Liberty Media Corp annual report, FY2014

Liberty Media Corporation: FY2014 Form 10-K Summary

Business context and reporting period

Liberty Media Corporation reported for the fiscal year ended December 31, 2014; the filing was signed February 26, 2015. Liberty primarily owns media, communications and entertainment interests, with Sirius XM Holdings as its principal consolidated subsidiary, the Atlanta Braves as a wholly owned subsidiary, and Live Nation Entertainment as a significant equity-method affiliate.

Comparability with prior periods is affected by the January 2013 consolidation of Sirius XM, the 2013 Starz spin-off, and the November 2014 spin-off of Liberty Broadband. Liberty Broadband received Liberty’s former Charter, TruePosition and Time Warner Cable interests, certain liabilities and initial indebtedness. The 2014 results therefore are not directly comparable with pre-2013 or pre-spin-off results.

Financial performance and key metrics

Metric	2014	2013	Change
Revenue	$4.450 billion	$4.002 billion	+$448 million
Operating income	$841 million	$814 million	+$27 million
Adjusted OIBDA	$1.417 billion	$1.322 billion	+$95 million
Net earnings	$395 million	$8.991 billion	Down sharply; 2013 included major transaction gains
Net earnings attributable to Liberty stockholders	$178 million	$8.780 billion	Down sharply
Basic continuing-operations EPS	$0.52	$24.73	Down sharply
Cash flow from operating activities	$1.125 billion	$1.236 billion	-$111 million

Sirius XM generated $4.141 billion of Liberty’s revenue, $1.466 billion of Adjusted OIBDA and $1.004 billion of operating income. Stand-alone Sirius XM revenue was $4.181 billion, up from $3.799 billion, while stand-alone Adjusted OIBDA increased to $1.464 billion from $1.367 billion.
Sirius XM had approximately 27.3 million subscribers at year-end, including 22.5 million self-pay and 4.8 million paid promotional subscribers. Liberty’s economic ownership was approximately 56%, with approximately 44% held by noncontrolling interests.
Consolidated operating margin was approximately 18.9%, compared with approximately 20.3% in 2013. Consolidated Adjusted OIBDA margin was approximately 31.8%, compared with approximately 33.0% in 2013.
Revenue growth was primarily driven by Sirius XM subscriber growth, a full year of connected-vehicle revenue and rate increases. Sirius XM subscriber revenue increased 8% and other revenue increased 22% on a stand-alone basis.
Subscriber service costs increased 15%, principally because of higher revenue sharing and royalties. The statutory sound-recording royalty rate increased to 9.5% in 2014 from 8.4% in 2013.
Stock-based compensation increased to $217 million from $193 million, largely because of additional Sirius XM compensation expense.
Share of losses of affiliates was $113 million, including a $94 million Charter loss for the portion of the year before the Broadband Spin-Off and a $30 million Live Nation loss. Live Nation’s results included an impairment charge, Liberty’s share of which was approximately $36 million.

Cash flow, debt and liquidity

Year-end cash and cash equivalents were $681 million, down from $1.088 billion. Corporate and other cash was $533 million; Sirius XM cash was $148 million.
Unencumbered fair-value-option securities were $157 million at corporate and other, while Sirius XM had none listed in this category. Total available-for-sale and other cost investments were $816 million, including approximately $718 million of publicly traded non-affiliate investments.
Total debt principal was $5.891 billion, including $1.0 billion of Liberty corporate-level convertible notes, $250 million of margin loans, approximately $4.2 billion of Sirius XM notes and $380 million drawn under Sirius XM’s revolving credit facility.
Liberty separately disclosed approximately $1.2 billion of corporate-level debt. Sirius XM had approximately $4.5 billion of aggregate indebtedness, including the revolving facility.
Sirius XM generated $1.253 billion of operating cash flow, repurchased approximately $2.5 billion of its shares and repaid approximately $1.0 billion of long-term debt. Liberty’s own operating cash flow was negative $128 million.
Liberty had $750 million of availability under its margin-loan revolver, and Sirius XM had $870 million available under its $1.25 billion secured revolving credit facility. Management stated that available liquidity was sufficient for projected uses, but Liberty noted that cash flows of Sirius XM are not freely accessible because Sirius XM is separately public and has substantial noncontrolling interests.
Contractual obligations totaled approximately $10.366 billion, including $5.891 billion of debt principal, $2.028 billion of interest, $584 million of programming fees, $601 million of operating leases and $398 million of guaranteed Braves employment contracts.

