Liberty Global plc — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Liberty Global provides communications services in Europe, including video, broadband, fixed-line telephony and mobile. Results are presented for continuing operations unless noted; Austria and the businesses covered by the Vodafone sale agreement are classified as discontinued operations. Comparative results may also be affected by the 2017 LiLAC split-off, acquisitions, foreign exchange and the 2018 revenue-accounting change.
Key financial results
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue, continuing operations | $3,045.1 million | $2,774.9 million | $6,139.6 million | $5,444.7 million |
| Operating income | $263.9 million | $208.9 million | $384.3 million | $425.4 million |
| Adjusted OIBDA, continuing operations | $1,309.8 million | $1,195.4 million | $2,581.6 million | $2,301.8 million |
| Earnings (loss) from continuing operations | $668.7 million | $(761.3) million | $(696.3) million | $(1,126.8) million |
| Net earnings (loss) attributable to Liberty Global shareholders, including discontinued operations | $912.6 million | $(674.3) million | $(273.9) million | $(994.5) million |
| Continuing-operations diluted EPS attributable to shareholders | $0.80 | $(0.90) | $(0.93) | $(1.34) |
Q2 revenue rose 9.9% as reported; management cited 2.8% organic growth. For the first half, reported revenue increased 12.9% and organic growth was 2.7%. Reported growth includes substantial foreign-exchange effects. Revenue growth was led by broadband, mobile handset sales and B2B; organic residential cable subscription revenue was broadly flat, with video and fixed-line telephony declines offsetting broadband gains.
Q2 Adjusted OIBDA increased 10.3% as reported and 3.2% organically; first-half growth was 12.8% reported and 2.5% organic. Segment margins were mixed: Q2 U.K./Ireland 44.0% (44.8% prior year), Belgium 50.9% (46.2%), Switzerland 56.9% (62.7%) and Central and Eastern Europe 44.4% (45.6%).
Cash flow, debt and liquidity
- Cash flow: First-half operating cash flow from continuing operations was $2,142.9 million, up from $1,558.4 million. Net capital expenditures were $797.8 million, versus $588.0 million. Adjusted free cash flow was negative $1,127.9 million, compared with negative $432.6 million, reflecting substantial payments on vendor- and intermediary-financed amounts.
- Cash and working capital: Cash and cash equivalents were $862.4 million at June 30, down from $1,672.4 million at year-end. Total current assets were $3,571.5 million against current liabilities of $9,984.9 million; management reported a negative working-capital position but said it expected to meet foreseeable requirements over the next 12 months.
- Debt: Debt and capital lease obligations totaled $31,818.5 million, including $3,392.6 million current. The weighted average stated rate on debt was 4.48%; the reported aggregate rate including specified derivative effects and other items was 3.98%. Management’s leverage ratios, which include continuing and discontinued operations, were 5.0x debt and 4.9x net debt to annualized quarterly Adjusted OIBDA. All borrowing groups were in covenant compliance at June 30.
- Liquidity access: $670.6 million of cash was held by Liberty Global and unrestricted subsidiaries, subject to tax and legal considerations; $191.8 million was held in borrowing groups. Reported unused facility capacity was approximately $2.6 billion, subject to facility terms and restrictions.
Material changes, outlook and risks
- Q2 continuing earnings improved sharply year over year, but results were heavily affected by non-operating volatility. Derivative gains were $675.5 million in Q2 2018 versus losses of $351.7 million in Q2 2017; first-half derivative gains were $464.2 million versus losses of $596.1 million. Management cautions these fair-value movements are volatile and not a dependable source of income.
- First-half income tax expense was $617.2 million, including the estimated effect of the U.S. Mandatory Repatriation Tax. The company estimated that tax liability at $289.6 million at June 30; its calculation remained subject to refinement. Q2 recorded an income tax benefit of $92.8 million.
- On May 9, 2018, Liberty Global agreed to sell Germany, Romania, Hungary and the Czech Republic to Vodafone. Based on December 2017 net debt and working capital, estimated cash proceeds were approximately €10.6 billion; closing was subject to regulatory approval and was not expected until mid-2019. If antitrust approval fails and the agreement terminates on that basis, Vodafone agreed to a €250 million compensatory payment. Liberty Global would retain cash generated by these businesses through closing.
- The sale of UPC Austria closed July 31, 2018. Liberty Global received net proceeds of approximately €1.8 billion ($2.1 billion at the transaction-date exchange rate); approximately $1.5 billion was used to repay or redeem debt. The company said remaining proceeds could support general corporate purposes, including an additional $500 million of share repurchases. The board authorized that additional buyback on July 31.
- During the first half, Liberty Global repurchased shares for $1,288.3 million. Remaining authorization at June 30 was $783.9 million, before the additional authorization noted above.
- Competition remains significant, particularly in Switzerland and Belgium; management reported pressure on subscriber units and/or average revenue per user in those markets. The VodafoneZiggo joint venture also reported competitive mobile pricing pressure and a first-half net loss of $238.1 million. Liberty Global recorded $118.8 million of share losses of affiliates for the first half and warned that impairment of its investment could be significant.
- Belgian regulators’ June 2018 decision requires Telenet to offer third-party access to parts of its network and set interim wholesale resale prices 17% lower from August 1, 2018; Telenet intended to challenge the decision. Other disclosed risks include programming-cost inflation, foreign exchange and interest rates, Brexit uncertainty, regulatory changes, and possible future goodwill or asset impairment.
- No specific consolidated earnings or revenue guidance is provided in the supplied filing text. Management stated it expects to refinance or extend maturities as debt comes due and believes resources are sufficient for the next 12 months, while noting that refinancing access and terms are not assured.
Important facts for investors to verify
- Regulatory progress, closing conditions, expected proceeds and any termination outcome for the Vodafone transaction.
- Use of UPC Austria proceeds, including debt reductions and the additional share-repurchase authorization.
- Organic revenue and Adjusted OIBDA trends by market, especially subscriber and ARPU trends in Belgium and Switzerland.
- Cash conversion and adjusted free cash flow, including vendor/intermediary financing repayments and capital spending.
- Debt maturities, refinancing capacity, leverage and access to cash held by subsidiaries.
- Final U.S. repatriation-tax calculations, tax examinations and the status of material legal and regulatory contingencies.
- VodafoneZiggo performance, competitive pressures and any impairment assessment of the joint-venture investment.