Comcast Corporation 2010 Form 10-K Summary
Business Context and Reporting Period
Comcast filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2010. The company primarily provided U.S. video, high-speed Internet and phone services through its Cable segment, which generated approximately 94% of consolidated revenue. The Programming segment consisted principally of E!, Golf Channel, VERSUS, G4 and Style. Comcast employed approximately 102,000 people and served approximately 22.8 million video, 17.0 million high-speed Internet and 8.6 million phone customers at year-end.
The filing includes fourth-quarter 2010 results but is an annual filing, not a standalone Form 10-Q. On January 28, 2011, after the reporting period, Comcast closed its transaction with GE and acquired control of NBCUniversal Holdings, owning 51% while GE retained 49%.
Key Financial Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $37.937 billion | $35.756 billion | 6.1% increase |
| Operating income | $7.980 billion | $7.214 billion | 10.6% increase |
| Net income attributable to Comcast | $3.635 billion | $3.638 billion | 0.1% decrease |
| Diluted EPS | $1.29 | $1.26 | Increase |
| Cash flow from operating activities | $11.179 billion | $10.281 billion | 8.7% increase |
| Capital expenditures | $4.961 billion | $5.117 billion | 3.0% decrease |
| Total debt | $31.415 billion | $29.096 billion | 8.0% increase |
| Cash and cash equivalents | $5.984 billion | $671 million | Increase |
Operating margin was approximately 21.0% in 2010, compared with 20.2% in 2009. Cable segment operating income before depreciation and amortization was $14.561 billion on $35.762 billion of revenue, a 40.7% margin compared with 40.4% in 2009. Programming segment operating income before depreciation and amortization was $469 million on $1.674 billion of revenue, a margin of approximately 28.0%.
Cable revenue increased 5.6% to $35.762 billion. High-speed Internet revenue increased 10.4% to $8.566 billion, phone revenue increased 12.9% to $3.682 billion, and advertising revenue increased 25.9% to $1.818 billion. Video revenue increased only 0.8% to $19.525 billion.
Net cash used in investing activities was $5.711 billion, while net cash used in financing activities was $155 million. Comcast paid $1.064 billion of dividends and repurchased approximately 70 million shares for $1.2 billion. Year-end current assets were $8.886 billion versus current liabilities of $8.234 billion.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income grew faster than in 2009, supported by Internet, phone, advertising and Programming segment growth.
- Net income was essentially flat because income-tax expense increased to $2.436 billion from $1.478 billion. The effective tax rate rose to 39.9% from 28.9%; 2009 benefited from approximately $566 million of tax-related items.
- Video customers declined by approximately 757,000, following a decline of approximately 623,000 in 2009. Management attributed the decline to expired promotions, competition and economic weakness.
- High-speed Internet customers increased by approximately 1.1 million and phone customers by approximately 988,000. Digital video penetration increased to 86.6% from 78.2%.
- Video programming expenses, Comcast’s largest operating expense, increased 5.6% to $7.438 billion, reflecting higher license rates, additional digital customers and expanded programming.
- Cable capital expenditures declined to $4.847 billion from $5.037 billion, while investment continued in all-digital conversion, DOCSIS 3.0, business services and other network initiatives.
- Total debt increased by approximately $2.3 billion, primarily because Comcast issued $3.4 billion of notes to refinance maturities, support working capital and fund part of the NBCUniversal transaction.
- Goodwill impairment charges totaled $76 million, including $60 million in Programming and $16 million in Corporate and Other.
Guidance, Outlook, Commentary, Risks and Unusual Items
Management expected further residential video customer declines in 2011 but continued growth in Internet, phone, advanced services and business services. Management expected 2011’s annual effective tax rate to be between 35% and 40%, partly because of the partnership structure of NBCUniversal Holdings.
Comcast stated that it expected to meet current and long-term liquidity requirements through operating cash flow, existing cash and investments, available credit facilities and future financing. Available borrowing capacity under credit facilities was approximately $6.4 billion at December 31, 2010. The company was in compliance with its debt covenants and had a $6.8 billion revolving credit facility due in 2013.
The NBCUniversal transaction required a $6.2 billion cash payment at closing. NBCUniversal issued $9.1 billion of senior debt and became a consolidated subsidiary beginning in 2011. Comcast also committed, subject to limitations, to fund up to $2.875 billion for each of two potential GE redemptions, or up to $5.75 billion in aggregate, if NBCUniversal Holdings cannot fund them.
Beginning in 2011, Comcast expected to report five segments: Cable Distribution, Cable Networks, Broadcast Networks, Filmed Entertainment and Theme Parks. The filing did not provide pro forma revenue or earnings for the combined company because the acquisition accounting was incomplete.
- Principal business risks include intense competition from satellite, telephone, wireless and online video providers; changing technology and consumer behavior; rising programming and sports-rights costs; weak economic conditions; advertising cyclicality; and dependence on content distribution agreements.
- Regulatory risks include FCC, DOJ and NBCUniversal transaction conditions, open-Internet requirements, arbitration rights for distributors, retransmission-consent obligations, franchise requirements and possible changes to media ownership and programming rules.
- Material commitments included $31.377 billion of debt obligations, $19.653 billion of purchase obligations, $2.006 billion of operating leases and $5.974 billion of other long-term obligations as of December 31, 2010, excluding NBCUniversal obligations.
- Uncertain tax positions were approximately $1.3 billion, with $604 million of accrued related interest. Comcast was disputing proposed IRS adjustments relating primarily to financing transactions.
- Pending antitrust, program-packaging, set-top-box, patent and other litigation was not expected by management to materially affect consolidated financial position, but an adverse outcome could be material to results or cash flow for an individual period.
- Management identified cable franchise-right valuation and income-tax accounting as critical estimates. A hypothetical 10% reduction in certain cable franchise fair values would have produced an estimated $711 million impairment in the Eastern Division, with no impairment indicated for the other divisions at that sensitivity level.
Investor Verification Checklist
- Verify the 2011 pro forma impact, purchase-price allocation, goodwill, noncontrolling interest and segment reporting for NBCUniversal when disclosed in subsequent filings.
- Assess the effect of NBCUniversal’s $9.1 billion of debt and Comcast’s potential aggregate $5.75 billion GE redemption funding commitment on leverage and liquidity.
- Track video subscriber losses, retention after promotional periods, average revenue per customer and continued growth in Internet and phone subscribers.
- Monitor programming, retransmission-consent, sports-rights and other content costs relative to revenue growth and Cable margins.
- Review the sustainability of the 39.9% effective tax rate and the resolution of approximately $1.3 billion of uncertain tax positions.
- Evaluate regulatory compliance costs and restrictions arising from the FCC order and DOJ consent decree.
- Confirm cash conversion, capital expenditure requirements, debt maturities and the planned completion of share repurchases and dividend increases.