Business Context and Reporting Period
Liberty Media Corporation’s unaudited Form 10-Q covers the three and nine months ended September 30, 2014, with comparisons to the corresponding 2013 periods. Liberty operates primarily in media, communications and entertainment. Its principal consolidated business is SIRIUS XM, with additional interests in the Atlanta Braves, TruePosition, Charter Communications, Live Nation, SIRIUS XM Canada and publicly traded securities.
SIRIUS XM had approximately 26.7 million subscribers at September 30, 2014, including 22.0 million self-pay subscribers and 4.7 million paid promotional subscribers. Liberty held approximately 57% of SIRIUS XM, with approximately 43% attributable to noncontrolling interests.
Key Financial Metrics
| Amounts in millions, except per-share data | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $1,184 | $1,110 | $3,355 | $2,977 |
| Operating income | $249 | $248 | $635 | $625 |
| Adjusted OIBDA | $392 | $379 | $1,058 | $1,003 |
| Net earnings | $87 | $116 | $265 | $8,372 |
| Net earnings attributable to Liberty stockholders | $33 | $76 | $105 | $8,228 |
| Diluted earnings per share | $0.10 | $0.21 | $0.30 | $22.67 |
| Net cash provided by operating activities | Not provided | Not provided | $801 | $889 |
Q3 operating margin was approximately 21.0%, compared with 22.3% in the prior-year quarter. Nine-month operating margin was approximately 18.9%, compared with 21.0%. Adjusted OIBDA margin was approximately 33.1% in Q3 and 31.5% for the nine months, versus approximately 34.1% and 33.7%, respectively, in the comparable 2013 periods.
- SIRIUS XM revenue was $1,047 million in Q3 and $3,060 million for the nine months, up from $959 million and $2,626 million, respectively.
- SIRIUS XM Adjusted OIBDA was $381 million in Q3 and $1,085 million for the nine months, compared with $353 million and $956 million.
- Cash and cash equivalents were $377 million at September 30, 2014, down from $1.088 billion at December 31, 2013.
- Total debt was $6.116 billion principal amount, with $754 million classified as current and $5.320 billion classified as long-term debt on the balance sheet. Carrying value was $6.074 billion.
- Total assets were $33.845 billion and total liabilities were $11.251 billion at September 30, 2014.
- Investments in equity-method affiliates totaled $3.298 billion, including a $2.376 billion carrying value for Charter and $452 million for Live Nation.
Cash Flow, Liquidity and Capital Structure
- Nine-month investing cash flow was an outflow of $401 million, including $153 million of capital expenditures, $169 million invested in cost and equity-method investees, and $349 million of purchases of short-term investments and marketable securities.
- Nine-month financing cash flow was an outflow of $1.111 billion. Major uses included $1.660 billion of debt repayments and $1.650 billion of subsidiary share repurchases. Debt borrowings were $2.218 billion.
- Corporate and other liquidity included $273 million of cash and $482 million of unencumbered fair-value-option securities. SIRIUS XM held $104 million of cash, although Liberty noted that access to SIRIUS XM cash is limited by its separate public-company structure and significant noncontrolling interest.
- SIRIUS XM had $1.105 billion of availability under its secured revolving credit facility. Liberty also reported a $750 million undrawn availability under its remaining margin-loan arrangement.
- Liberty’s principal cash uses include debt service, capital expenditures, investments, potential Liberty share repurchases and further margin-loan repayment. Management expected to fund these uses with cash on hand, operating cash flow and borrowing capacity.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.7% in Q3 and 12.7% for the nine months, primarily from SIRIUS XM subscriber growth, rate increases, connected-vehicle revenue and the inclusion of a full nine months of consolidated SIRIUS XM results.
- Adjusted OIBDA increased 3.4% in Q3 and 5.5% for the nine months, driven by SIRIUS XM operating efficiencies and higher revenue, partly offset by weaker results at the Atlanta Braves and TruePosition and reduced corporate-and-other contributions.
- Operating income was essentially flat in Q3 and increased 1.6% for the nine months. Higher stock-based compensation, depreciation and amortization, and other subsidiary costs offset operating gains.
- Net earnings attributable to Liberty stockholders declined sharply because the prior-year nine-month period included a nonrecurring approximately $7.5 billion gain from the 2013 acquisition of control of SIRIUS XM. The 2014 nine-month period included only $105 million attributable to Liberty stockholders.
- Interest expense increased to $70 million in Q3 and $185 million for the nine months, from $39 million and $78 million, primarily because SIRIUS XM debt was consolidated for a full comparative period and average debt increased.
- Realized and unrealized losses on financial instruments were $15 million in Q3 and $55 million for the nine months, compared with gains of $64 million and $222 million in the prior-year periods.
- Operating cash flow decreased to $801 million from $889 million, while investing cash outflow improved substantially from $2.240 billion to $401 million. Financing cash flow changed from a $719 million inflow to a $1.111 billion outflow.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal consolidated revenue or earnings guidance. Management expects SIRIUS XM to continue funding debt repayment and share repurchases with operating cash flow, cash on hand, additional debt issuance and its credit facility. Management also expects Liberty to use available cash, operating cash flow and margin-loan capacity for corporate purposes.
- On November 4, 2014, after the reporting date, Liberty completed the spin-off of Liberty Broadband. Liberty Broadband included Liberty’s Charter interest, TruePosition, a Time Warner investment, related deferred tax liabilities and initial indebtedness. The filing expects the transaction to be accounted for at historical cost and treated as discontinued operations beginning in the fourth quarter.
- SIRIUS XM issued $1.5 billion of 6% senior secured notes due 2024 and used proceeds for general corporate purposes. SIRIUS XM also conducted accelerated share repurchases totaling up to $850 million; the August agreement settled in October 2014.
- Liberty’s $1 billion cash convertible notes due 2023 and related bond hedge are carried at fair value, creating earnings volatility from changes in the Liberty share price and other market inputs.
- Key risks include subscriber acquisition and retention, dependence on automobile manufacturers, programming royalties, satellite or information-technology failures, competition, regulation, cybersecurity, technological change, access to capital, leverage and market-price volatility in public-company investments.
- Liberty guaranteed certain Starz studio-output obligations. The guarantee for released films was $91 million at September 30, 2014 and was expected to lapse in November 2014; potential obligations for unreleased films were not determinable.
- Atlanta Braves player and coaching contracts totaled $369 million of guaranteed commitments at September 30, 2014, payable through periods after 2017.
- The company reported no legal proceedings in Part II, Item 1 and stated that other litigation and tax contingencies were not expected to be material, although loss estimates were not available for certain matters.
- Management stated that disclosure controls and procedures were effective as of September 30, 2014, with no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Reconcile Liberty’s consolidated results with SIRIUS XM’s standalone results and purchase-accounting adjustments, including the approximately 43% noncontrolling interest.
- Confirm the effect of the November 2014 Liberty Broadband spin-off on discontinued operations, debt, liquidity, investment holdings and future comparability.
- Review debt maturities, collateral requirements and covenant compliance for Liberty margin loans and SIRIUS XM secured debt.
- Assess whether SIRIUS XM subscriber growth, churn, royalty costs and connected-vehicle investments support continued Adjusted OIBDA expansion.
- Evaluate exposure to market-price changes in Charter, Live Nation, SIRIUS XM Canada and Liberty’s fair-value securities; management estimated that a 10% decline would reduce the value of relevant securities by approximately $681 million in aggregate.
- Verify the timing and cash impact of SIRIUS XM share repurchases, the October 2014 margin-loan refinancing and the $300 million distribution received by Liberty Broadband before the spin-off.