Business context and reporting period
Charter Communications, Inc. filed this Form 10-K for the fiscal year ended December 31, 2011. Charter is a U.S. cable and broadband provider, serving about 5.2 million residential and commercial customers. Services include video, high-speed Internet, telephone, commercial connectivity and advertising. The filing also reports fourth-quarter results. Comparisons with periods before Charter’s November 2009 emergence from Chapter 11 are affected by fresh-start accounting.
Financial and operating performance
| Metric | 2011 | 2010 |
|---|---|---|
| Revenue | $7.204 billion | $7.059 billion |
| Operating income | $1.041 billion | $1.024 billion |
| Operating margin | 14.4% | 14.5% |
| Net loss attributable to Charter shareholders | $369 million | $237 million |
| Adjusted EBITDA | $2.675 billion | $2.599 billion |
| Adjusted EBITDA margin | 37.1% | 36.8% |
| Cash flow from operations | $1.737 billion | $1.911 billion |
| Capital expenditures | $1.311 billion | $1.209 billion |
| Free cash flow | $483 million | $710 million |
Fourth-quarter 2011 revenue was $1.834 billion, operating income $265 million, and net loss attributable to Charter shareholders $67 million, or $0.63 per share. Fourth-quarter 2010 revenue was $1.784 billion, operating income $279 million, and net loss $85 million.
At year-end, total debt was $12.856 billion on an accreted-value basis ($12.821 billion principal); blended weighted-average interest was 7.1%, and 82% of principal was effectively fixed-rate. Debt maturities included $531 million in 2012 and $4.341 billion in 2016. Cash and cash equivalents were $29 million, including $27 million restricted; available credit-facility capacity was approximately $1.3 billion. Current assets were $370 million and current liabilities $1.153 billion.
Changes versus the prior comparable period
- Revenue increased 2%; growth in Internet, telephone and commercial services offset a 2% decline in video revenue.
- Residential basic video customers declined by 215,500 on an acquisition- and divestiture-adjusted basis. Residential Internet customers increased by 228,600 and telephone customers by 69,500 on the same basis.
- Commercial revenue increased 18% to $583 million; Internet revenue rose 6% to $1.706 billion and telephone revenue rose 4% to $858 million.
- Adjusted EBITDA increased 3%, while free cash flow fell $227 million, primarily reflecting higher cash interest and capital spending. Net interest expense rose $86 million, with the weighted-average interest rate increasing from 6.2% to 7.3%.
- Programming costs rose to approximately $1.9 billion. Capital expenditures increased to $1.311 billion.
- Charter reported a larger net loss, including $143 million of debt-extinguishment losses and $299 million of income tax expense, much of the latter deferred and noncash.
Outlook, commentary, risks and unusual items
- Management expected positive free cash flow in 2012 and projected capital expenditures of $1.4 billion to $1.5 billion. The filing gives no specific 2012 revenue or Adjusted EBITDA guidance.
- Management said customer growth could remain challenging in 2012. It cited competition, economic conditions and video customer losses, while pursuing growth in broadband, commercial services and bundled offerings.
- Programming expenses are expected to keep increasing, particularly from retransmission consent, sports and other content costs. The company warned that it may not be able to pass these increases fully to customers; some programming agreements expired or were due to expire by the end of 2012.
- Charter identified substantial debt, refinancing and covenant risks, including dependence on subsidiary distributions and access to capital markets. It reported no debt default at year-end and said applicable leverage tests were met.
- After year-end, Charter issued $750 million of 6.625% notes due 2022 and used proceeds and a term-loan draw to refinance or repurchase debt. The delayed-draw $500 million Term Loan A amount was drawn in February 2012.
- Charter repurchased approximately $200 million of shares under an authorization and entered into additional privately negotiated repurchases; total 2011 share purchases described in the filing were approximately $733 million. Some counterparties were funds affiliated with significant shareholders.
- Thomas M. Rutledge became CEO on February 13, 2012, following the announced departure of Michael J. Lovett. Risks also include regulation, franchise renewals, patent and other litigation, cybersecurity, and limits on the use of tax loss carryforwards.
Important facts for investors to verify
- Reconcile fourth-quarter and annual results to the audited statements, and distinguish GAAP results from management-defined Adjusted EBITDA and free cash flow.
- Review debt maturities, refinancing terms and covenant headroom, including the effect of subsequent 2012 transactions and subsidiary distribution restrictions.
- Track video subscriber attrition, broadband and commercial customer growth, and whether revenue growth translates into sustained free cash flow.
- Assess the trajectory of programming costs, customer pricing and margins, and the status and terms of expiring programming agreements.
- Review the share repurchases, related-party disclosures and remaining share count, alongside capital needs and debt-reduction priorities.
- Consider tax-loss limitations, litigation and regulatory contingencies, and the assumptions underlying franchise valuations and impairment tests.