MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a
supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Cable Inc.’s (together with its subsidiaries, “TWC” or the “Company”) business, any recent developments,
financial condition, cash flows and results of operations. MD&A is organized as follows:
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Overview.
This section provides a general description of TWC’s business, as well as any recent
developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends. This section also provides a summary of how the Company’s operations are presented
in the accompanying consolidated financial statements.
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Results of operations.
This section provides an analysis of the Company’s results of operations
for the three months ended March 31, 2016. This analysis is presented on both a consolidated and reportable segment basis.
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Financial condition and liquidity.
This section provides an analysis of the Company’s financial
condition as of March 31, 2016 and cash flows for the three months ended March 31, 2016.
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Caution concerning forward-looking statements
. This section provides a description of the use of
forward-looking information appearing in this report, including in MD&A and the consolidated financial statements. Such information is based on management’s current expectations about future events, which are subject to uncertainty and
changes in circumstances. Refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “2015 Form 10-K”) for a discussion of the risk factors applicable to the Company.
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OVERVIEW
TWC is among
the largest providers of video, high-speed data and voice services in the U.S., with technologically advanced, well-clustered cable systems located mainly in five geographic areas – New York State (including New York City), the Carolinas, the
Midwest (including Ohio, Kentucky and Wisconsin), Southern California (including Los Angeles) and Texas. TWC’s mission is to connect its customers to the world—simply, reliably and with superior service. As of March 31, 2016, TWC
served approximately 16.1 million residential and business services customers who subscribed to one or more of its video, high-speed data and voice services. During the three months ended March 31, 2016, TWC’s revenue increased 7.2%
to approximately $6.2 billion.
Recent Developments
Charter Merger
On May 23, 2015, TWC entered into an Agreement and Plan of Mergers (the “Charter Merger Agreement”) with
Charter Communications, Inc. (“Charter”) and certain of its subsidiaries, pursuant to which the parties will engage in a series of transactions (the “Charter merger”) that will result in the Company and Charter becoming 100%
owned subsidiaries of a new public parent company (“New Charter”), on the terms and subject to the conditions set forth in the Charter Merger Agreement.
Upon the consummation of the Charter merger, each share of TWC common stock (other than treasury shares held by the Company
and TWC stock held by the Liberty Parties (as defined below)) will be converted into the right to receive, at the option of each stockholder, either (i) $100 in cash and shares of New Charter Class A common stock equivalent to 0.5409
shares of Charter Class A common stock (“Charter common stock”) or (ii) $115 in cash and shares of New Charter Class A common stock equivalent to 0.4562 shares of Charter common stock. Upon the consummation of the Charter
merger, subject to certain exceptions, each share of TWC common stock held by Liberty Broadband Corporation or Liberty Interactive Corporation (together, the “Liberty Parties”) will convert only into the right to receive shares of New
Charter Class A common stock.
On September 21, 2015, the Company’s stockholders approved the adoption of
the Charter Merger Agreement, and Charter’s stockholders approved, among other things, the adoption of the Charter Merger Agreement and the issuance of New Charter Class A common stock to TWC stockholders in the Charter merger. The Charter
merger is subject to regulatory approvals and certain other closing conditions.
1
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Bright House Networks Transaction
On May 23, 2015, Charter and Advance/Newhouse Partnership (“A/N”) and certain of their affiliates amended an
agreement the parties had signed on March 31, 2015 (the “Bright House Networks Agreement”). Under the amended Bright House Networks Agreement, Charter will acquire Bright House Networks, LLC (“Bright House Networks”),
subject to, among other conditions, the closing of the Charter merger. Bright House Networks is a 100% owned subsidiary of a partnership (“TWE-A/N”) between A/N and Time Warner Cable Enterprises LLC (“TWCE”), a subsidiary of
TWC. The closing of Charter’s acquisition of Bright House Networks is expected to occur concurrently with the closing of the Charter merger. However, the closing of the Charter merger is not conditioned on the closing of the Bright House
Networks transaction.
In the Charter Merger Agreement, the Company and TWCE agreed to irrevocably and unconditionally
waive their “right of first offer” to acquire the assets of Bright House Networks during the pendency of the Charter merger. This waiver will expire if the Charter Merger Agreement is terminated in accordance with its terms, provided that
the Company or any of its Affiliates (as defined in the Charter Merger Agreement) does not, within nine months following such a termination, enter into an agreement or understanding in respect of, or consummate, an alternative acquisition
transaction. As discussed further in “—Financial Statement Presentation—Reportable Segments—Other Operations Segment,” TWC receives a fee from A/N for providing Bright House Networks with high-speed data services and certain
management functions, which is included in Other Operations revenue.
Reportable Segments
The Company has three reportable segments: Residential Services, Business Services and Other Operations, which have been
determined based on how management evaluates and manages the business. For additional information about the components of each of the Company’s reportable segments, as well as shared functions, refer to “—Financial Statement
Presentation—Reportable Segments,” below.
Residential Services Segment
TWC offers video, high-speed data and voice services, as well as security and home management services, to residential
customers. As of March 31, 2016, the Company served approximately 15.4 million residential services customers and, during the three months ended March 31, 2016, revenue from the provision of residential services increased 5.8% to
approximately $4.9 billion, representing 79.7% of TWC’s total revenue.
TWC’s video service provides over 300
channels (including, on average, over 200 high-definition (“HD”) channels) and over 30,000 video-on-demand choices, an increasing subset of which consumers can watch on the device of their choosing, both inside and outside the home.
TWC’s high-speed data service is available in a range of speed (from up to 2 to up to 300 megabits per second (“Mbps”) downstream), price and monthly consumption (unlimited, 30 gigabyte (“GB”) and 5 GB) levels and, for most
high-speed data customers, includes access to a nationwide network of nearly 500,000 WiFi hotspots along with communications and Internet security features. TWC’s voice service provides unlimited calling throughout the U.S. and its territories
and to Canada, Mexico, China, Hong Kong, India, Norway and the European Union and access to popular features in one simple package. TWC’s IntelligentHome service provides residential customers with advanced security and home management
technology. The Company expects growth in Residential Services revenue in 2016 driven by an increase in customers and higher revenue per customer.
Residential Services programming costs represent a significant portion of the Company’s operating costs and expenses and
are expected to continue to increase, reflecting rate increases on existing programming services. TWC expects that its programming costs as a percentage of video revenue will continue to increase, in part due to an increasingly competitive
environment.
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TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Business Services Segment
TWC offers a wide range of business high-speed data, networking, voice, video, hosting and cloud computing services. As of
March 31, 2016, TWC served 765,000 business customers, including small and medium businesses; large enterprises; government, education and non-profit institutions; and telecommunications carriers. TWC offers these services to retail and
wholesale businesses using its own network infrastructure and third-party infrastructure as required to meet customer needs.
