Charter Communications, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below include fourth quarter 2019. Charter is a U.S. broadband and cable operator serving 29.2 million residential and small- and medium-business customer relationships, with video, Internet, voice, mobile, commercial and advertising operations.
Financial and operating results
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $45.764 billion | $43.634 billion | +4.9% |
| Operating income | $6.511 billion | $5.221 billion | +24.7% |
| Adjusted EBITDA (non-GAAP) | $16.855 billion | $16.059 billion | +5.0% |
| Net income attributable to Charter shareholders | $1.668 billion | $1.230 billion | +35.6% |
| Diluted earnings per share | $7.45 | $5.22 | +42.7% |
| Net cash from operating activities | $11.748 billion | $11.767 billion | Down $19 million |
| Capital expenditures | $7.195 billion | $9.125 billion | Down $1.930 billion |
| Free cash flow (non-GAAP) | $4.608 billion | $2.172 billion | Up $2.436 billion |
Approximate margins: operating margin 14.2% versus 12.0%; Adjusted EBITDA margin 36.8% versus 36.8%. The filing defines free cash flow as operating cash flow less capital expenditures and changes in accrued capital-expenditure liabilities.
Revenue mix: Internet $16.667 billion (+9.8%); video $17.607 billion (+1.5%); residential voice $1.920 billion (-9.1%); commercial $6.424 billion (+3.7%); advertising $1.568 billion (-12.1%); mobile $726 million, compared with $106 million in 2018. Growth reflected Internet and commercial customer additions, pricing and mobile; advertising fell mainly because of lower political revenue.
Customer trends: Residential Internet customers increased by 1.283 million to 24.908 million; video customers declined by 484,000 to 15.620 million; residential wireline voice customers declined by 692,000 to 9.443 million. Mobile lines reached 1.082 million, from 134,000. Residential revenue per customer rose to $112.63 monthly from $111.56.
Fourth quarter: Revenue was $11.761 billion, operating income $1.959 billion and net income attributable to Charter shareholders $714 million. Diluted EPS was $3.28.
Liquidity, debt and capital allocation
- Year-end principal debt was approximately $78.4 billion ($79.1 billion accreted value); reported leverage was 4.5x Adjusted EBITDA, at the high end of management’s 4.0–4.5x target. About 14% of borrowings were variable-rate.
- Cash and cash equivalents were $3.483 billion, and available credit facilities were approximately $4.7 billion. Current debt maturities were $3.777 billion in 2020. The company reported a 5.1% blended weighted-average interest rate.
- Interest expense was $3.797 billion, up from $3.540 billion. Contractual obligations totaled $143.5 billion, including principal, estimated interest, leases, programming minimums and other commitments.
- Charter issued senior notes during 2019, using proceeds for general corporate purposes, including buybacks and debt repayment. It repurchased 16.7 million Class A shares for approximately $6.7 billion and bought $885 million of Charter Holdings units from Advance/Newhouse. Remaining repurchase authorization was $1.4 billion.
- No cash dividends have been paid, and the company said it does not intend to pay them in the foreseeable future.
Changes, outlook and risks
- Management said integration of Time Warner Cable and Bright House was substantially complete. Lower capital spending reflected completion of the all-digital conversion, DOCSIS 3.1 rollout and integration work. Charter expects 2020 cable capital expenditures to decline as a percentage of cable revenue versus 2019; a specific dollar forecast was not provided.
- Management expects continued customer-relationship growth and benefits from Spectrum pricing and packaging, while anticipating continued video and wireline voice losses. It expects mobile growth, including 5G offerings in 2020, but cautioned that mobile expansion will continue to pressure Adjusted EBITDA and working capital.
- Mobile generated $726 million of 2019 revenue but reduced Adjusted EBITDA by approximately $520 million and free cash flow by approximately $1.2 billion. These effects include growth costs and device-related cash timing.
- Programming costs were $11.3 billion, up from $11.1 billion. Management expects ongoing rate increases and says it cannot fully pass these costs on without risking customer losses, creating pressure on video margins and cash flow.
- Key risks include strong competition from fiber, wireless/5G and online video providers; subscriber declines in video and voice; programming and retransmission-consent costs; network or cybersecurity disruption; regulatory and privacy changes; franchise renewals; and substantial debt, refinancing, interest-rate and covenant risks. Merger-related regulatory conditions include broadband buildout, low-income offers and restrictions on fixed broadband data caps and usage-based pricing for specified periods.
- Unusual or notable items included $69 million of pension expense in 2019 versus $192 million of pension benefit in 2018, equity-investment impairments of approximately $121 million, and a $25 million loss on debt extinguishment. The 2019 tax expense was $439 million; 2017 net income was unusually elevated by a tax-law remeasurement benefit and is not directly comparable.
- The company paid a prior TWC-related Sprint patent verdict, including interest and costs, after the U.S. Supreme Court denied review. Other patent and shareholder litigation and regulatory investigations remain; the filing says outcomes and potential losses in certain matters cannot be predicted or reasonably estimated.
Investor verification checklist
- Confirm the sustainability and cash conversion of revenue and Adjusted EBITDA growth, particularly against Internet additions and continuing video and voice subscriber losses.
- Track mobile unit economics, device financing and working-capital needs, and whether mobile can improve profitability as it scales.
- Reconcile free cash flow improvement with the sharp reduction in capital expenditures, and assess whether lower 2020 capital intensity is achievable without impairing network quality or growth.
- Review debt maturities, refinancing plans, variable-rate exposure and covenant headroom; distinguish $78.4 billion principal debt from $79.1 billion accreted value.
- Monitor programming-cost escalation, retransmission renewals, customer pricing and video churn, as well as material litigation and regulatory developments.
Audit and controls: KPMG issued an unqualified opinion on the consolidated financial statements and an unqualified opinion on internal control over financial reporting. The auditor identified capitalization of installation labor and overhead as a critical audit matter.