Liberty Media Corporation — Q1 2017 Form 10-Q Summary
Business context and reporting period
Liberty Media reported results for the three months ended March 31, 2017. Its principal businesses and investments include SIRIUS XM, Formula 1, Braves Holdings, Live Nation and public-equity investments. Results are presented through three tracking-stock groups: Liberty SiriusXM, Liberty Braves and Liberty Formula One. The tracking-stock groups are not separate legal entities, and holders remain exposed to the liabilities of Liberty Media Corporation.
Liberty completed the acquisition of control of Formula 1 on January 23, 2017 and began consolidating Formula 1 from that date. Formula 1 revenue and expenses are seasonal, with most events occurring from March through November.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $1.395 billion | $1.204 billion | +$191 million |
| Adjusted OIBDA | $467 million | $391 million | +$76 million |
| Operating income | $259 million | $781 million | -$522 million |
| Income before taxes | $120 million | $684 million | -$564 million |
| Net earnings | $44 million | $427 million | -$383 million |
| Net earnings attributable to Liberty stockholders | $(21) million | $364 million | -$385 million |
| Cash flow from operations | $403 million | $887 million | -$484 million |
| Capital expenditures | $156 million | $67 million | +$89 million |
Revenue increased 15.9% year over year. Adjusted OIBDA margin was approximately 33.5%, compared with approximately 32.5% in the prior-year quarter. Operating margin was approximately 18.6%, compared with 64.9% in Q1 2016, although the prior-year result benefited from a $511 million net Vivendi legal-settlement gain. Net earnings attributable to Liberty stockholders represented a loss of approximately 1.5% of revenue.
- SIRIUS XM revenue was $1.294 billion, up from $1.200 billion, and Adjusted OIBDA was $500 million, up from $439 million. SIRIUS XM had approximately 31.6 million subscribers, including 26.2 million self-pay subscribers.
- Formula 1 contributed $96 million of consolidated revenue and $18 million of Adjusted OIBDA for the period consolidated. Formula 1 generated an operating loss of $57 million, including acquisition-related amortization.
- Braves Holdings revenue was $5 million and Adjusted OIBDA was a loss of $25 million. Braves Holdings incurred approximately $102 million of capital expenditures for the ballpark and adjacent mixed-use development.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $1.071 billion at March 31, 2017, compared with $562 million at December 31, 2016.
- Total assets were $41.002 billion, including $18.313 billion of goodwill and $6.467 billion of amortizable intangible assets. Formula 1 contributed approximately $3.968 billion of goodwill and $5.484 billion of acquired amortizable intangible assets in the preliminary purchase-price allocation.
- Total debt principal was approximately $13.186 billion, compared with $8.018 billion at year-end 2016. Long-term debt reported on the balance sheet was $13.306 billion, and current debt was $48 million.
- Formula 1 debt included approximately $3.844 billion of bank loans and $351 million of Delta Topco exchangeable notes. Formula 1 repaid $300 million of second-lien debt during March 2017.
- Liberty drew $350 million under its Live Nation margin loan to fund the Formula 1 acquisition and had $150 million of remaining availability. The Liberty SiriusXM margin-loan facility had $500 million of undrawn availability, and SIRIUS XM’s revolving credit facility had $1.220 billion of availability.
- Unencumbered liquidity included approximately $1.071 billion of cash and $387 million of Formula One Group fair-value-option securities. Access to subsidiary cash may be limited by noncontrolling interests, debt restrictions and tax considerations.
- Operating cash flow of $403 million and financing inflows of $1.902 billion, including debt borrowings and $1.550 billion from issuance of Series C Liberty Formula One stock, more than offset $1.797 billion of investing cash outflows.
Material changes versus the prior comparable period
- Formula 1 was consolidated for the first time, adding $96 million of revenue and materially increasing debt, goodwill, intangible assets, amortization and interest expense.
- Cash paid for the Formula 1 acquisition was approximately $1.647 billion during the quarter; total acquisition consideration was approximately $4.698 billion, funded with cash, debt and equity issuance.
- Interest expense increased to $140 million from $84 million, primarily because of higher average debt, including approximately $46 million attributable to Formula 1.
- Depreciation and amortization increased to $164 million from $87 million, primarily due to Formula 1 acquisition accounting.
- Operating income and net earnings declined sharply because Q1 2016 included the $511 million net Vivendi settlement gain. Excluding that unusual item, consolidated Adjusted OIBDA improved by $76 million.
- SIRIUS XM revenue benefited from subscriber growth and higher average monthly revenue per subscriber. Its subscriber base increased approximately 1% from December 31, 2016, while SIRIUS XM Adjusted OIBDA increased approximately 14%.
- The Braves’ new ballpark was placed into service on March 31, 2017. Braves Holdings began depreciating the stadium and accounting for related financing obligations under the financing method.
Outlook, commentary, risks and unusual items
Management stated that available liquidity is expected to be sufficient for projected uses of cash. Expected uses include debt service, investment in existing or new businesses, potential share repurchases, SIRIUS XM capital expenditures and dividends, Formula 1 debt service and investment, and continued Braves ballpark and mixed-use development spending. Braves Holdings expects approximately $242 million of additional 2017 capital expenditures, primarily for the ballpark and adjacent development.
SIRIUS XM’s board expected regular quarterly dividends totaling $0.04 per share annually, subject to future declarations. Liberty had $1.3 billion remaining under its authorized share-repurchase program, but made no Liberty tracking-stock repurchases during the quarter.
Important risks include Formula 1 integration and acquisition accounting, Formula 1 seasonality, substantial leverage and variable-rate debt, dependence on subscribers and automakers, satellite and technology failures, competition, music-rights costs, regulatory matters, market-price volatility in pledged securities, and restrictions on access to subsidiary cash.
- The SoundExchange royalty litigation remains unresolved. The estimable portion of reasonably possible additional loss was stated as $0 to $70 million, plus interest or late fees; no additional liability was recorded because loss was not considered probable.
- Liberty’s exchangeable debentures are affected by the proposed AT&T acquisition of Time Warner. If completed, the transaction could change the reference shares and distributions associated with those debentures.
- The Formula 1 purchase-price allocation remained preliminary at March 31, 2017, and may change as valuation of acquired intangibles, liabilities and tax balances is finalized.
- The filing states that Liberty and its principal subsidiaries were in compliance with debt covenants at March 31, 2017.
Investor verification priorities
- Verify the final Formula 1 purchase-price allocation, acquired intangible values, goodwill and resulting amortization expense.
- Monitor Formula 1 event timing, revenue recognition, cash generation and integration costs, particularly because Q1 is seasonally weak.
- Assess consolidated leverage, maturities, interest-rate exposure, collateral requirements and restrictions on subsidiary cash transfers.
- Track SIRIUS XM subscriber growth, churn, average revenue per subscriber, royalty costs, share repurchases and dividends.
- Follow the SoundExchange proceeding and any potential damages, interest or royalty obligations.
- Evaluate Braves stadium and mixed-use development costs, remaining funding needs and the resulting financing obligations.
- Consider the effect of tracking-stock attribution and intergroup interests; the tracking stocks do not represent ownership of separate legal entities or direct claims on attributed assets.