Liberty Global plc — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. Liberty Global provided video, broadband internet, fixed-line telephony and, in some markets, mobile services across 14 countries. The June 7, 2013 acquisition of Virgin Media substantially changed the company’s scale and limits year-over-year comparability.
Financial and operating results
- Revenue: $14.47 billion, up 45.8% from $9.93 billion; excluding acquisitions and foreign-exchange effects, revenue increased 5.1%. Virgin Media contributed $3.65 billion after acquisition.
- Operating income: $2.01 billion, compared with $1.98 billion in 2012. Depreciation and amortization rose to $4.28 billion from $2.66 billion. Segment operating cash flow was $6.74 billion, up 39.5% reported and 4.9% organically.
- Net results: Loss from continuing operations was $882 million, versus a $584 million loss in 2012. Net loss attributable to Liberty Global shareholders was $964 million, compared with net income of $323 million in 2012; the prior year included a $924 million after-tax gain on the Austar disposal. Basic and diluted loss per share was $2.87, versus earnings per share of $1.21.
- Cash flow and investment: Continuing-operations cash from operations was $3.92 billion, up from $2.84 billion. Capital expenditures were $2.48 billion, versus $1.87 billion. Company-defined free cash flow was $1.13 billion, versus $885 million.
- Margins: European Operations Division operating cash flow margin was 48.7%, down from 51.8%, reflecting the addition of Virgin Media and pressure in some markets. VTR Group margin was 35.7%, up from 33.4%. The Netherlands and Belgium margins declined.
- Debt and liquidity: Debt and capital lease obligations totaled $44.70 billion, up from $27.52 billion; cash and cash equivalents were $2.70 billion. Debt to annualized fourth-quarter operating cash flow was 5.3x, or 4.9x net of cash, against a stated target range of 4–5x. The company reported $1.02 billion of current debt and lease obligations and $3.35 billion of unused borrowing capacity. Management said it expected sufficient resources to meet foreseeable needs over the next 12 months; subsidiary debt covenants were in compliance at year-end.
- Fourth quarter: Revenue was $4.47 billion and operating income was $518 million. Net loss attributable to shareholders was $121 million, or $0.31 per share.
- Scale: At year-end, continuing operations passed 47.2 million homes and served 48.3 million video, internet and fixed-line telephony revenue-generating units, plus 4.1 million mobile subscribers.
Material changes and significant items
- The Virgin Media acquisition added a major U.K. business and was funded with shares, cash and new debt. Reported 2013 revenue growth therefore substantially reflects acquisition effects.
- Revenue growth was led organically by broadband internet subscription revenue, up 10.6%, and mobile subscription revenue, up 102.1% (the latter from a smaller base). Video subscription revenue grew 0.6%; fixed-line telephony grew 4.3%. The Netherlands had an organic revenue decline of 2.2%.
- Investing cash outflow increased to $7.95 billion, driven by acquisition spending, Ziggo share purchases and higher capital expenditures. Liberty Global held an effective 28.5% interest in Ziggo at year-end and announced a recommended offer for the remaining shares in January 2014, subject to conditions and approvals.
- Impairment, restructuring and other operating charges were $297.5 million, including an $84.9 million charge as VTR Wireless ceased commercial use of its own mobile network, $80 million of employee reorganization and integration costs, and a $73 million impairment of Telenet spectrum rights. VTR Wireless also recorded $98.3 million of incremental depreciation following the strategy change.
- A $146 million litigation provision was released after the company considered the Cignal litigation resolved. Non-operating results included $1.02 billion of derivative losses, $349 million of foreign-currency transaction gains, $524 million of investment fair-value gains and $212 million of debt modification and extinguishment losses.
- Income tax expense rose to $355.5 million from $75.0 million. The filing cites enacted U.K. tax-rate changes, permanent differences, a deemed change in control affecting subsidiary tax attributes and increased valuation allowances.
- The sale of substantially all Chellomedia assets for €750 million ($1.03 billion) closed on January 31, 2014. Results were presented as discontinued operations at year-end. The company retained certain Dutch programming interests and expected continuing programming-related cash outflows under contracts through at least 2017.
Outlook, risks and contingencies
- Management expected organic revenue and operating cash flow growth over the next few years, excluding Chellomedia and Ziggo, with growth expected from broadband, fixed-line telephony, digital cable, business services and expanding mobile offers. The company cautioned that results depend on competitive, economic, technological, political and regulatory conditions.
- For 2014, management expected European segment operating cash flow margins to remain relatively unchanged and the VTR Group margin to increase. Expected property and equipment additions were 21%–23% of revenue for the European Operations Division and 18%–20% for VTR Group.
- Key risks include intense competition and pricing pressure; programming costs and content availability; regulation and third-party network access obligations, particularly in Belgium; foreign-exchange and interest-rate volatility; high leverage and refinancing needs; and restrictions on moving cash from operating subsidiaries to the parent.
- Important proceedings included appeals concerning German approval of the KBW acquisition, a German antitrust review of housing-association contract terms, and Telenet appeals against Belgian wholesale-access obligations. The filing also disclosed a disputed Virgin Media VAT exposure estimated at up to £36.1 million, for which no loss was accrued because loss was not considered probable.
- In January 2014, VTR businesses were moved into a separate borrowing group and VTR Finance issued $1.4 billion of 6.875% senior secured notes due 2024. Liberty Global said it was exploring options for its Latin American operations, including a possible spin-off, but stated that the review was preliminary and no transaction was assured.
- KPMG issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- How much of reported growth and operating cash flow reflects Virgin Media acquisition effects versus organic performance, and whether integration benefits materialize.
- Debt maturity, covenant headroom, interest and derivative cash requirements, and the company’s ability to refinance while maintaining its targeted leverage.
- Whether competition and regulatory access requirements in Belgium, Germany and the Netherlands affect customer retention, pricing, revenue or margins.
- The sustainability of free cash flow after capital expenditures, vendor-financing repayments, lease payments, acquisitions and share repurchases.
- Final terms, financing, regulatory approvals and closing conditions for the Ziggo offer, and the outcome of the proposed Latin American strategic review.
- Resolution of tax examinations, litigation and other contingencies, including the German KBW proceedings and the unaccrued Virgin Media VAT exposure.