Liberty Global plc — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. The filing is by Liberty Global plc, an international video, broadband, fixed-line and mobile services provider operating in 14 countries. Unless noted, amounts are U.S. dollars.
Key financial metrics
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $4,566.5 million | $4,602.2 million | $9,083.4 million | $9,135.9 million |
| Operating income | $624.9 million | $669.5 million | $1,182.4 million | $1,251.2 million |
| Net loss attributable to Liberty Global shareholders | $464.7 million | $249.9 million | $1,002.2 million | $328.7 million |
| Loss per share, basic and diluted | $0.53 | $0.32 | $1.13 | $0.42 |
| Segment Adjusted OIBDA | $2,185.0 million | $2,144.9 million | $4,282.3 million | $4,272.4 million |
| Adjusted OIBDA margin | 47.9% | 46.6% | 47.1% | 46.8% |
Cash flow, six months: Operating cash flow was $2,685.8 million, compared with $2,916.7 million in 2014. Investing cash outflow was $1,692.1 million (2014: $456.6 million); financing cash outflow was $1,332.5 million (2014: $4,059.9 million). Cash declined $339.0 million to $819.5 million. Company-defined free cash flow was $922.3 million, down from $1,052.8 million.
Balance sheet and liquidity: Total assets were $69,993.7 million and total liabilities $57,520.5 million at June 30. Cash was $819.5 million versus $1,158.5 million at year-end 2014. Debt and capital lease obligations totaled approximately $46.1 billion, including $1.6 billion classified as current; $42.7 billion was not due until 2020 or later. Management reported debt/annualized Adjusted OIBDA leverage of 5.0x and net leverage of 4.9x. Current assets of $3,251.7 million were below current liabilities of $8,033.7 million; management nevertheless said it expected to meet or refinance current obligations and fund foreseeable needs over the next 12 months. Subsidiary debt restrictions limit access to some cash and borrowing capacity.
Capital spending and debt costs: Cash capital expenditures were $1,262.4 million for the half year, while total property and equipment additions, including vendor financing and leases, were $1,965.5 million. Interest expense was $1,216.7 million for the half year, down from $1,295.3 million. Losses on debt modification and extinguishment increased to $348.3 million from $73.9 million, largely reflecting refinancing premiums and write-offs.
Material changes versus prior comparable periods
- Reported revenue declined 0.8% in Q2 and 0.6% for the half year, while organic revenue increased 3.5% and 3.2%, respectively. Currency translation and acquisitions materially affected reported comparisons.
- Organic broadband subscription revenue grew 9.8% in Q2 and 9.9% for the half year; video and fixed-line telephony faced subscriber or revenue pressure. Organic RGU additions slowed to 138,300 in Q2 and 206,700 for the half year, versus 238,800 and 583,900 a year earlier.
- Adjusted OIBDA rose 1.9% in Q2 and 0.2% for the half year; organic Adjusted OIBDA growth was 5.1% and 2.7%. Segment performance benefited from organic growth, though the Netherlands saw organic declines and margin pressure.
- Net loss attributable to shareholders widened, reflecting lower operating income, a $130.0 million Q2 income tax expense versus a small benefit in 2014, and volatile non-operating items. Q2 derivative losses were $679.7 million, compared with $328.6 million in 2014; half-year derivative losses were lower year over year, at $61.2 million versus $705.2 million.
- Share repurchases totaled $935.8 million in the first half, for 18.7 million Class C shares. The remaining authorization was $3,002.8 million.
Outlook, management commentary, risks and unusual items
- Management’s Liberty 3.0 program focuses on customer experience, operating-model efficiency and capital optimization. Management expects the program over several years to support higher organic revenue and Adjusted OIBDA growth, but gave no specific revenue or earnings forecast.
- Management expected 2015 property and equipment additions to equal 21%–23% of consolidated revenue. It also expected additional restructuring charges in 2015 related to Ziggo integration.
- Virgin Media anticipated a meaningful increase in programming costs from August 2015 and expected to pass on a substantial portion through a September rate increase; the filing cautions that this may not be achieved.
- On July 1, 2015, the company completed the LiLAC tracking-share transaction, distributing LiLAC shares to holders of the corresponding Liberty Global share classes. The groups remain part of one legal company; their assets and liabilities are not legally segregated. The filing warns that board discretion over reattributions, group funding and the tracking-share structure can create conflicts and affect investor valuation.
- Telenet agreed to acquire Belgian mobile operator BASE for approximately $1.48 billion, subject to regulatory and other closing conditions, with completion expected by March 2016. If competition authorities do not approve the deal, a $111.5 million termination fee may be payable. Liberty Puerto Rico acquired Choice Cable TV in June for $276.1 million.
- Material exposures include intense competition, foreign-exchange and interest-rate volatility, substantial leverage and refinancing needs, and regulatory risks. Belgium network-access requirements could pressure Telenet; German video carriage contracts and bulk agreements also require monitoring. Virgin Media disclosed unaccrued VAT exposures of up to approximately $68 million and a potential separate prompt-payment-discount challenge of up to approximately $102 million, before penalties and interest.
- Other contingencies include tax audits and legal proceedings. Unrecognized tax benefits were $561.6 million; resolution of audits and statute expirations could reduce that balance by up to $250 million over the next 12 months. The filing states that outcomes and timing remain uncertain.
- Unusual items include the 2015 refinancing-related charges noted above and $31.3 million of restructuring charges for the first half. The 2014 comparison included an $86.1 million charge related to Telenet’s discontinued digital terrestrial television business. The 2014 half-year also included a $332.7 million after-tax disposal gain from Chellomedia, which had no corresponding 2015 amount.
Important facts for investors to verify
- Whether organic subscriber, revenue and Adjusted OIBDA trends persist, especially in the Netherlands and in video and fixed-line services.
- Whether leverage, refinancing and subsidiary cash-access restrictions remain manageable, and whether management’s 12-month liquidity assessment holds.
- Whether the BASE acquisition closes on expected terms and whether integration of Ziggo, Choice and other acquired operations delivers anticipated benefits.
- The realized impact of Virgin Media’s programming-cost increases and the effectiveness of planned rate increases.
- Developments in Belgian access regulation, Virgin Media VAT matters, tax examinations and other material legal contingencies.
- The economic, voting, liquidity and allocation implications of the LiLAC tracking shares, including the board’s ability to reattribute assets and liabilities.