During the three months ended March 31, 2016, revenue from the provision of business services increased 13.4% to $886
million, representing 14.3% of TWC’s total revenue. The Company expects continued strong growth in Business Services revenue driven by an increase in the number of customers, higher wholesale access, growing product penetration, demand for
higher-priced tiers of service and price increases.
Other Operations Segment
TWC’s Other Operations segment principally consists of (i) Time Warner Cable Media (“TWC Media”), the
advertising sales arm of TWC; (ii) the Company’s regional sports networks that carry Los Angeles Lakers’ basketball games and other sports programming (Time Warner Cable SportsNet and Time Warner Cable Deportes and, collectively, the
“Lakers’ RSNs”); (iii) the Company’s local sports, news and lifestyle channels (e.g., Time Warner Cable News NY1); (iv) other operating revenue and costs, including those derived from A/N and home shopping
network-related services; and (v) operating revenue and costs associated with SportsNet LA, a regional sports network carrying the Los Angeles Dodgers’ baseball games and other sports programming. During the three months ended
March 31, 2016, TWC generated revenue from Other Operations of $440 million.
As discussed further below in
“—Financial Statement Presentation,” TWC Media sells its video and online advertising inventory to local, regional and national advertising customers and also sells third-party advertising inventory on behalf of other video
distributors, including, among others, Verizon Communications Inc.’s (“Verizon”) FiOS, AT&T Inc.’s (“AT&T”) U-verse and DIRECTV and Charter. Advertising revenue generated by TWC Media is cyclical, benefiting in
years that include political elections as a result of political candidate and issue-related advertising.
Competition
The operations of each of TWC’s reportable segments face intense competition, both from existing competitors and, as a
result of the rapid development of new technologies, services and products, from new entrants.
Residential Services Segment
TWC faces intense competition for residential customers from a variety of alternative communications, information and
entertainment delivery sources across each of its residential services. Some of these competitors offer a broad range of services with features and functions comparable to those provided by TWC and in bundles similar to those offered by TWC,
sometimes including wireless service. Each of TWC’s residential services also faces competition from other companies that provide services on a stand-alone basis. TWC’s residential video service faces competition from direct broadcast
satellite services, and increasingly from companies that deliver content to consumers over the Internet, including in many cases the same networks that supply programming to TWC. TWC’s residential high-speed data service faces competition from
wireless Internet providers and direct broadcast satellite services. TWC’s residential voice service faces competition from wireless voice providers, “over-the-top” phone services and other communications alternatives.
Business Services Segment
TWC faces intense competition as to each of its business services offerings. Its business high-speed data, networking and
voice services face competition from a variety of providers, including incumbent local telephone companies. TWC’s cell tower backhaul service also faces competition from traditional telephone companies as well as other telecommunications
carriers, such as metro and regional fiber-based carriers. TWC’s business video service faces competition from direct broadcast satellite providers. TWC also competes with cloud, hosting and related service providers and application-service
providers.
3
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Other Operations Segment
TWC faces intense competition for advertising revenue across many different platforms and from a wide range of local and
national competitors. Advertising competition has increased and will likely continue to increase as new formats seek to attract the same advertisers. TWC competes for advertising revenue against, among others, local broadcast stations, national
cable and broadcast networks, radio stations, print media and online advertising companies and content providers.
Financial Statement Presentation
Consolidated
Revenue.
The Company generates revenue from each of its reportable segments: Residential Services, Business Services
and Other Operations, each of which is discussed below under “Reportable Segments.”
Operating costs and expenses
Programming and content
.
Programming and content costs include (i) programming costs for the
Residential Services and Business Services segments and (ii) content costs, which include (a) the content acquisition costs associated with the Lakers’ RSNs and SportsNet LA and (b) other content production costs for the
Lakers’ RSNs, SportsNet LA and the Company’s local sports, news and lifestyle channels. Content acquisition costs for the Los Angeles Lakers’ basketball games and Los Angeles Dodgers’ baseball games are recorded as games are
exhibited over the applicable season.
Sales and marketing
.
Sales and marketing costs consist of the costs
incurred at the Residential Services, Business Services and Other Operations segments to sell and market the Company’s services. Costs primarily include employee-related and third-party marketing costs (e.g., television, online, print and radio
advertising). Employee-related costs primarily include costs associated with retail centers and activities related to direct sales, in-bound sales and retention sales.
Technical operations
.
Technical operations costs consist of the costs incurred at the Residential Services,
Business Services and Other Operations segments associated with the installation, repair and maintenance of the Company’s distribution plant. Costs primarily include employee-related costs and materials costs associated with non-capitalizable
activities.
Customer care
.
Customer care costs consist of the costs incurred at the Residential Services
and Business Services segments associated with the Company’s customer service activities. Costs primarily include employee-related costs and outsourced customer care costs.
Other operating
.
Other operating costs consist of all other operating costs incurred at the Residential
Services, Business Services and Other Operations segments that are not specifically identified above, including Residential Services and Business Services video franchise and other fees. Other operating costs also include operating costs associated
with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources). In addition, other operating costs include functions supporting more than one reportable segment that
are centrally managed, including costs associated with facilities (e.g., rent, property taxes and utilities), network operations (e.g., employee costs associated with central engineering activities), vehicles and procurement.
Reportable Segments
The Company’s segment results include intercompany transactions related to programming provided to the Residential
Services and Business Services segments by the Lakers’ RSNs, SportsNet LA and the Company’s local sports, news and lifestyle channels. These services are reflected as programming expense for the Residential Services and Business Services
segments and as revenue for the Other Operations segment and are eliminated in consolidation. Additionally, the operating costs described above that are associated with broad “corporate” functions or functions supporting more than one
reportable segment are recorded as shared functions and are not allocated to the reportable segments. As such, the reportable segment results reflect how management views such segments in assessing financial performance and allocating resources and
are not necessarily indicative of the results of operations that each segment would have achieved had they operated as stand-alone entities during the periods presented.
4
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Residential Services Segment
Revenue
.
Residential Services segment revenue consists of revenue from video, high-speed data, voice and other
services offered to residential subscribers. The Company sells video, high-speed data and voice services to residential subscribers separately and in bundled packages at rates lower than if the subscriber purchases each product on an individual
basis. Revenue received from subscribers to bundled packages is allocated to each product in a pro-rata manner based on the standalone selling price of each of the respective services.
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Video.
