Business Context and Reporting Period
Liberty Media Corporation filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. Liberty owns interests in media, communications and entertainment businesses, with SIRIUS XM and the Atlanta Braves as its principal consolidated operating segments.
Two major transactions affect comparability: Liberty was spun off from Starz on January 11, 2013, with Starz presented as discontinued operations, and Liberty obtained control of SIRIUS XM on January 18, 2013, resulting in consolidation of SIRIUS XM. Prior-period results therefore do not include consolidated SIRIUS XM revenue and expenses.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2013 | Six Months Ended June 30, 2013 |
|---|---|---|
| Total revenue | $1.078 billion | $1.867 billion |
| Operating income | $236 million | $396 million |
| Operating margin | 21.9% | 21.2% |
| Adjusted OIBDA | $372 million | $643 million |
| Adjusted OIBDA margin | 34.5% | 34.4% |
| Net earnings attributable to Liberty stockholders | $96 million | $8.158 billion |
| Diluted EPS attributable to Liberty stockholders | $0.79 | $67.42 |
| Net cash provided by operating activities | Not separately provided for the quarter | $607 million |
Six-month revenue consisted primarily of SIRIUS XM revenue of $1.667 billion, Atlanta Braves revenue of $132 million and corporate and other revenue of $68 million. SIRIUS XM reported approximately 25 million subscribers at June 30, 2013, including almost 20 million self-pay subscribers.
Cash and cash equivalents were $937 million at June 30, 2013, compared with $603 million at December 31, 2012. Liberty also reported approximately $516 million of unencumbered fair-value-option securities. SIRIUS XM separately held $652 million of cash, although Liberty stated that access to SIRIUS XM cash is limited by its significant noncontrolling interest and subsidiary-level restrictions.
Total debt was approximately $4.363 billion of principal, including $3.071 billion of fixed-rate SIRIUS XM debt and $1.120 billion of variable-rate corporate margin loans. The balance sheet reported $4.359 billion of long-term debt and $4 million of current debt. Total assets were $33.884 billion and total equity was $24.313 billion at June 30, 2013.
Material Changes Versus the Prior Comparable Period
- Revenue increased by $943 million, or approximately 698%, in the second quarter and by $1.697 billion, or approximately 998%, for the six-month period, principally because SIRIUS XM was consolidated in 2013.
- Operating income increased from $2 million to $236 million in the quarter and from a $30 million loss to $396 million for the six months.
- Adjusted OIBDA increased from $18 million to $372 million in the quarter and from $1 million to $643 million for the six months. SIRIUS XM contributed $354 million of quarterly and $622 million of six-month Adjusted OIBDA.
- Six-month net earnings included a noncash approximately $7.5 billion gain from purchase accounting when Liberty obtained control of SIRIUS XM. The transaction also generated a $257 million six-month income tax benefit, primarily from tax-basis effects related to the acquisition.
- Second-quarter and six-month 2012 results benefited from Liberty's share of a one-time approximately $3.0 billion SIRIUS XM tax benefit, of which Liberty recognized approximately $1.229 billion. This benefit did not recur in 2013.
- Liberty invested approximately $2.6 billion to acquire approximately 27% of Charter Communications, funded with approximately $1.2 billion of cash and $1.4 billion of new margin loans.
- Liberty repurchased $140 million of its own Series A shares during the six months. SIRIUS XM repurchased $1.109 billion of its shares and repaid approximately $298 million of debt.
- The Atlanta Braves benefited from a one-time recognition of approximately $30 million of revenue in the first six months from settlement of broadcast-rights issues.
Cash Flow, Liquidity, Debt and Risks
For the six months, operating cash flow was $607 million, investing cash flow was an outflow of $2.205 billion and financing cash flow was an inflow of $732 million. Investing outflows were driven primarily by the Charter acquisition and $2.584 billion of investments in and loans to cost and equity investees. Financing inflows included $2.809 billion of borrowings, partly offset by $845 million of debt repayments, $140 million of Liberty share repurchases and $1.109 billion of subsidiary share repurchases.
Liberty had $327 million remaining under its $450 million share-repurchase authorization at June 30, 2013. Management also disclosed a potential transaction that, if completed, would require approximately $380 million to repurchase Liberty Series A shares; completion remained subject to conditions and was not assured.
Margin loans are secured by shares of SIRIUS XM, Charter, Live Nation, Time Warner, Viacom, CenturyLink and Time Warner Cable. The agreements contain affirmative and negative covenants but no financial covenants. SIRIUS XM reported $1.25 billion of availability under its revolving credit facility and compliance with its debt covenants at June 30, 2013.
Management identified risks including subscriber retention and acquisition, dependence on automakers, rising music royalties, satellite or information-technology failures, competition, regulatory changes, leverage and collateral values, restricted access to subsidiary cash, market-price volatility, litigation, tax matters and integration of acquired businesses.
Liberty continued to guarantee certain Starz studio output obligations. Guarantees for films released through June 30, 2013 totaled approximately $195 million, while potential guarantees for unreleased films were not determinable and could be significant. Liberty also disclosed guaranteed Atlanta Braves employment contracts totaling approximately $160 million.
Liberty is pursuing an appeal of a judgment against Vivendi of approximately €945 million, including prejudgment interest. The ultimate recovery and timing are uncertain, and no recovery is recorded in the financial statements pending final resolution.
Guidance and Management Commentary
The filing does not provide formal consolidated revenue, earnings or cash-flow guidance. Management expected Liberty to fund projected uses with cash on hand, operating cash flow, investment sales, possible sales of SIRIUS XM shares to SIRIUS XM under its repurchase program and margin-loan capacity. Management expected SIRIUS XM to fund its needs with cash on hand, operating cash flow and additional borrowing.
Management stated that future Braves broadcast revenue should increase following the broadcast-rights settlement, although the 2013 six-month benefit included a one-time recognition. Management also noted that SIRIUS XM's operating cash flows are significant but are not readily available to Liberty because of noncontrolling interests and subsidiary restrictions.
Most Important Facts for Investors to Verify
- Assess underlying performance excluding the approximately $7.5 billion SIRIUS XM purchase-accounting gain and the prior-year one-time SIRIUS XM tax benefit.
- Reconcile Liberty's consolidated results with SIRIUS XM's stand-alone results and account for the January 18, 2013 consolidation date.
- Review SIRIUS XM's subscriber trends, self-pay mix, churn, royalty costs and ability to generate distributable cash.
- Evaluate leverage, maturities, interest rates, collateral requirements and potential market-value effects on the $1.120 billion of margin loans.
- Confirm funding capacity for the potential $380 million share repurchase transaction and other planned investments.
- Review Charter's operating performance and Liberty's limited ability to direct its equity-method affiliates.
- Monitor the Starz guarantee exposure, Vivendi litigation appeal, tax contingencies and other indemnification obligations.
- Consider the effect of purchase-accounting amortization, goodwill, FCC licenses and other valuation estimates on future earnings and impairment risk.