Liberty Media Corporation — 2017 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2017, filed February 28, 2018. Liberty operates through three tracking-stock groups: Liberty SiriusXM, Braves and Formula One. The principal businesses are Sirius XM Holdings, Formula 1, Braves Holdings and an equity-method investment in Live Nation. The tracking-stock groups are not separate legal entities; investors remain stockholders of Liberty as a whole and do not directly own the underlying businesses.
- Liberty owned approximately 70% of Sirius XM economically at year-end.
- Liberty acquired control of Formula 1 on January 23, 2017 and began consolidating it from that date.
- The Braves relocated to SunTrust Park for the 2017 season and continued development of The Battery Atlanta mixed-use project.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $7.594 billion | $5.276 billion | +44% |
| Operating income | $1.394 billion | $1.734 billion | -20% |
| Net earnings | $1.890 billion | $924 million | +105% |
| Net earnings attributable to Liberty stockholders | $1.354 billion | $680 million | +99% |
| Adjusted OIBDA | $2.493 billion | $1.773 billion | +41% |
| Cash flow from operating activities | $1.732 billion | $2.171 billion | -20% |
| Cash and cash equivalents | $1.029 billion | $562 million | +$467 million |
| Total debt, principal amount | $13.810 billion | $8.018 billion | +$5.792 billion |
Consolidated operating margin was approximately 18.4% in 2017 versus 32.9% in 2016. The decline primarily reflects the 2016 $511 million net Vivendi lawsuit settlement gain and the inclusion of Formula 1 acquisition-related depreciation and amortization. Adjusted OIBDA margin was approximately 32.8% in 2017 versus 33.6% in 2016.
- Sirius XM: Revenue was $5.425 billion, up from $5.014 billion; Adjusted OIBDA was $2.109 billion, up from $1.853 billion; operating income was $1.588 billion, up from $1.386 billion. Sirius XM had approximately 32.7 million subscribers, including 27.5 million self-pay subscribers, and generated $1.849 billion of operating cash flow.
- Formula 1: Reported revenue was $1.783 billion and Adjusted OIBDA was $438 million for the period consolidated. Pro forma full-year revenue was $1.784 billion versus $1.796 billion in 2016, and pro forma Adjusted OIBDA was $438 million versus $450 million. Pro forma operating income was a loss of $37 million versus income of $47 million, primarily because of higher acquisition-related amortization.
- Braves Holdings: Revenue was $386 million versus $262 million. Adjusted OIBDA was $7 million versus a $16 million loss, while operating loss widened to $106 million from $57 million because of higher stadium, player, development and depreciation costs.
- Equity affiliates: Liberty recorded $104 million of share of affiliate earnings versus $14 million in 2016. The 2017 amount included a $69 million gain recognized through a Braves-related equity affiliate. Live Nation contributed a $18 million loss to Liberty’s equity-method earnings.
Cash flow, debt and liquidity
- Operating cash flow declined to $1.732 billion, principally because 2016 benefited from stronger working-capital movements and Formula 1 was consolidated for only part of 2017.
- Investing cash flow was negative $3.137 billion, including $1.647 billion of net cash paid for Formula 1, $862 million of investments in and loans to investees, and $517 million of capital expenditures.
- Financing cash flow was positive $1.868 billion, including $6.697 billion of borrowings, $1.938 billion from issuance of Series C Liberty Formula One stock and $5.107 billion of debt repayments.
- Corporate-level debt was approximately $3.0 billion, including the $750 million SiriusXM margin loan, $1.0 billion of 1.375% cash convertible notes, $450 million of 1% cash convertible notes, $445 million of exchangeable debentures and $350 million drawn under the Live Nation margin loan.
- Sirius XM had approximately $6.8 billion of debt principal outstanding, including $300 million drawn under a $1.75 billion revolving credit facility, leaving approximately $1.45 billion of facility availability.
- Formula 1 had approximately $3.3 billion outstanding under its senior loan facility and fully repaid its second-lien facility during 2017. The senior facility was refinanced in January 2018, reducing outstanding debt to $2.9 billion.
- Braves Holdings had $667 million of debt and $98 million drawn under operating credit facilities at year-end. The Braves and affiliated entities continued funding the stadium and mixed-use development.