Video revenue includes subscriber fees for the Company’s various tiers or packages of video
programming services generally distinguished from one another by the number and type of programming networks they include. Video revenue also includes related equipment rental charges, installation charges, broadcast and sports fees and fees
collected on behalf of local franchising authorities and the Federal Communications Commission (the “FCC”). Additionally, video revenue includes revenue from the sale of premium networks, transactional video-on-demand (e.g., events and
movies) and digital video recorder (“DVR”) service.
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High-speed data.
High-speed data revenue primarily includes subscriber fees for the Company’s
high-speed data services and related equipment rental and installation charges. The Company offers multiple tiers of high-speed data services providing various service speeds, data usage levels and other attributes to meet the different needs of its
subscribers. In addition, high-speed data revenue includes fees received from Earthlink, LLC, whose online services are provided to some of TWC’s customers.
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Voice.
Voice revenue includes subscriber fees for the Company’s voice services, along with related
installation charges, as well as fees collected on behalf of governmental authorities.
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Other.
Other revenue includes revenue from security and home management services and other residential
subscriber-related fees.
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Operating costs and expenses
.
Residential Services segment
operating costs and expenses include the operating costs and expenses that management believes are necessary to assess the performance of and allocate resources to the Residential Services segment. Such costs include programming costs, sales and
marketing costs, technical operations costs, customer care costs, video franchise and other fees and other operating costs (e.g., high-speed data connectivity costs, voice network costs and bad debt expense). Employee costs directly attributable to
the Residential Services segment are included within each operating cost and expense category as applicable. Operating costs and expenses exclude costs and expenses related to “corporate” functions and functions supporting more than one
reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) and are not within the control of segment management.
Business Services Segment
Revenue
.
Business Services segment revenue consists of revenue from video, high-speed data, voice, wholesale
transport and other services offered to business customers. The Company sells video, high-speed data and voice services to business subscribers separately and in bundled packages, and the revenue is allocated to each product in a pro-rata manner
based on the standalone selling price of each of the respective services.
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Video.
Video revenue includes the same fee categories received from business video subscribers as
described above under Residential Services video revenue.
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High-speed data.
High-speed data revenue primarily includes subscriber fees for the Company’s
high-speed data services and related installation charges. High-speed data revenue also includes amounts generated by the sale of commercial networking and point-to-point transport services, such as Metro Ethernet services.
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Voice.
Voice revenue includes subscriber fees for the Company’s voice services, along with related
installation charges, as well as fees collected on behalf of governmental authorities.
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5
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
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Wholesale transport.
Wholesale transport revenue primarily includes amounts generated by the sale of
point-to-point transport services offered to wireless telephone providers (i.e., cell tower backhaul) and other telecommunications carriers.
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Other.
Other revenue primarily includes revenue from enterprise-class, cloud-enabled hosting, managed
applications and services and other business subscriber-related fees.
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Operating costs and
expenses
.
Business Services segment operating costs and expenses include the operating costs and expenses that management believes are necessary to assess the performance of and allocate resources to the Business Services segment. Such costs
are consistent with the operating costs and expense categories described above under Residential Services operating costs and expenses. Operating costs and expenses exclude costs and expenses related to “corporate” functions and functions
supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) and are not within the control of segment management.
Other Operations Segment
Revenue
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Advertising.
Advertising revenue is generated through TWC Media’s sale of video and online
advertising inventory to local, regional and national advertising customers. The Company derives most of its advertising revenue from the sale of advertising inventory on cable networks owned by third parties. The rights to such advertising
inventory are acquired by the Company in connection with its agreements to carry such networks or obtained through contractual agreements to sell advertising inventory on behalf of other video distributors (including, among others, Verizon’s
FiOS, AT&T’s U-verse and DIRECTV and Charter). The Company also generates advertising revenue from the sale of inventory on the Lakers’ RSNs, SportsNet LA and the Company’s local sports, news and lifestyle channels (e.g., Time
Warner Cable News NY1).
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Other.
Other revenue primarily includes (i) fees received from distributors of the Lakers’
RSNs and SportsNet LA; (ii) fees paid to TWC by A/N for (a) the ability to distribute the Company’s high-speed data service and (b) TWC’s management of certain functions, including, among others, the acquisition of
programming rights, as well as the provision of certain functions, including engineering; and (iii) home shopping network-related revenue (including commissions earned on the sale of merchandise and carriage fees). Other revenue also includes
intercompany revenue from the Residential Services and Business Services segments for programming provided by the Lakers’ RSNs, SportsNet LA and the Company’s local sports, news and lifestyle channels.
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Operating costs and expenses
.
Other operating costs and expenses primarily include operating costs associated
with TWC Media, the Lakers’ RSNs, SportsNet LA and the Company’s local sports, news and lifestyle channels.
Shared Functions
Operating costs and expenses
.
Shared functions operating costs and expenses consist of costs associated
with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities,
network operations, vehicles and procurement) as well as other activities not attributable to a reportable segment.
Merger-related and restructuring costs
.
All merger-related and restructuring costs incurred by the Company are
recorded as shared functions.
Use of Operating Income before Depreciation and Amortization
In discussing its segment performance, the Company may use certain measures that are not calculated and presented in
accordance with U.S. generally accepted accounting principles (“GAAP”). These measures include Operating Income before Depreciation and Amortization (“OIBDA”), which the Company defines as Operating Income before depreciation of
tangible assets and amortization of intangible assets. For additional information regarding the use of segment OIBDA, see Note 9 to the accompanying consolidated financial statements.
6
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Recent Accounting Standards
See Note 2 to the accompanying consolidated financial statements for accounting standards adopted in 2016 and recently issued
accounting standards not yet adopted.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015
The following discussion provides an analysis of the Company’s results of operations and should be read in conjunction
with the accompanying consolidated statement of operations, as well as the consolidated financial statements and notes thereto and MD&A included in the 2015 Form 10-K.
Consolidated Results
The consolidated financial results for the Company for the three months ended March 31, 2016 and 2015 were as follows (in
millions):
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Three Months Ended March 31,
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2016
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2015
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% Change
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Revenue:
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Residential services
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$
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4,934
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$
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4,662
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5.8%
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Business services
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886
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781
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13.4%
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Other
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371
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334
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11.1%
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Total revenue
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6,191
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5,777
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7.2%
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Costs and expenses:
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Programming and content
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1,551
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1,419
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9.3%
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Sales and marketing
(a)
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613
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559
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9.7%
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Technical operations
(a)
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426
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399
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6.8%
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Customer care
(a)
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238
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226
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5.3%
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Other operating
(a)
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1,204
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1,178
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2.2%
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Depreciation
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940
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852
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10.3%
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Amortization
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34
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34
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—
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Merger-related and restructuring costs
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40
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26
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53.8%
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Total costs and expenses
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5,046
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4,693
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7.5%
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Operating Income
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1,145
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1,084
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5.6%
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Interest expense, net
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(350)
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(348)
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0.6%
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Other income, net
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11
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|
|
10
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10.0%
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Income before income taxes
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806
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746
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8.0%
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Income tax provision
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(312)
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(288)
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8.3%
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Net income
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494
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|
|
458
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7.9%
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Less: Net income attributable to noncontrolling interests
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—
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—
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NM
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Net income attributable to TWC shareholders
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$
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494
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$
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458
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7.9%
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NM—Not
meaningful.
