Comcast Corporation 10-Q Summary
Business context and reporting period
Comcast filed its unaudited Form 10-Q for the three months ended March 31, 2011. The period reflects the January 28, 2011 closing of the NBCUniversal transaction, under which Comcast acquired control and a 51% ownership interest in NBCUniversal Holdings; GE retained 49%.
NBCUniversal results are consolidated from January 29 through March 31, 2011. Comcast reported five segments: Cable Communications, Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks. Cable Communications represented approximately 75% of consolidated revenue.
Financial performance and key metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Revenue | $12.128 billion | $9.202 billion | 31.8% |
| Operating income | $2.224 billion | $1.935 billion | 14.9% |
| Operating margin | 18.3% | 21.0% | Down 2.7 percentage points |
| Income before taxes | $1.635 billion | $1.470 billion | 11.2% |
| Net income from consolidated operations | $1.039 billion | $879 million | 18.1% |
| Net income attributable to Comcast | $943 million | $866 million | 9.0% |
| Diluted EPS | $0.34 | $0.31 | 9.7% |
| Net cash from operating activities | $3.468 billion | $2.903 billion | 19.5% |
| Capital expenditures | $1.106 billion | $925 million | 19.6% |
Operating cash flow margin was approximately 28.6%, compared with 31.5% in the prior-year quarter. Interest expense increased to $605 million from $524 million, primarily because NBCUniversal debt was consolidated.
At March 31, 2011, cash and cash equivalents were $1.822 billion, down from $5.984 billion at December 31, 2010. Total debt, including current and long-term portions, was $40.426 billion, compared with $31.415 billion at year-end. Debt had an estimated fair value of $42.8 billion. Available borrowing capacity under credit facilities was approximately $5.5 billion, including an undrawn $750 million NBCUniversal revolving facility.
Total assets increased to $154.259 billion from $118.534 billion, primarily due to the NBCUniversal transaction. Redeemable noncontrolling interests increased to $15.239 billion from $143 million, reflecting GE’s 49% interest in NBCUniversal Holdings. The filing does not provide a company-defined liquidity ratio or leverage target.
Material changes versus the prior comparable period
- The NBCUniversal transaction contributed $2.2 billion of reported revenue during the period and materially increased goodwill, intangible assets, film and television costs, debt and redeemable noncontrolling interests.
- Preliminary acquisition accounting recorded $24.076 billion of consideration, $12.034 billion of identifiable net assets, $12.042 billion of goodwill and $13.032 billion of redeemable noncontrolling interest associated with acquired net assets.
- Consolidated revenue increased 31.8%, but operating costs excluding depreciation and amortization increased 43.0%; amortization increased 41.9% because of acquired assets.
- Cable Communications revenue rose 5.8% to $9.084 billion and operating income before depreciation and amortization rose 7.7% to $3.749 billion. Business services revenue increased 49.9% to $394 million.
- Video customers declined by 39,000 during the quarter to 22.763 million, while high-speed Internet customers increased by 418,000 to 17.406 million and phone customers increased by 260,000 to 8.870 million.
- Reported NBCUniversal segment results are not directly comparable with the prior year because only part of the acquired businesses’ results is included in 2011. On a pro forma combined basis, NBCUniversal revenue declined 11.5% while operating income before depreciation and amortization increased 4.9%.
- Broadcast Television pro forma revenue declined primarily because Q1 2010 included $782 million of revenue from the Vancouver Olympics. Filmed Entertainment pro forma revenue declined 8.2% and generated a $146 million operating loss before depreciation and amortization.
Cash flows, capital allocation and unusual items
- Investing cash outflow was $6.887 billion, including $5.658 billion for acquisitions, $1.106 billion of capital expenditures and $123 million for intangible assets. The acquisition payment to GE was approximately $6.2 billion, funded with cash on hand and $650 million of commercial paper borrowings.
- Financing cash outflow was $743 million, including $1.759 billion of debt repayments, $525 million of share repurchases and $261 million of dividends, partly offset by $1.677 billion of net short-term borrowings.
- Comcast repurchased approximately 23.3 million Class A Special shares for $525 million. Approximately $1.6 billion remained under the repurchase authorization, and management expected to complete repurchases by year-end 2011 subject to market conditions.
- The annual dividend plan was increased 19% to $0.45 per share, with a quarterly dividend of $0.1125 per share.
- NBCUniversal transaction and related costs totaled $123 million in Q1 2011, including $107 million in operating costs and expenses and $16 million in other expense.
- Acquisition-related values, including goodwill, intangible assets, film and television costs, contingencies, deferred taxes, contingent consideration and the redeemable noncontrolling interest, were preliminary and subject to potentially significant changes until finalized within one year of closing.
Guidance, outlook, management commentary and risks
- Management expected the 2011 annual effective tax rate to be approximately 35% to 40%, influenced by the partnership structure of NBCUniversal Holdings.
- Management expected further declines in residential video customers during the remainder of 2011 because of competitive pressures and economic weakness.
- Management expected home entertainment revenue to remain pressured by continuing DVD sales declines, piracy, competition, rental alternatives and the shift toward digital entertainment.
- Management stated that liquidity requirements, including fixed charges, capital expenditures, debt obligations and shareholder returns, were expected to be met through operating cash flow, existing cash and investments, available credit and future financing.
- GE has potential redemption rights for its NBCUniversal interest beginning in 2014 and 2018. Comcast may be required to fund up to $2.875 billion for each of two redemptions, or up to $5.75 billion in aggregate, if NBCUniversal Holdings cannot fund them.
- Comcast was evaluating Blackstone’s offer to sell its 50% interest in Universal City Development Partners. The filing states that the offer period extended into early June 2011.
- Risks include intense competition, changing technology and consumer behavior, rising programming costs, advertising-market weakness, content acceptance, loss or unfavorable renewal of programming agreements, regulation, economic weakness, systems disruptions, intellectual property claims, labor disputes and pension obligations.
- Pending antitrust, patent and other litigation could be material to results of operations or cash flows in an individual period, although management did not expect the matters to have a material adverse effect on consolidated financial position. The filing does not provide a clear range of possible loss.
Most important facts for investors to verify
- Whether NBCUniversal achieves the expected operating benefits and whether pro forma revenue weakness in Broadcast Television and Filmed Entertainment persists.
- Final acquisition accounting adjustments and their effects on goodwill, intangible-asset amortization, deferred taxes, contingencies and GE’s redeemable noncontrolling interest.
- Debt reduction, commercial paper usage, interest expense and liquidity after the substantial acquisition-related cash outflow.
- Trends in video customer losses, high-speed Internet and phone additions, business services growth and programming-cost inflation.
- DVD and home entertainment trends, advertising-market conditions and the performance of NBCUniversal content.
- Potential funding requirements associated with GE’s future NBCUniversal redemption rights and the outcome of the UCDP investment decision.
- Developments in pending antitrust litigation, labor negotiations and other legal contingencies.