Liberty Trims DCI Results


Liberty Media Corp. last week said it would reduce 2001 cash flow results for Discovery Communications Inc. by $132 million, applying new accounting standards required by the Financial Accounting Standards Board.

In an April 3 press release, Liberty amended its 2001 annual report to reflect accounting changes as part of the Emerging Issues Task Force Issue 01-9, which requires certain companies to record certain expenses — such as the amortization of cable-network launch costs and advertising commissions — as operating expenses.

Liberty reduced DCI's 2001 earnings before interest, taxes, depreciation and amortization (EBITDA, or cash flow) to $243 million from $375 million.

The adjustment is only attributable to DCI, of which Liberty owns 50 percent, and will not affect the programmer's net income or its ability to meet loan covenants, Liberty said.

In the past, companies were allowed to book launch costs in two ways — recording them as operating expenses (which are netted against revenue and reduce EBITDA) or accounting for them in the general below-the-line amortization line, which would not affect EBITDA.

Liberty had chosen to record launch costs using the latter method, which some analysts would consider to be aggressive.

Discovery reported launch costs of about $123 million in 2001.

Goldman Sachs & Co. analyst Richard Greenfield figured those launch costs should fall to $110 million in 2002, and to $60 million in 2003. Over time, Greenfield added, launch costs should stabilize at between $15 million and $20 million.


But the reduced EBITDA forced Greenfield to lower his valuation of Discovery by nearly half, from $4 billion to $2.5 billion.

Otherwise, Liberty had a solid year, with revenue up 35 percent to $2.06 billion. It reported a large net loss in 2001 — $6.2 billion, or $2.40 per share, versus net income of $1.5 billion, or 57 cents per share in 2000 — mainly due to the decline in value of stock investments, including AOL Time Warner Inc. and News Corp.

For the year, Liberty wrote down $2.1 billion in AOL stock and $900 million in News Corp. stock.