Liberty Global plc — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial statements are unaudited. Liberty Global provides video, broadband, fixed-line, mobile and business communications services across Europe, Latin America and the Caribbean. Comparability with 2015 is affected by the CWC and BASE acquisitions and, for some comparisons, the Choice acquisition.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5,207.2m | $4,597.4m | $14,869.3m | $13,680.8m |
| Adjusted OIBDA | $2,414.6m | $2,191.9m | $6,835.8m | $6,474.2m |
| Operating income | $902.7m | $545.5m | $1,977.1m | $1,727.9m |
| Net earnings (loss) | $(205.1)m | $140.6m | $(468.7)m | $(791.0)m |
| Net earnings (loss) attributable to Liberty Global shareholders | $(249.5)m | $133.3m | $(517.2)m | $(868.9)m |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $4,041.5m | $4,159.3m |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $1,945.0m | $1,851.5m |
| Adjusted free cash flow | Not presented quarterly | Not presented quarterly | $915.1m | $1,692.6m |
- Revenue rose 13.3% in Q3 and 8.7% year to date as reported; organic growth excluding acquisitions, dispositions and foreign exchange was 2.4% and 2.7%, respectively. Acquisitions added an estimated $745.2m to Q3 and $1,349.1m to nine-month revenue.
- Adjusted OIBDA increased 10.2% in Q3 and 5.6% year to date as reported; organic growth was 3.7% and 2.7%. Calculated consolidated Adjusted OIBDA margins were approximately 46.4% in Q3 versus 47.7%, and 46.0% year to date versus 47.3%.
- Operating income improved, but Q3 turned to a net loss. Non-operating expense was $998.3m for the quarter, including a $436.4m derivative loss and $64.8m debt modification/extinguishment loss. Nine-month net loss narrowed year over year, partly reflecting lower non-operating expense.
- Nine-month operating cash flow declined $117.8m, which management attributed principally to higher interest and tax payments, partly offset by derivative receipts and acquired CWC cash generation. Adjusted free cash flow fell to $915.1m from $1,692.6m; it deducts vendor/intermediary financing repayments and certain lease principal payments and is a non-GAAP measure.
- Nine-month total property and equipment additions were $3,474.6m, including $1,439.3m financed through vendor arrangements and $78.0m through capital leases. Cash capital expenditures were $1,945.0m.
Debt, liquidity and balance sheet
- At September 30, cash and cash equivalents were $977.1m. Current assets were $3,924.6m and current liabilities $8,636.6m, a working-capital deficit of approximately $4.7bn.
- Debt and capital lease obligations had a carrying amount of $43,947.5m, including $2,155.4m current and $41,792.1m long-term. Management reported approximately $44.2bn of principal debt and lease obligations; $39.5bn was not due until 2021 or later.
- Debt figures and leverage require care: Dutch JV entity assets and liabilities were classified as held for sale, and the company’s leverage calculation excludes that debt and related OIBDA. On that basis, quarter-end debt/annualized Adjusted OIBDA was 5.0x and net debt/Adjusted OIBDA was 4.8x. Borrowing groups were reported in covenant compliance.
- Only $500.0m of cash was identified as held by Liberty Global and unrestricted subsidiaries and available at the corporate level, subject to tax and legal considerations; $477.1m was held within borrowing groups, where access may be restricted. Management said it expected sufficient resources to refinance or repay current maturities and meet foreseeable needs for the next 12 months, while noting future refinancing is not assured.
Material changes, outlook and risks
- Acquisitions and joint venture: Liberty Global acquired CWC in May 2016 for consideration valued at $4.68bn and acquired Belgian mobile operator BASE in February for $1.50bn. The CWC purchase-price allocation remained preliminary. A 50:50 Dutch joint venture with Vodafone was expected to combine Ziggo and Vodafone’s Netherlands mobile business; regulatory approval was conditional, and closing was anticipated around year-end 2016. Liberty Global expected an approximately €1.0bn equalization payment, subject to adjustments, and to account for its interest under the equity method.
- Capital spending outlook: Management expected 2016 property and equipment additions, as a percentage of revenue, of 25%–27% consolidated, excluding Ziggo Group Holding and including BASE and CWC. It cautioned actual spending could vary. It also expected significant restructuring charges over the next 12 months as it optimized operations and integrated acquired businesses.
- Operating trends: Organic broadband and video subscription revenue grew, while fixed-line telephony and mobile subscription revenue declined on an organic basis. Management cited competitive pressure, market maturity and subscriber or ARPU declines in several markets, particularly the Netherlands, Switzerland and parts of the Caribbean. Programming and copyright costs rose and were expected to continue increasing.
- Subsequent events: Hurricane Matthew damaged networks in the Bahamas in October. Preliminary estimates indicated Q4 2016 revenue and Adjusted OIBDA impacts of $8m–$10m and $8m–$12m, respectively, and network repair additions of $35m–$45m. Insurance was expected to cover a significant portion, but recovery amount and timing were uncertain. In October, UPC Poland agreed to acquire Multimedia Polska for PLN 3.0bn ($783.6m) enterprise value, subject to conditions and regulatory approval.
- Financial and legal exposures: Foreign-exchange and interest-rate movements create earnings volatility; 96% of total debt was effectively fixed-rate at quarter-end through derivatives. Brexit-related uncertainty and sterling weakness could affect results. Tax audits and unresolved VAT matters remain; potential Virgin Media exposures included £46.4m for one VAT dispute and £67.0m already paid in another disputed matter. Telenet faced a €1.4bn damages claim tied to its Interkabel acquisition, which it intended to contest; no loss was accrued because loss was not considered probable. Belgian network-access regulation and proposed UK/Ireland network charge increases also pose risks.
- Other unusual items included a $69.8m share of the Vivendi litigation settlement recorded in nine-month other income, and $142.3m of nine-month acquisition costs within impairment, restructuring and other operating items. The company warned that future goodwill or long-lived-asset impairment charges could be significant if performance or market conditions deteriorate.
Most important facts for investors to verify
- Organic growth, margins and cash generation apart from acquisition and foreign-exchange effects, especially the decline in adjusted free cash flow.
- Debt and covenant calculations, including the treatment of Ziggo’s held-for-sale debt, restricted subsidiary cash, upcoming maturities and the company’s reliance on refinancing.
- Completion economics and timing of the Vodafone Dutch JV, including the equalization payment, debt arrangements and proceeds distribution.
- Integration progress and final purchase accounting for CWC and BASE, and the regulatory and closing conditions for the proposed Multimedia acquisition.
- Actual Bahamas storm losses and insurance recoveries, and developments in material tax, litigation and network-access matters.