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(a)
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Amounts include total employee costs, as follows (in millions):
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Three Months Ended March 31,
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2016
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2015
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% Change
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Employee costs
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$
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1,413
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$
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1,321
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7.0%
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Revenue.
The increase in revenue for the three months ended March 31,
2016 was due to increases in revenue at all segments. Revenue by segment is discussed in greater detail below in “Segment Results.”
7
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Costs and expenses
Operating costs and expenses.
The increase in operating costs and expenses for the three months ended March 31,
2016 was primarily due to increases in programming and employee costs, partially offset by a decline in bad debt expense. The increase in employee costs reflects the Company’s continued investments in sales and marketing, technical operations
and customer care initiatives, as well as a $26 million increase in employee medical costs (as a result of prior year changes in estimates of previously established employee medical accruals, partially offset by lower claims activity). Operating
costs and expenses by segment are discussed in greater detail below in “Segment Results.”
Depreciation.
Depreciation increased primarily due to the continued investment in customer premise equipment and scalable infrastructure.
Merger-related and restructuring costs.
Merger-related costs for the three months ended March 31, 2016 were as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Charter merger:
|
|
|
|
|
|
|
|
|
|
Employee retention costs
|
|
$
|
32
|
|
|
$
|
—
|
|
|
Advisory and legal fees
|
|
|
3
|
|
|
|
—
|
|
|
Comcast merger:
|
|
|
|
|
|
|
|
|
|
Employee retention costs
|
|
|
—
|
|
|
|
14
|
|
|
Advisory and legal fees
|
|
|
—
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
Merger-related costs
|
|
$
|
35
|
|
|
$
|
24
|
|
|
|
|
|
|
|
|
|
|
|
The Company expects to incur additional merger-related costs in connection with the Charter
merger through the closing of the merger.
The Company incurred restructuring costs of $5 million and $2 million for the
three months ended March 31, 2016 and 2015, respectively, primarily related to employee terminations and other exit costs. The Company expects to incur additional restructuring costs in 2016.
Operating Income.
Operating Income increased primarily due to growth in revenue, partially offset by higher
operating costs and expenses, depreciation and merger-related and restructuring costs, as discussed above.
Interest
expense, net.
Interest expense, net, increased slightly due to higher average interest rates, partially offset by lower average debt outstanding during the three months ended March 31, 2016 compared to 2015.
Other income, net.
Other income, net, detail is shown in the table below (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Income from equity-method investments, net
|
|
$
|
10
|
|
|
$
|
10
|
|
|
Other
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$
|
11
|
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision.
For the three months ended March 31, 2016 and 2015,
the Company recorded income tax provisions of $312 million and $288 million, respectively. The effective tax rates were 38.7% and 38.6% for the three months ended March 31, 2016 and 2015, respectively.
8
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Net income attributable to TWC shareholders and net income per common
share attributable to TWC common shareholders.
Net income attributable to TWC shareholders and net income per common share attributable to TWC common shareholders were as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Net income attributable to TWC shareholders
|
|
$
|
494
|
|
|
$
|
458
|
|
|
|
7.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share attributable to TWC common shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.73
|
|
|
$
|
1.60
|
|
|
|
8.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.72
|
|
|
$
|
1.59
|
|
|
|
8.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to TWC shareholders increased primarily due to an increase in
Operating Income, partially offset by an increase in income tax provision.
|
|
|
|
Segment Results
|
|
|
|
Residential Services.
The financial results of the Residential Services
segment for the three months ended March 31, 2016 and 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
2,508
|
|
|
$
|
2,469
|
|
|
|
1.6%
|
|
|
High-speed data
|
|
|
1,897
|
|
|
|
1,696
|
|
|
|
11.9%
|
|
|
Voice
|
|
|
504
|
|
|
|
473
|
|
|
|
6.6%
|
|
|
Other
|
|
|
25
|
|
|
|
24
|
|
|
|
4.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
4,934
|
|
|
|
4,662
|
|
|
|
5.8%
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
|
|
|
1,494
|
|
|
|
1,369
|
|
|
|
9.1%
|
|
|
Sales and marketing
(a)
|
|
|
399
|
|
|
|
371
|
|
|
|
7.5%
|
|
|
Technical operations
(a)
|
|
|
375
|
|
|
|
355
|
|
|
|
5.6%
|
|
|
Customer care
(a)
|
|
|
198
|
|
|
|
189
|
|
|
|
4.8%
|
|
|
Video franchise and other fees
(b)
|
|
|
117
|
|
|
|
114
|
|
|
|
2.6%
|
|
|
Other
(a)
|
|
|
158
|
|
|
|
183
|
|
|
|
(13.7%
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
2,741
|
|
|
|
2,581
|
|
|
|
6.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA
|
|
$
|
2,193
|
|
|
$
|
2,081
|
|
|
|
5.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Amounts
include total employee costs, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Employee costs
|
|
$
|
762
|
|
|
$
|
726
|
|
|
|
5.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Video franchise and other fees include fees collected on behalf of franchising authorities and the FCC.
|
9
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Selected residential subscriber-related statistics as of March 31, 2016
and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Video
(a)
|
|
|
10,842
|
|
|
|
10,819
|
|
|
|
0.2%
|
|
|
High-speed data
(b)
|
|
|
12,989
|
|
|
|
11,990
|
|
|
|
8.3%
|
|
|
Voice
(c)
|
|
|
6,498
|
|
|
|
5,604
|
|
|
|
16.0%
|
|
|
|
|
|
|
|
Single play
(d)
|
|
|
5,868
|
|
|
|
5,673
|
|
|
|
3.4%
|
|
|
Double play
(e)
|
|
|
4,030
|
|
|
|
4,389
|
|
|
|
(8.2%)
|
|
|
Triple play
(f)
|
|
|
5,467
|
|
|
|
4,654
|
|
|
|
17.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(g)
|
|
|
15,365
|
|
|
|
14,716
|
|
|
|
4.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Video subscriber numbers reflect billable subscribers who purchase at least the basic service video programming
tier. The determination of whether a video subscriber is categorized as residential or business is based on the type of subscriber purchasing the service.
