Charter Communications, Inc. — 2013 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended December 31, 2013, filed February 21, 2014. Charter is a U.S. cable operator providing video, Internet, voice, commercial communications and advertising services. At year-end it served approximately 5.9 million residential and commercial customer relationships across about 12.8 million passings. The filing also reports fourth-quarter 2013 results.
Charter acquired Bresnan in July 2013 for $1.625 billion, adding systems in Colorado, Montana, Wyoming and Utah. The acquisition and its financing affect year-over-year comparability; Bresnan contributed $270 million of reported 2013 revenue after acquisition.
Financial and operating metrics
| Metric | 2013 | 2012 |
|---|---|---|
| Revenue | $8.155 billion | $7.504 billion |
| Income from operations | $925 million | $916 million |
| Net loss | $169 million | $304 million |
| Net loss per share | $1.65 | $3.05 |
| Operating cash flow | $2.158 billion | $1.876 billion |
| Capital expenditures | $1.825 billion | $1.745 billion |
| Free cash flow (non-GAAP) | $409 million | $144 million |
| Adjusted EBITDA (non-GAAP) | $2.858 billion | $2.694 billion |
| Debt principal | $14.248 billion | $12.937 billion |
Revenue increased 9% as reported; pro forma growth excluding acquisition timing was 5%. Approximate operating margin was 11.3% versus 12.2% in 2012; net margin was approximately negative 2.1% versus negative 4.1%. Adjusted EBITDA margin was approximately 35.1% versus 35.9%.
Revenue mix shifted: video revenue rose 11% to $4.030 billion; Internet revenue rose 17% to $2.186 billion; commercial revenue rose 25% to $822 million. Voice revenue fell 22% to $644 million, primarily due to pricing and bundled-revenue allocation; advertising revenue declined 13% to $291 million. Residential Internet customers increased by 598,000, while video customer trends varied with acquisitions and dispositions. Residential revenue per customer relationship was $107.97, up from $105.78.
Fourth-quarter 2013 revenue was $2.148 billion, operating income $246 million and net income $39 million, compared with $1.913 billion, $206 million and a $40 million net loss, respectively, in fourth-quarter 2012.
Year-end cash and cash equivalents were $21 million. Approximately $1.1 billion was available under credit facilities. Debt carried a 5.6% blended weighted-average rate, and approximately 84% was effectively fixed-rate. About $414 million of principal was scheduled to mature in 2014; the filing classifies it as long-term, citing available credit-facility capacity.
Material changes versus prior comparable period
- Revenue rose $651 million, driven by Bresnan, Internet and commercial growth, pricing and service-level changes; acquisition timing accounted for a substantial part of reported growth.
- Adjusted EBITDA increased 6%, but operating costs rose $485 million. Programming costs reached $2.146 billion, and customer-service costs and marketing also increased.
- Income from operations was nearly flat despite higher revenue; depreciation and amortization increased to $1.854 billion, partly due to Bresnan and recent capital investment.
- Net loss narrowed by $135 million. Lower interest expense and a $137 million reduction in deferred tax liability related to tax-basis step-ups contributed; management cautioned against assuming a similar tax benefit will recur.
- Operating cash flow improved, and free cash flow increased from $144 million to $409 million. Cash flow remained sensitive to substantial capital spending.
- Debt rose by about $1.3 billion year over year, primarily reflecting acquisition financing and other debt transactions. Charter recorded $123 million of debt-extinguishment losses.
Outlook, commentary, risks and unusual items
- Management expected 2014 capital expenditures of approximately $2.2 billion, including about $400 million for completing the all-digital transition. It expected to continue generating free cash flow but provided no specific numeric free-cash-flow forecast.
- Charter expected to complete its all-digital rollout by year-end 2014, enabling more HD channels and faster Internet speeds. Execution delays or costs above plan could affect customer retention and results.
- Management’s growth strategy emphasizes bundled services, Internet and commercial customers, improved customer care and expanded digital offerings. It noted continuing video competition, economic uncertainty, and pressure from wireless substitution in voice.
- Programming costs are a major expense and expected to continue rising. Charter said it cannot fully pass these increases to customers without risking customer losses; certain programming agreements were expired or due to expire by the end of 2014.
- Charter reported January–February 2014 developments after year-end: it proposed discussions with Time Warner Cable (TWC), while TWC and Comcast announced a merger agreement and Comcast’s plan to sell systems. Charter stated that any transaction remained uncertain.
- Debt, refinancing access, covenant compliance and restrictions on subsidiary distributions are material risks. The filing reported no debt covenant default at year-end; Charter Operating’s leverage ratios were below stated covenant limits.
- Tax attributes include about $8.3 billion of federal net operating loss carryforwards, with approximately $6.2 billion subject to Section 382 and other limitations. Valuation allowances were substantial; future usable tax benefits and cash taxes depend on future taxable income and ownership-change limits.
- Contingencies include a Montana property-tax dispute: approximately $25 million of protest payments remained in escrow after an adverse state supreme court ruling and remand. The filing also describes patent litigation with no reasonably estimable loss range, among other ordinary-course claims.
- Charter reported a $39 million fourth-quarter net profit after losses in the first three quarters; the full-year result remained a net loss. Tax and financing items materially influenced reported earnings.
Most important facts for investors to verify
- How much of 2013’s revenue and EBITDA growth reflects Bresnan versus organic performance, and whether customer growth and margins persist.
- Whether 2014 capex, particularly the all-digital program, stays near the $2.2 billion plan and delivers the promised customer and network benefits.
- Debt maturities, refinancing terms, available liquidity and the capacity of operating subsidiaries to distribute cash under covenant restrictions.
- Programming-cost increases, contract renewals and the impact on video margins, pricing and churn.
- Developments in the TWC/Comcast transaction landscape and any resulting acquisition, divestiture or integration commitments.
- Outcome and potential financial exposure of the Montana tax case, patent matters and other contingencies; assess whether tax-loss carryforwards can be used as projected.