Charter Communications, Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; filed February 23, 2015. The filing also reports fourth-quarter results. Dollar amounts are in millions unless noted.
Business context
Charter provides subscription video, high-speed Internet and voice services, commercial broadband services and advertising over cable networks. At year-end it served approximately 6.2 million residential and commercial customer relationships across 12.9 million estimated passings. The all-digital transition was completed during 2014. Results include Bresnan, acquired in July 2013, so reported annual growth is not wholly organic.
Key financial metrics
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $9,108 | $8,155 |
| Operating income | $971 | $909 |
| Operating margin | 10.7% | 11.1% |
| Adjusted EBITDA (non-GAAP) | $3,190 | $2,858 |
| Net loss | $(183) | $(169) |
| Net loss per share | $(1.70) | $(1.65) |
| Cash from operating activities | $2,359 | $2,158 |
| Capital expenditures | $2,221 | $1,825 |
| Free cash flow (non-GAAP) | $171 | $409 |
Revenue grew 12% year over year; pro forma growth excluding the timing effect of Bresnan was 8%. Adjusted EBITDA increased 12%, while operating margin narrowed. Interest expense rose to $911 from $846. The company remained loss-making, principally citing interest, depreciation and amortization, and deferred tax expense.
Revenue by service in 2014: video $4,443 (49%); Internet $2,576 (28%); voice $575 (6%); commercial $993 (11%); advertising $341 (4%); other $180 (2%). Internet revenue grew 18% and commercial revenue 22%; voice revenue fell 11%. Residential video customers declined 17,000, while Internet customers increased 383,000. Monthly residential revenue per customer was $111.52, up from $108.12.
Fourth quarter: Revenue was $2,360 versus $2,148 in Q4 2013; operating income was $277 versus $244. Charter reported a net loss of $48, compared with net income of $39, and a loss per share of $0.44 versus diluted earnings per share of $0.35.
At December 31, 2014, total debt was approximately $21.1 billion in principal amount, including $7.0 billion of transaction-related borrowings held in escrow; carrying/accreted debt was $21.0 billion. The blended weighted-average interest rate was 5.4%. Cash and cash equivalents were $3, while restricted cash was $7,111. Credit-facility availability was approximately $817, with a separate $500 million revolver extension committed and available. Shareholders’ equity was $146; total assets were $24,550.
Material changes versus prior comparable period
- Revenue increased $953, led by Internet, commercial services, pricing and bundled services; Bresnan contributed approximately $276 of 2014 revenue growth.
- Programming costs rose to $2,459 from $2,146, reflecting contractual increases, retransmission-consent costs and expanded carriage. Management said it could not fully pass these increases to customers.
- Capital expenditures increased $396 to $2,221, including $410 related to the all-digital transition. Free cash flow fell by $238, mainly due to higher capital spending and interest costs.
- Debt increased substantially, primarily from financing raised and placed in escrow for the proposed Comcast transactions. Charter incurred approximately $75 of related interest expense in 2014.
Outlook, transactions and principal risks
- Outlook: Management expected 2015 capital expenditures of approximately $1.7 billion, excluding potential transaction-related expenditures. It planned to use free cash flow, credit availability and refinancing opportunities to fund operations, investment and debt needs; no specific revenue or earnings guidance was provided.
- Comcast transactions: The agreement contemplated acquiring and exchanging cable systems, resulting in a net increase of approximately 1.3 million TWC video customers, and receiving an approximately 33% interest in the proposed GreatLand Connections. Estimated purchase consideration and transaction expenses were approximately $7.2 billion. Closing remained subject to conditions and approvals. Charter anticipated dilution of existing shareholders’ ownership to approximately 92% after the transactions.
- Leverage and liquidity: High debt service requirements, covenants, variable-rate exposure and restrictions on subsidiary distributions could constrain financial flexibility. Most debt maturities are thereafter, with $1.1 billion due in 2017 and $17.3 billion thereafter; refinancing depends on market access.
- Operating risks: Competition from satellite, telecom, wireless and internet-delivered video may pressure customer retention, pricing and advertising. Programming and retransmission costs may continue to rise faster than rates, potentially reducing video margins.
- Execution and regulation: Transaction closing, integration, synergies, transition costs, acquired-system performance and potential programming dis-synergies are uncertain. Proposed broadband regulation, franchise requirements, privacy/cybersecurity obligations and other regulatory changes could increase costs or limit operations.
- Taxes and contingencies: Charter disclosed $9.5 billion of federal tax-loss carryforwards, subject to ownership-change limitations, and a $3.1 billion valuation allowance against deferred tax assets. Patent and ordinary-course litigation outcomes could not be predicted; the company reported no expected material effect from the California waste-disposal investigation at that time.
Most important facts for investors to verify
- Whether the Comcast/TWC-related transactions closed, their final consideration, financing, shareholder dilution and regulatory conditions.
- Whether Internet and commercial growth can offset video and voice customer/revenue pressure, and whether per-customer revenue gains persist.
- Programming-cost growth, customer churn and the resulting impact on operating margins and cash generation.
- Whether 2015 capital spending tracks the stated estimate and free cash flow recovers from the 2014 decline.
- Debt maturities, refinancing access, covenant headroom and the availability and use of escrowed funds and revolving credit.
- Realizability and timing of tax-loss carryforwards, including any further Section 382 ownership-change limits.