Charter Communications, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are with Q1 2010 unless noted. Charter is a U.S. cable operator offering video, high-speed Internet, telephone, commercial services and advertising. It reported approximately 5.2 million residential and commercial customers. Dollar amounts are in millions unless indicated.
Financial performance and liquidity
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Revenue | $1,770 | $1,735 |
| Operating income | $269 | $251 |
| Operating margin | 15.2% | 14.5% |
| Adjusted EBITDA (non-GAAP) | $663 | $637 |
| Net income (loss) | $(110) | $24 |
| Diluted earnings (loss) per share | $(0.97) | $0.21 |
| Cash from operating activities | $447 | $530 |
| Capital expenditures | $356 | $310 |
| Free cash flow (non-GAAP) | $72 | $205 |
- Revenue rose 2%; Adjusted EBITDA increased 4%. Operating costs were $768, selling, general and administrative expenses $345, and depreciation and amortization $383. Adjusted EBITDA margin was approximately 37.5%, versus 36.7%.
- Net interest expense increased to $233 from $204. Charter recorded a $67 debt-extinguishment loss related to refinancing; Q1 2010 included $1. Income tax expense was $79, compared with $19; the prior-year amount included a $69 benefit from a partnership-interest exchange.
- At March 31, cash and cash equivalents were $26, plus $28 restricted cash held in escrow. The cash flow statement reports $54 ending cash including restricted cash. Revolving credit availability was approximately $957.
- Long-term debt carrying value was $12,554 (principal amount $12,506); management described accreted debt value as approximately $12.6 billion. Total assets were $15,705 and shareholders’ equity $1,182.
Changes, business trends and significant transactions
- Revenue growth reflected increases in Internet, telephone and commercial customers, pricing and advanced video services; asset sales reduced the year-over-year revenue increase by about $18.
- Video revenue fell 2% to $908, while high-speed Internet revenue rose 4% to $412, telephone revenue rose 7% to $212, and commercial revenue rose 16% to $137. Basic video customers declined; Internet and telephone customer counts increased.
- Charter added approximately 25,600 total customers during the quarter but lost approximately 23,800 basic video customers. Year over year, video customers fell to 4.253 million from 4.548 million, while Internet customers increased to 3.334 million from 3.166 million and telephone customers to 1.741 million from 1.623 million.
- Programming costs increased to approximately $466 from $457, mainly due to contractual rate increases. Capital spending increased by $46, primarily reflecting investments in residential and commercial service capabilities.
- In January, subsidiaries issued $1.4 billion of 7.00% senior notes due 2019 and used proceeds to repay Charter Operating credit-facility debt. In March, Charter repurchased 4.5 million shares privately for $207 million ($46.10 per share), funded with cash and available liquidity.
Outlook, risks and contingencies
- Management expected 2011 capital expenditures of $1.3–$1.4 billion. It anticipated programming expense growth at a higher rate than in 2010, citing retransmission consent, programmer rate increases and additional programming.
- Management said liquidity from cash, free cash flow, revolving facilities and capital-market access was expected to meet projected operating needs. It expected to use free cash flow, revolver availability and refinancing transactions to extend or reduce debt maturities; refinancing timing and terms depend on market conditions.
- Debt maturities included $1.1 billion in 2012 and $2.2 billion in 2014. A $1.3 billion maturity concentration in early 2014 could affect the Charter Operating revolver’s maturity: absent lender consent, its termination date may move from March 2015 to December 2013 under specified conditions.
- Management cited competition, weak economic and housing conditions, high unemployment, basic-video customer losses and rising programming costs as risks to growth. It warned that continued adverse conditions could contribute to future franchise or goodwill impairments.
- Other stated risks include franchise renewal and compliance, new market entrants, net-neutrality and other regulation, channel-carriage requirements, pole-attachment costs, and potential additional regulation of voice services. Interest-rate exposure is partly managed with swaps; approximately 75% of principal debt was effectively fixed at quarter-end.
- Appeals relating to the 2009 bankruptcy plan remained unresolved: appeals by Law Debenture Trust and R2 Investments were denied in March 2011 and appealed; securities-plaintiff appeals remained pending. Charter said it could not predict the outcome. The company also disclosed an EPA self-audit concerning backup-battery reporting issues, which it did not view as material, and other ordinary-course claims that could be material in aggregate.
- Disclosure controls were concluded effective; management reported no material change in internal control over financial reporting during the quarter. The interim financial statements are unaudited.
Important facts for investors to verify
- Whether operating cash generation and free cash flow recover after the year-over-year declines, given higher capital spending and interest costs.
- Debt refinancing progress, the early-2014 maturity concentration, revolver maturity conditions, and continued covenant compliance and subsidiary distribution capacity.
- Whether Internet, telephone and commercial growth can offset ongoing basic-video customer losses and increased programming costs.
- The effect and resolution of pending legal appeals and other contingencies, along with the potential impact of evolving regulatory requirements.
- Management’s non-GAAP Adjusted EBITDA and free-cash-flow calculations and reconciliations; these measures are not substitutes for GAAP results or operating cash flow.