Liberty Global plc — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. The filing is by Liberty Global plc, the U.K.-incorporated parent formed in connection with the June 7, 2013 Virgin Media acquisition. Amounts are U.S. dollars unless noted.
Business context and reporting period
Liberty Global provides video, broadband internet, fixed-line telephony and mobile services, with operations in 14 countries, primarily in Europe and Chile. The quarter’s results include Virgin Media only from June 8 through June 30, so reported comparisons are materially affected by the acquisition. The 2012 comparison also includes Austar as a discontinued operation; its 2012 disposal generated a substantial one-time gain.
Financial performance and liquidity
- Revenue: Q2 revenue was $3.162 billion, up 25.2% year over year; organic growth excluding acquisitions and foreign exchange was 5.5%. First-half revenue was $5.930 billion, up 17.2%, with 5.7% organic growth. Q2 organic growth was strongest in Belgium (12.5%), Chile (9.0%) and Germany (8.3%); the Netherlands declined 2.0%.
- Profit: Q2 operating income was $445.2 million, versus $479.0 million a year earlier. Continuing-operations earnings were $8.7 million, versus a $214.7 million loss; the company-attributable continuing-operations result was a loss of $11.6 million. First-half continuing-operations earnings were $30.6 million, versus a $243.9 million loss; the company-attributable loss was $12.6 million. Prior-year reported net earnings included a $924.1 million after-tax Austar disposal gain.
- Margins: Company-defined segment operating cash flow was $1.450 billion in Q2, up 21.3% reported and 3.9% organically. Its consolidated margin was approximately 45.9%, compared with 47.3% in Q2 2012. Operating income margin was approximately 14.1%, versus 19.0%. Operating cash flow is a non-GAAP measure and excludes, among other items, share-based compensation, depreciation and amortization, and restructuring and impairment items.
- Cash flow: First-half cash from operating activities was $1.346 billion, versus $1.394 billion from continuing operations in the prior-year comparison. Capital expenditures were $994.6 million. Company-defined free cash flow was $215.7 million, down from $391.2 million, reflecting in part higher vendor-financing principal payments. Investing activities used $6.278 billion, largely due to acquisitions and investments; financing activities provided $5.016 billion. Cash and cash equivalents increased $86.1 million to $2.125 billion.
- Debt and liquidity: June 30 debt and capital lease obligations totaled $41.904 billion, including $845.0 million classified as current; cash was $2.125 billion. Management cited pro forma net debt to annualized operating cash flow of 5.0x, including Virgin Media for the full quarter. Corporate-level cash held by Liberty Global and non-operating subsidiaries was $1.421 billion; access to operating-subsidiary cash and facilities may be constrained by debt terms, tax and other considerations. The filing states management believes resources are sufficient for foreseeable requirements over the next 12 months.
- Other: First-half interest expense was $1.013 billion. The six-month income tax expense was $216.4 million, including $91.4 million from loss of subsidiary tax attributes due to a deemed change in control. Foreign-currency translation reduced comprehensive earnings by $479.3 million in the first half.
Material changes versus the prior comparable period
- The Virgin Media acquisition added substantial assets, revenue and debt, but its contribution to reported Q2 operating results covers only the post-acquisition period. Virgin Media contributed $401.3 million of revenue and $12.9 million of net earnings in that period.
- Total debt and capital lease obligations rose from $27.525 billion at December 31, 2012 to $41.904 billion at June 30, 2013. Total assets increased from $38.308 billion to $63.706 billion.
- Reported revenue growth substantially exceeded organic growth because of acquisitions and currency effects. Organic RGU additions were 191,300 in Q2, compared with 364,300 in Q2 2012; first-half additions were 564,100 versus 809,200.
- Share-based compensation expense increased to $93.9 million in Q2 from $35.6 million, including acquisition-related replacement awards and Telenet plan adjustments. First-half expense rose to $120.7 million from $63.3 million.
- First-half debt modification and extinguishment losses increased to $170.0 million from $13.7 million, primarily due to refinancing and redemption activity.
Outlook, management commentary, risks and unusual items
- Management expected full-year 2013 property and equipment additions as a percentage of revenue to decline slightly from 2012. For Virgin Media, it expected that percentage to be 19%–21% for the post-acquisition portion of 2013. No specific earnings or revenue guidance is provided in the supplied filing text.
- Management expected to stop using VTR Wireless’s Chilean mobile network in Q4 2013 while exploring alternatives, potentially including expanded MVNO arrangements. The decision prompted $42.4 million of incremental Q2 depreciation. Network assets had a $64.6 million net carrying value, and related tower and real-estate lease payments totaled $112.5 million; possible restructuring costs were not quantified.
- Liberty Global was also evaluating strategic alternatives for Chellomedia, including a possible partial or full disposition, without committing to a course of action. It planned further Horizon TV launches, including Ireland and Germany later in 2013.
- Management highlighted competitive pressure, especially in the Netherlands, where revenue and operating cash flow weakened, and warned that margin could remain under pressure. Analog video subscriber declines, promotional discounts, programming-cost increases and regulatory resale-access requirements in Belgium and the Netherlands are additional concerns.
- Other material exposures include substantial leverage and refinancing needs, foreign-exchange and interest-rate volatility, counterparty risk, potential goodwill or other asset impairment, and uncertain regulatory and litigation outcomes. A Puerto Rico facility technical default related to previously misstated lender information was waived; the filing says it did not trigger cross-defaults under other debt agreements.
- Unusual items include acquisition costs of $31.1 million in Q2, impairment/restructuring and other operating items of $46.3 million, and the $42.4 million Chile network depreciation charge. The preliminary Virgin Media purchase-price allocation included $8.982 billion of goodwill and remained subject to revision.
Important facts for investors to verify
- How Virgin Media integration, realized synergies and full-quarter contributions affect organic growth, cash generation and leverage.
- Debt maturities, covenant headroom, cash availability across subsidiaries and the sustainability of refinancing access.
- Whether organic subscriber and revenue trends—particularly in the Netherlands and for video services—stabilize, and whether competitive or regulatory changes pressure pricing and margins.
- The final Virgin Media purchase-price allocation, including goodwill, customer relationships, property and equipment, and tax effects.
- The outcome and financial consequences of the Chile mobile strategy, Belgian and Dutch regulatory proceedings, tax examinations, and significant legal contingencies.