Charter Communications, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with Q1 2012. Charter is a U.S. cable operator offering video, Internet, telephone, commercial services, advertising, and fiber connectivity. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Revenue | $1,917 | $1,827 | Up 5% |
| Operating income | $223 | $230 | Down 3%; operating margin about 11.6%, versus 12.6% |
| Adjusted EBITDA | $670 | $652 | Up 3%; non-GAAP measure; margin about 34.9%, versus 35.7% |
| Net loss | $(42) | $(94) | Loss per share $(0.42), versus $(0.95) |
| Operating cash flow | $541 | $454 | Increase largely reflected timing of interest payments |
| Capital expenditures | $412 | $340 | Up $72 |
| Free cash flow | $118 | $102 | Company-defined non-GAAP measure |
| Long-term debt | $12,816 carrying value; $12.9 billion principal | $12,808 carrying value | About $800 million available under credit facilities |
| Cash and restricted cash | $65 and $27 | $7 and $27 at Dec. 31, 2012 | Restricted cash remained subject to escrow restrictions at quarter-end |
Current assets were $374 million versus current liabilities of $1.29 billion. Management stated it expected positive free cash flow in 2013 and believed cash, free cash flow, revolving credit availability, and capital-market access were sufficient for projected operating cash needs. Debt maturities included $47 million in 2013, $400 million in 2014, $598 million in 2016, and $1.8 billion in 2017; $10.0 billion was due thereafter.
Material changes and operating trends
- Revenue increased primarily on residential Internet and commercial growth, pricing and expanded-service penetration. Video revenue rose 7% to $956 million and Internet revenue rose 11% to $501 million. Commercial revenue increased 20% to $183 million.
- Residential video customers declined by 199,000 year over year to 3.965 million. Residential Internet customers increased by 251,000 to 3.884 million, and telephone customers increased by 151,000 to 1.973 million. Residential revenue per customer relationship was $107.25, up from $104.95.
- Telephone revenue fell 21% to $171 million, principally due to pricing and bundle revenue allocation; advertising revenue decreased 9% to $60 million.
- Operating costs rose $72 million, including higher programming costs and customer-service costs. Programming costs were $515 million, up $24 million; customer-service costs rose $36 million. Depreciation and amortization increased $17 million to $425 million.
- Net interest expense declined $27 million to $210 million, with the average interest rate falling from 6.8% to 6.0% and average debt modestly lower. The net loss improved, aided by income tax expense declining to $9 million from $71 million; the comparison included a $55 million tax-basis step-up benefit in Q1 2013.
Outlook, financing, risks, and unusual items
- Management expected 2013 capital expenditures of approximately $1.7 billion, excluding acquisitions, and expected positive free cash flow. Capital investment was planned for customer equipment, commercial growth, plant reliability, back-office systems, and the transition toward an all-digital platform.
- Charter agreed to acquire Bresnan for $1.625 billion in cash, subject to adjustments. The acquisition and a related $1.5 billion seven-year term loan were expected to close in Q3 2013. Subsequent to quarter-end, Charter also amended its credit agreement, arranged a $1.2 billion term loan F, and issued $1.0 billion of 5.75% notes due 2024 to refinance debt.
- In March 2013, CCO Holdings issued $1.0 billion of senior notes due 2021 and 2023 and used proceeds to repay Charter Operating term-loan debt. The refinancing resulted in a $42 million debt-extinguishment loss. Charter also de-designated its interest-rate derivatives as cash-flow hedges; approximately $30 million of existing losses was expected to be reclassified into earnings over the following 12 months.
- Liberty Media completed its purchase of an approximately 27% beneficial interest on May 1, 2013, for approximately $2.6 billion. It obtained rights to designate up to four directors, subject to the stockholders agreement. The transaction also triggered a second ownership change under Section 382, limiting use of tax loss carryforwards; Charter said it expected to retain the ability to use them over time.
- Key business risks cited include aggressive competition, video customer losses, economic weakness, rising programming and retransmission-consent costs that may not be fully passed to customers, execution risks from organizational and product changes, high debt and refinancing needs, and compliance with debt covenants. Management warned near-term customer connections, revenue, and expenses could be adversely affected during operational changes.
- Charter reported patent litigation and ordinary-course claims, including wage-and-hour matters; it could not estimate a loss range for the patent cases. The Supreme Court denied review of appeals concerning Charter’s 2009 bankruptcy reorganization on April 29, 2013. Restricted cash of $27 million related to bankruptcy-court escrow; the restrictions were resolved in April 2013.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during Q1. No impairment charges were recorded in the quarter.
Most important facts for investors to verify
- Whether Internet and commercial growth can offset continued video subscriber losses and falling telephone revenue.
- Whether programming, service, and planned capital costs pressure margins and free cash flow, and whether the $1.7 billion capital-expenditure outlook is maintained.
- Debt refinancing and acquisition funding terms, the Bresnan closing and integration, covenant headroom, and the company’s ability to refinance future maturities.
- The effects of Section 382 limits on tax attributes and any resulting cash taxes, as well as the timing and earnings impact of derivative-loss reclassifications.
- Liberty Media’s governance influence and any potential conflicts of interest; also monitor litigation and other contingencies for developments.