Charter Communications, Inc. — Q2 2011 Form 10-Q
Business context and reporting period. Charter is a U.S. cable operator offering video, Internet, telephone, commercial services and advertising. This unaudited filing covers the three and six months ended June 30, 2011; amounts are in millions unless stated otherwise. Charter reported approximately 5.2 million residential and commercial customers at quarter-end.
Financial performance and liquidity
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $1,791 | $1,771 | $3,561 | $3,506 |
| Income from operations | $270 | $254 | $539 | $505 |
| Adjusted EBITDA | $673 | $646 | $1,336 | $1,283 |
| Net loss | $(107) | $(81) | $(217) | $(57) |
| Basic and diluted loss per share | $(0.98) | $(0.72) | $(1.95) | $(0.51) |
| Operating cash flow | Not separately stated | Not separately stated | $907 | $981 |
| Capital expenditures | $324 | $339 | $680 | $649 |
| Free cash flow | $155 | $127 | $227 | $332 |
Revenue increased 1% in Q2 and 2% in the first half. Operating margin was approximately 15% in both 2011 periods, versus 14% in 2010. Adjusted EBITDA margin was approximately 37.6% in Q2 2011 and 37.5% for the first half, calculated from reported figures. Adjusted EBITDA and free cash flow are non-GAAP measures as defined by the company and should not be treated as substitutes for GAAP results or operating cash flow.
- Balance sheet and debt: At June 30, cash and cash equivalents were $166, plus $28 of restricted cash; total assets were $15,809 and shareholders’ equity was $1,064. Long-term debt was $12,620 at accreted value ($12,521 principal), versus $12,306 at accreted value at year-end 2010.
- Liquidity: The company reported approximately $1.2 billion available under its revolving credit facility. Management said it expected cash on hand, free cash flow, revolver availability and capital-market access to fund projected operating needs.
- Debt service and maturities: Debt maturities were $16 in the remainder of 2011, $1.1 billion in 2012, $230 million in 2013, $1.0 billion in 2014, $30 million in 2015, $4.6 billion in 2016 and $5.5 billion thereafter. The company reported a 7.5% blended weighted-average interest rate at June 30, with approximately 87% of total principal effectively fixed, including swaps.
Material changes versus the prior comparable period
- Revenue growth reflected increases in Internet, telephone and commercial services, partly offset by a 3% decline in video revenue. Commercial revenue grew 17% in Q2; Internet revenue grew 4% and telephone revenue 3%.
- The company lost approximately 107,500 basic video customers during the first half and total customers declined approximately 12,100. At June 30, video customers were 4.17 million versus 4.47 million a year earlier; Internet customers rose to 3.35 million from 3.19 million and telephone customers to 1.75 million from 1.66 million.
- Q2 Adjusted EBITDA rose to $673 from $646, supported by commercial, Internet and telephone growth and lower selling, general and administrative costs. Operating income also increased.
- Net loss worsened by $26 in Q2 and $160 in the first half. Higher interest expense and debt-extinguishment losses were key factors. First-half interest expense rose to $474 from $423; loss on extinguishment of debt was $120 versus $35.
- First-half operating cash flow declined $74 and free cash flow declined $105 year over year. The filing attributes the free-cash-flow reduction mainly to less cash from working-capital movements, higher cash interest and $31 more capital spending.
Outlook, commentary and risks
- Management expected 2011 capital expenditures of approximately $1.3–$1.4 billion and said it expected to continue generating free cash flow. It cited possible future refinancing, debt reduction, business investment, acquisitions, system swaps, stock repurchases or dividends; no specific transaction was identified as probable and material.
- Management attributed pressure on customer demand to competition and weakened economic conditions, including housing weakness and unemployment. It warned that continued adverse conditions could further affect growth and results, and potentially contribute to impairment of franchises and goodwill.
- Programming costs increased and management expected them to continue rising, at a higher rate than in 2010, due to contractual increases, retransmission-consent costs and additional programming. Competition, customer losses, price sensitivity and the ability to offset programming costs are material business risks.
- Debt, refinancing needs, interest rates, covenant compliance and restrictions on subsidiary distributions are significant financial risks. Management reported no debt-covenant default for the quarter and stated that applicable subsidiaries met leverage tests at June 30; future distribution capacity is not assured.
- Interest-rate swaps had $2.0 billion notional outstanding and a reported fair-value liability of $66. The filing describes regulatory uncertainty around broadband/net neutrality, franchises, channel carriage and VoIP, among other matters.
- Two parties appealed the March 2011 denial of appeals concerning the bankruptcy reorganization plan; securities plaintiffs’ appeals were denied in July 2011. The company said it could not predict the ultimate outcome or estimate a reasonable range of loss. Ordinary-course litigation could be material in aggregate. An EPA self-reporting audit identified backup-battery reporting compliance issues; the company did not view them as material.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer losses, especially in basic video, continue and whether growth in Internet, telephone and commercial services offsets them.
- How programming-cost increases, including retransmission consent, affect margins and pricing.
- Debt refinancing progress, maturity management, interest costs, revolver availability and covenant/distribution capacity.
- Whether planned capital spending stays within the $1.3–$1.4 billion outlook and supports sustainable free cash flow.
- Developments in bankruptcy-related appeals, other litigation, franchise renewals and regulatory proceedings.
- The company’s non-GAAP Adjusted EBITDA and free-cash-flow definitions and reconciliations when comparing performance with peers.