Charter Communications, Inc. — FY 2018 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2018; quarterly figures include fourth-quarter results. Charter is a major U.S. cable and broadband provider, serving 28.1 million residential and small- and medium-business customer relationships. Its services include video, Internet, voice, mobile, commercial connectivity, advertising and regional sports and news programming. Results are consolidated across the businesses acquired in the 2016 Time Warner Cable and Bright House transactions, which affects comparisons with earlier years.
Financial performance
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Revenue | $43.634 billion | $41.581 billion | +4.9% |
| Operating income | $5.221 billion | $4.106 billion | +27.2%; operating margin about 12.0%, versus 9.9% |
| Adjusted EBITDA (non-GAAP) | $16.059 billion | $15.301 billion | +5.0%; margin about 36.8% in both years |
| Net income attributable to Charter shareholders | $1.230 billion | $9.895 billion | 2017 included a $9.3 billion tax benefit from U.S. tax reform |
| Diluted earnings per share | $5.22 | $34.09 | Prior-year figure was materially boosted by the tax benefit |
| Cash from operating activities | $11.767 billion | $11.954 billion | Down $187 million |
| Capital expenditures | $9.125 billion | $8.681 billion | Up $444 million |
| Free cash flow (non-GAAP) | $2.172 billion | $4.093 billion | Down $1.921 billion; mobile reduced 2018 free cash flow by about $594 million |
Revenue mix and operating indicators. Internet revenue rose 7.7% to $15.181 billion, supported by 1.107 million net residential Internet customer additions and pricing. Video revenue increased 4.4% to $17.348 billion, despite a 296,000 decline in residential video customers. Voice revenue fell 16.8% to $2.114 billion as residential voice customers declined by 289,000. Commercial revenue grew 4.6% to $6.193 billion; advertising revenue rose 18.2% to $1.785 billion, primarily reflecting political advertising and advanced ad products. Mobile generated $106 million of revenue; Charter reported 134,000 mobile lines at year-end.
Programming costs were $11.124 billion, up $528 million, and represented about 40% of operating costs and expenses. Interest expense, net, increased to $3.540 billion from $3.090 billion. The filing reports a $75 million impairment of non-strategic assets within the $85 million net loss on asset sales and disposals. Pension remeasurement produced a $122 million gain in 2018, compared with a $55 million loss in 2017.
Fourth-quarter snapshot
| Metric | Q4 2018 | Q4 2017 |
|---|---|---|
| Revenue | $11.231 billion | $10.602 billion |
| Operating income | $1.439 billion | $1.204 billion |
| Net income attributable to Charter shareholders | $296 million | $9.553 billion |
| Diluted EPS | $1.29 | $34.56 |
The exceptionally high Q4 2017 net income and EPS reflect the tax-reform benefit and are not directly comparable with recurring operating performance.
Debt, liquidity and capital allocation
- Year-end debt principal was approximately $72.0 billion ($72.827 billion accreted value on the balance sheet), versus $69.003 billion principal at year-end 2017. Net-debt leverage was 4.5x, at the upper end of management’s 4.0x–4.5x target range.
- Cash and cash equivalents were $551 million; restricted cash was $214 million. Charter had approximately $2.8 billion available under credit facilities. The filing states management believes available liquidity and capital-market access are sufficient for projected needs.
- About 85% of principal debt was effectively fixed-rate; the blended weighted-average interest rate was 5.4%. Charter Operating reported leverage ratios within its credit-facility limits.
- Contractual obligations included $71.961 billion of debt principal and $44.573 billion of estimated interest payments. Approximately $3.457 billion of principal was due in 2019.
- Charter repurchased about 14.1 million shares for $4.322 billion in 2018 and had $480 million of remaining repurchase authorization at year-end. It does not expect to pay cash dividends in the foreseeable future.
Outlook, commentary and risks
- Management expected 2019 capital expenditures, excluding mobile, of approximately $7 billion, compared with $8.9 billion in 2018. The expected reduction was attributed to completion of the all-digital conversion, DOCSIS 3.1 rollout and substantial integration work. Actual spending would depend on product development and customer growth.
- Management said integration was nearly complete and expected further benefits from SPP penetration, customers rolling off introductory pricing, productivity improvements and modest price increases. These are expectations, not guarantees.
- Management anticipated continued mobile start-up costs and negative working-capital effects from device installment plans. The mobile business reduced 2018 Adjusted EBITDA by about $240 million and free cash flow by about $594 million.
- Programming costs are expected to keep rising, with a concentration of contract expirations at or before the end of 2019. Charter cautioned it may not be able to pass cost increases fully to customers without risking subscriber losses.
- A significant regulatory contingency concerns the New York Public Service Commission’s 2018 actions over merger build-out commitments, including an order purporting to rescind approval of Charter’s New York acquisition and a demand for an exit plan. The PSC also sought penalties of $100,000 per day. Charter disputes the allegations; it said it could not reasonably estimate a possible loss range and warned an adverse result could be material.
- Other material risks include intense competition across broadband, video and mobile; substantial debt and refinancing needs; programming negotiations; cybersecurity and service disruptions; regulatory changes; and potential customer losses. The filing also describes pending patent litigation, including a prior $146 million Sprint verdict and related proceedings.
- In January 2019, Charter issued $2.0 billion of senior notes and amended its credit agreement, adding a $1.7 billion term loan and increasing revolving capacity to $4.75 billion. Proceeds were intended for general corporate purposes, buybacks and debt repayment, including 2019 maturities.
Most important facts for investors to verify
- Whether the 2019 capital-spending reduction is achieved and translates into stronger free cash flow after mobile investment and working-capital needs.
- Progress in residential Internet additions, video and voice customer losses, customer revenue per relationship, churn and mobile-line growth.
- Programming renewal outcomes and the effect of higher programming and retransmission-consent costs on margins and pricing.
- Resolution and potential financial impact of the New York PSC dispute, including the build-out commitments and requested penalties.
- Debt maturities, refinancing terms, leverage, interest costs and the balance between buybacks, investment and debt management.
- Interpretation of year-over-year earnings: 2017 net income was unusually elevated by the tax-reform benefit, while 2018 free cash flow declined substantially.