Charter Communications, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Unaudited consolidated results. Unless stated otherwise, amounts are in millions of dollars.
Business context
Charter provides cable video, Internet, telephone, advertising and commercial connectivity services in the United States. It reported approximately 5.9 million residential and commercial customer relationships at quarter-end. On July 1, 2013, Charter acquired Bresnan for $1.625 billion, adding systems in Montana, Wyoming, Colorado and Utah; Bresnan contributed $134 million of Q3 revenue.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $2,118 | $1,880 | $6,007 | $5,591 |
| Operating income | $220 | $211 | $679 | $710 |
| Net loss | $(70) | $(87) | $(208) | $(264) |
| Adjusted EBITDA | $732 | $651 | $2,094 | $1,996 |
| Operating cash flow | $538 | $468 | $1,563 | $1,391 |
| Free cash flow | $132 | $(17) | $325 | $111 |
| Capital expenditures | $425 | $488 | $1,259 | $1,296 |
Revenue rose 13% in Q3 and 7% year to date; on a pro forma basis including Bresnan for the comparable periods, growth was 5% in both periods. Q3 Adjusted EBITDA increased 12% and nine-month EBITDA increased 5%. Operating margin was approximately 10.4% in Q3 versus 11.2% a year earlier, and 11.3% year to date versus 12.7%. Adjusted EBITDA margin was approximately 34.6% in Q3 versus 34.6%, and 34.9% year to date versus 35.7%.
Growth reflected Internet and commercial customer gains, pricing and product mix, and Bresnan. Video revenue increased 15% in Q3 and Internet revenue 23%; commercial revenue rose 30%. Telephone revenue fell 23% and advertising revenue fell 12% in Q3. Higher programming, customer-service and marketing expenses, along with increased depreciation and amortization, pressured operating income. Net losses narrowed, aided in part by lower interest and income tax expense.
Cash, debt and liquidity
- Cash and cash equivalents were $41 at September 30, 2013, versus $7 at year-end 2012; restricted cash of $27 at year-end was released in April.
- Long-term debt carrying value was $14,306; principal debt was approximately $14.4 billion, comprising $4.0 billion of credit-facility debt and $10.4 billion of notes. Debt increased from $12,808 carrying value at December 31, 2012, including financing for Bresnan.
- Approximately $978 million was available under credit facilities. Current liabilities were $1,382, against current assets of $357.
- Nine-month investing cash outflow was $1,926, including $673 for Bresnan net of debt assumed. Financing cash inflow was $397. Cash interest paid was $584.
- Management reported no debt covenant default at quarter-end and said subsidiaries met applicable leverage tests. Debt maturities include $414 in 2014 and $1.1 billion in 2017; $12.7 billion is due thereafter.
Material changes, outlook and risks
- Charter issued and refinanced debt during 2013, including a $1.5 billion seven-year term loan E used to finance Bresnan, and issued notes while retiring other debt. Nine-month loss on debt extinguishment was $123, versus $74 in 2012.
- Management expected 2013 capital expenditures of approximately $1.8 billion and positive free cash flow for the year. It anticipated continued elevated investment in customer equipment, commercial growth, network reliability, back-office systems and the transition to an all-digital platform.
- Management cited competition, economic weakness, customer demand and video substitution as risks. Programming costs were rising, including retransmission-consent and annual contractual costs; the company said it might not be able to pass increases through without losing customers.
- Other risks include substantial leverage and refinancing needs, restrictions on subsidiary distributions, interest-rate exposure, and potential limits on tax-loss carryforwards following ownership changes. Liberty Media acquired an approximately 27% beneficial interest and obtained rights to designate up to four board nominees.
- Patent and ordinary-course litigation remained pending. A Montana property-tax dispute involving Bresnan included approximately $25 million of payments held in escrow; the state appeal had been argued but not decided. Potential losses were not estimable for the patent matters.
- Tax expense benefited from a $58 million reduction in deferred tax liabilities associated with a tax-basis step-up; management did not expect a similarly large benefit absent comparable financing transactions. Acquisition-related costs and the debt-extinguishment losses were notable items.
Important facts for investors to verify
- How much of reported growth and EBITDA improvement is sustainable excluding Bresnan and other acquisition effects?
- Whether customer, pricing and product-mix trends can offset video pressure, programming-cost inflation and weaker advertising.
- Whether projected positive full-year free cash flow and approximately $1.8 billion of capital expenditures were achieved.
- Debt maturities, refinancing access, covenant headroom and the availability of cash at the operating subsidiaries that service debt.
- Resolution and financial exposure, if any, from the Montana tax appeal and pending litigation; the filing does not provide a clear estimate for certain potential losses.
- Effects of Liberty Media’s ownership and board rights, and of Section 382 restrictions, on governance and use of tax-loss carryforwards.