Charter Communications, Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. The unaudited consolidated results cover Charter and its subsidiaries. Charter provides residential and commercial video, Internet, telephone, advertising, and connectivity services; it reported approximately 5.3 million customers.
Key financial metrics
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $1.880 billion | $1.809 billion | $5.591 billion | $5.370 billion |
| Operating income | $211 million | $237 million | $710 million | $776 million |
| Net loss | $87 million | $85 million | $264 million | $302 million |
| Adjusted EBITDA (non-GAAP) | $651 million | $653 million | $1.996 billion | $1.989 billion |
| Operating cash flow | $468 million | $405 million | $1.391 billion | $1.312 billion |
| Free cash flow (non-GAAP) | $(17) million | $90 million | $111 million | $317 million |
| Capital expenditures | $488 million | $304 million | $1.296 billion | $984 million |
Operating margin was 11% in Q3 2012 versus 13% in Q3 2011, and 13% for the first nine months versus 14% in the prior-year period. Interest expense was $229 million in Q3 and $691 million year to date. The nine-month debt-extinguishment loss was $74 million, compared with $124 million in 2011.
At September 30, cash and cash equivalents were $868 million, plus $27 million restricted cash. Total debt was $13.690 billion at accreted value, including $870 million classified as current; shareholders’ equity was $173 million. The filing reported approximately $1.1 billion of credit-facility availability at quarter-end; after giving effect to subsequent note redemptions, it reported approximately $715 million available.
Changes versus the prior comparable period
- Revenue grew 4% in both the quarter and year-to-date periods, supported by Internet, commercial, and advertising growth. Video revenue was flat in Q3 and down 1% year to date.
- Internet revenue rose 8% in Q3 and 9% year to date; commercial revenue rose 21% in both periods. Advertising revenue increased 16% in Q3 and 13% year to date.
- Residential video customers declined by 163,000 year over year, while residential Internet customers increased by 307,000 and telephone customers by 116,000. Digital video customers grew by 83,000.
- Q3 operating income fell $26 million as operating costs and depreciation increased. Adjusted EBITDA was nearly unchanged. Year-to-date net loss narrowed, primarily reflecting lower debt-extinguishment losses and interest expense.
- Year-to-date free cash flow declined $206 million, primarily due to a $312 million increase in capital expenditures, partly offset by improved operating cash generation and payment timing for interest.
Outlook, management commentary, risks, and unusual items
- Management expected 2012 capital expenditures of $1.6–$1.7 billion and positive free cash flow for the full year. It said capital spending would remain elevated to support digitization, HD/DVR penetration, customer equipment, commercial growth, Internet capacity, and reliability.
- Management said organizational, sales, and operating changes could temporarily weigh on customer connects, revenue, and expenses. It reported reaching its goal of 100 HD channels across substantially all of its footprint in July 2012.
- Programming costs continued to rise because of contractual increases, retransmission-consent costs, and additional programming. The company said it had not fully passed these costs to customers and did not expect to do so without potential customer losses.
- Key risks cited include aggressive competition, basic-video customer losses, economic and housing weakness, online video alternatives, wireless substitution for telephone service, programming-cost increases, access to financing, and compliance with debt covenants. Management warned that unsuccessful growth initiatives or persistent competitive and economic pressures could adversely affect results and contribute to future franchise or goodwill impairment.
- In August, CCO Holdings issued $1.25 billion of 5.25% notes due 2022. Subsequent to quarter-end, Charter redeemed $678 million of 13.5% notes and planned to redeem the remaining $468 million; the filing expected a non-cash gain of approximately $52 million in Q4 related to the redemptions.
- Patent, antitrust, wage-and-hour, and other ordinary-course litigation remains. The company said it could not predict outcomes or estimate a reasonable loss range for certain matters. A Second Circuit decision affirmed dismissal of appeals related to Charter’s bankruptcy plan; rehearing was denied October 18, 2012.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether revenue and customer growth in Internet and commercial services can offset continuing video-customer losses and lower telephone ARPU.
- Whether rising programming, service, and capital costs pressure margins and free cash flow, and whether the company achieves its 2012 capital-spending and free-cash-flow expectations.
- Debt maturity, refinancing, and liquidity assumptions, including the effect of the October 2012 redemptions and the distinction between quarter-end and post-redemption credit availability.
- The full-year impact of elevated investment and organizational changes on customer additions, service quality, and operating expenses.
- Potential outcomes and financial exposure from pending litigation, and the company’s ability to maintain covenant compliance and access capital markets.
Adjusted EBITDA and free cash flow are non-GAAP measures as defined by Charter and should be considered alongside, not as substitutes for, GAAP results. Interim results are not necessarily indicative of full-year results.