Comcast Corporation: 2011 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Comcast filed its quarterly report for the three and six months ended June 30, 2011. The company operates Cable Communications and, following the January 28, 2011 transaction with General Electric, five reportable segments: Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks.
NBCUniversal results are included from January 29, 2011 onward. Comcast owns 51% of NBCUniversal Holdings, while GE owns 49%. The transaction substantially affects comparability with 2010; management also provides unaudited pro forma information.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Three Months Ended June 30, 2010 | Six Months Ended June 30, 2011 | Six Months Ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $14.333 billion | $9.525 billion | $26.461 billion | $18.727 billion |
| Operating income | $2.938 billion | $2.078 billion | $5.162 billion | $4.013 billion |
| Net income attributable to Comcast | $1.022 billion | $884 million | $1.965 billion | $1.750 billion |
| Diluted EPS | $0.37 | $0.31 | $0.70 | $0.62 |
| Cash flow from operations | Not separately provided | Not separately provided | $6.956 billion | $5.332 billion |
- Second-quarter revenue increased 50.5%, operating income increased 41.4%, and net income attributable to Comcast increased 15.6%.
- Six-month revenue increased 41.3%, operating income increased 28.6%, and net income attributable to Comcast increased 12.3%.
- Calculated operating margin was approximately 20.5% in the second quarter versus 21.8% in the prior-year quarter, and 19.5% for the six months versus 21.4% in 2010. The decrease reflects the inclusion of NBCUniversal, including acquisition-related amortization and content costs.
- Six-month operating cash flow increased 30.5% to $6.956 billion. Capital expenditures were $2.377 billion, cash paid for intangible assets was $296 million, and acquisition spending was $5.660 billion.
- Cash and cash equivalents were $1.997 billion at June 30, 2011, down from $5.984 billion at December 31, 2010. Current assets were $8.350 billion and current liabilities were $12.697 billion.
- Reported debt consisted of $1.350 billion of current debt and $38.209 billion of long-term debt, or approximately $39.559 billion in total. The filing states estimated fair value of debt was approximately $43 billion.
- Net debt based on reported total debt less cash was approximately $37.6 billion. Comcast reported approximately $5.7 billion of availability under its credit facilities, in addition to the $1.5 billion NBCUniversal revolving credit facility, which was undrawn at June 30.
- Dividends declared were $0.1125 per common share for the quarter. Comcast repurchased approximately 46 million Class A Special shares for approximately $1.1 billion during the six months.
Material Changes Versus the Prior Comparable Period
- The NBCUniversal transaction added $4.1 billion of revenue in the second quarter and $6.3 billion for the period from January 29 through June 30, 2011. It contributed $236 million and $228 million, respectively, to Comcast-attributable net income for those periods.
- NBCUniversal added approximately $11.955 billion of preliminary goodwill, $14.376 billion of identifiable intangible assets and $9.115 billion of debt in the acquisition accounting allocation. The allocation remained preliminary and subject to potentially significant changes.
- Six-month Cable Communications revenue increased 5.7% to $18.425 billion, while operating income before depreciation and amortization increased 7.2% to $7.635 billion. High-speed Internet customers increased by 561,000 and phone customers by 453,000, while video customers declined by 277,000.
- At June 30, Comcast served approximately 22.5 million video customers, 17.5 million high-speed Internet customers and 9.1 million phone customers.
- On a pro forma combined basis, NBCUniversal segment revenue increased 2.0% for the six months, while operating income before depreciation and amortization increased 5.1%. Cable Networks and Theme Parks improved, while Broadcast Television revenue declined primarily because 2010 included the Vancouver Olympics. Filmed Entertainment remained unprofitable before depreciation and amortization for the six-month pro forma period.
- Interest expense increased to $1.226 billion for the six months from $1.067 billion, primarily because Comcast consolidated NBCUniversal's $9.1 billion of senior debt.
- Investment income increased to $150 million from $101 million for the six months, but included significant mark-to-market volatility from prepaid forward sale agreements.
Guidance, Outlook, Risks and Unusual Items
- Management expects the 2011 annual effective tax rate to be between 35% and 40%.
- Management expects further declines in residential video customers during the remainder of 2011 because of competition and economic weakness.
- Programming expenses are rising, and advertising revenue remains sensitive to economic conditions, automotive advertising trends and the absence of political advertising.
- Home entertainment revenue is expected to remain negatively affected by declining DVD sales, piracy, digital substitution, rental kiosks and weak consumer spending.
- Comcast accepted a $4.38 billion bid for U.S. broadcast rights to the 2014, 2016, 2018 and 2020 Olympic Games. Most related cash payments are expected to occur around the time associated revenue is collected.
- On July 1, 2011, NBCUniversal acquired the remaining 50% of Universal City Development Partners for $1.025 billion. UCDP became wholly owned and its results will be consolidated thereafter. NBCUniversal had approximately $750 million outstanding under its revolving facility following the transaction.
- GE may require redemptions of portions of its NBCUniversal interest beginning in 2014 and 2018. Comcast committed to fund up to $2.875 billion for each of two potential redemptions, or up to $5.75 billion in aggregate, subject to stated conditions.
- Transaction-related costs totaled $129 million for the six months, including $113 million in operating costs, $16 million in other expense and no material interest expense. The acquisition accounting, including goodwill, intangible assets, film and television costs, tax liabilities and redeemable noncontrolling interest, remained preliminary.
- Pending antitrust and other litigation could be material to results or cash flows in an individual period, although management does not expect the ultimate disposition to materially affect consolidated financial position. The filing does not provide a clear range of potential loss.
- Management reported that disclosure controls and procedures were effective. No significant changes to previously disclosed risk factors were reported.
Most Important Facts for Investors to Verify
- Verify the sustainability of operating performance excluding NBCUniversal acquisition effects and compare reported results with the company's pro forma measures.
- Monitor video customer losses, pricing, broadband and phone growth, business services expansion and rising programming costs.
- Assess leverage and liquidity after the NBCUniversal acquisition and the subsequent UCDP acquisition, including the timing and funding of potential GE redemptions.
- Review the final NBCUniversal purchase-price allocation and its effect on amortization, goodwill, taxes and future earnings.
- Evaluate exposure to advertising cycles, content acceptance, film performance, declining DVD sales, programming renewals, technology changes and regulatory requirements.
- Track Olympic rights commitments, film and television cost estimates, receivables monetization and significant litigation contingencies.