Charter Communications, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. Charter is a U.S. cable operator providing video, Internet, voice, commercial services and advertising. It reported approximately 6.1 million residential and commercial customer relationships at quarter-end. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $2,259 | $1,972 | $4,461 | $3,889 |
| Income from operations | $250 | $236 | $493 | $459 |
| Operating margin | 11.1% | 12.0% | 11.0% | 11.8% |
| Net loss | $(45) | $(96) | $(82) | $(138) |
| Adjusted EBITDA (non-GAAP) | $795 | $692 | $1,562 | $1,362 |
| Free cash flow (non-GAAP) | $70 | $75 | $144 | $193 |
- Revenue increased 15% in both periods year over year. Management attributed growth to the Bresnan acquisition and expansion in Internet, triple-play and commercial services, alongside pricing and product mix. On a pro forma basis for Bresnan, revenue growth was 7% for both periods.
- Adjusted EBITDA increased 15% in both periods. Q2 growth was 13% excluding non-recurring items. Operating income rose, but operating margin narrowed as depreciation and amortization grew faster than revenue.
- Net loss narrowed versus 2013; the prior-year periods included $81 million of Q2 and $123 million of first-half debt-extinguishment losses. Q2 2014 diluted loss per share was $0.42, compared with $0.96; first-half loss per share was $0.77, compared with $1.37.
- First-half cash from operations was $1,209, up from $1,025. Capital expenditures were $1,109, versus $834; free cash flow fell to $144 from $193. Cash interest paid was $401, versus $370.
- At June 30, cash was $9, current assets $337 and current liabilities $1,606. Long-term debt carrying value was $14,019; principal debt was approximately $14.1 billion, including $3.7 billion of credit-facility debt and $10.4 billion of high-yield notes. Approximately $1.2 billion was available under credit facilities. Debt maturities included $382 million in 2014. The filing reports no covenant default at quarter-end.
Business changes and management commentary
- Customer growth was strongest in Internet and commercial services. At June 30, residential Internet customers were 4.568 million, up 644,000 year over year; residential video customers were 4.166 million, up 249,000 as reported but down 40,000 after adjusting for Bresnan. Residential voice customers were 2.360 million, up 341,000. Monthly residential revenue per customer relationship was $110.81, versus $108.67.
- By service, Q2 revenue grew 23% in Internet, 28% in commercial and 13% in video; voice revenue declined 8%. Management cited subscriber growth, pricing and advanced-service penetration, partly offset by basic-video customer losses and lower voice pricing/bundle allocation.
- Programming costs rose to $607 in Q2 from $519 and represented 41% of operating costs, versus 40%. Management expects continued programming-cost increases and says it cannot fully pass them through without risking customer losses. Costs to serve customers and marketing also increased.
- Charter continued its all-digital transition, network investment and efforts to insource sales and service operations. Management expects capital expenditures to remain elevated.
Outlook, transactions and risks
- Charter expected 2014 capital expenditures of approximately $2.2 billion, excluding potential Comcast transaction expenditures; approximately $400 million was expected for the all-digital plan. First-half capital expenditures included $253 million related to that transition.
- Under the April 2014 agreement with Comcast, Charter would acquire a net 1.4 million existing TWC customers through asset purchases and exchanges, and New Charter would acquire approximately 33% of SpinCo, a new cable company serving about 2.5 million customers. The estimated financing for acquired assets and transaction expenses was approximately $8.4 billion in new Charter debt. The agreement was contingent on Comcast’s TWC merger and other closing conditions, including regulatory and stockholder approvals and financing. No assurance was given that the transactions would close.
- Management identified integration demands, financing availability and terms, increased debt and interest expense, potential programming dis-synergies, transaction costs, regulatory conditions, and possible failure to realize expected benefits as material transaction risks. Existing Charter shareholders were expected to own approximately 89% of New Charter immediately after closing, subject to transaction assumptions and adjustments.
- Other business risks include competition, economic conditions, video customer attrition, rising programming costs, franchise renewal and regulation, and exposure to interest rates. Approximately 84% of debt principal was effectively fixed-rate, including swaps. Interest-rate derivatives had $1.7 billion notional value and $27 million fair value liability; approximately $13 million of accumulated losses was expected to be reclassified into earnings over the next 12 months.
- The Montana property-tax dispute was settled in June 2014. Charter also disclosed patent litigation and ordinary-course claims; it could not predict outcomes or reasonably estimate possible losses for the patent cases. No impairment was recorded in the periods presented.
- Management stated it believed available cash, operating cash flow, revolving-credit availability and capital-market access were sufficient for projected operating needs, while noting refinancing depends on market conditions. Forward-looking results remain subject to risks and uncertainties.
Key facts for investors to verify
- Whether the Comcast/TWC transactions received all approvals, closed on the expected terms and required the anticipated debt financing and shareholder dilution.
- Whether customer growth, especially Internet and commercial growth, can offset video and voice pressures, and whether reported subscriber comparisons are affected by Bresnan and reporting methodology.
- Whether programming-cost increases, capital spending and integration or all-digital costs continue to pressure margins and free cash flow.
- Debt maturities, revolver availability, covenant compliance and the company’s capacity to refinance while managing its approximately $14.1 billion debt principal.
- The magnitude and timing of transaction, litigation, regulatory and tax exposures; the filing does not provide a clear estimate of potential patent-litigation losses.