Liberty Global plc — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are included where disclosed. Liberty Global provided video, broadband, fixed-line telephony and, in many markets, mobile services across 14 countries, serving approximately 27.5 million customer relationships.
Key financial results and liquidity
| Metric | 2015 | 2014 | Change or context |
|---|---|---|---|
| Revenue | $18.280 billion | $18.248 billion | Up 0.2% reported; up 3.6% organically, excluding foreign exchange and acquisition/disposition effects. |
| Operating income | $2.349 billion | $2.228 billion | Up approximately 5.4%. |
| Adjusted OIBDA | $8.667 billion | $8.522 billion | Up 1.7% reported and 4.3% organically; approximately 47.4% of 2015 revenue. This is a non-GAAP measure. |
| Loss from continuing operations | $(1.050) billion | $(0.981) billion | Loss widened; 2015 included income tax expense of $364.9 million versus a $75.0 million tax benefit in 2014. |
| Net cash from operating activities | $5.706 billion | $5.613 billion | Up $93.0 million. |
| Cash capital expenditures | $2.500 billion | $2.684 billion | Property and equipment additions, including vendor financing and capital leases, were $4.137 billion. |
| Free cash flow | $2.519 billion | $2.172 billion | Company-defined non-GAAP measure; rose $346.8 million. |
| Debt and capital lease obligations | $47.057 billion | $46.159 billion | $2.538 billion classified as current; $42.0 billion not due until 2021 or later. |
| Cash and cash equivalents | $982 million | $1.159 billion | Most year-end cash was held within subsidiary borrowing groups and may not be freely accessible to the parent. |
Management reported leverage of 4.9x consolidated debt and 4.8x net debt to annualized fourth-quarter Adjusted OIBDA, calculated using the company’s specified covenant methodology. Borrowing groups were in compliance with debt covenants at year-end. The company reported negative working capital but said it expected to repay or refinance current obligations and fund foreseeable liquidity needs over the next 12 months.
For the fourth quarter, revenue was $4.599 billion versus $4.615 billion in 2014; operating income was $621.3 million versus $273.3 million; and net loss attributable to Liberty Global shareholders was $283.6 million versus $523.4 million.
Business and material changes versus prior periods
- Organic revenue growth was led by broadband internet subscription revenue, up 9.4%, and B2B revenue, up 6.4%. Video revenue was broadly flat organically, while fixed-line telephony revenue declined 0.8% organically.
- Organic growth in total revenue and Adjusted OIBDA was 3.6% and 4.3%, respectively, but reported revenue growth was limited by foreign exchange. Currency translation and transaction effects were material; foreign-currency transaction losses were $1.149 billion.
- The company added 869,900 RGUs organically, compared with 1,278,900 in 2014. Broadband internet additions and fixed-line telephony growth were offset in part by declines in basic video subscribers. Total year-end RGUs were 57.0 million, and mobile subscribers were 4.8 million.
- Acquisitions affected comparability: the Netherlands included the full-year impact of Ziggo, acquired in November 2014; Puerto Rico included Choice, acquired in June 2015. Reported results also reflected substantial adverse foreign-exchange translation.
- The LiLAC tracking shares were created on July 1, 2015 for the Latin America and Caribbean businesses. They are shares of the same parent company, not shares in a separate legal entity or a direct claim on the attributed businesses’ assets.
- Liberty Global repurchased 49.98 million Class C shares during 2015 for $2.345 billion. The board increased the remaining repurchase authorization to $4.0 billion after year-end. The company said it did not intend to pay cash dividends for the foreseeable future.
Outlook, management commentary, risks and unusual items
- Strategy and outlook: Liberty 3.0 is intended to drive growth through network extensions, mobile and business services, and operating efficiencies. Management expects the program, if successfully implemented, to produce meaningfully higher consolidated organic revenue and Adjusted OIBDA growth beginning in 2017. This is an expectation, not a guarantee.
- Network investment: Planned extensions could connect up to four million additional premises in the U.K. and six million in other markets through 2019. Management estimated property and equipment additions at 25%–27% of revenue in 2016, excluding BASE and CWC, and 25%–28% over 2016–2018. Actual spending and returns may differ.
- Transactions after year-end: Telenet acquired Belgian mobile operator BASE on February 11, 2016 for €1.324 billion, financed with new debt and existing liquidity. The proposed CWC acquisition was expected to close in the second quarter of 2016, subject to shareholder, regulatory and court approvals; a $50 million termination fee could apply in specified circumstances if it did not complete.
- Debt and refinancing: The group remains highly leveraged and dependent on operating performance, refinancing markets and compliance with subsidiary-level covenants. Despite extensive hedging, foreign-exchange movements, interest rates and counterparty defaults could affect earnings, liquidity or debt service.
- Unusual earnings items: 2015 included $847.2 million of net derivative gains, $1.149 billion of foreign-currency transaction losses, $388.0 million of debt modification and extinguishment losses, and $174.1 million of impairment, restructuring and other operating charges. Derivative and investment fair-value movements are volatile and should not be treated as recurring operating performance.
- Share-based compensation and restructuring: Share-based compensation was $318.2 million, including $99.3 million of incremental expense from modifications related to the LiLAC transaction. Management expects significant restructuring charges in 2016.
- Contingencies and operating risks: Telenet faces a €1.4 billion damages claim from Proximus relating to the PICs network agreement; no amount was accrued because loss was not considered probable. Other disclosed matters include U.K. VAT disputes, a Hungarian VAT assessment of $20.3 million excluding interest and penalties, and competitive and regulatory access risks in Belgium.
- Macroeconomic and regulatory exposure: Management highlighted Puerto Rico’s fiscal distress, including missed government bond payments, tax changes and possible debt restructuring. Other risks include intense competition, programming-cost inflation, customer churn, regulatory intervention, and reliance on third-party mobile networks and content providers.
Most important facts for investors to verify
- Reconcile the $2.519 billion company-defined free cash flow to GAAP operating cash flow, cash capital expenditures, vendor financing and lease payments; assess whether the higher free cash flow is sustainable.
- Review debt maturities, refinancing needs, covenant headroom, subsidiary cash restrictions and the distinction between consolidated debt and management’s covenant-based leverage ratios.
- Separate organic performance from acquisitions and currency effects; focus particularly on broadband growth, video subscriber losses, ARPU trends and the Netherlands’ reported and pro forma results.
- Evaluate the expected cost, execution and returns of the network extensions and Liberty 3.0 program, including the forecast increase in capital intensity and planned restructuring.
- Track completion, financing and integration of BASE and CWC, including regulatory remedies, acquisition costs and any potential termination fee.
- Assess material legal and tax exposures, particularly the Proximus claim, U.K. VAT disputes, the Hungarian assessment and Puerto Rico’s economic conditions.
- Understand the tracking-share structure: Liberty Global and LiLAC shareholders remain exposed to the parent company’s overall liabilities, and the groups are not separate legal entities.
KPMG issued an unqualified opinion on the consolidated financial statements and reported effective internal control over financial reporting as of December 31, 2015; the acquired Choice and TV3 entities were excluded from management’s internal-control assessment.