Liberty Media Corporation 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed February 28, 2014. Liberty owns interests in media, communications and entertainment businesses, principally SIRIUS XM, the Atlanta Braves, TruePosition, Charter Communications and Live Nation.
Comparability with 2012 is substantially affected by the January 2013 Spin-Off of Starz and Liberty’s January 18, 2013 acquisition of control of SIRIUS XM. SIRIUS XM was consolidated from that date; Starz is presented as discontinued operations for prior periods.
Financial performance and key metrics
| Metric | 2013 | 2012 | Change or comment |
|---|---|---|---|
| Revenue | $4.002 billion | $368 million | Increase primarily from consolidating SIRIUS XM |
| Operating income | $814 million | $(80) million | Operating margin approximately 20.3% |
| Adjusted OIBDA | $1.322 billion | $8 million | Adjusted OIBDA margin approximately 33.0% |
| Net earnings | $8.991 billion | $1.412 billion | Includes significant nonrecurring gains |
| Net earnings attributable to Liberty stockholders | $8.780 billion | $1.414 billion | 2013 diluted continuing-operations EPS was $73.17 |
| Operating cash flow | $1.236 billion | $(29) million | Improved primarily from SIRIUS XM consolidation |
| Cash flow from investing activities | $(2.764) billion | $224 million | Included $2.585 billion invested in cost and equity-method investees |
| Cash flow from financing activities | $813 million | $(1.162) billion | Included debt borrowings and repayments |
SIRIUS XM contributed $3.625 billion of Liberty’s consolidated revenue and $1.289 billion of Adjusted OIBDA. On a standalone basis, SIRIUS XM reported 25.6 million subscribers at year-end, including 21.1 million self-pay subscribers, $3.799 billion of revenue, $1.367 billion of Adjusted OIBDA and $1.045 billion of operating income.
At December 31, 2013, Liberty reported $1.088 billion of cash, $1.324 billion of available-for-sale and other cost investments, $3.299 billion of equity-method investments, $5.555 billion of total debt at carrying value and $23.882 billion of total equity, including $9.801 billion of noncontrolling interests. Corporate and other liquidity included $953 million of cash and $542 million of unencumbered fair-value-option securities; SIRIUS XM held $135 million of cash.
Material changes versus the prior comparable period
- Liberty began consolidating SIRIUS XM after obtaining voting control, creating a $7.5 billion pretax, largely nontaxable purchase-accounting gain and adding substantial assets, liabilities, revenue and expenses to the consolidated statements.
- Liberty acquired approximately 26.9 million Charter shares and 1.1 million warrants for approximately $2.6 billion, obtaining approximately 25% ownership and accounting for Charter as an equity-method affiliate.
- SIRIUS XM acquired Agero’s connected-vehicle business for approximately $525 million, including $389 million recorded as goodwill and $247 million allocated to amortizable intangible assets.
- Liberty issued $1 billion of 1.375% cash convertible notes due 2023, entered into a bond hedge costing approximately $299 million and received approximately $170 million from related warrant transactions.
- SIRIUS XM issued new senior notes, refinanced higher-cost debt, repaid approximately $2.0 billion of long-term debt and repurchased approximately $1.8 billion of its common stock.
- Liberty repurchased 1.265 million Series A shares for $140 million and completed a separate exchange involving approximately 6.3 million Liberty shares, $417 million of cash and Leisure Arts.
- 2012 included a $1.229 billion share of SIRIUS XM’s deferred-tax-asset valuation allowance benefit and 2011 included one-time TruePosition revenue recognition of approximately $1.029 billion; these items materially distort historical comparisons.
Outlook, risks, contingencies and unusual items
The filing does not provide a formal consolidated earnings or revenue forecast. Management expects to fund projected uses through cash, operating cash flow, investment sales, proceeds from the planned SIRIUS XM share repurchase and margin-loan capacity, and states that available liquidity is sufficient for projected needs.
- Liberty and SIRIUS XM agreed to a $500 million SIRIUS XM share repurchase in three tranches. The first tranche, $160 million, was completed in November 2013. The remaining schedule was deferred in connection with Liberty’s proposal to acquire the SIRIUS XM public shares.
- Liberty proposed a tax-free transaction under which SIRIUS XM public shares would be exchanged for Liberty Series C shares. The proposal required approval by a SIRIUS XM independent committee, SIRIUS XM public stockholders and Liberty stockholders, and was not completed as of the filing date.
- Consolidated contractual obligations totaled $8.843 billion, including $5.541 billion of debt principal, $1.360 billion of interest, $801 million of programming fees, $675 million of operating leases and $133 million of Braves employment commitments.
- Principal risks include SIRIUS XM subscriber churn and dependence on automakers, competition from terrestrial and Internet audio services, satellite and information-technology failures, rising music royalties, regulatory and license-renewal risks, significant subsidiary and corporate debt, margin-call exposure, market volatility in public investments, privacy breaches and litigation.
- Liberty guarantees certain Starz studio obligations; guarantees for released films totaled $159 million at year-end, while exposure for unreleased films was not determinable and expected to be significant.
- Liberty was pursuing an appeal in litigation against Vivendi involving an approximately €945 million judgment; any recovery was excluded from the financial statements pending final resolution.
- Multiple shareholder actions were filed concerning Liberty’s proposal to acquire the remaining SIRIUS XM shares. Earlier SIRIUS XM shareholder litigation had been dismissed, and another action was discontinued.
- Music royalty rates payable by SIRIUS XM under the statutory license were scheduled to rise from 9.0% of eligible revenue in 2013 to 9.5% in 2014, 10.0% in 2015, 10.5% in 2016 and 11.0% in 2017.
Most important facts for investors to verify
- Separate recurring operating performance from the $7.5 billion SIRIUS XM consolidation gain, the $496 million subsidiary exchange gain and other fair-value or transaction gains.
- Assess Liberty’s access to subsidiary cash: despite consolidating SIRIUS XM, Liberty states that it does not have ready access to much of SIRIUS XM’s cash because of public ownership, noncontrolling interests and debt restrictions.
- Review corporate-level debt, margin-loan collateral, maturities and covenants, particularly the $749 million of debt principal due in 2014 and the pledged public securities.
- Evaluate SIRIUS XM subscriber growth, self-pay mix, churn, average revenue per subscriber, royalty costs and dependence on automotive distribution.
- Review the status, approvals, financing and tax treatment of the proposed SIRIUS XM transaction and the remaining share repurchase tranches.
- Verify the potential exposure from tax-sharing indemnities, Starz guarantees, pending litigation, Vivendi proceedings and other unquantified contingencies.
- Use caution when comparing 2013 with prior periods because of the Starz Spin-Off, SIRIUS XM consolidation, Charter acquisition and prior one-time TruePosition and tax items.