Liberty Global plc — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The company provides video, broadband internet, fixed-line telephony and mobile services across 14 countries. Comparisons are affected by the June 2013 Virgin Media acquisition; the filing presents Chellomedia as a discontinued operation after its sale in January 2014. Unless noted, amounts are U.S. dollars.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $4.50 billion | $4.28 billion | $13.63 billion | $10.01 billion |
| Operating income | $703.7 million | $521.2 million | $1.95 billion | $1.49 billion |
| Continuing-operations earnings (loss) | $175.7 million | $(810.8) million | $(478.3) million | $(777.8) million |
| Net earnings (loss) attributable to Liberty Global shareholders | $157.1 million | $(830.1) million | $(171.6) million | $(842.7) million |
| Cash from continuing operating activities | Not stated for quarter | Not stated for quarter | $4.07 billion | $2.45 billion |
| Free cash flow | Not stated for quarter | Not stated for quarter | $1.34 billion | $402.3 million |
Q3 diluted earnings per share were $0.20, versus a loss of $1.04 per share. The nine-month loss per share was $0.21, versus a loss of $1.33. Nine-month 2014 results included a $332.7 million after-tax gain on the Chellomedia sale; continuing operations remained loss-making.
Q3 revenue increased 5.2% as reported and 2.8% excluding acquisitions and foreign-exchange effects. Nine-month revenue rose 36.2% as reported, largely reflecting Virgin Media; organic growth was 3.7%, or 3.2% excluding Virgin Media’s organic contribution. Q3 operating income margin was approximately 15.6%, compared with 12.2% a year earlier.
Segment operating cash flow, a company-defined non-GAAP measure, was $2.11 billion in Q3 and $6.38 billion for the nine months. The corresponding Q3 consolidated operating cash flow margin was approximately 47%. Nine-month capital expenditures were $2.05 billion; property and equipment additions, including vendor-financed and leased assets, were $2.79 billion.
Financial position and liquidity
- At September 30, cash and cash equivalents were $954.9 million, down from $2.70 billion at year-end 2013. Current liabilities exceeded current assets.
- Total debt and capital lease obligations were $41.13 billion, including $39.48 billion of debt. Debt and lease obligations due within one year were $1.67 billion; $37.5 billion was not due until 2019 or later. The reported weighted-average debt interest rate was 5.48%; including derivatives and other specified effects, the company reported 6.5%.
- Management reported debt and net-debt leverage of 4.6x and 4.5x, respectively, against an intended debt range of four to five times quarterly annualized operating cash flow. All borrowing groups were in covenant compliance.
- Only $477.7 million of cash was held by Liberty Global and unrestricted subsidiaries and identified as available at the corporate level, subject to tax and legal considerations; the rest was held within borrowing groups and may be restricted. Management said it believed resources were sufficient for foreseeable needs and current maturities over the next 12 months, while noting refinancing and market-access risks.
- Nine-month financing cash flow was a $3.68 billion use, including $6.85 billion of debt repayments and share repurchases, partly offset by $4.46 billion of borrowings. The company repurchased $949.9 million of its shares during the nine months.
Material changes and management commentary
- Organic Q3 growth was led by broadband internet subscription revenue, up 12.5%; mobile subscription revenue rose 9.6%. Video subscription revenue declined 1.0% organically, while other revenue fell 12.0% organically. Management cited broadband and fixed-line customer growth, pricing and customer mix, offset by video declines and lower interconnect, installation and handset revenue.
- Q3 operating cash flow increased 6.1% as reported and 4.3% organically. For the nine months, it rose 36.1% as reported and 7.3% organically; excluding Virgin Media’s contribution, organic growth was 5.2%.
- Nine-month operating cash flow benefited from the larger consolidated business, while operating cash generation also funded higher interest payments and capital investment. Free cash flow improved year over year, but remains a company-defined measure and excludes certain financing and contractual obligations.
- Non-operating results were volatile: Q3 included a $527.9 million derivative gain and $375.8 million foreign-currency transaction loss; nine-month results included derivative losses of $177.3 million and foreign-currency losses of $433.0 million. Management cautioned such gains and losses are not reliable recurring income sources.
- During the nine months, restructuring and other operating items included an $86.1 million charge for Telenet’s discontinued digital terrestrial TV capacity contracts. Q3 operating costs also benefited from a $39.1 million U.K. local-authority charge reduction, of which $33.5 million related to prior periods.
- No quantified consolidated earnings or revenue guidance is provided in the supplied filing text. Management highlighted competitive pressure, particularly in the Netherlands, and anticipated higher programming costs, inflationary pressures and foreign-exchange exposure. It also cited planned VAT increases in 2015 that could raise annual payments by approximately $49–$57 million for Virgin Media and $15–$18 million for UPC DTH.
Transactions, risks and contingencies
- After quarter-end, the Ziggo offer was declared unconditional on November 5, 2014. Tendered shares plus Liberty Global’s existing holding represented approximately 87.9% of Ziggo. European Commission clearance included a commitment to divest the Film1 channel and specified Dutch network and content-access commitments.
- Other post-quarter refinancing included Virgin Media notes used to redeem higher-coupon 2019 notes, and Unitymedia KabelBW’s issuance of $900 million of 2025 notes to redeem higher-coupon 2019 notes.
- Key exposures include Belgian competition and resale-access regulation, German regulatory appeals concerning the Kabel BW acquisition, Dutch resale regulation, a Chilean interconnection-tariff proposal with potential retroactive credits of about $11.2 million, and a U.K. VAT dispute with estimated maximum exposure of about $63.7 million that was not accrued because loss was not considered probable.
- The company disclosed ongoing tax audits and $478.2 million of unrecognized tax benefits. It said resolutions or statute expirations could reduce those benefits by up to $230 million over the following 12 months.
- Programming, network, purchase, lease and other commitments totaled $8.05 billion, excluding debt and capital leases. The filing cautions that minimum programming commitments understate expected payments and do not include contractual inflation or other price adjustments.
Investor verification priorities
- Separate organic operating trends from acquisition, currency and discontinued-operation effects, particularly for Virgin Media and the nine-month comparisons.
- Assess the quality and recurrence of earnings, including the Chellomedia disposal gain, derivative and foreign-currency volatility, tax valuation allowances, and the U.K. cost-reduction benefit.
- Verify corporate-accessible liquidity versus cash held in borrowing groups, upcoming maturities, subsidiary distribution restrictions, and the company’s ability to refinance while maintaining covenant compliance.
- Monitor completion and integration of the Ziggo acquisition, associated financing needs, and compliance with European Commission commitments.
- Track competitive and regulatory developments in the Netherlands, Belgium, Germany and Chile, as well as programming-cost inflation and the disclosed tax and legal contingencies.