Material changes versus the prior comparable period

Revenue and Adjusted OIBDA increased as Sirius XM contributed a full year of consolidated results and continued to grow subscribers and operating efficiency.
Net earnings fell from $8.991 billion to $395 million because 2013 included an approximately $7.5 billion non-taxable gain from consolidating Sirius XM.
Corporate and other Adjusted OIBDA declined to a $49 million loss from $33 million of positive Adjusted OIBDA, reflecting the Broadband Spin-Off, reduced subsidiary activity and higher corporate costs.
Equity-method investments declined to $851 million from $3.299 billion, primarily because Charter and other investments were distributed in the Broadband Spin-Off.
Liberty completed the Broadband Spin-Off and received an approximately $300 million distribution, reflected as approximately $259 million of cash provided in the consolidated cash-flow statement after related items.
Liberty issued Series C shares as a dividend to Series A and Series B holders at a ratio of two Series C shares for each Series A or Series B share. The transaction was treated as a stock split for accounting purposes and prior EPS and share data were adjusted.
There were no Liberty share repurchases under the formal program during 2014. Approximately $627 million remained available under the repurchase authorization at year-end.

Guidance, outlook, commentary, risks and unusual items

No specific consolidated revenue, earnings or cash-flow guidance was provided. Management expected to fund future uses with cash on hand, operating cash flow and borrowing capacity, while continuing to evaluate investments, debt repayment, capital expenditures and potential share repurchases.
ANLBC is developing a new Braves ballpark and adjacent mixed-use complex. The ballpark is expected to cost approximately $672 million, with ANLBC responsible for the remaining costs after $392 million of expected public funding. ANLBC had advanced project costs and expected reimbursement when approximately $368 million of authority bonds were issued in 2015.
Sirius XM expected to progressively roll out a redesigned Internet radio platform beginning in the first quarter of 2015 and intended to discontinue Backseat TV by the end of 2015.
Sound-recording royalty rates were scheduled to rise to 10.0% in 2015, 10.5% in 2016 and 11.0% in 2017. Sirius XM also faced uncertainty regarding pre-1972 recording rights, webcasting royalty rates and related litigation.
Material litigation included pre-1972 sound-recording cases, SoundExchange royalty litigation and Telephone Consumer Protection Act class actions. Sirius XM stated that reasonably possible losses could not be estimated and that unfavorable outcomes could materially affect results and cash flows.
Key operating risks include competition from free and Internet-based audio services, dependence on automakers, subscriber churn and pricing, satellite failures, limited satellite insurance, information-security incidents, regulatory changes, music royalty increases and Sirius XM’s significant leverage.
Liberty’s liquidity is exposed to market values of pledged securities and margin loans. The company also has substantial goodwill and indefinite-lived intangible assets, including $14.345 billion of goodwill and $8.6 billion of FCC licenses, making impairment assumptions important.
The IRS agreed in December 2014 with the nontaxable characterization of the Broadband Spin-Off, although the filing notes that tax opinions and IRS conclusions do not eliminate all potential tax exposure under the tax-sharing agreement.
KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective at December 31, 2014.

Most important facts for an investor to verify

Reconcile Liberty’s consolidated results with Sirius XM’s stand-alone results and account for the approximately 44% noncontrolling interest.
Review corporate-level debt maturities, margin-loan collateral requirements and refinancing or repayment needs, particularly the $257 million of debt due in 2015.
Assess whether Sirius XM’s subscriber growth, self-pay mix, churn, average revenue per subscriber and royalty costs support continued margin expansion.
Evaluate the potential financial exposure from pre-1972 recording, SoundExchange and TCPA litigation, for which the filing provides no estimable loss range.
Verify the funding plan, cost overruns and cash requirements for the Braves’ ballpark and mixed-use development.
Review the valuation sensitivity of Sirius XM goodwill, FCC licenses and other indefinite-lived intangibles to changes in subscriber trends, competition, royalty rates and discount rates.
Consider the effect of the Broadband Spin-Off, Series C stock dividend and other Liberty reorganizations when comparing historical per-share and balance-sheet data.