Charter Communications, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2013. Charter operates U.S. cable systems, selling video, Internet, telephone, commercial connectivity and advertising services. Financial amounts below are in millions unless otherwise noted.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $1,972 | $1,884 | $3,889 | $3,711 |
| Operating income | $236 | $269 | $459 | $499 |
| Net loss | $(96) | $(83) | $(138) | $(177) |
| Adjusted EBITDA (non-GAAP) | $692 | $693 | $1,362 | $1,345 |
| Operating cash flow | $484 | $469 | $1,025 | $923 |
| Free cash flow (non-GAAP) | $75 | $26 | $193 | $128 |
| Capital expenditures | $422 | $468 | $834 | $808 |
Q2 operating margin was about 12% of revenue, versus about 14% a year earlier; six-month operating margin was about 12%, versus about 13%. Net loss per diluted share was $0.96 in Q2 2013 and $0.84 in Q2 2012; for the six-month periods it was $1.37 and $1.78, respectively. Interest expense was $211 in Q2 and $421 for the first half. Debt-extinguishment losses were $81 and $123, respectively, partly offset by derivative gains of $20 and $17.
Balance sheet, debt and liquidity
- At June 30, cash was $44; current assets were $333 and current liabilities $1,280. Long-term debt had an accreted carrying value of $12,812; principal debt was approximately $12.9 billion. Shareholders’ equity was $61.
- Approximately $986 of credit-facility capacity was available. The weighted-average rate on total debt was about 5.9%; approximately 94% of debt was effectively fixed at quarter-end, before the subsequent Bresnan financing.
- First-half operating cash flow of $1,025 less $834 of capital expenditures produced reported free cash flow of $193. Cash increased from $7 at year-end 2012 to $44; the $27 of restricted cash at year-end was released in April.
- Debt maturities disclosed as of June 30 included $25 in 2013, $400 in 2014, $49 in 2015, $78 in 2016, $1.1 billion in 2017 and $11.2 billion thereafter. Charter expected 2013 capital expenditures of approximately $1.8 billion, including the Bresnan acquisition’s impact.
Changes and operating trends
- Revenue rose 5% in both the quarter and first half. Video, Internet and commercial revenue grew, while telephone and advertising revenue declined.
- Residential Internet customers increased by 262,000 year over year to 3.924 million; residential telephone customers rose by 191,000 to 2.019 million. Residential video customers fell by 181,000 to 3.917 million. Residential customer relationships were 5.096 million, and revenue per relationship was $108.67 versus $106.00.
- Q2 video revenue increased 8% and Internet revenue 12%; commercial revenue grew 21%. Telephone revenue fell 27%, largely because of price adjustments and bundle revenue allocation despite customer growth. Advertising revenue fell 16%, including lower political and vendor-related sales.
- Operating costs excluding depreciation and amortization increased 8% in Q2, with higher customer-service labor, preventive maintenance and programming costs. Adjusted EBITDA was essentially flat for Q2 and rose 1.3% for the first half.
- First-half interest expense declined year over year as the average interest rate fell to 6.0% from 6.7%, despite debt remaining around $12.9 billion on average. First-half net loss improved, while the Q2 loss widened.
Outlook, material events and risks
- Management expected positive free cash flow for 2013 and believed cash, free cash flow, revolver availability and capital-market access would meet projected operating needs. These expectations are subject to actual results and market conditions.
- Management described efforts to improve service, simplify offers, increase digital and HD/DVR penetration, grow customer relationships and emphasize bundled services. It cautioned that organizational changes and operating transitions were adversely affecting near-term revenue and expenses, and expected elevated capital spending.
- Programming costs were expected to keep increasing; management said it could not fully pass those increases to customers without risking customer losses. Competition, economic weakness, video substitution to Internet services and wireless telephone substitution were identified as pressures.
- In July 2013, after quarter-end, Charter acquired Bresnan for $1.625 billion in cash, funded primarily with a newly activated $1.5 billion seven-year term loan and Charter Operating credit-facility borrowings. The acquired systems served 303,000 video customers and 375,000 customer relationships as of March 31, 2013. The filing’s market-risk discussion said the transaction-related borrowing reduced the effectively fixed share of debt to approximately 83%.
- Liberty Media completed its purchase of an approximately 27% beneficial interest on May 1 for about $2.6 billion and received rights to designate up to four directors. The transaction triggered a second Section 382 ownership change, limiting the use of existing tax loss carryforwards and potentially increasing future cash taxes.
- A Montana property-tax dispute involving Bresnan remained on appeal. Approximately $25 million of protest payments were held in escrow; the company disclosed potential additional exposure for earlier years of up to approximately $15 million including interest. Patent and ordinary-course litigation also remained unresolved; possible losses could not be estimated for the patent matters.
- Charter de-designated its interest-rate derivatives as accounting hedges in Q1, though management said they continued to manage interest-rate risk. Approximately $26 million of accumulated derivative losses was expected to be reclassified into earnings over the next twelve months. No impairment charges were recorded in the periods presented.
- The Supreme Court denied the remaining petitions seeking review of appeals concerning Charter’s 2009 bankruptcy plan. Management reported effective disclosure controls and no material change in internal control over financial reporting during Q2.
Important facts for investors to verify
- Whether Internet and commercial growth can offset continuing video-customer losses, telephone revenue declines and advertising weakness.
- Whether service and programming cost increases pressure margins, and whether elevated capital spending delivers the planned customer and product improvements.
- Post-acquisition leverage, interest-rate exposure, Bresnan integration and the actual 2013 capital-expenditure and free-cash-flow outcomes.
- The availability and timing of subsidiary distributions, refinancing access and compliance with debt covenants; subsidiary distributions are restricted under specified conditions.
- The eventual outcome and financial impact of the Montana tax appeal and other litigation, and the effect of Section 382 limits on tax attributes and future cash taxes.
- Adjusted EBITDA and free cash flow are non-GAAP measures defined by Charter and should be considered alongside GAAP results and cash flows.