Liberty Media Corporation — Q1 2014 Form 10-Q Summary
Business context and reporting period
Liberty Media Corporation reported unaudited results for the three months ended March 31, 2014. The company operates primarily in media, communications and entertainment through controlling and noncontrolling interests, with SIRIUS XM as its principal consolidated operating segment. Other significant interests include Charter Communications, Live Nation, the Atlanta Braves and TruePosition.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Total revenue | $1,011 million | $789 million |
| Operating income | $155 million | $151 million |
| Adjusted OIBDA | $294 million | $262 million |
| Net earnings | $72 million | $8,104 million |
| Net earnings attributable to Liberty stockholders | $22 million | $8,059 million |
| Basic and diluted EPS | $0.19 | $67.72 basic; $66.60 diluted |
| Cash flow from operating activities | $294 million | $339 million |
| Capital expenditures | $66 million | $26 million |
Revenue increased $222 million, or approximately 28%, primarily from a full quarter of consolidated SIRIUS XM revenue and approximately $100 million of underlying SIRIUS XM growth. SIRIUS XM contributed $988 million of revenue and $335 million of Adjusted OIBDA, compared with $729 million and $259 million, respectively, in the prior-year reported period.
Consolidated operating margin was approximately 15.3% versus 19.1% in Q1 2013. Adjusted OIBDA margin was approximately 29.1% versus 33.2%. The margin comparisons were affected by the change in SIRIUS XM consolidation and purchase-accounting adjustments.
At March 31, 2014, cash and cash equivalents were $377 million, compared with $1.088 billion at December 31, 2013. Total assets were $33.693 billion and total equity was $23.877 billion. Total debt principal was $4.668 billion, including $770 million classified as current; carrying-value debt was $4.719 billion before the current classification adjustment.
Reported liquidity included $377 million of cash and cash equivalents, consisting of $256 million at corporate and other entities and $121 million at SIRIUS XM, plus $546 million of unencumbered corporate fair-value-option securities. SIRIUS XM had $940 million of availability under its credit facility, while Liberty reported $750 million of availability under a margin-loan revolving facility.
Material changes versus the prior comparable period
- Revenue increased 28%, while operating income rose only $4 million because of higher operating expenses, depreciation and amortization, and stock-based compensation.
- Adjusted OIBDA increased $32 million to $294 million, driven by a full quarter of SIRIUS XM consolidation and operating efficiencies, partly offset by weaker results at certain other businesses.
- Net earnings fell sharply from $8.104 billion to $72 million. Q1 2013 included an approximately $7.5 billion nonrecurring gain from obtaining control of SIRIUS XM and applying purchase accounting.
- Interest expense increased to $53 million from $11 million, primarily because SIRIUS XM debt was consolidated for the full quarter and average debt was higher.
- Share of affiliate losses was $35 million versus earnings of $17 million, including a $28 million loss from Charter and a $14 million loss from Live Nation.
- Realized and unrealized losses on financial instruments were $65 million versus a $97 million gain in Q1 2013, reflecting losses on derivatives and fair-value-option securities partly offset by a gain on the cash convertible notes.
- Operating cash flow declined $45 million, while investing cash flow shifted to a $111 million use from a $357 million source. Financing cash use increased to $894 million, primarily due to debt repayments and subsidiary share repurchases.
- Liberty repaid the $670 million Charter-related margin loan during the quarter. SIRIUS XM also repaid part of its credit facility and repurchased shares.
Guidance, outlook, risks and unusual items
Management did not provide a specific consolidated earnings or revenue guidance figure in the filing. Management expects Liberty’s cash uses to include investments, debt service, capital expenditures, potential Liberty share repurchases and additional margin-loan repayments. Funding sources are expected to include cash on hand, operating cash flow, investment sales, proceeds from the SIRIUS XM share repurchase agreement and available borrowing capacity.
SIRIUS XM had 25.8 million subscribers at March 31, 2014, including 21.3 million self-pay and 4.5 million paid promotional subscribers. Stand-alone SIRIUS XM revenue increased to $998 million from $897 million, while stand-alone Adjusted OIBDA increased to $334 million from $329 million. Subscriber revenue growth reflected higher subscriber volumes, rate increases and the connected-vehicle business, partly offset by discounts, lifetime-plan recognition and an automaker agreement change.
Liberty’s board approved a dividend of two Series C Liberty shares for each Series A or Series B share, with a July 2014 distribution date. Management also expected a tax-free spin-off of Liberty Broadband, containing interests including Charter and TruePosition, and a related subscription-rights offering, subject to conditions including a tax opinion. Completion was expected in the second half of 2014, but the filing does not guarantee completion.
In April 2014, Liberty completed the final two tranches of its SIRIUS XM share repurchase agreement for approximately $340 million. In April, Liberty also reduced its Barnes & Noble ownership to less than 2% through a sale generating approximately $250 million. In May 2014, SIRIUS XM issued $1.5 billion of 6.00% senior secured notes due 2024.
Material risks include subscriber demand and retention, dependence on automakers, competition, rising music royalties, satellite or information-technology failures, regulatory changes, litigation, market-price volatility in public investments, interest-rate exposure, leverage, cybersecurity and the execution and tax treatment of the proposed Liberty Broadband spin-off.
Liberty guaranteed up to $170 million of obligations under a Starz studio output agreement for films released through March 31, 2014; the guarantee was expected to lapse in November 2014. The company also reported $406 million of guaranteed Atlanta Braves player and coach employment commitments, payable through periods extending beyond 2018. Management recorded no liability for the Starz guarantee and stated that pending legal and tax contingencies were not expected to be material, although losses could not be estimated for certain matters.
Important facts for investors to verify
- Confirm the effects of SIRIUS XM’s approximately 47% noncontrolling interest on Liberty’s attributable earnings and cash access.
- Reconcile reported revenue, margins and Adjusted OIBDA for SIRIUS XM with purchase-accounting adjustments and the non-comparable Q1 2013 consolidation period.
- Review debt maturities, margin-loan collateral, borrowing-base requirements and the effect of pledged securities on liquidity.
- Track completion, tax treatment, ownership allocation and subscription-rights terms for the Liberty Broadband spin-off.
- Assess the sensitivity of public-investment and affiliate values to market declines; the filing estimates a 10% decline could reduce AFS securities by $130 million and the market value of certain public equity-method investments by $481 million.
- Monitor SIRIUS XM subscriber growth, churn, royalty costs, automaker relationships, share repurchases and compliance with debt covenants.
- Follow the status of the SIRIUS XM-related shareholder litigation, which management stated became moot after withdrawal of the acquisition proposal and was being voluntarily discontinued.