Charter Communications, Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports unaudited fourth-quarter results. Dollars are in millions unless noted. Charter provides residential and commercial cable video, Internet, telephone, and advertising services, serving approximately 5.4 million customers.
Financial performance and key metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Revenue | $7,504 | $7,204 |
| Operating income | $916 | $1,041 |
| Operating margin | 12.2% | 14.5% |
| Net loss | $(304) | $(369) |
| Net loss per diluted share | $(3.05) | $(3.39) |
| Adjusted EBITDA (non-GAAP) | $2,694 | $2,675 |
| Cash from operating activities | $1,876 | $1,737 |
| Capital expenditures | $1,745 | $1,311 |
| Free cash flow (non-GAAP) | $144 | $483 |
| Debt, principal amount | $12,937 | $12,821 |
Revenue grew 4%, while operating income fell as operating costs and depreciation and amortization increased. Adjusted EBITDA was nearly flat; its margin was approximately 35.9%, versus 37.1% in 2011. Net losses persisted, reflecting interest, depreciation and amortization, and deferred tax expense. Interest expense was $907 million; income tax expense was $257 million, predominantly deferred.
Fourth quarter: Revenue was $1,913, operating income $206, net loss $40, and diluted loss per share $0.41. Compared with fourth-quarter 2011, revenue rose from $1,834, while operating income declined from $265; net loss narrowed from $67.
Revenue mix and customers: Video revenue was $3,639 (flat year over year); Internet $1,866 (+9%); telephone $828 (-3%); commercial $658 (+21%); and advertising $334 (+14%). Residential video customers fell to 3.989 million from 4.144 million, while Internet customers grew to 3.785 million from 3.492 million. Commercial PSUs increased to 467,000 from 412,000.
Liquidity, debt, and cash flow
Year-end cash and cash equivalents were $7 million, restricted cash $27 million, current assets $333 million, and current liabilities $1,224 million. Available credit-facility capacity was approximately $960 million. Debt had an accreted value of $12.808 billion; about 87% of principal was effectively fixed-rate. The blended weighted-average interest rate was 6.0%, down from 7.1%.
Principal maturities included $260 million in 2013, $411 million in 2014, $1.556 billion in 2016, and $1.655 billion in 2017; $8.957 billion was due thereafter. Contractual debt interest payments were estimated at $5.347 billion in total. Operating cash flow increased, but free cash flow fell sharply as capital expenditures rose. The company expects 2013 capital expenditures of approximately $1.7 billion and expects positive free cash flow, while noting that refinancing terms depend on market conditions.
Material changes, outlook, and risks
- Internet and commercial growth, plus advertising, drove revenue gains; video revenue was flat amid basic-video customer losses. Programming costs rose to $1.979 billion, and the company said it cannot fully pass cost increases to customers without risking further churn.
- Capital expenditures increased by $434 million, including spending on customer equipment, network reliability, commercial growth, and organizational realignment. Management expected elevated investment and possible short-term disruption to customer connections, revenue, and expenses during operating changes.
- Charter launched revised bundled pricing in mid-2012; about 30% of customers were on the new plan by year-end. Management’s objectives included improving customer value, increasing product penetration, and reducing churn.
- In February 2013, Charter agreed to acquire Optimum West for approximately $1.6 billion cash, with a $1.5 billion term-loan commitment to fund part of the purchase. Closing was expected in the third quarter of 2013.
- Principal risks include substantial indebtedness, refinancing and covenant constraints, competition from satellite, telephone, wireless, and Internet-delivered services, rising programming and retransmission-consent costs, franchise renewals and regulation, technology investment needs, and potential customer attrition. Tax-loss utilization is limited by ownership-change rules.
- Patent litigation and appeals concerning the 2009 bankruptcy plan remained pending; Charter said outcomes and possible losses could not be reasonably estimated. Other ordinary-course claims could be material in aggregate. No impairment charges were recorded in 2012, though franchise and goodwill valuations depend on uncertain forecasts.
Most important facts for investors to verify
- Whether Internet and commercial growth can offset video and telephone pressure while sustaining margins and customer retention.
- Whether programming-cost inflation, pricing actions, and renewals of contracts expiring by the end of 2013 affect churn and profitability.
- How the $1.7 billion 2013 capital-spending plan affects free cash flow, and whether management’s positive-free-cash-flow expectation is achieved.
- Debt refinancing, upcoming maturities, covenant headroom, and the availability of cash at the relevant subsidiary borrowers.
- Final purchase price, financing, closing conditions, and integration economics for the Optimum West acquisition.
- Potential cash-tax effects of restricted tax-loss carryforwards and the outcomes of material litigation and regulatory matters.