Charter Communications, Inc. — Q2 2012 Form 10-Q
Business context and reporting period. Charter is a U.S. cable operator providing video, Internet, telephone, commercial connectivity and advertising services. This unaudited filing covers the three and six months ended June 30, 2012; financial amounts are in millions of dollars unless noted. The company reported approximately 5.3 million residential and commercial customers.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $1,884 | $1,791 | $3,711 | $3,561 |
| Income from operations | $269 | $270 | $499 | $539 |
| Net loss | $(83) | $(107) | $(177) | $(217) |
| Adjusted EBITDA (non-GAAP) | $693 | $673 | $1,345 | $1,336 |
| Free cash flow (non-GAAP) | $26 | $155 | $128 | $227 |
| Capital expenditures | $468 | $324 | $808 | $680 |
- Revenue increased 5% in Q2 and 4% in the first half. Operating margin was approximately 14.3% in Q2 (15.1% prior year) and 13.4% in the first half (15.1% prior year). Adjusted EBITDA margin was approximately 36.8% in Q2 (37.6% prior year) and 36.2% in the first half (37.5% prior year).
- Q2 diluted loss per share was $0.84 versus $0.98; first-half loss per share was $1.78 versus $1.95. Interest expense was $225 in Q2 and $462 for the half. Income tax expense was $68 and $139, respectively.
- Six-month operating cash flow was $923, compared with $907 a year earlier. Cash paid for interest was $448 versus $402. Cash used in investing was $785, primarily capital spending; cash used in financing was $135. Free cash flow is company-defined and non-GAAP.
- At June 30, cash and cash equivalents were $5 and restricted cash was $27. Long-term debt was $12,786 at accreted value ($12,804 principal); total current liabilities were $1,194 and shareholders’ equity was $244. Credit-facility availability was approximately $756.
- Debt accreted value declined from $12.9 billion at year-end 2011 to $12.8 billion. The blended weighted-average interest rate was 6.6%, and approximately 79% of principal was effectively fixed, including swaps.
Material changes versus prior periods
- Internet revenue rose 11% in Q2 and 10% for the first half; commercial revenue rose 22% and 21%. Advertising sales increased 14% and 11%. Video revenue was approximately flat in Q2 and declined 1% for the half.
- Residential video customers fell by 126,000 year over year, while Internet customers increased 310,000 and telephone customers increased 80,000. Total RGUs reached 13.511 million, up from 13.106 million. Customer reporting methodology changed in 2012, with prior periods reclassified.
- Programming costs increased $25 in Q2 and $47 for the half, primarily from contractual rate increases, retransmission-consent costs and new programming. Selling, general and administrative costs rose $30 and $57, while depreciation and amortization rose $22 and $47.
- Free cash flow declined as capital spending and cash interest payments increased. First-half capital expenditures were $128 higher year over year.
Outlook, management commentary, risks and unusual items
- Management expected positive free cash flow for 2012 and projected capital expenditures of approximately $1.5–$1.7 billion. It expected to use free cash flow, available credit and potential refinancing transactions to address liquidity and debt maturities; refinancing terms depend on market conditions.
- Charter planned to expand digital and HD-DVR penetration, simplify offers and improve customer service and sales operations. It reached its goal of 100 HD channels across substantially all of its footprint in July 2012. Management cautioned that the transition could temporarily hurt customer connections, revenue and operating expenses, and that capital expenditures could increase.
- Management cited intense competition, weaker economic conditions, housing-market weakness, high unemployment, video substitution to Internet services, and wireless substitution for telephone service. It warned that programming costs may continue rising and may not be fully passed on to customers without risking subscriber losses.
- Debt refinancing and repurchases produced a $59 Q2 loss on extinguishment of debt and a $74 first-half loss. April refinancing included a $750 term loan due 2019 and a new $1.15 billion revolving facility due 2017. No impairment charges were recorded in the periods presented.
- Contingencies include appeals related to the company’s 2009 bankruptcy plan and patent, antitrust, wage-and-hour and other ordinary-course litigation. Management could not predict outcomes or estimate a reasonable loss range for the bankruptcy appeals or patent claims; aggregate litigation could be material.
- Management stated there was no default under the relevant debt agreements at June 30 and that subsidiaries met applicable leverage tests then. Distributions remain subject to covenant and legal restrictions. The filing reported no material change to the risk factors in the 2011 Form 10-K and no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Whether subscriber and revenue growth in Internet and commercial services can offset continuing basic-video customer losses and pressure on telephone growth.
- Whether programming-cost inflation, customer-service initiatives and higher capital expenditures affect margins, free cash flow and the 2012 capital-spending outlook.
- Debt maturities, refinancing access, covenant compliance and subsidiary distribution restrictions; the filing lists $3.4 billion due in 2016 and $8.6 billion thereafter.
- The quality and sustainability of reported Adjusted EBITDA and free cash flow, both non-GAAP measures, and the reconciliation to GAAP cash flows and net loss.
- Potential exposure from bankruptcy-plan appeals and litigation, and the effect of deferred tax liabilities and related tax expense on reported losses.