Liberty Media Corporation: 2016 Form 10-K Summary
Business context and reporting period
Liberty Media reported for the fiscal year ended December 31, 2016. The company primarily owns interests in media and entertainment businesses, including controlling ownership of Sirius XM, wholly owned Braves Holdings, and a significant equity interest in Live Nation. Liberty operated three tracking stock groups after completing its recapitalization on April 15, 2016: Liberty SiriusXM, Liberty Braves, and Liberty Media, subsequently renamed the Formula One Group after the January 2017 Formula 1 closing. The tracking stock groups are not separate legal entities and do not provide holders with direct ownership of the underlying assets.
Sirius XM was Liberty's principal reportable segment. Sirius XM had approximately 31.3 million subscribers at year-end, including approximately 26.0 million self-pay subscribers and 5.4 million paid promotional subscribers. Liberty also operated the Atlanta Braves and attributed its Live Nation investment and other public securities to the Formula One Group.
Key financial metrics
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue | $5.276 billion | $4.795 billion | +$481 million, approximately 10% |
| Operating income | $1.734 billion | $954 million | +$780 million |
| Adjusted OIBDA | $1.773 billion | $1.628 billion | +$145 million, approximately 9% |
| Net earnings | $924 million | $248 million | +$676 million |
| Net earnings attributable to Liberty stockholders | $680 million | $64 million | +$616 million |
| Cash flow from operating activities | $2.171 billion | $1.232 billion | +$939 million |
| Capital expenditures | $568 million | $296 million | +$272 million |
| Cash and cash equivalents | $562 million | $201 million | +$361 million |
| Total assets | $31.377 billion | $29.798 billion | +$1.579 billion |
| Principal debt outstanding | $7.973 billion | $6.881 billion | +$1.092 billion |
Calculated consolidated margins were approximately 32.9% for operating income, 33.6% for Adjusted OIBDA, and 17.5% for net earnings. Adjusted OIBDA is a non-GAAP measure that excludes depreciation and amortization, stock compensation, litigation settlements, and certain restructuring or impairment items.
Sirius XM generated $5.014 billion of Liberty-reported revenue and $1.853 billion of Adjusted OIBDA. Its standalone revenue was $5.017 billion, operating income was $1.432 billion, and Adjusted OIBDA was $1.856 billion. Braves Group revenue was $262 million, with a $61 million operating loss and a $20 million Adjusted OIBDA loss. The Braves incurred approximately $360 million of capital expenditures for the new ballpark and adjacent mixed-use development.
Liberty's operating cash flow was $2.171 billion, while investing activities used $1.264 billion and financing activities used $546 million. Major investing uses included $784 million of investments in cost and equity investees and $568 million of capital expenditures. Major financing uses included $1.674 billion of Sirius XM share repurchases, partially offset by $2.745 billion of debt borrowings and $203 million from the Liberty Braves rights offering.
At December 31, 2016, Liberty reported $1.309 billion of available-for-sale and other cost investments and $1.117 billion of equity-method investments. The Formula One Group included $444 million of unencumbered fair-value-option securities and $168 million of cash; the Liberty SiriusXM Group had approximately $287 million of cash, and the Braves Group had approximately $107 million.
Material changes versus the prior comparable period
- Sirius XM revenue increased $462 million, driven by subscriber growth, higher average monthly revenue per subscriber, advertising, and royalty-related revenue. Sirius XM Adjusted OIBDA increased $193 million.
- Consolidated operating income benefited substantially from a $511 million net gain on the Vivendi litigation settlement. Liberty received a $775 million payment before legal fees and amounts payable to another plaintiff.
- Sirius XM redeemed $650 million of 5.875% senior notes due 2020, funded with cash and borrowings, and recognized a $24 million loss on extinguishment. It also issued $1 billion of 5.375% senior notes due 2026.
- Sirius XM repurchased approximately 420.1 million shares for $1.7 billion and began paying a quarterly dividend of $0.01 per share. Liberty continued to own approximately 67% of Sirius XM's equity.
