Charter Communications, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; fourth-quarter figures are also shown. Charter is a U.S. cable and broadband provider serving approximately 6.7 million residential and small- and medium-business customers. The 10-K was filed February 9, 2016.
Financial performance and key metrics
| Metric | 2015 | 2014 |
|---|---|---|
| Revenue | $9.754 billion | $9.108 billion |
| Income from operations | $1.114 billion | $971 million |
| Operating margin | Approximately 11.4% | Approximately 10.7% |
| Adjusted EBITDA (non-GAAP) | $3.406 billion | $3.190 billion |
| Net loss | $271 million | $183 million |
| Net loss per diluted share | $2.43 | $1.70 |
| Cash flow from operations | $2.359 billion | $2.359 billion |
| Capital expenditures | $1.840 billion | $2.221 billion |
| Free cash flow (non-GAAP) | $547 million | $171 million |
| Debt principal at year-end | $35.9 billion | $21.1 billion |
Revenue grew 7.1%; Adjusted EBITDA grew 7%. Operating income rose, but net loss widened as net interest expense increased to $1.306 billion from $911 million and Charter recorded a $128 million debt-extinguishment loss. The 2015 tax benefit of $60 million included a $187 million deferred tax benefit tied to a tax restructuring; results also included $70 million of merger and acquisition costs and $72 million of transaction-related operating costs.
Revenue mix: residential services generated $8.129 billion (83% of revenue), commercial services $1.127 billion (12%), advertising $309 million (3%), and other revenue $189 million. Internet revenue rose 16.6% to $3.003 billion; commercial revenue rose 13.5% to $1.127 billion. Video revenue increased 3.2% to $4.587 billion despite a 2,000-customer decline; voice revenue fell 6.4% to $539 million.
Fourth-quarter 2015 revenue was $2.512 billion, operating income $323 million, and net loss $122 million. In fourth-quarter 2014, revenue was $2.360 billion, operating income $277 million, and net loss $48 million.
Liquidity, debt, and capital spending
- Year-end cash and cash equivalents were $5 million; restricted cash was $22.264 billion, largely financing proceeds held in escrow for the proposed transactions and not freely available for general use.
- Available credit-facility capacity was approximately $961 million. Current assets of $345 million were below current liabilities of $1.972 billion.
- Debt principal was approximately $35.9 billion, including $21.8 billion associated with the proposed Time Warner Cable transaction and held in escrow. The blended average interest rate was 5.1%; approximately 83% of debt was effectively fixed-rate.
- Scheduled principal payments were $121 million in 2016, $140 million in 2017, $844 million in 2018, $665 million in 2019, $4.2 billion in 2020, and $29.9 billion thereafter. Total contractual obligations, including estimated debt interest, were $58.8 billion.
- Operating cash flow was flat year over year. Free cash flow increased mainly because capital expenditures declined; cash interest paid rose to $1.046 billion from $850 million.
- Capital expenditures fell 17% to $1.840 billion after completion of the all-digital transition. Management expected 2016 spending to reflect customer growth, product development, and transaction-related transition work; it did not provide a specific 2016 capital-spending forecast.
Business changes, transactions, and outlook
- Residential Internet customers increased by 442,000 to 5.227 million; video customers were 4.322 million and voice customers 2.598 million. Monthly residential revenue per customer increased to $111.19 from $108.67.
- Management attributed growth to Internet and triple-play additions, commercial customers, service upgrades, and pricing. It also cited competition, video customer losses, and programming-cost inflation as constraints on future revenue and margins.
- Charter had agreed to acquire Time Warner Cable in a transaction valued at approximately $79 billion enterprise value and to acquire Bright House. Both remained subject to regulatory approvals and other closing conditions; Charter expected closing in the second quarter of 2016. Financing included substantial debt issuance, a proposed $4.3 billion Liberty Broadband investment for the TWC transaction, and cash and equity consideration for Bright House.
- Charter had issued $21.8 billion of debt financing proceeds held in escrow for the pending TWC transaction. If the transaction did not close, specified escrow proceeds would be used to repay related debt, potentially with premiums, and some transaction costs would remain with Charter.
- Regulatory commitments connected with approval included network investment, line extensions, Wi-Fi access points, all-digital conversion, minimum Internet offerings, and temporary commitments on usage-based pricing and settlement-free interconnection.
- In February 2016, a subsidiary announced a planned $1.7 billion senior-notes offering, expected to refinance certain notes due 2019 and 2020 and support general corporate purposes, including a possible higher cash election by TWC shareholders.
Risks, contingencies, and unusual items
- High leverage, substantial interest costs, debt covenants, restricted subsidiary distributions, and large maturities could constrain investment and financial flexibility. The company reported compliance with applicable leverage covenants at year-end.
- Programming costs rose to $2.678 billion, up $219 million; management expected continued increases and said it could not fully pass them to customers without risking subscriber losses.
- Competition from satellite, telephone, wireless, and Internet-delivered video providers could pressure customer retention, pricing, advertising, and margins. Internet customer growth partly offset video and voice weakness.
- The TWC and Bright House transactions faced regulatory, integration, financing, execution, and litigation risks. Expected synergies were not assured; regulatory conditions, delayed closing, or failure to close could add costs or reduce anticipated benefits.
- Charter disclosed shareholder litigation related to the transactions, patent cases, and ordinary-course claims. A settlement of TWC-merger disclosure litigation remained subject to court approval and transaction completion; the filing did not provide a clear estimate of potential losses for patent or other claims.
- Other material exposures included changing broadband and privacy regulation, cybersecurity and network disruptions, franchise renewal risk, interest-rate movements, and possible limits on the use of tax-loss carryforwards. The company reported $11.3 billion of federal net operating loss carryforwards, subject to expiration and ownership-change limitations.
- Charter reported a history of net losses and a shareholders’ deficit of $46 million at year-end. No impairment of goodwill, franchises, or other long-lived assets was recorded in 2015.
Most important facts for investors to verify
- Whether and on what terms the TWC and Bright House transactions closed, including final regulatory conditions, financing, and the resulting debt and ownership structure.
- How much of the $22.264 billion restricted cash and $21.8 billion escrowed debt was released, used, or repaid after year-end.
- Whether Internet subscriber growth and commercial expansion continued to offset video and voice declines, and whether revenue growth translated into sustainable margins and free cash flow.
- Actual programming-cost increases, customer churn, and the company’s ability to pass costs through without losing subscribers.
- Debt maturities, refinancing terms, covenant headroom, available liquidity, and the effect of interest rates on cash interest expense.
- Final transaction-related commitments and costs, litigation outcomes, and any tax-asset realization or impairment developments.