Charter Communications, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparative period is Q1 2011. Charter is a U.S. cable operator offering video, Internet, telephone, advertising and commercial connectivity services. It reported approximately 5.3 million residential and commercial customers.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Revenue | $1.827 billion | $1.770 billion; up 3% |
| Income from operations | $230 million; 12.6% of revenue | $269 million; 15.2% of revenue |
| Adjusted EBITDA (non-GAAP) | $652 million; 35.7% of revenue | $663 million; 37.5% of revenue |
| Net loss | $94 million; $0.95 per share | $110 million; $0.97 per share |
| Operating cash flow | $454 million | $447 million |
| Capital expenditures | $340 million | $356 million |
| Free cash flow (non-GAAP) | $102 million | $72 million |
| Long-term debt, carrying value | $12.802 billion | $12.856 billion at Dec. 31, 2011 |
Cash and cash equivalents were $31 million, including $27 million of restricted cash; unrestricted cash was therefore $4 million. Credit-facility availability was approximately $1.1 billion. Current assets of $338 million were below current liabilities of $1.140 billion. Total shareholders’ equity was $326 million.
Material changes versus Q1 2011
- Revenue growth was led by Internet (+9%), commercial (+20%), telephone (+2%), advertising (+6%) and other (+13%); video revenue declined 2% to $895 million.
- Residential video customers fell by 138,000 year over year (166,000 after adjusting for acquisitions); residential Internet customers increased by 299,000 and telephone customers by 81,000. Total reported RGUs rose to 13.523 million from 13.147 million.
- Operating costs increased faster than revenue: operating expense excluding depreciation and amortization rose $46 million, including $22 million higher programming costs and $15 million higher service labor. SG&A increased $27 million.
- Operating income and Adjusted EBITDA declined despite higher revenue. Net loss improved, partly because the debt-extinguishment loss was $15 million versus $67 million in Q1 2011.
- Free cash flow increased to $102 million, primarily reflecting more favorable working-capital changes. Cash interest paid rose to $216 million from $202 million.
Outlook, financing, risks and unusual items
- Management expected 2012 capital expenditures of approximately $1.4–$1.5 billion and expected to continue generating positive free cash flow. Planned investment included customer growth, additional HD channels, and customer-experience and network improvements.
- Management cited competition, economic weakness, video customer losses and online video substitution as pressures. Programming costs were expected to continue rising; Charter said it could not fully pass those increases to customers without risking further customer losses.
- Charter aimed to reach 100 HD channels by mid-2012, ahead of its prior year-end target, and was working to increase digital and HD-DVR penetration. Management cautioned that growth efforts could raise spending and might not succeed.
- In January 2012, CCO Holdings issued $750 million of 6.625% notes due 2022 and used proceeds, with other financing, to repurchase or repay higher-cost debt. The transaction produced a $15 million Q1 debt-extinguishment loss.
- Subsequent events: In April, Charter Operating refinanced term loans with a new $750 million term loan due 2019 and replaced its $1.3 billion revolver with a $1.15 billion facility due 2017. Charter expected an approximately $60 million non-cash refinancing loss in Q2. The $201 million 8.00% notes due April 30, 2012 were paid at maturity.
- Debt maturities included $224 million in 2012, $268 million in 2013, $504 million in 2014, and $4.1 billion in 2016. Charter said liquidity was sufficient based on cash generation, credit availability and capital-market access, but refinancing terms would depend on market conditions. Subsidiary distributions to parent entities are subject to debt-covenant and legal restrictions.
- Risks include interest-rate exposure, competition, programming costs, covenant compliance and access to financing. Patent, antitrust, wage-and-hour and other litigation remained pending; Charter could not predict outcomes or estimate reasonable loss ranges. Appeals related to its 2009 bankruptcy-plan confirmation also remained pending, with outcomes and potential losses uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to the risk factors in the 2011 Form 10-K were reported.
Important facts for investors to verify
- Whether Internet and commercial growth can offset continuing video customer and revenue declines, and whether reported customer trends are comparable after acquisitions and reporting-method changes.
- Whether programming, labor and customer-experience investment costs continue to pressure EBITDA and operating margins.
- Execution and terms of the April refinancing, the expected Q2 refinancing charge, and the company’s ability to address its substantial debt maturities and maintain covenant compliance.
- Whether 2012 capital spending stays within the $1.4–$1.5 billion outlook while free cash flow remains positive.
- Developments in bankruptcy-related appeals and other litigation; the filing provides no clear estimate of potential losses.