Liberty Media Corp annual report, FY2015

Liberty Media Corporation: 2015 Form 10-K Summary

Business context and reporting period

Filed February 26, 2016, for the fiscal year ended December 31, 2015. Liberty owns controlling and noncontrolling interests in media and entertainment businesses. Its principal consolidated businesses are SIRIUS XM and Braves Holdings; its principal equity-method investment is Live Nation. SIRIUS XM generated approximately 95% of consolidated revenue and had approximately 29.6 million subscribers at year-end, including 24.3 million self-pay subscribers.

The filing is an annual report, not a standalone fourth-quarter filing. Fourth-quarter 2015 revenue was $1.208 billion, operating income was $217 million, net earnings were $89 million, and net earnings attributable to Liberty stockholders were $44 million.

Key financial metrics

Metric	2015	2014	Change
Revenue	$4.795 billion	$4.450 billion	+7.8%
Adjusted OIBDA	$1.628 billion	$1.417 billion	+14.9%
Operating income	$954 million	$841 million	+13.4%
Net earnings	$248 million	$395 million	Down $147 million
Net earnings attributable to Liberty stockholders	$64 million	$178 million	Down $114 million
Basic and diluted EPS	$0.19	$0.52	Down $0.33
Operating cash flow	$1.213 billion	$1.125 billion	+7.8%

Consolidated operating margin was approximately 19.9%, and Adjusted OIBDA margin was approximately 34.0%. SIRIUS XM reported standalone revenue of $4.570 billion, Adjusted OIBDA of $1.643 billion and operating income of $1.179 billion. Liberty’s reported SIRIUS XM results reflect purchase-accounting adjustments.

• Cash and cash equivalents declined to $201 million from $681 million.
• Available-for-sale and other cost investments totaled $533 million; the market value of the minority public investment portfolio included in this balance was approximately $425 million.
• Equity-method investments totaled $1.115 billion, including a $764 million carrying value for Live Nation and a reported market value of approximately $1.711 billion.
• Total debt principal was $6.938 billion, including approximately $1.2 billion of corporate-level debt and approximately $5.5 billion at SIRIUS XM. Long-term debt on the balance sheet was $6.626 billion.
• Corporate and other liquidity included $89 million of cash and $420 million of unencumbered fair-value-option securities. SIRIUS XM held $112 million of cash. Liberty reported $1 billion of available capacity under its margin-loan revolver and SIRIUS XM reported $1.4 billion available under its $1.75 billion credit facility.
• Contractual obligations totaled $12.631 billion, including $6.938 billion of principal debt, $2.335 billion of interest payments, $1.327 billion of programming fees, $583 million of operating leases and $273 million of guaranteed Braves player and coach contracts.

Material changes versus the prior comparable period

• Revenue increased $345 million, primarily from $411 million of SIRIUS XM growth. Corporate and other revenue fell $66 million, principally because TruePosition was deconsolidated in the November 2014 Liberty Broadband spin-off.
• SIRIUS XM revenue increased 10% on Liberty’s reported basis. Standalone subscriber revenue increased 8%, while standalone other revenue increased 19%.
• Adjusted OIBDA increased $211 million, led by a $194 million increase at SIRIUS XM. The consolidated Adjusted OIBDA margin expanded from approximately 31.8% to 34.0%.
• Operating income benefited from improved SIRIUS XM performance and the absence of TruePosition losses, but was reduced by a $108 million pre-1972 sound-recording settlement charge excluded from Adjusted OIBDA.
• Net earnings declined because 2014 included more favorable non-operating results, while 2015 included a $140 million net loss on financial instruments, higher interest expense, a $210 million tax expense and lower affiliate earnings. The 2013 comparison is distorted by a roughly $7.5 billion nontaxable gain from consolidating SIRIUS XM.
• Operating cash flow increased, but cash declined by $480 million after investing and financing uses. Liberty repurchased approximately $350 million of its own shares and SIRIUS XM repurchased approximately $2.0 billion of its shares.
• Braves Holdings revenue declined approximately $7 million because of lower attendance and concession sales, while its Adjusted OIBDA improved approximately $9 million due largely to lower player and game operating costs.

Guidance, outlook, commentary, risks and unusual items

• Management stated that available liquidity was expected to cover projected uses, including debt service, investment activity, share repurchases, capital expenditures and the Braves stadium project. No formal consolidated revenue or earnings guidance was provided.
• Liberty expected to complete a reclassification into Liberty Braves, Liberty Media and Liberty SiriusXM tracking stocks in the first half of 2016, subject to stockholder approval and tax counsel’s opinion. A related Braves subscription-rights offering was expected to fund repayment of an intergroup note and working capital.
• SunTrust Park was expected to open for the 2017 season. The ballpark’s expected cost was approximately $672 million, with Braves Holdings expected to contribute at least $280 million. The related mixed-use development was estimated at $558 million, with affiliated entities expected to fund approximately $490 million.
• SIRIUS XM planned to transition its Sirius satellite constellation toward geostationary operation during 2016 and expected automakers to begin deploying its SXM17 product as early as 2017. The company has no in-orbit satellite insurance.
• Music royalty rates were scheduled to increase from 10% of applicable gross revenue in 2015 to 10.5% in 2016 and 11% in 2017 for certain sound recordings. The filing also identifies continuing uncertainty over pre-1972 recording rights and future royalty costs.
• SIRIUS XM settled a pre-1972 recording lawsuit for $210 million in 2015, of which $108 million was recognized as a nonrecurring expense and approximately $83 million was deferred for future amortization. Remaining copyright and royalty matters, including a SoundExchange claim seeking at least $50 million and potentially $100 million or more, were not reasonably estimable.
• SIRIUS XM faced multiple TCPA class actions involving calling practices. Potential damages could be significant, but the filing states that any loss or range of loss was not reasonably estimable.
• Principal risks include competition from free and internet-based audio services, dependence on automakers and subscriber retention, satellite and information-technology failures, regulatory and copyright exposure, significant subsidiary debt, limited access to SIRIUS XM cash because of noncontrolling interests, market volatility in public investments, and construction and financing risks at the Braves development.
• Liberty settled its Vivendi litigation after year-end for a $775 million payment; the company expected net pre-tax proceeds of approximately $510 million after legal fees and amounts payable to Liberty Global. This subsequent event was not reflected in the December 31, 2015 balance sheet.

Most important facts for investors to verify

• Reconcile consolidated Liberty results with SIRIUS XM’s standalone results and purchase-accounting adjustments.
• Assess whether SIRIUS XM’s subscriber growth, self-pay mix, churn, pricing and royalty costs support continued Adjusted OIBDA expansion.
• Review debt maturities, covenant compliance, collateral requirements and Liberty’s ability to access cash held at SIRIUS XM.
• Monitor the effect of the $210 million recording settlement, remaining TCPA and copyright proceedings, and future royalty-rate changes.
• Verify the financing, construction progress, cost overruns and 2017 opening plan for SunTrust Park and the related mixed-use development.
• Confirm the timing, approvals, tax treatment, allocation mechanics and dilution implications of the proposed tracking-stock reclassification and Braves rights offering.
• Evaluate the sensitivity of results and liquidity to Live Nation, Time Warner and Viacom market values and other financial-instrument valuations.
• Consider the effect of noncontrolling interests: Liberty held approximately 61% economically of SIRIUS XM, while approximately 39% of SIRIUS XM earnings belonged to noncontrolling interests.