanced streaming platform and 360L, which combines satellite and streaming functionality in vehicles. It planned additional video programming and continued deployment with automakers.
- Sirius XM’s statutory sound-recording royalty rate was 15.5% of applicable gross revenue beginning in 2018, compared with 11% in 2017. A $150 million SoundExchange settlement payment resulted in a $69 million 2018 charge excluded from Adjusted OIBDA.
- Sirius XM’s acquisition of Pandora closed on February 1, 2019 in an all-stock transaction valued at approximately $2.9 billion. The acquisition reduced Liberty’s economic ownership of Sirius XM from approximately 73% to approximately 67% and will require integration of the businesses.
- Formula 1’s principal revenue depends on race promotion, broadcasting, advertising and sponsorship contracts. Risks include contract renewals, team participation, FIA and competition-law matters, currency movements, event cancellations, piracy, Brexit-related disruption and reliance on key personnel.
- Braves Holdings is funding ongoing development, including Phase II of The Battery Atlanta, expected to cost approximately $200 million and be funded with approximately $55 million of equity and $145 million of new debt. Risks include construction costs, tenant demand, stadium performance, MLB rules and on-field results.
- Material company-wide risks include competition, discretionary consumer spending, automobile sales, subscriber churn, music-licensing costs, satellite failures, cybersecurity, regulatory proceedings, litigation, tax disputes, leverage and restricted access to subsidiary cash.
- Pending matters include a Sirius XM Telephone Consumer Protection Act class action and a reported United Kingdom Serious Fraud Office pre-investigation concerning the 2013 Concorde Implementation Agreement. Management stated that ordinary-course legal and tax contingencies are not expected to be material, but outcomes remain uncertain.
Most Important Facts for Investors to Verify
- Reconcile consolidated results with the separate attributed financial information for the three tracking-stock groups; historical group results do not represent standalone-company results.
- Assess the effect of Sirius XM’s Pandora acquisition on ownership dilution, leverage, subscriber trends, integration costs and future cash distributions.
- Review Sirius XM’s royalty obligations, satellite replacement schedule, subscriber churn, automobile exposure and debt maturities.
- Evaluate Formula 1’s 2019 and later contract renewals, team commitments beyond 2020, event economics, leverage covenants and exposure to currency and geopolitical risks.
- Evaluate Braves Holdings’ development financing, remaining borrowing capacity, guaranteed player obligations and the economic performance of SunTrust Park and The Battery Atlanta.
- Review the $13.421 billion debt balance, collateral pledged under margin loans, covenant compliance and the limited availability of cash from subsidiaries.
- Adjust earnings comparisons for the 2017 Tax Act benefit, the 2018 SoundExchange settlement, fair-value changes in debt and derivatives, stock-based compensation and other unusual items.
- Note that Liberty’s Chairman beneficially controlled approximately 47.7% of aggregate voting power as of January 31, 2019, creating significant governance and control concentration.