Liberty Global plc — 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing was signed February 27, 2019. Unless noted, financial results below are for continuing operations; Germany, Hungary, Romania, the Czech Republic, Austria and UPC DTH are presented as discontinued operations for the periods shown. 2017 comparisons for operating metrics are sometimes presented on a pro forma basis for the 2018 revenue-accounting standard.
Business context
Liberty Global provides video, broadband, fixed-line telephony and mobile services, principally in the U.K. and Ireland, Belgium, Switzerland, Poland and Slovakia. It also owns a 50% equity-method interest in Dutch operator VodafoneZiggo. At year-end, continuing operations passed approximately 25.1 million homes and reported 25.3 million fixed-service revenue-generating units and 6.0 million mobile subscribers. The company connected approximately 657,000 additional premises through network extensions during 2018.
Key financial metrics
| Metric | 2018 | Comparable period / context |
|---|---|---|
| Revenue | $11.96 billion | $11.25 billion on a 2017 pro forma basis; reported growth 6.2%, organic growth 2.1% |
| Operating income | $839 million | $792 million in 2017 |
| Adjusted OIBDA | $5.15 billion | $4.79 billion on a 2017 pro forma basis; margin approximately 43.1% versus 42.6% |
| Continuing-operations result | Net loss of $1.41 billion | Net loss of $2.35 billion in 2017 |
| Net earnings attributable to Liberty Global shareholders | $725 million | Includes discontinued-operations earnings and the gain on the UPC Austria sale; continuing-operations loss attributable to shareholders was $1.53 billion |
| Cash from continuing operating activities | $3.99 billion | $3.44 billion in 2017 |
| Capital spending | $1.45 billion cash capital expenditures; $3.71 billion total property and equipment additions | 2017 cash capital expenditures were $1.25 billion. Additions include substantial vendor-financed and leased equipment |
| Adjusted free cash flow | $108 million | $745 million in 2017 |
| Debt and capital leases | $29.81 billion carrying amount | $3.62 billion current; $22.7 billion not due until 2024 or later |
| Cash and liquidity | $1.48 billion cash and equivalents; $2.50 billion undrawn debt facilities | $1.34 billion of cash was held by Liberty Global and unrestricted subsidiaries; access to subsidiary cash is subject to restrictions |
Material changes and operating performance
- Organic revenue increased 2.1%, but underlying trends varied: U.K./Ireland revenue rose 3.9% and Adjusted OIBDA 3.5%; Belgium revenue declined 1.2% while Adjusted OIBDA rose 8.1%; Switzerland revenue declined 3.7% and Adjusted OIBDA declined 10.4%.
- Broadband subscription revenue increased organically 3.7%, while video revenue declined 1.8% and fixed-line telephony revenue declined 4.2%. Management cited competitive pressure, subscriber changes and pricing or product mix.
- Direct service costs increased organically 5.5%, including higher programming and sports-rights costs. Adjusted OIBDA growth therefore did not translate into stronger free cash flow.
- Cash from continuing operating activities improved, but adjusted free cash flow fell sharply, principally reflecting increased principal payments on vendor- and intermediary-financed amounts. Cash capital expenditures were $1.45 billion; total property and equipment additions were $3.71 billion.
- Debt and capital leases decreased from $32.64 billion to $29.81 billion. Reported leverage was 5.0 times gross debt and 4.8 times net debt to annualized quarterly Adjusted OIBDA; these ratios include continuing and discontinued operations.
Outlook, transactions, risks and unusual items
- Management expected 2019 property and equipment additions to decline significantly from 2018 and planned to continue network extensions and expand DOCSIS 3.1 and gigabit services. Investment programs may be modified or discontinued at management’s discretion.
- The sale of UPC Austria closed in July 2018, generating $2.06 billion net cash proceeds and a $1.10 billion after-tax disposal gain. At year-end, the Vodafone Disposal Group sale was pending, with estimated proceeds of approximately €10.6 billion based on earlier net-debt and working-capital figures; regulatory approval was expected in mid-2019. The UPC DTH sale, at approximately €180 million enterprise value, was expected to close in the first half of 2019. A sale of UPC Switzerland was agreed after year-end, on February 27, 2019, for CHF 6.3 billion enterprise value and estimated net cash proceeds of CHF 2.6 billion, subject to adjustments and approvals.
- Continuing-operations results included $1.57 billion of income tax expense, substantially affected by the U.S. Mandatory Repatriation Tax and other tax-accounting differences. The filing reports a $293 million liability for that tax after expected tax attributes.
- Volatile non-operating items materially affected reported results: derivative gains were $1.13 billion, foreign-currency transaction gains were $90 million, and fair-value losses on certain investments and debt were $385 million. These amounts are not necessarily indicative of recurring performance.
- Impairment, restructuring and other operating items rose to $248 million, including $96 million of restructuring charges and an $83 million provision for a U.K. VAT dispute. Separately, Virgin Media estimated maximum exposure of £47 million in another VAT matter, for which no loss was accrued because a loss was not considered probable.
- Key risks include intense competition and price pressure, rising content costs, foreign-exchange and interest-rate movements, substantial leverage, restrictions on moving cash from subsidiaries, and regulatory changes. Belgium’s wholesale-access decision may enable competitors to resell Telenet network services; Telenet appealed. Brexit outcomes and approvals and completion of pending disposals were uncertain.
- Liberty Global reported negative working capital, but management stated that it expected sufficient resources to repay or refinance current maturities and meet foreseeable liquidity requirements over the next 12 months. It also stated that borrowing groups were in covenant compliance at year-end.
Important facts for investors to verify
- Closing, final cash proceeds and debt repayment effects of the Vodafone, UPC DTH and UPC Switzerland transactions, including required regulatory and shareholder approvals.
- Whether the decline in adjusted free cash flow persists, and how vendor-financing repayments and the anticipated reduction in 2019 capital additions affect cash available for debt reduction and shareholder returns.
- Underlying subscriber, churn, pricing and margin trends, particularly in Switzerland and Belgium, and whether broadband growth can offset declines in video and fixed-line telephony.
- The ultimate outcomes and cash impact of the U.K. VAT proceedings, the Belgian wholesale-access appeal and other disclosed legal or regulatory contingencies.
- The composition and sustainability of reported earnings, including the tax expense, disposal gains and fair-value and derivative movements; also verify that cash and borrowing capacity are accessible where needed within the group.
KPMG issued an unqualified opinion on the consolidated financial statements and internal controls over financial reporting; management also concluded disclosure controls were effective at year-end.