Liberty Global plc — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2013. Liberty Global provides video, broadband, fixed-line and mobile services across 14 countries. On June 7, 2013, it completed the Virgin Media acquisition, a major change in group scale and in the comparability of reported results. Virgin Media contributed $1.59 billion of Q3 revenue and $1.99 billion for the post-acquisition portion of the nine-month period.
Key financial metrics
| Metric | Q3 2013 | Nine months 2013 |
|---|---|---|
| Revenue | $4.37 billion | $10.30 billion |
| Operating income | $521.9 million | $1.49 billion |
| Loss from continuing operations | $821.6 million | $791.0 million |
| Net loss attributable to Liberty Global shareholders | $830.1 million | $842.7 million |
| Loss per share attributable to shareholders | $2.09 | $2.66 |
| Operating cash flow, a company-defined non-GAAP measure | $2.00 billion | $4.72 billion |
Cash flow and margins. For the nine months, operating cash flow from continuing operations was $2.47 billion, capital expenditures were $1.80 billion, and company-defined free cash flow was $408.2 million, versus $328.2 million in the prior-year period. Consolidated segment operating cash flow margin was approximately 45.8% in both the third quarter and nine-month period, compared with 48.6% and 47.7%, respectively, in 2012. These margins and cash-flow measures are not GAAP measures.
Debt and liquidity. At September 30, total debt and capital lease obligations were $44.00 billion, including $854.1 million classified as current; cash and cash equivalents were $2.21 billion. The company reported debt and net-debt leverage of 5.3x and 5.0x annualized quarterly operating cash flow, respectively, using its stated exclusions and covenant-related methodology. Unused borrowing capacity was $3.29 billion, subject to facility terms and covenants. Liberty Global and non-operating subsidiaries held $1.23 billion of cash; $981.4 million was held in operating subsidiaries, and access to some subsidiary liquidity is restricted.
Changes versus prior comparable periods
- Reported revenue rose 73.5% in Q3 and 35.9% for nine months, substantially reflecting Virgin Media and other acquisitions. Excluding acquisition effects and foreign exchange, revenue grew 4.3% and 5.2%, respectively.
- Organic subscription revenue increased 3.5% in Q3 and 4.1% for nine months. Broadband internet was the strongest subscription category; video and telephony growth was more modest.
- Operating income was broadly similar to 2012: $521.9 million versus $509.1 million in Q3, and $1.49 billion versus $1.48 billion for nine months. Higher depreciation and amortization, interest expense and acquisition-related costs weighed on bottom-line results.
- Q3 derivative losses were $876.3 million, compared with $237.2 million a year earlier; nine-month derivative losses were $685.2 million versus $613.9 million. These results were materially affected by valuation movements and can be volatile.
- Nine-month 2012 net earnings included a $924.1 million after-tax gain from the sale of Austar. Accordingly, reported 2012 net income of $709.9 million is not directly comparable with 2013 net loss; 2012 continuing operations recorded a $249.7 million loss.
Outlook, commentary, risks and unusual items
- Outlook: The filing does not provide formal full-year earnings guidance. Management expected 2013 property and equipment additions as a percentage of revenue to decline slightly versus 2012; it estimated Virgin Media’s post-acquisition capex ratio at 19%–21%.
- Acquisition and integration: Management cited expected integration benefits and synergies from Virgin Media, while noting that acquisition accounting remained preliminary. Nine-month restructuring and other operating items included integration-related costs.
- Unusual items: The company released a $146.0 million litigation provision after the Dutch Supreme Court dismissed the Cignal claims. VTR Wireless ceased using its own mobile network in September and migrated traffic to a third-party network; related Q3 restructuring charges were $78.9 million, alongside accelerated depreciation.
- Planned disposition: On October 28, 2013, Liberty Global agreed to sell substantially all Chellomedia assets, excluding certain Dutch premium channels, for €750 million in cash. Closing was expected in Q1 2014, subject to conditions; the company expected to recognize a gain if completed.
- Competition and regulation: Management described competitive pressure, including organic declines in the Netherlands and pressure on customer and average-revenue trends in several markets. Potential regulated resale access in Belgium and the Netherlands could strengthen competitors. The German court ruling overturning the initial clearance of the Kabel BW acquisition remained subject to appeal and could lead to renewed review or additional remedies.
- Other risks: Significant debt, refinancing and covenant exposure, interest-rate and foreign-exchange movements, derivative counterparty risk, programming and network costs, and possible impairments remain important risks. Virgin Media’s VAT dispute had an estimated maximum exposure of £35.1 million ($56.8 million), which was not accrued because loss was not considered probable. The filing also describes other legal and regulatory contingencies whose outcomes or potential losses may not be reasonably estimable.
Investor verification priorities
- Separate organic performance from acquisition and currency effects, especially the partial-period contribution of Virgin Media.
- Review the composition and cash consequences of derivative losses, and the assumptions behind leverage and liquidity measures.
- Track free cash flow against capital spending, debt service, refinancing needs and restrictions on transferring subsidiary cash.
- Monitor Virgin Media integration, restructuring and expected synergies, as well as the outcome and proceeds of the Chellomedia sale.
- Follow the German, Belgian and Dutch regulatory matters and the Virgin Media VAT dispute, including any change in the company’s loss assessments.