Business Context and Reporting Period
Liberty Media Corporation filed an unaudited Form 10-Q for the quarter ended March 31, 2018. The company operates through media, communications and entertainment interests, primarily SIRIUS XM, Formula 1 and Braves Holdings, and reports three tracking-stock groups: Liberty SiriusXM, Liberty Braves and Liberty Formula One. Tracking stocks do not represent separate legal entities or direct ownership of the attributed assets.
Results include Formula 1 from its January 23, 2017 acquisition date. Formula 1 and Braves Holdings are seasonal, with comparatively lower first-quarter activity.
Financial Performance and Key Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $1,517 million | $1,395 million | +$122 million, 9% |
| Operating income | $227 million | $259 million | -$32 million, 12% |
| Adjusted OIBDA | $489 million | $467 million | +$22 million, 5% |
| Net earnings | $213 million | $44 million | +$169 million |
| Net earnings attributable to Liberty stockholders | $131 million | $(21) million | Improved by $152 million |
| Operating margin | 15.0% | 18.6% | Down 3.6 percentage points |
| Adjusted OIBDA margin | 32.2% | 33.5% | Down 1.3 percentage points |
- SIRIUS XM revenue was $1,375 million, up from $1,294 million. Adjusted OIBDA was $530 million versus $500 million, and operating income was $407 million versus $381 million. Subscribers increased approximately 1% sequentially to 33.1 million at March 31, 2018.
- Formula 1 revenue was $114 million versus $96 million. Reported Adjusted OIBDA was $3 million versus $18 million on a pro forma comparable basis, while operating loss was $109 million versus a pro forma $105 million loss. First-quarter results are seasonally low because most events occur from March through November.
- Braves Holdings revenue was $28 million versus $5 million, but operating loss widened to $49 million from $32 million. The comparison benefited from three home games in Q1 2018 versus none in Q1 2017, while player, stadium and development costs increased.
- Net earnings benefited from $153 million of realized and unrealized gains on financial instruments, compared with a $12 million loss in the prior-year quarter. Interest expense increased to $150 million from $140 million.
- Cash flow from operating activities was $624 million versus $403 million. Investing cash flow was $(424) million, including $393 million invested in affiliates and debt and equity securities. Capital expenditures were $89 million versus $156 million.
- Cash, cash equivalents and restricted cash totaled $1,079 million at March 31, 2018, including $1,042 million of cash and cash equivalents. Total assets were $42.5 billion and total equity was $22.5 billion.
Debt, Liquidity and Capital Allocation
- Total debt principal was approximately $14.0 billion at March 31, 2018, with $14.1 billion of carrying value. Long-term debt on the balance sheet was $14.1 billion; current debt was $36 million.
- Debt increased from $13.95 billion of principal at December 31, 2017, partly reflecting the March 2018 issuance of approximately $400 million of 2.125% exchangeable debentures due 2048.
- Available borrowing capacity included $600 million under the Liberty SiriusXM margin loan, $150 million under the Live Nation margin loan and $1,385 million under SIRIUS XM’s secured revolving credit facility.
- Group cash balances were approximately $658 million for Liberty SiriusXM, $114 million for Braves and $270 million for Formula One. Access to subsidiary cash may be limited by minority ownership, covenants or restricted-payment tests.
- During the quarter, Liberty repurchased $31 million of Series C Liberty SiriusXM stock. Subsidiaries repurchased approximately $309 million of shares, and SIRIUS XM paid a $49 million dividend, of which Liberty received $35 million.
Material Changes Versus the Prior Comparable Period
- Revenue increased 9%, led by SIRIUS XM growth of $81 million, Braves Holdings growth of $23 million and Formula 1 growth of $18 million.
- Operating income declined despite higher revenue because Formula 1 and Braves operating results deteriorated, while depreciation and amortization rose to $216 million from $164 million.
- Adjusted OIBDA increased modestly, principally from SIRIUS XM, but Formula 1 and Braves each declined.
- Net earnings improved primarily because of favorable fair-value changes in financial instruments and lower income-tax expense of $15 million versus $76 million.
- The company adopted ASC 606 revenue accounting on January 1, 2018 using the modified retrospective method. The adoption increased opening retained earnings by $41 million and changed the quarter’s reported revenue and net earnings relative to prior accounting; without ASC 606, management estimated Q1 revenue would have been $1,535 million and net earnings $208 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available liquidity is expected to be sufficient for projected uses of cash. Expected uses include debt service, investments, share repurchases, SIRIUS XM satellite and operating spending, Formula 1 debt service and investment, and approximately $50 million of Braves Holdings capital expenditures for the remainder of 2018.
- SIRIUS XM expects to continue regular quarterly dividends at an aggregate annual rate of $0.044 per share, subject to board declarations.
- The Tax Cuts and Jobs Act remains subject to analysis; the company expects to complete its assessment by December 2018, and the ultimate impact could materially differ from provisional amounts.
- Key risks include subscriber retention and automaker dependence, higher music royalties, Formula 1 and Braves seasonality, substantial indebtedness and variable interest rates, exposure to public-security prices, technology or satellite failures, regulatory changes, cybersecurity, litigation and the outcome of SoundExchange royalty claims.
- SIRIUS XM is defending two SoundExchange proceedings involving alleged royalty underpayments. As of March 31, 2018, the company considered losses in excess of recorded liabilities to be remote, but the actual outcome may differ.
- Fair-value gains are volatile and noncash in significant part. A 10% decline in marketable debt and equity securities would have reduced their value by approximately $150 million; a 10% decline in Live Nation’s share price would have reduced the value of Liberty’s stake by approximately $294 million.
Most Important Facts to Verify
- Reconcile the $153 million financial-instrument gain and determine the recurring versus nonrecurring components of Q1 earnings.
- Assess leverage, refinancing requirements, collateralized margin loans and sensitivity to interest-rate and security-price movements.
- Review SIRIUS XM subscriber growth, churn, royalty rates and automaker relationships, including the 2018 post-1972 recording royalty rate increase to 15.5% from 11%.
- Evaluate Formula 1’s seasonal earnings profile, debt reduction and the comparability of reported results with the prior-year pro forma figures.
- Review ASC 606 transition effects, deferred revenue and the timing of Formula 1 and Braves contract revenue.
- Monitor SoundExchange litigation, Tax Act finalization, Braves development commitments and the company’s ability to access subsidiary cash.