Liberty Global plc — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited. The filing identifies the registrant as Liberty Global plc. Amounts are U.S. dollars unless noted.
Business context
Liberty Global provides video, broadband, fixed-line, mobile and business communications services across Europe, Latin America and the Caribbean. In 2016 it acquired BASE in Belgium (February 11) and Cable & Wireless Communications (CWC) (May 16); these acquisitions materially affect period comparisons. Its Liberty Global and LiLAC shares are tracking shares of one legal parent, not claims on separate entities.
Financial results and liquidity
- Q2 revenue: $5.074 billion, up 11.1% reported; organic growth was 3.1%. Acquisition impact contributed substantially to reported growth. Broadband subscription revenue was a source of organic growth, while fixed-line telephony declined.
- Q2 operating performance: Adjusted OIBDA was $2.306 billion, up 5.5% reported but 1.1% organically. Its calculated consolidated margin was approximately 45.4%, versus 47.9% a year earlier. Operating income fell to $487.8 million from $624.9 million, reflecting higher depreciation, restructuring and other operating items.
- Q2 earnings: Net earnings were $109.1 million versus a $409.9 million loss; earnings attributable to Liberty Global shareholders were $101.4 million versus a $464.7 million loss. Results include large, volatile derivative, currency and investment fair-value movements.
- First-half results: Revenue was $9.662 billion, up 6.4% reported and 3.1% organically. Adjusted OIBDA was $4.421 billion, up 3.2% reported and 2.5% organically. Operating income was $1.074 billion versus $1.182 billion; net loss narrowed to $263.6 million from $931.6 million.
- Cash flow: First-half operating cash flow was $2.667 billion, near $2.686 billion in 2015. Free cash flow, a company-defined non-GAAP measure, was $396.1 million versus $922.3 million. Cash capital expenditures were $1.276 billion; total property and equipment additions, including vendor financing and leases, were $2.229 billion.
- Debt and liquidity: June 30 cash was $1.286 billion. Debt principal was $50.615 billion, plus $1.312 billion of capital lease obligations; balance-sheet debt and leases totaled $51.644 billion. Management reported 5.0x debt and 4.8x net debt to annualized quarterly Adjusted OIBDA, including a full-quarter CWC adjustment. Current debt and lease obligations were $2.143 billion. Current liabilities of $9.884 billion exceeded current assets of $4.481 billion.
- Cash accessibility: $557.5 million of cash was held in borrowing groups and may be restricted. Management identified $728.8 million held by the parent and unrestricted subsidiaries as available at the corporate level, subject to tax and legal considerations.
Material changes versus prior periods
- Reported revenue and Adjusted OIBDA growth benefited from BASE and CWC, while organic growth was more modest. CWC contributed only from its May acquisition date; BASE contributed from February.
- Q2 impairment, restructuring and other operating items increased to $190.3 million from $25.7 million; first-half charges were $214.7 million versus $42.7 million. These included acquisition costs and restructuring charges.
- First-half interest expense rose to $1.276 billion from $1.217 billion, primarily reflecting higher average debt, partly offset by lower rates from refinancing.
- Q2 net earnings include a $1.052 billion net derivative gain, compared with a $679.7 million loss in Q2 2015. In the first half, derivative gains were $543.3 million versus a $61.2 million loss, while investment and debt fair-value changes were a $644.6 million loss versus a $262.2 million gain. These items make reported earnings volatile and are not reliable indicators of recurring performance.
Outlook, commentary and risks
- Management expected 2016 property and equipment additions to equal 25%–27% of consolidated revenue, including 26%–28% for the Liberty Global Group and 19%–21% for LiLAC; actual spending could vary.
- Management expected significant restructuring charges over the next 12 months as it optimized operations and integrated acquisitions. It also cited rising programming costs, including new sports rights, as a cost and margin pressure.
- The proposed 50:50 Dutch joint venture with Vodafone, combining Ziggo and Vodafone’s Dutch mobile business, was expected to close around year-end 2016. The European Commission approved it subject to Vodafone divesting its Dutch fixed-line business. Liberty Global expected an approximately €1.0 billion equalization payment, subject to adjustments, and planned to account for its interest using the equity method.
- Management cited intense competition, including video and broadband pressure in the Netherlands and Switzerland, and regulatory risks such as mandated network access in Belgium. Organic growth included broadband gains but also basic-video subscriber losses; mobile organic subscriber additions slowed year over year.
- Brexit created currency, market and operating uncertainty. The filing also highlighted Puerto Rico’s weak fiscal and economic conditions and increased political, regulatory and economic exposure from CWC’s markets.
- Material contingencies include Proximus’s €1.4 billion (about $1.6 billion) claim against Telenet relating to the Interkabel transaction; no amount was accrued because loss was not considered probable. Other disclosed matters include U.K. VAT disputes, a Hungarian VAT assessment, tax audits, and regulatory proceedings. The filing states outcomes and potential effects may be uncertain.
- A $69.8 million cash receipt from the Vivendi litigation settlement was recognized in first-half other income; management considered the matter closed. Disclosure controls were assessed as effective, with no material change in internal controls reported.
Most important facts for investors to verify
- How much of subsequent revenue and Adjusted OIBDA growth is organic, and whether acquired businesses deliver the anticipated integration benefits.
- Whether leverage, refinancing needs and cash availability remain manageable given the $50.6 billion debt principal, upcoming maturities and restrictions on subsidiary cash.
- Whether free cash flow recovers from the first-half decline after capital investment, vendor-financing repayments, interest and taxes.
- How Brexit, foreign exchange movements, competitive pressure and regulatory decisions affect margins, subscribers and cash generation.
- Progress and final terms of the Dutch joint venture, including required divestitures and proceeds to Liberty Global.
- Developments in the Telenet, VAT and other legal or tax matters, and any resulting accruals or cash payments.