Business Context and Reporting Period
Liberty Media Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2013. The company operates primarily in media, communications and entertainment, with consolidated businesses consisting principally of SIRIUS XM and the Atlanta Braves, plus equity-method investments including Charter Communications and Live Nation.
Comparability with 2012 is significantly affected by Liberty’s January 2013 spin-off from Starz and its January 18, 2013 acquisition of a controlling interest in SIRIUS XM. SIRIUS XM was consolidated beginning January 18, 2013; Starz is presented as discontinued operations for prior periods.
Financial Performance and Position
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $1.110 billion vs. $154 million | $2.977 billion vs. $324 million |
| Operating income | $248 million vs. $10 million | $625 million vs. $(20) million |
| Net earnings | $116 million vs. $220 million | $8.372 billion vs. $1.309 billion |
| Net earnings attributable to Liberty stockholders | $76 million vs. $221 million | $8.228 billion vs. $1.308 billion |
| Adjusted OIBDA | $379 million vs. $29 million | $1.003 billion vs. $30 million |
| Net cash provided by operating activities | $889 million vs. $53 million for the comparable nine-month period |
Third-quarter operating margin was approximately 22.3%, compared with approximately 6.5% in the prior-year quarter. Nine-month operating margin was approximately 21.0%, compared with a prior-year operating loss. Adjusted OIBDA margins were approximately 34.1% and 33.7% for the third quarter and nine months, respectively; prior-year comparable margins were approximately 18.8% and 9.3%.
- SIRIUS XM contributed $959 million of third-quarter revenue and $2.626 billion of nine-month revenue, with Adjusted OIBDA of $353 million and $956 million, respectively.
- SIRIUS XM standalone revenue increased 11% in the third quarter and 12% for the nine months, while standalone Adjusted OIBDA increased 15% and 15%, respectively. SIRIUS XM reported 25.6 million subscribers at September 30, 2013, including 20.7 million self-pay subscribers.
- Atlanta Braves revenue was $119 million in the third quarter and $251 million for the nine months, versus $114 million and $216 million, respectively. Nine-month results benefited from a one-time recognition of revenue related to a settlement of historical broadcast-rights issues.
- The nine-month net earnings increase was dominated by a $7.5 billion pretax gain from applying purchase accounting when Liberty obtained control of SIRIUS XM. The gain was excluded from taxable income.
- Income tax was an expense of $94 million in the third quarter and a benefit of $170 million for the nine months. The nine-month benefit was primarily associated with the SIRIUS XM acquisition and related tax-basis adjustments.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $1.171 billion at September 30, 2013, compared with $603 million at December 31, 2012.
- Cash flow from operations was $889 million. Investing cash flow was $(2.240) billion, primarily reflecting $2.584 billion invested in cost and equity-method investees, including the Charter investment, and $408 million of acquisitions. Financing cash flow was $719 million.
- Total debt had a carrying value of $4.807 billion, including $496 million classified as current and $4.385 billion classified as long-term. Principal outstanding was approximately $4.881 billion.
- Debt included SIRIUS XM debt and $1.120 billion of Liberty margin loans. Margin loans were secured by shares of SIRIUS XM, Charter, Live Nation and other public companies; the agreements had no financial covenants but included other restrictive covenants.
- Corporate and other liquidity included $408 million of cash and $453 million of unencumbered fair-value-option and available-for-sale securities. SIRIUS XM held $717 million of cash, although Liberty stated that its access to SIRIUS XM cash flows is limited by SIRIUS XM’s separate public-company status and approximately 47% noncontrolling interest.
- Liberty repurchased $140 million of its Series A common stock during the nine months. No repurchases occurred during the third quarter, and $327 million remained available under the $450 million authorization at September 30.
Material Changes, Outlook and Unusual Items
- Liberty acquired approximately 27% of Charter for approximately $2.6 billion in May 2013, funded with cash and new margin loans. Charter was accounted for as an equity-method affiliate; its carrying value was $2.440 billion at September 30.
- On October 3, 2013, Liberty exchanged Leisure Arts, approximately $417 million of cash and rights under a CNBC revenue-sharing agreement for approximately 6.3 million Liberty Series A shares. Liberty expected to recognize a significant, generally nontaxable gain in the fourth quarter.
- On October 9, 2013, Liberty agreed to sell a yet-to-be-determined number of SIRIUS XM shares back to SIRIUS XM for $500 million in three tranches through the second quarter of 2014. Liberty expected to retain majority ownership.
- On October 17, 2013, Liberty issued $1.0 billion of 1.375% cash convertible senior notes due 2023. Net proceeds were approximately $871 million after bond-hedge and warrant transactions, with approximately $200 million intended for partial repayment of a margin-loan revolver and the balance for general corporate purposes.
- Subsequent to quarter-end, SIRIUS XM completed the redemption of its remaining 7.625% senior notes due 2018 and acquired Agero’s connected-vehicle business for approximately $530 million.
- Management’s outlook depends on subscriber growth, retention, pricing, automaker relationships, programming and royalty costs, technology performance, access to capital and the performance of equity affiliates. The filing provides no formal consolidated revenue or earnings guidance.
Risks, Contingencies and Other Matters
- Liberty continued to guarantee certain Starz studio output obligations. Guarantees for films released through September 30 totaled $157 million; obligations for unreleased films were not determinable and were expected to be significant. No liability was accrued.
- Liberty had potential indemnification obligations related to prior asset sales for which maximum exposure could not be estimated.
- Liberty guaranteed $128 million of Atlanta Braves player and coach employment obligations as of September 30, excluding potential incentive compensation.
- A Vivendi litigation judgment of approximately €945 million, including prejudgment interest, remained on appeal. Any recovery will not be recognized until final disposition.
- Key operating risks include subscriber churn and demand, reliance on automakers, competitive responses, increasing music royalties, satellite or information-technology failures, regulatory changes, indebtedness and collateral values, acquisition integration, market-price volatility and litigation.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2013, with no material change in internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the portion of reported earnings attributable to the $7.5 billion SIRIUS XM purchase-accounting gain and other nonrecurring tax effects.
- Reconcile Liberty’s consolidated results with SIRIUS XM’s standalone operating trends and account for the approximately 47% noncontrolling interest.
- Monitor SIRIUS XM subscriber growth, self-pay mix, churn, pricing, royalty costs and automaker-related acquisition costs.
- Review margin-loan collateral values, maturity dates, interest-rate exposure and the effect of any required collateral actions.
- Assess liquidity available at Liberty corporate versus cash held at SIRIUS XM and other subsidiaries.
- Confirm the accounting and cash implications of the October 2013 CNBC/Leisure Arts exchange, SIRIUS XM share repurchase agreement and Liberty convertible-note financing.
- Track the Vivendi appeal, Starz guarantee exposure and other unresolved legal, tax and indemnification matters.