Liberty Media Corporation 2017 Q2 10-Q Summary
Business context and reporting period
Form 10-Q for the quarter and six months ended June 30, 2017, filed August 9, 2017. Liberty operates through three tracking-stock groups: Liberty SiriusXM, Liberty Braves and Liberty Formula One. Significant businesses include SIRIUS XM, Formula 1, Braves Holdings and equity-method investment Live Nation. Formula 1 was acquired and consolidated beginning January 23, 2017, making year-over-year comparisons less comparable.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $2,140 million | $1,366 million | $3,535 million | $2,570 million |
| Operating income | $422 million | $328 million | $681 million | $1,109 million |
| Net earnings | $156 million | $142 million | $200 million | $569 million |
| Net earnings attributable to Liberty stockholders | $94 million | $82 million | $73 million | $446 million |
| Adjusted OIBDA | $698 million | $455 million | $1,165 million | $846 million |
| Cash flow from operating activities | Not separately provided | Not separately provided | $739 million | $1,262 million |
Q2 revenue increased approximately 57%, primarily from $616 million of Formula 1 revenue and $113 million of SIRIUS XM growth. Six-month revenue increased approximately 38%. Q2 operating margin was approximately 19.7%, compared with 24.0% in the prior-year quarter; Adjusted OIBDA margin was approximately 32.6%, compared with 33.3%. Six-month operating margin was approximately 19.3%, compared with 43.2%, principally because the prior-year period included a $511 million net Vivendi settlement gain.
- SIRIUS XM: Q2 revenue was $1,348 million and Adjusted OIBDA was $519 million. Subscribers reached approximately 32.0 million, up from 31.3 million at December 31, 2016.
- Formula 1: Q2 revenue was $616 million and Adjusted OIBDA was $164 million. Six-month revenue was $712 million and Adjusted OIBDA was $182 million, with approximately $194 million of acquisition-date-to-June 30 net loss, including $179 million of amortization.
- Braves Holdings: Q2 revenue was $176 million and Adjusted OIBDA was $25 million. Six-month revenue was $181 million and Adjusted OIBDA was negative $2 million.
- Balance sheet: Cash and cash equivalents were $744 million, compared with $562 million at December 31, 2016. Total assets were $41.4 billion and total equity was $21.1 billion.
- Debt and liquidity: Total debt was approximately $13.5 billion, compared with $8.0 billion at year-end 2016. Long-term debt was $13.5 billion. Available borrowing capacity included $500 million under the SiriusXM margin loan, $150 million under the Live Nation margin loan and $750 million under the SiriusXM credit facility.
Material changes versus the prior comparable period
- Formula 1 became a consolidated subsidiary, adding significant revenue, assets, debt and amortization expense.
- Liberty paid $1.647 billion of net cash for the Formula 1 acquisition during the first six months and issued equity and debt to fund the transaction.
- Goodwill increased to $18.4 billion from $14.3 billion, and amortizable intangible assets increased to $6.4 billion from $1.1 billion, primarily because of Formula 1 acquisition accounting.
- Operating cash flow declined $523 million to $739 million, while investing cash outflow increased to $2.468 billion, mainly due to the Formula 1 acquisition and investments in affiliates.
- Financing activities provided $1.906 billion, including $2.597 billion of borrowings and $1.938 billion from issuance of Series C Liberty Formula One stock, partly offset by $1.791 billion of debt repayments.
- SIRIUS XM completed a recapitalization of SIRIUS XM Canada, resulting in a 70% equity interest and a $131 million long-term loan. SIRIUS XM also agreed to invest up to $480 million in Pandora preferred stock, with $172.5 million purchased by June 30.
Guidance, outlook, risks and unusual items
Management stated that available liquidity was sufficient for projected uses of cash. Expected uses include investment in businesses, debt service, potential share repurchases, SiriusXM operating and satellite expenditures, Formula 1 debt service and Braves stadium and mixed-use development costs. Braves Holdings expected approximately $198 million of additional 2017 capital expenditures.
- Formula 1 revenue and expenses are seasonal, with events generally occurring from March through November.
- Braves Holdings had approximately $692 million spent on the new ballpark and expected approximately $558 million of mixed-use development costs, with additional debt and equity funding requirements.
- SIRIUS XM had pending SoundExchange royalty claims. The estimable portion of reasonably possible additional loss was $0 to $70 million plus interest and late fees; no additional liability was recorded because the loss was not considered probable.
- Formula 1’s acquisition price allocation remained preliminary. The filing also disclosed a UK Serious Fraud Office pre-investigation review concerning the 2013 Concorde Implementation Agreement.
- Key risks include subscriber retention and automaker dependence, competition and technology changes, satellite or information-system failures, integration of Formula 1, substantial indebtedness, interest-rate and market-price volatility, regulatory matters and litigation.
- Liberty’s tracking stocks do not represent separate legal entities. Holders remain exposed to the liabilities of the parent company, and Liberty SiriusXM stock could face suspension or delisting if specified Nasdaq requirements are not met.
- Subsequent to quarter-end, SIRIUS XM redeemed certain notes and issued $1.0 billion of 3.875% notes due 2022 and $1.5 billion of 5.00% notes due 2027 to refinance debt. Formula 1 subsequently repaid its second-lien facility using additional first-lien borrowing and cash.
Important facts for investors to verify
- Assess Formula 1’s normalized contribution separately from acquisition-related amortization, debt and seasonal revenue recognition.
- Reconcile Liberty’s consolidated liquidity with cash held at subsidiaries, restricted cash and the approximately 32% noncontrolling interest in SIRIUS XM.
- Review debt maturities, variable-rate exposure, collateral pledges and compliance with SiriusXM, Braves and Formula 1 covenants.
- Monitor SIRIUS XM subscriber growth, churn, average revenue per subscriber and royalty-related costs.
- Evaluate Braves stadium and mixed-use development spending, financing requirements and completion risks.
- Review the Pandora investment, SIRIUS XM Canada transaction and associated related-party agreements.
- Consider the effect of fair-value gains and losses, convertible instruments, bond hedges and potential tracking-stock dilution on reported earnings.