|
|
(b)
|
High-speed data subscriber numbers reflect billable subscribers who purchase any of the high-speed data
services offered by TWC. The determination of whether a high-speed data subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber.
|
|
(c)
|
Voice subscriber numbers reflect billable subscribers who purchase an IP-based telephony service. The
determination of whether a voice subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber.
|
|
(d)
|
Single play subscriber numbers reflect customers who subscribe to one of the Company’s video, high-speed
data and voice services.
|
|
(e)
|
Double play subscriber numbers reflect customers who subscribe to two of the Company’s video, high-speed
data and voice services.
|
|
(f)
|
Triple play subscriber numbers reflect customers who subscribe to all three of the Company’s video,
high-speed data and voice services.
|
|
(g)
|
Customer relationships represent the number of subscribers who purchase at least one of the Company’s
video, high-speed data and voice services. For example, a subscriber who purchases only high-speed data service and no video service will count as one customer relationship, and a subscriber who purchases both video and high-speed data services will
also count as only one customer relationship.
|
Revenue.
Residential Services segment revenue
increased due to increases in video, high-speed data and voice revenue, each of which is discussed further below.
Average
monthly revenue per unit for the Residential Services segment for the three months ended March 31, 2016 and 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Video
(a)
|
|
$
|
77.25
|
|
|
$
|
76.26
|
|
|
|
1.3%
|
|
|
High-speed data
(b)
|
|
|
49.32
|
|
|
|
47.82
|
|
|
|
3.1%
|
|
|
Voice
(c)
|
|
|
26.23
|
|
|
|
29.00
|
|
|
|
(9.6%)
|
|
|
Customer relationship
(d)
|
|
|
107.96
|
|
|
|
106.46
|
|
|
|
1.4%
|
|
|
(a)
|
Average monthly residential video revenue per unit represents residential video revenue divided by the
corresponding average residential video subscribers for the period.
|
|
(b)
|
Average monthly residential high-speed data revenue per unit represents residential high-speed data revenue
divided by the corresponding average residential high-speed data subscribers for the period.
|
|
(c)
|
Average monthly residential voice revenue per unit represents residential voice revenue divided by the
corresponding average residential voice subscribers for the period.
|
|
(d)
|
Average monthly residential revenue per residential customer relationship represents residential services
revenue divided by the corresponding average residential customer relationships for the period.
|
10
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The major components of residential video revenue for the three months ended
March 31, 2016 and 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Programming tiers
(a)
|
|
$
|
1,581
|
|
|
$
|
1,587
|
|
|
|
(0.4%)
|
|
|
Premium networks
|
|
|
217
|
|
|
|
209
|
|
|
|
3.8%
|
|
|
Transactional video-on-demand
|
|
|
51
|
|
|
|
61
|
|
|
|
(16.4%)
|
|
|
Video equipment rental and installation charges
|
|
|
394
|
|
|
|
343
|
|
|
|
14.9%
|
|
|
DVR service
|
|
|
148
|
|
|
|
155
|
|
|
|
(4.5%)
|
|
|
Franchise and other fees
(b)
|
|
|
117
|
|
|
|
114
|
|
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,508
|
|
|
$
|
2,469
|
|
|
|
1.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Programming tier revenue includes subscriber fees for the Company’s various tiers or packages of video
programming services generally distinguished from one another by the number and type of programming networks they include.
|
|
(b)
|
Franchise and other fees include fees collected on behalf of franchising authorities and the FCC.
|
The increase in residential video revenue was due to an increase in average revenue per subscriber and
growth in video subscribers. The increase in average revenue per subscriber was primarily the result of growth in video equipment rental and premium network revenue, partially offset by lower transactional video-on-demand, programming tier and DVR
service revenue.
Residential high-speed data revenue increased due to growth in high-speed data subscribers and an
increase in average revenue per subscriber. The increase in average revenue per subscriber was primarily due to increases in prices and equipment rental charges.
The increase in residential voice revenue was due to growth in voice subscribers, partially offset by a decrease in average
revenue per subscriber.
Operating costs and expenses.
Operating costs and expenses increased primarily due to
higher programming, sales and marketing and technical operations costs, partially offset by a decrease in other operating costs.
Selected Residential Services average monthly costs per subscriber for the three months ended March 31, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Programming costs per video subscriber
|
|
$
|
46.00
|
|
|
$
|
42.28
|
|
|
|
8.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voice costs per voice subscriber
|
|
$
|
3.30
|
|
|
$
|
3.68
|
|
|
|
(10.3%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in programming costs (which include intercompany expense from the Other
Operations segment for programming costs associated with the Lakers’ RSNs, SportsNet LA and the Company’s local sports, news and lifestyle channels) was primarily due to contractual rate increases.
Sales and marketing costs increased primarily due to increased sales-related headcount and higher compensation costs per
employee related to the Company’s subscriber growth initiatives, as well as higher marketing costs.
Technical
operations costs increased primarily due to increased headcount, higher compensation costs per employee and increased installation-related activities (reflecting subscriber growth and the Company’s continued investments to improve the customer
experience).
Customer care costs increased primarily due to increased headcount and higher compensation costs per
employee (reflecting subscriber growth and the Company’s continued investments to improve the customer experience).
11
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Other operating costs decreased primarily due to lower bad debt expense,
partially offset by increases in a number of other categories.
OIBDA.
OIBDA increased due to the increase in
revenue, partially offset by higher operating costs and expenses, as discussed above.
Business Services.
The financial results of the Business Services segment for the three months ended March 31, 2016 and 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Video
|
|
$
|
100
|
|
|
$
|
94
|
|
|
|
6.4%
|
|
|
High-speed data
|
|
|
447
|
|
|
|
376
|
|
|
|
18.9%
|
|
|
Voice
|
|
|
161
|
|
|
|
142
|
|
|
|
13.4%
|
|
|
Wholesale transport
|
|
|
130
|
|
|
|
121
|
|
|
|
7.4%
|
|
|
Other
|
|
|
48
|
|
|
|
48
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
886
|
|
|
|
781
|
|
|
|
13.4%
|
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Programming
|
|
|
50
|
|
|
|
43
|
|
|
|
16.3%
|
|
|
Sales and marketing
(a)
|
|
|
161
|
|
|
|
137
|
|
|
|
17.5%
|
|
|
Technical operations
(a)
|
|
|
38
|
|
|
|
30
|
|
|
|
26.7%
|
|
|
Customer care
(a)
|
|
|
40
|
|
|
|
37
|
|
|
|
8.1%
|
|
|
Video franchise and other fees
(b)
|
|
|
5
|
|
|
|
4
|
|
|
|
25.0%
|
|
|
Other
(a)
|
|
|
56
|
|
|
|
51
|
|
|
|
9.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses
|
|
|
350
|
|
|
|
302
|
|
|
|
15.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA
|
|
$
|
536
|
|
|
$
|
479
|
|
|
|
11.9%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Amounts
include total employee costs, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Employee costs
|
|
$
|
202
|
|
|
$
|
176
|
|
|
|
14.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b)
|
Video franchise and other fees include fees collected on behalf of franchising authorities and the FCC.
