Liberty Media Corporation 2012 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2012, with quarterly information for the fourth quarter. The historical statements include Starz, LLC as a consolidated subsidiary and Sirius XM Radio Inc. as an equity-method affiliate. The presentation is unusual because Liberty was spun off from Starz on January 11, 2013 and is treated as Starz’s accounting successor.
Liberty’s principal businesses and investments included Starz, the Atlanta Braves, TruePosition, Sirius XM, Live Nation, Barnes & Noble and other public-company securities. The company eliminated its tracking-stock structure in November 2011.
Financial performance and key metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Revenue | $1,999 million | $3,024 million | Down $1,025 million |
| Operating income | $326 million | $957 million | Down $631 million |
| Adjusted OIBDA | $450 million | $1,060 million | Down $610 million |
| Net earnings attributable to Liberty stockholders | $1,414 million | $836 million | Up $578 million |
| Basic earnings per share | $11.78 | $7.14 | Up $4.64 |
| Net cash provided by operating activities | $236 million | $276 million | Down $40 million |
| Cash and cash equivalents | $1,353 million | $2,070 million | Down $717 million |
Reported operating margin was approximately 16.3% and Adjusted OIBDA margin was approximately 22.5%. Net earnings were heavily affected by non-operating items, particularly Liberty’s $1,367 million share of Sirius XM earnings, including a $1,229 million benefit attributable to Sirius XM’s recognition of deferred tax assets.
- Starz revenue increased 1.0% to $1,631 million; Adjusted OIBDA declined slightly to $445 million and operating income declined to $406 million.
- Starz Networks revenue increased 0.6% to $1,277 million. Starz subscribers totaled 21.2 million and Encore subscribers totaled 34.8 million at year-end.
- Atlanta Braves revenue increased 8.2% to $225 million, while Adjusted OIBDA improved to $22 million from a $6 million loss.
- Corporate and other revenue fell to $143 million from $1,201 million because 2011 included substantial one-time TruePosition deferred-revenue recognition.
- Share of earnings of affiliates rose to $1,346 million from $87 million, principally due to Sirius XM’s tax benefit and improved operating results.
- Realized and unrealized gains on financial instruments were $232 million, compared with $68 million in 2011.
Balance sheet, debt and liquidity
| Metric at December 31 | 2012 | 2011 |
|---|---|---|
| Total assets | $8,325 million | $7,719 million |
| Equity-method investments | $3,341 million | $563 million |
| Available-for-sale and other cost investments | $1,392 million | $1,859 million |
| Total debt | $540 million | $1,295 million |
| Total stockholders’ equity | $6,440 million | $5,259 million |
Liquidity consisted primarily of $1,353 million of cash, $67 million of short-term marketable securities and $1,079 million of non-strategic available-for-sale securities. Liberty reported no corporate public debt rating and stated that it had no debt to service on a go-forward basis after the Spin-Off, because the remaining debt obligations stayed with Starz.
2012 investing cash flow was positive $214 million, but the company invested $1,716 million in cost and equity-method investees, primarily Sirius XM and Live Nation. Financing cash flow was negative $1,167 million, including $1,254 million of debt repayments and $323 million of Liberty share repurchases.
Material changes versus the prior comparable period
- Revenue, operating income and Adjusted OIBDA declined sharply because 2011 included approximately $1,029 million of one-time TruePosition deferred-revenue recognition and approximately $409 million of related deferred-cost recognition.
- Liberty increased its Sirius XM ownership to approximately 49% at December 31, 2012 and acquired additional Sirius XM shares and converted preferred stock in January 2013, resulting in voting control exceeding 50%.
- Liberty acquired approximately 11 million additional Live Nation shares for $107 million during 2012, increasing the carrying value of that equity-method investment.
- Starz extended several distributor agreements in the fourth quarter. Two extensions had less favorable economics and would have reduced 2012 Starz Networks revenue by approximately 3% on a pro forma basis, although the agreements include contractual annual increases.
- Liberty issued $500 million of Starz 5.00% Senior Notes due 2019, using the proceeds to repay the Starz term loan.
- The company changed Sirius XM and Live Nation equity-method reporting from a three-month lag to current reporting and retrospectively adjusted prior periods.
Guidance, outlook, risks and unusual items
The filing does not provide formal consolidated earnings or revenue guidance. Management’s stated priorities included renewing Starz distributor agreements, expanding original programming, developing digital rights and maintaining investment flexibility.
- Starz’s Disney output agreement will expire after 2015; Disney notified Starz that it would not extend the agreement. Starz is evaluating replacement content and additional original programming.
- Following the Spin-Off, Liberty expected to have limited recurring operating cash flow because Starz cash flows would no longer be available. A cash distribution of approximately $1.2 billion was made to Liberty around the Spin-Off.
- Liberty guaranteed certain Starz studio obligations. Guarantees for films released through December 31, 2012 totaled $399 million; obligations for unreleased films were not determinable and were expected to be significant.
- Starz’s estimated future programming commitments for released films totaled $950 million, excluding commitments for films not yet theatrically released.
- The company identified material exposure to tax risks associated with the Spin-Off. Liberty’s indemnification obligations under the tax-sharing agreement were not capped.
- Sirius XM faced approximately $2.5 billion of debt at December 31, 2012 and significant competition from terrestrial radio, Internet audio and smartphone-based services. Its $1.25 billion revolving facility was undrawn.
- Sirius XM’s statutory sound-recording royalty rate increases from 8.0% in 2012 to 9.0% in 2013 and 11.0% in 2017.
- Liberty was involved in shareholder litigation relating to its Sirius XM investment and control transactions. The filing also disclosed a favorable Vivendi judgment of approximately €945 million, including prejudgment interest, but stated that any recovery would not be recognized until final resolution because the judgment was under appeal.
- Liberty’s fourth-quarter option exchange generated approximately $24 million of incremental compensation expense and additional future compensation expense.
Most important facts for an investor to verify
- How post-Spin-Off financial statements separate discontinued Starz operations from Liberty’s continuing operations.
- The purchase-price accounting, gain recognition and noncontrolling interest effects of consolidating Sirius XM beginning in the first quarter of 2013.
- Liberty’s actual recurring cash flow and liquidity after losing access to Starz cash flows and despite consolidating Sirius XM.
- The ultimate status and financial exposure from Spin-Off tax indemnities and tax-sharing arrangements.
- Renewal or replacement economics for Starz programming, particularly after the Disney agreement expires.
- The outcome of Sirius XM shareholder litigation, related control matters and the treatment of its exchangeable notes after the January 2013 fundamental change.
- Whether reported 2012 earnings, which benefited materially from Sirius XM’s deferred-tax-asset recognition, are representative of ongoing earnings.