- Liberty completed the tracking stock recapitalization and a fully subscribed Liberty Braves rights offering that issued 15.8 million Series C shares and generated approximately $203 million. Approximately $150 million was used to repay the Braves intergroup note.
- Liberty acquired a nearly 20% interest in Formula 1 during 2016 for approximately $746 million in cash, but did not consolidate Formula 1 until the January 23, 2017 closing of the remaining acquisition. Formula 1 therefore contributed no 2016 revenue and was not a consolidated operating business at year-end.
- Stock-based compensation expense declined to $150 million from $204 million, primarily because Sirius XM purchase-accounting amortization ended after 2015.
Guidance, outlook, risks, contingencies, and unusual items
The filing does not provide a clear consolidated numerical earnings or revenue forecast. Management stated that available liquidity was expected to cover projected uses of cash, including debt service, Sirius XM capital expenditures and share repurchases, Braves development spending, potential acquisitions, and Liberty share repurchases.
- Formula 1: The January 2017 acquisition creates integration, financing, foreign-exchange, regulatory, counterparty, team-governance, and contract-renewal risks. Formula 1's subsidiary debt is non-recourse to Liberty but contains restrictive covenants that may limit distributions and operating flexibility.
- Liquidity and debt: Liberty had approximately $1.7 billion of corporate-level debt, while consolidated debt also included substantial Sirius XM and Braves Holdings borrowings. Liberty has limited direct access to Sirius XM cash because of Sirius XM's noncontrolling interests and debt restrictions.
- Braves development: The new SunTrust Park and Battery Atlanta projects require significant additional capital and debt. The filing identifies risks of cost overruns, delays, weak attendance, lower-than-expected rental income, and failure to achieve projected benefits.
- Sirius XM royalties: A Copyright Royalty Board ruling issued January 10, 2017 found that certain revenue exclusions were not properly applied. Sirius XM estimated reasonably possible additional losses of $0 to $70 million, plus interest or late fees, beyond recorded liabilities; no additional liability was recorded because a loss was not considered probable.
- Other litigation: Sirius XM paid $35 million in 2016 to settle TCPA class actions. The 2016 results also included the $46 million Sirius XM music royalty legal settlement and reserve charge, excluded from Adjusted OIBDA as unusual.
- Operating risks: Key risks include competition from streaming and terrestrial audio providers, dependence on automakers, satellite failure without in-orbit insurance, music-rights costs, cybersecurity, FCC and consumer-protection regulation, live-event popularity, and the Braves' on-field performance.
- Tracking stock structure: Investors remain exposed to Liberty as a whole, not only to the assets attributed to a specific tracking stock. The board can reattribute assets and liabilities among groups, and holders do not have separate boards or direct claims on group assets.
Most important facts for investors to verify
- Reconcile consolidated Liberty results with Sirius XM's standalone filings and account for Liberty's approximately 33% Sirius XM noncontrolling interest.
- Review the January 2017 Formula 1 closing, acquisition financing, post-closing debt, share issuance, exchangeable notes, and subsequent Formula One Group results; these items are largely subsequent to the 2016 reporting period.
- Assess the sustainability of 2016 earnings excluding the $511 million Vivendi settlement and other unusual legal items.
- Review Sirius XM's royalty litigation exposure, the Copyright Royalty Board process, and ongoing music-rights rates.
- Evaluate Braves Holdings' remaining stadium and Battery Atlanta funding needs, debt covenants, MLB debt-compliance requirements, and expected cash generation after the 2017 relocation.
- Analyze the maturity profile and restrictions of the approximately $7.973 billion of principal debt, including the $250 million margin loan secured by Sirius XM shares.
- Consider the effect of the tracking stock structure, voting control, intergroup interest, potential dilution, and John Malone's approximately 47.6% aggregate voting power.
- Verify that the filing's unqualified audit opinion and effective internal-control conclusion remain consistent with subsequent filings.