|
12
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Selected business subscriber-related statistics as of March 31, 2016 and
2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Video
(a)
|
|
|
214
|
|
|
|
206
|
|
|
|
3.9%
|
|
|
High-speed data
(b)
|
|
|
651
|
|
|
|
591
|
|
|
|
10.2%
|
|
|
Voice
(c)
|
|
|
386
|
|
|
|
334
|
|
|
|
15.6%
|
|
|
|
|
|
|
|
Single play
(d)
|
|
|
366
|
|
|
|
349
|
|
|
|
4.9%
|
|
|
Double play
(e)
|
|
|
312
|
|
|
|
274
|
|
|
|
13.9%
|
|
|
Triple play
(f)
|
|
|
87
|
|
|
|
78
|
|
|
|
11.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
(g)
|
|
|
765
|
|
|
|
701
|
|
|
|
9.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Video subscriber numbers reflect billable subscribers who purchase at least the basic service video programming
tier. The determination of whether a video subscriber is categorized as residential or business is based on the type of subscriber purchasing the service.
|
|
(b)
|
High-speed data subscriber numbers reflect billable subscribers who purchase any of the high-speed data
services offered by TWC. The determination of whether a high-speed data subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber.
|
|
(c)
|
Voice subscriber numbers reflect billable subscribers who purchase an IP-based telephony service. The
determination of whether a voice subscriber is categorized as residential or business is generally based upon the type of service provided to that subscriber.
|
|
(d)
|
Single play subscriber numbers reflect customers who subscribe to one of the Company’s video, high-speed
data and voice services.
|
|
(e)
|
Double play subscriber numbers reflect customers who subscribe to two of the Company’s video, high-speed
data and voice services.
|
|
(f)
|
Triple play subscriber numbers reflect customers who subscribe to all three of the Company’s video,
high-speed data and voice services.
|
|
(g)
|
Customer relationships represent the number of subscribers who purchase at least one of the Company’s
video, high-speed data and voice services. For example, a subscriber who purchases only high-speed data service and no video service will count as one customer relationship, and a subscriber who purchases both video and high-speed data services will
also count as only one customer relationship. Customers who purchase wholesale transport or cloud services but do not purchase one of the Company’s video, high-speed data or voice services are not included in the Company’s subscriber
results.
|
Revenue.
Business services revenue increased primarily due to growth in high-speed data
and voice subscribers and higher wholesale transport revenue.
Operating costs and expenses.
Operating costs and
expenses increased primarily as a result of increased headcount and higher compensation costs per employee, as well as growth in programming, voice and marketing costs.
OIBDA.
OIBDA increased due to the increase in revenue, partially offset by higher operating costs and expenses, as
discussed above.
Other Operations.
The financial results of the Other Operations segment for the three
months ended March 31, 2016 and 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
244
|
|
|
$
|
230
|
|
|
|
6.1%
|
|
|
Other
|
|
|
196
|
|
|
|
168
|
|
|
|
16.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
440
|
|
|
|
398
|
|
|
|
10.6%
|
|
|
Operating costs and expenses
(a)
|
|
|
247
|
|
|
|
235
|
|
|
|
5.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OIBDA
|
|
$
|
193
|
|
|
$
|
163
|
|
|
|
18.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Amounts
include total employee costs, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Employee costs
|
|
$
|
87
|
|
|
$
|
85
|
|
|
|
2.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue.
Advertising revenue increased primarily due to higher political advertising
revenue, which was $11 million for the three months ended March 31, 2016 compared to $2 million for the three months ended March 31, 2015. The Company expects advertising revenue in 2016 to increase compared to 2015 due primarily to a
cyclical increase in political advertising revenue.
13
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Other revenue increased primarily due to the recognition of approximately $20
million of revenue associated with the settlement of a contractual dispute, as well as an increase in affiliate fees from the Residential Services segment and other distributors of the Lakers’ RSNs and SportsNet LA. The Company continues to
seek additional distribution agreements for the carriage of SportsNet LA by major distributors.
Operating costs and
expenses.
Operating costs and expenses increased primarily as a result of higher costs associated with advertising inventory sold on behalf of other video distributors and an increase in content costs associated with the Lakers’ RSNs.
OIBDA.
OIBDA increased due to an increase in revenue, partially offset by an increase in operating costs and
expenses, as discussed above.
Shared Functions.
Costs and expenses associated with the
Company’s shared functions, which consist of operating costs associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting
more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) as well as other activities not directly attributable to a reportable segment, for the three months ended March 31,
2016 and 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Operating costs and expenses
(a)
|
|
$
|
763
|
|
|
$
|
727
|
|
|
|
5.0%
|
|
|
Merger-related and restructuring costs
|
|
|
40
|
|
|
|
26
|
|
|
|
53.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
$
|
803
|
|
|
$
|
753
|
|
|
|
6.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
Amounts
include total employee costs, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
% Change
|
|
|
Employee costs
|
|
$
|
362
|
|
|
$
|
334
|
|
|
|
8.4%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses.
Operating costs and expenses increased primarily due to
higher compensation costs per employee and an increase in insurance expense, partially offset by lower costs as a result of operating efficiencies.
Merger-related and restructuring costs.
Refer to “Consolidated Results—Costs and expenses—Merger-related
and restructuring costs” for detail of merger-related and restructuring costs for the three months ended March 31, 2016 and 2015. The Company expects to incur additional merger-related costs in connection with the Charter merger through
the closing of the merger, as well as additional restructuring costs in 2016.
FINANCIAL CONDITION AND LIQUIDITY
Management believes that cash generated by or available to TWC should be sufficient to fund its capital and liquidity needs
for the next twelve months and for the foreseeable future thereafter, including quarterly dividend payments and maturities of long-term debt. TWC’s sources of cash include cash and equivalents on hand, cash provided by operating activities and
borrowing capacity under the Company’s $3.5 billion senior unsecured five-year revolving credit facility (the “Revolving Credit Facility”) and the Company’s $2.5 billion unsecured commercial paper program (which is supported by
unused committed capacity under the Revolving Credit Facility), as well as access to capital markets.