- Liquidity attributed to the groups totaled approximately $1.029 billion of cash, plus $368 million of Formula One Group fair-value-option securities and $150 million of available borrowing capacity under the Live Nation margin loan. Access to subsidiary cash is restricted by noncontrolling interests, debt covenants and separate-company structures.
Material changes versus the prior comparable period
- Formula 1 became a consolidated business, adding $1.783 billion of reported revenue, $438 million of Adjusted OIBDA and substantial debt and amortizable intangible assets.
- Consolidated assets increased to $41.996 billion from $31.377 billion, while long-term debt increased to $13.954 billion from $8.018 billion.
- Sirius XM revenue and Adjusted OIBDA grew 8% and 14%, respectively, supported by subscriber growth, pricing, Sirius XM Canada agreements and connected-vehicle services.
- Braves revenue increased 47%, primarily from the new SunTrust Park, higher attendance and ticket pricing, concessions and development-project revenue, but costs and depreciation increased materially.
- Operating income decreased despite higher revenue because 2016 included the $511 million Vivendi settlement gain and 2017 included significantly higher amortization, interest expense and stock-based compensation.
- Net earnings benefited from a $1.063 billion income-tax benefit, principally from the Tax Cuts and Jobs Act rate reduction, Formula 1 tax settlements and changes in the recoverability of U.K. tax losses.
- Sirius XM invested $480 million in Pandora preferred stock, acquired Automatic Labs for approximately $108 million and completed a Sirius XM Canada recapitalization.
Guidance, outlook, commentary and unusual items
- Management expected Sirius XM to continue funding operations, capital expenditures, replacement satellites, legal settlements, debt service and dividends from operating cash flow, cash on hand and its credit facility.
- Sirius XM planned new digital products, including a redesigned Internet-radio application and the 360L in-vehicle interface in 2018.
- Formula 1’s strategy focused on expanding the event calendar, increasing sponsorship and digital monetization, and improving fan engagement and viewership. No formal consolidated earnings guidance is provided in the filing text.
- The Copyright Royalty Board set Sirius XM’s satellite sound-recording royalty rate at 15.5% of applicable gross revenue for 2018–2022, versus 11.0% in 2017, creating a significant prospective cost increase.
- Sirius XM recorded $45 million of fourth-quarter music-royalty legal settlements and reserves in 2017, excluded from Adjusted OIBDA. Sirius XM also recognized $43 million of ongoing pre-1972 recording royalty expense.
- The filing identifies SoundExchange litigation alleging royalty underpayments, including claims for $50 million to $100 million or more in one action and unspecified damages in a second action. Sirius XM assessed an incremental loss beyond recorded liabilities as remote at year-end, but actual losses may differ.
- A TCPA class action alleges unlawful telemarketing practices by Sirius XM. Formula 1 also disclosed a U.K. Serious Fraud Office pre-investigation inquiry regarding the 2013 Concorde Implementation Agreement.
- Liberty expects no cash dividends on its tracking stocks for the foreseeable future. The company had $1.3 billion remaining under its share-repurchase authorization and made no Liberty tracking-stock repurchases in the fourth quarter.
Most important facts an investor should verify
- Reconcile reported results with the Formula 1 acquisition date; 2017 consolidated Formula 1 results cover less than a full year, while pro forma figures are unaudited and illustrative.
- Assess debt maturities, refinancing needs and collateral requirements, particularly the $750 million margin loan due in 2018 and Formula 1’s highly leveraged capital structure.
- Quantify the effect of Sirius XM’s 15.5% sound-recording royalty rate on future margins and free cash flow.
- Review the ultimate exposure from SoundExchange, TCPA and other legal or regulatory matters.
- Evaluate the sustainability of the $1.063 billion 2017 tax benefit; it was largely nonrecurring and materially affected net earnings.
- Consider Braves Holdings’ remaining stadium, Battery Atlanta and spring-training capital requirements, debt covenants and ability to generate expected development returns.
- Account for the 30% Sirius XM noncontrolling interest when assessing cash available to Liberty stockholders.
- Understand the structural risks of the tracking stocks: no direct ownership of attributed assets, shared parent-level liabilities, limited separate voting rights and the board’s ability to reattribute assets among groups.
- Note that management’s internal-control assessment excluded Delta Topco, which contributed $9.461 billion of assets and $1.783 billion of 2017 revenue; the auditors nevertheless issued an unqualified opinion on Liberty’s consolidated financial statements and internal control over financial reporting.