Liberty Global plc — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual report, not a standalone fourth-quarter filing. Liberty Global provides video, broadband, fixed-line telephony and mobile services across Europe, Latin America and the Caribbean. It acquired Cable & Wireless Communications (CWC) in May and Telenet acquired BASE in February. On December 31, Liberty Global contributed its Netherlands business to a 50:50 joint venture with Vodafone, VodafoneZiggo, and began accounting for the venture as an equity-method investment.
Financial and operating performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $20.009 billion | $18.280 billion |
| Operating income | $2.801 billion | $2.349 billion |
| Adjusted OIBDA | $9.248 billion | $8.667 billion |
| Net earnings (loss) from continuing operations | $1.767 billion | $(1.050) billion |
| Net cash from operating activities | $5.936 billion | $5.706 billion |
| Capital expenditures, cash-flow basis | $2.644 billion | $2.500 billion |
| Adjusted free cash flow | $2.041 billion | $2.519 billion |
| Debt and capital lease obligations | $43.559 billion | $46.749 billion |
| Cash and cash equivalents | $1.629 billion | $0.982 billion |
- Revenue rose 9.5% reported, but 2.6% organically, excluding foreign-exchange effects and acquisitions/dispositions. Acquisitions contributed substantially to reported growth. Organic broadband subscription revenue increased 6.6%; fixed-line telephony declined 1.6%, while mobile subscription revenue declined 1.2%.
- Adjusted OIBDA increased 6.7% reported and 3.1% organically. Its consolidated margin was approximately 46.2%, compared with 47.4% in 2015. Results include acquired businesses and the year’s changing business perimeter.
- FY net earnings included a $1.218 billion income-tax benefit, primarily from a $1.1 billion release of Dutch tax valuation allowances, and a $520.8 million pre-tax gain on the Dutch JV transaction. Quarterly data reports $2.223 billion of net earnings attributable to Liberty Global shareholders in Q4; the filing does not provide a clear standalone explanation of that quarter’s result beyond the full-year items.
- Operating cash flow increased, but adjusted free cash flow declined 19.0%, reflecting higher capital spending and payments on vendor/intermediary financing. Property and equipment additions were $5.207 billion, including vendor-financed and leased assets, versus cash-flow capital expenditures of $2.644 billion.
- At year-end, cash was $1.629 billion and current liabilities exceeded current assets. Management cited negative working capital but said it expected sufficient resources to repay or refinance near-term maturities and meet foreseeable liquidity needs over the next 12 months. A further $2.3 billion was received from the Dutch JV on January 4, 2017; the year-end balance sheet included a $2.347 billion receivable from the JV.
- Debt and capital leases totaled $43.559 billion; $38.5 billion was not due until 2021 or later. Management reported leverage of 4.8x debt and 4.6x net debt to annualized Q4 Adjusted OIBDA, or 4.3x net debt leverage after the Dutch JV cash receipt. The filing says borrowing groups were covenant-compliant at year-end.
Material changes and unusual items
- CWC contributed $1.445 billion of post-acquisition 2016 revenue and BASE contributed $597.1 million. Their results, along with acquisitions and foreign exchange, complicate year-over-year comparisons.
- The Netherlands business was deconsolidated at year-end; its results remain in the 2016 income statement, while its assets and liabilities were removed from the year-end consolidated balance sheet. Liberty Global retained a 50% equity-method interest.
- Impairment, restructuring and other operating items were $348.5 million, including $164.0 million of direct acquisition costs and $189.1 million of restructuring charges. Interest expense increased 8.1% to $2.638 billion; debt-modification and extinguishment losses were $237.2 million.
- Reported derivative gains were $845.1 million, while fair-value losses on certain investments and debt were $461.5 million and foreign-currency transaction losses were $290.0 million. These items are volatile and not a dependable source of recurring earnings.
- Liberty Global repurchased shares for $2.068 billion during 2016. It does not intend to pay cash dividends in the foreseeable future.
Outlook, management commentary and principal risks
- Management expects its Liberty GO program, planned through 2018, to produce consolidated organic revenue and Adjusted OIBDA growth meaningfully above recent rates, while acknowledging results depend on factors outside its control.
- For 2017, it expects to connect approximately 1.4 million additional homes and commercial premises in the Liberty Global Group and connect or upgrade approximately 450,000 in the LiLAC Group. Planned property and equipment additions are 29%–31% of revenue for the Liberty Global Group and 21%–23% for LiLAC; management cautions actual spending may vary.
- Key risks include intense competition and pricing pressure; rising programming costs; regulatory access and pricing requirements, particularly in Belgium; foreign-currency and interest-rate volatility; high leverage and refinancing needs; and the ability to realize acquisition synergies. The company also highlights Brexit uncertainty, Puerto Rico’s economic and government-debt pressures, and Hurricane Matthew’s damage to Bahamas networks. It estimated hurricane-related Q4 2016 revenue and Adjusted OIBDA reductions of $2 million and $4 million, respectively, and repair additions of up to $40 million.
- Goodwill associated with CWC was $5.5 billion. Management warned that a hypothetical decline of 20% or more in the fair value of any CWC reporting unit could trigger an impairment charge. Pending acquisitions in Belgium/Luxembourg and Poland remained subject to customary conditions and regulatory approval.
- Contingencies include Telenet litigation over the Belgian network-access arrangements, a claimed €1.4 billion in damages relating to the PICs acquisition, disputed UK VAT matters, and other tax, regulatory and legal proceedings. The filing states that loss is not considered probable for the specified UK VAT exposures and PICs matter; outcomes remain uncertain.
Important facts for investors to verify
- How much of FY 2016 earnings reflects the Dutch valuation-allowance release and Dutch JV gain, and what is the sustainable earnings and tax profile after the transaction?
- How should cash generation be assessed given the gap between $2.644 billion of cash capital expenditures and $5.207 billion of total property and equipment additions, and the decline in adjusted free cash flow?
- What cash is practically available to the parent, given subsidiary debt restrictions, noncontrolling interests and foreign-exchange limits, and how will debt maturities be refinanced?
- Are CWC and BASE meeting integration and return expectations, and what evidence supports the carrying value of CWC goodwill?
- What are the eventual costs and competitive effects of Belgian network-access regulation, outstanding tax matters, the Bahamas recovery, and the pending acquisitions?