In accordance with
the Company’s investment policy of diversifying its investments and limiting the amount of its investments in a single entity or fund, the Company may invest its cash and equivalents in a combination of money market and government funds and
U.S. Treasury securities, as well as other similar instruments.
TWC’s unused committed financial capacity was $4.734
billion as of March 31, 2016, reflecting $1.297 billion of cash and equivalents and $3.437 billion of available borrowing capacity under the Revolving Credit Facility.
14
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Current Financial Condition
As of March 31, 2016, the Company had $22.492 billion of debt, $1.297 billion of cash and equivalents (net debt of
$21.195 billion, defined as total debt less cash and equivalents) and $9.357 billion of total TWC shareholders’ equity. As of December 31, 2015, the Company had $22.502 billion of debt, $1.170 billion of cash and equivalents (net debt of
$21.332 billion) and $8.995 billion of total TWC shareholders’ equity.
The following table shows the significant
items contributing to the change in net debt from December 31, 2015 to March 31, 2016 (in millions):
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
21,332
|
|
|
Cash provided by operating activities
|
|
|
(1,608)
|
|
|
Capital expenditures
|
|
|
1,318
|
|
|
Dividend paid
|
|
|
217
|
|
|
All other, net
|
|
|
(64)
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2016
|
|
$
|
21,195
|
|
|
|
|
|
|
|
On March 16, 2016, the Company’s Board of Directors declared a quarterly cash
dividend of $0.75 per share of TWC common stock, payable in cash on April 22, 2016 to stockholders of record at the close of business on April 1, 2016.
Cash Flows
Cash and
equivalents increased $127 million and decreased $160 million for the three months ended March 31, 2016 and 2015, respectively. Components of these changes are discussed below in more detail.
Operating Activities
Details of cash provided by operating activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Operating Income
|
|
$
|
1,145
|
|
|
$
|
1,084
|
|
|
Depreciation
|
|
|
940
|
|
|
|
852
|
|
|
Amortization
|
|
|
34
|
|
|
|
34
|
|
|
Noncash equity-based compensation expense
|
|
|
41
|
|
|
|
42
|
|
|
Cash paid for interest, net
(a)
|
|
|
(389)
|
|
|
|
(392)
|
|
|
Cash paid for income taxes, net
(b)
|
|
|
(13)
|
|
|
|
(3)
|
|
|
All other, net, including working capital changes
|
|
|
(150)
|
|
|
|
(109)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by operating activities
|
|
$
|
1,608
|
|
|
$
|
1,508
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts include interest income received (primarily cash received under interest rate swap contracts) of $10
million and $16 million for the three months ended March 31, 2016 and 2015, respectively.
|
|
(b)
|
Amounts include cash refunds of income taxes of $3 million and $2 million for the three months ended
March 31, 2016 and 2015, respectively.
|
Cash provided by operating activities increased from $1.508
billion for the three months ended March 31, 2015 to $1.608 billion for the three months ended March 31, 2016. This increase was primarily related to an increase in Operating Income (excluding depreciation and amortization), partially
offset by an increase in working capital requirements.
On December 18, 2015, the Protecting Americans from Tax Hikes
Act of 2015 was enacted, extending bonus depreciation deductions on the cost of the Company’s qualified capital expenditures from 2015 through 2019. Due to the late enactment of this Act, the Company made all 2015 income tax payments as if
bonus depreciation were not going to be extended. This resulted in a 2015 overpayment of approximately $120 million, the application of which is expected to reduce the Company’s cash paid for income taxes, net, in the second quarter of
2016.
15
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
The Company made no cash contributions to its qualified defined benefit
pension plans (the “qualified pension plans”) during the three months ended March 31, 2016. As of March 31, 2016, the qualified pension plans and the nonqualified defined benefit pension plan (the “nonqualified pension
plan”) were estimated to be underfunded by $635 million. The Company may make discretionary cash contributions to the qualified pension plans in 2016. Such contributions will be dependent on a variety of factors, including current and expected
interest rates, asset performance, the funded status of the qualified pension plans and management’s judgment. For the nonqualified pension plan, the Company will continue to make contributions during the remainder of 2016 to the extent
benefits are paid.
Investing Activities
Details of cash used by investing activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Capital expenditures
|
|
$
|
(1,318)
|
|
|
$
|
(1,134)
|
|
|
Acquisition of intangible assets
|
|
|
(11)
|
|
|
|
(23)
|
|
|
Other investing activities
|
|
|
4
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities
|
|
$
|
(1,325)
|
|
|
$
|
(1,154)
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by investing activities increased from $1.154 billion for the three months ended
March 31, 2015 to $1.325 billion for the three months ended March 31, 2016, principally due to an increase in capital expenditures, primarily due to customer relationship growth, as well as the Company’s investments to improve network
reliability, upgrade older customer premise equipment and expand its network to additional residences, commercial buildings and cell towers.
TWC’s capital expenditures by major category were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Customer premise equipment
(a)
|
|
$
|
518
|
|
|
$
|
467
|
|
|
Scalable infrastructure
(b)
|
|
|
370
|
|
|
|
270
|
|
|
Line extensions
(c)
|
|
|
177
|
|
|
|
174
|
|
|
Upgrades/rebuilds
(d)
|
|
|
60
|
|
|
|
38
|
|
|
Support capital
(e)
|
|
|
193
|
|
|
|
185
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
1,318
|
|
|
$
|
1,134
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Amounts represent costs incurred in the purchase and installation of equipment that resides at a
customer’s home or business for the purpose of receiving/sending video, high-speed data and/or voice signals. Such equipment includes set-top boxes, remote controls, high-speed data modems (including wireless), telephone modems and the costs of
installing such new equipment. Customer premise equipment also includes materials and labor costs incurred to install the “drop” cable that connects a customer’s dwelling or business to the closest point of the main distribution
network.
|
|
(b)
|
Amounts represent costs incurred in the purchase and installation of equipment that controls signal reception,
processing and transmission throughout TWC’s distribution network, as well as controls and communicates with the equipment residing at a customer’s home or business. Also included in scalable infrastructure is certain equipment necessary
for content aggregation and distribution (video-on-demand equipment) and equipment necessary to provide certain video, high-speed data and voice service features (voicemail, email, etc.).
|
|
(c)
|
Amounts represent costs incurred to extend TWC’s distribution network into a geographic area previously
not served. These costs typically include network design, the purchase and installation of fiber optic and coaxial cable and certain electronic equipment.
|
|
(d)
|
Amounts primarily represent costs incurred to upgrade or replace certain existing components or an entire
geographic area of TWC’s distribution network. These costs typically include network design, the purchase and installation of fiber optic and coaxial cable and certain electronic equipment.
|
|
(e)
|
Amounts represent all other capital purchases required to run day-to-day operations. These costs typically
include vehicles, land and buildings, computer hardware/software, office equipment, furniture and fixtures, tools and test equipment. Amounts include capitalized software costs of $114 million and $102 million for the three months ended
March 31, 2016 and 2015, respectively.
|
16
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Financing Activities
Details of cash used by financing activities are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Short-term borrowings, net
|
|
$
|
—
|
|
|
$
|
131
|
|
|
Repayments of long-term debt
|
|
|
—
|
|
|
|
(500)
|
|
|
Dividends paid
|
|
|
(217)
|
|
|
|
(216)
|
|
|
Proceeds from exercise of stock options
|
|
|
58
|
|
|
|
71
|
|
|
Excess tax benefit from equity-based compensation
|
|
|
68
|
|
|
|
56
|
|
|
Taxes paid in cash in lieu of shares issued for equity-based compensation
|
|
|
(64)
|
|
|
|
(56)
|
|
|
Other financing activities
|
|
|
(1)
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities
|
|
$
|
(156)
|
|
|
$
|
(514)
|
|
|
|
|
|
|
|
|
|
|
|
Cash used by financing activities was $156 million for the three months ended March 31,
2016 compared to $514 million for the three months ended March 31, 2015. Cash used by financing activities for the three months ended March 31, 2016 primarily consisted of the payment of a quarterly cash dividend. Cash used by financing
activities for the three months ended March 31, 2015 primarily consisted of the repayment of TWC’s 3.5% senior notes due February 2015 ($500 million in aggregate principal amount) and the payment of a quarterly cash dividend, partially
offset by borrowings under the Company’s commercial paper program.
Outstanding Debt and Available Financial Capacity
Debt as of March 31, 2016 and December 31, 2015 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance as of
|
|
|
|
|
Maturity
|
|
Interest Rate
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
TWC notes and debentures
(a)
|
|
2017-2042
|
|
6.061%
(b)
|
|
$
|
20,363
|
|
|
$
|
20,370
|
|
|
TWCE debentures
(c)
|
|
2023-2033
|
|
7.923%
(b)
|
|
|
2,054
|
|
|
|
2,056
|
|
|
Revolving credit facility
(d)
|
|
2017
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Commercial paper program
(d)
|
|
2017
|
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital leases
|
|
2016-2042
|
|
|
|
|
75
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
(e)
|
|
|
|
|
|
$
|
22,492
|
|
|
$
|
22,502
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Outstanding balance amounts of the TWC notes and debentures as of March 31, 2016 and December 31,
2015 each include £1.258 billion of senior unsecured notes valued at $1.807 billion and $1.855 billion, respectively, using the exchange rates at each date.
|
|
(b)
|
Rate represents a weighted-average effective interest rate as of March 31, 2016 and, for the TWC notes and
debentures, includes the effects of interest rate swaps and cross-currency swaps.
|
|
(c)
|
Outstanding balance amounts of the TWCE debentures as of March 31, 2016 and December 31, 2015 include
an unamortized fair value adjustment of $54 million and $56 million, respectively, primarily consisting of the fair value adjustment recognized as a result of the 2001 merger of America Online, Inc. (now known as AOL Inc.) and Time Warner Inc. (now
known as Historic TW Inc.).
|
|
(d)
|
As of March 31, 2016, the Company had $3.437 billion of available borrowing capacity under the Revolving
Credit Facility (which reflects a reduction of $63 million for outstanding letters of credit backed by the Revolving Credit Facility).
|
|
(e)
|
Outstanding balance amounts of total debt as of March 31, 2016 and December 31, 2015 each include
current maturities of long-term debt of $5 million.
|
See the 2015 Form 10-K for further details
regarding the Company’s outstanding debt and other financing arrangements, including certain information about maturities, covenants and rating triggers related to such debt and financing arrangements. As of March 31, 2016, TWC was in
compliance with the leverage ratio covenant of the Revolving Credit Facility, with a ratio of consolidated total debt as of March 31, 2016 to consolidated EBITDA for the twelve months ended March 31, 2016 of approximately 2.6 times. In
accordance with the Revolving Credit Facility agreement, consolidated total debt as of March 31, 2016 was calculated as (a) total debt per the accompanying consolidated balance sheet less the TWCE unamortized fair value adjustment
(discussed above) and the fair value of debt subject to interest rate swaps, less (b) total cash per the accompanying consolidated balance sheet in excess of $25 million. In accordance with the Revolving Credit Facility agreement, consolidated
EBITDA for the twelve months ended March 31, 2016 was calculated as Operating Income plus depreciation, amortization and equity-based compensation expense.
17
TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform
Act of 1995, particularly statements anticipating future growth in revenue, Operating Income, cash provided by operating activities and other financial measures. Words such as “anticipates,” “estimates,” “expects,”
“projects,” “intends,” “plans,” “believes” and words and terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements.
These forward-looking statements are included throughout this report and are based on management’s current expectations and beliefs about future events. As with any projection or forecast, they are subject to uncertainty and changes in
circumstances.
The Company operates in a highly competitive, consumer and technology driven and rapidly changing business
that is affected by government regulation and economic, strategic, political and social conditions. Various factors could adversely affect the operations, business or financial results of TWC in the future and cause TWC’s actual results to
differ materially from those contained in the forward-looking statements, including those factors discussed in detail in Item 1A, “Risk Factors,” in the 2015 Form 10-K, and in TWC’s other filings made from time to time with the
Securities and Exchange Commission (the “SEC”) after the date of this report. In addition, important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include:
|
|
•
|
|
increased competition from existing and new providers of video, data and voice services;
|
|
|
•
|
|
the Company’s continued ability to exploit new and existing technologies that appeal to residential and
business services customers and advertisers;
|
|
|
•
|
|
changes in the regulatory and tax environments in which the Company operates, including, among others,
regulation of broadband Internet services, including under “net neutrality” rules recently adopted by the FCC, regulation of business data services and cable equipment, and changes in federal, state and local taxation;
|
|
|
•
|
|
increased difficulty negotiating programming and retransmission agreements on favorable terms, resulting in
increased costs to the Company and/or the loss of popular programming; and
|
|
|
•
|
|
changes or delays in, or impediments to executing on, the Company’s plans, initiatives and strategies,
including the proposed Charter merger.
|
Any forward-looking statements made by the Company in this
document speak only as of the date on which they are made. The Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements whether as a result of changes in circumstances, new
information, subsequent events or otherwise.
18
TIME WARNER CABLE INC.