Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
PART I. FINANCIAL INFORMATION
Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.
The Company’s operations are managed and reported to its Chairman and Chief Executive Officer (“CEO”), the Company’s chief operating decision maker, on a consolidated basis. The CEO assesses performance and allocates resources based on the consolidated results of operations. Under this organizational and reporting structure, the Company has one1 reportable segment, cable services.
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures typically included in Charter’s Annual Report on Form 10-K have been condensed or omitted for this quarterly report. The accompanying consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs; depreciation and amortization costs;costs, impairments of property, plantfranchises and equipment, intangiblesgoodwill, pension benefits and goodwill; pension benefits; income taxes; contingencies and programming expense.taxes. Actual results could differ from those estimates.
Indefinite-lived and finite-lived intangible assets consist of the following as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
Amortization expense related to customer relationships and other intangible assets for the three and six months ended June 30,March 31, 2020 and 2019 was $548$508 million and $1.1 billion, respectively, and $614$578 million, and $1.3 billion for the three and six months ended June 30, 2018, respectively.
The Company expects amortization expense on its finite-lived intangible assets will be as follows:
Actual amortization expense in future periods will differ from these estimates as a result of new intangible asset acquisitions or divestitures, changes in useful lives, impairments and other relevant factors.
In July 2018, the Company's build-to-suit lease arrangement with a single-asset special purpose entity ("SPE") to build a new Charter headquarters in Stamford, Connecticut obtained all approvals and was made effective. The SPE obtained a first-lien mortgage note to finance the construction with fixed monthly payments through July 15, 2035 with a 5.612% coupon interest rate. All payments of the mortgage note are guaranteed by Charter. The initial term of the lease is 15 years commencing August 1, 2020, with no termination options. At the end of the lease term there is a mirrored put option for the SPE to sell the property to Charter and call option for Charter to purchase the property for a fixed purchase price. As the Company has determined the SPE is a variable interest entity ("VIE") of which it became the primary beneficiary upon the effectiveness of the arrangement, the Company has consolidated the assets and liabilities of the SPE in its consolidated balance sheet as of June 30, 2019 and December 31, 2018 as follows.
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Assets | | | |
Current assets | $ | 2 |
| | $ | 2 |
|
Restricted cash | $ | 150 |
| | $ | 214 |
|
Property, plant and equipment | $ | 200 |
| | $ | 130 |
|
Liabilities | | | |
Current liabilities | $ | 2 |
| | $ | — |
|
Other long-term liabilities | $ | 350 |
| | $ | 346 |
|
6
Property, plant and equipment includes land, a parking garage and building construction costs, including the capitalization of qualifying interest. As of June 30, 2019 and December 31, 2018, other long-term liabilities include $342 million in VIE's mortgage note liability and $8 million and $4 million, respectively, in liability-classified noncontrolling interest recorded at amortized cost with accretion towards settlement of the put/call option in the lease. The consolidated statement of cash flows for the six months ended June 30, 2019 includes a decrease to restricted cash of $64 million primarily related to building construction costs.
Equity Investments
The Company recorded impairments on equity investments of approximately $11 million and $121 million during the three and six months ended June 30, 2019, respectively, and $39 million and $58 million during the three and six months ended June 30, 2018, respectively, which was recorded in other expense, net in the consolidated statements of operations.
4. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following as of June 30, 2019 and December 31, 2018:
|
| | | | | | | |
| June 30, 2019 | | December 31, 2018 |
Accounts payable – trade | $ | 790 |
| | $ | 758 |
|
Deferred revenue | 389 |
| | 494 |
|
Accrued liabilities: | | | |
Programming costs | 2,108 |
| | 2,044 |
|
Labor | 906 |
| | 1,052 |
|
Capital expenditures | 1,016 |
| | 1,472 |
|
Interest | 1,001 |
| | 1,045 |
|
Taxes and regulatory fees | 543 |
| | 526 |
|
Property and casualty | 458 |
| | 424 |
|
Other | 934 |
| | 990 |
|
| $ | 8,145 |
| | $ | 8,805 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
the arrangement, the Company has consolidated the assets and liabilities of the SPE in its consolidated balance sheets as of March 31, 2020 and December 31, 2019 as follows.
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Assets | | | |
| | | |
Restricted cash | $ | 28 | | | $ | 66 | |
Property, plant and equipment | $ | 335 | | | $ | 295 | |
Liabilities | | | |
Current liabilities | $ | 13 | | | $ | 11 | |
Other long-term liabilities | $ | 350 | | | $ | 350 | |
Property, plant and equipment includes land, a parking garage and building construction costs, including the capitalization of qualifying interest. As of March 31, 2020 and December 31, 2019, other long-term liabilities include $337 million and $339 million, respectively, in VIE's mortgage note liability and $13 million and $11 million, respectively, in liability-classified noncontrolling interest recorded at amortized cost with accretion towards settlement of the put/call option in the lease.
The consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 includes a decrease to restricted cash of $38 million and $39 million, respectively, primarily related to building construction costs.
Equity Investments
The Company recorded impairments on equity investments of approximately $110 million during the three months ended March 31, 2019 which were recorded in other income (expense), net in the consolidated statements of operations.
4. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following as of March 31, 2020 and December 31, 2019:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
Accounts payable – trade | $ | 733 | | | $ | 786 | |
Deferred revenue | 477 | | | 460 | |
Accrued liabilities: | | | |
Programming costs | 2,133 | | | 2,042 | |
Labor | 869 | | | 1,028 | |
Capital expenditures | 1,029 | | | 1,441 | |
Interest | 1,005 | | | 1,052 | |
Taxes and regulatory fees | 511 | | | 537 | |
Property and casualty | 468 | | | 458 | |
Operating lease liabilities | 218 | | | 214 | |
Other | 867 | | | 867 | |
| $ | 8,310 | | | $ | 8,885 | |
5. Leases
The primary leased asset classesOperating lease expenses were $108 million and $107 million for the three months ended March 31, 2020 and 2019, respectively, inclusive of $35 million and $36 million for the Company include real estate, dark fiber, colocation facilitiesthree months ended March 31, 2020 and other equipment. The2019, respectively, of both short-term lease agreements include both leasecosts and non-lease components, which the Company accounts for separately depending on the election made for each leased asset class. For real estate and dark fiber leased asset classes, the Company accounts for lease and non-lease components as a single lease component and includes all fixed payments in the measurement of lease liabilities and lease assets. For colocation facilities leased asset class, the Company accounts for lease and non-lease components separately including only the fixed lease payment component in the measurement of lease liabilities and lease assets.
In addition to fixed lease payments, certain of the Company’s lease agreements include variable lease payments which are tied to an index or rate such as the change in the Consumer Price Index. These variable payments arecosts that were not included in the measurement of operating lease liabilities.
Cash paid for amounts included in the measurement of operating lease liabilities, recorded as operating cash flows in the statements of cash flows, were $73 million and $71 million, for the three months ended March 31, 2020 and 2019, respectively. Operating lease assets.
Leaseright-of-use assets and lease liabilities are initially recognized based on the present value of the future lease payments over the expected lease term. Asobtained in exchange for most leases the implicit rate is not readily determinable, the Company uses a discount rate in determining the present value of future payments based on the yield-to-maturity of the Company’s secured publicly traded USD denominated debt instruments interpolating the duration of the debt to the term of the executed lease.
The Company’s leases have base rent periods and some with optional renewal periods. Leases with base rent periods of less than 12 months are not recorded on the balance sheet. For purposes of measurement of lease liabilities, the expected lease terms may include renewal options when it is reasonably certain that the Company will exercise such options. Based on conditions of the Company's existing leases and its overall business strategies, the majority of the Company's renewal options are not reasonably certain in determining the expected lease term. The Company will periodically reassess expected lease terms (and purchase options, if applicable) based on significant triggering events or compelling economic reasons to exercise such options.
The Company’s primary lease income represents sublease income on certain real estate leases. Sublease income is included in other revenue and presented gross from rent expense. For customer premise equipment ("CPE") where such CPE would qualify as a lease, the Company applies the practical expedient to combine the operating lease withobligations were $65 million and $56 million for the subscription service revenue as a single performance obligation in accordance with revenue recognition accounting guidance as the subscription service is the predominant component.three months ended March 31, 2020 and 2019, respectively.
The components of lease related expenses, net are as follows.
|
| | | | | | | |
| Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
Operating lease expense (a) | $ | 109 |
| | $ | 216 |
|
| | | |
Finance lease expense: | | | |
Amortization of right-of-use assets | 3 |
| | 7 |
|
Interest on lease liabilities | 2 |
| | 3 |
|
Total finance lease expense | 5 |
| | 10 |
|
| | | |
Sublease income | (7 | ) | | (14 | ) |
Total lease related expenses, net | $ | 107 |
| | $ | 212 |
|
7
| |
(a)
| Includes short-term leases and variable leases costs of $30 million and $65 million for the three and six months ended June 30, 2019, respectively. |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Supplemental cash flow information related to leases is as follows.
|
| | | |
| Six Months Ended June 30, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 147 |
|
Operating cash flows from finance leases | $ | 2 |
|
Financing cash flows from finance leases | $ | 4 |
|
| |
Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | $ | 161 |
|
Finance leases | $ | 26 |
|
Supplemental balance sheet information related to leases is as follows.
|
| | | |
| June 30, 2019 |
Operating leases: | |
Operating lease right-of-use assets | $ | 1,166 |
|
| |
Current operating lease liabilities | $ | 208 |
|
Long-term operating lease liabilities | 1,052 |
|
Total operating lease liabilities | $ | 1,260 |
|
| |
Finance leases: | |
Finance lease right-of-use assets (included within property, plant and equipment, net) | $ | 202 |
|
| |
Current finance lease liabilities (included within accounts payable and accrued liabilities) | $ | 6 |
|
Long-term finance lease liabilities (included within other long-term liabilities) | 97 |
|
Total finance lease liabilities | $ | 103 |
|
| |
Weighted average remaining lease term | |
Operating leases | 6.9 years |
|
Finance leases | 13.1 years |
|
| |
Weighted average discount rate | |
Operating leases | 4.5 | % |
Finance leases | 5.6 | % |
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| | | | |
Operating lease right-of-use assets: | | | | |
Included within other noncurrent assets | | $ | 1,096 | | | | $ | 1,092 | |
| | | |
Operating lease liabilities: | | | | |
Current portion included within accounts payable and accrued liabilities | | $ | 218 | | | | $ | 214 | |
Long-term portion included within other long-term liabilities | | 984 | | | | 979 | |
| | $ | 1,202 | | | $ | 1,193 | |
| | | |
Weighted average remaining lease term for operating leases | | 6.6 years | | 6.6 years |
Weighted average discount rate for operating leases | | 4.3 | % | | 4.4 | % |
Maturities of lease liabilities are as follows.
| | | | | | | |
| Operating leases | | |
Nine months ended December 31, 2020 | $ | 195 | | | |
2021 | 267 | | | |
2022 | 229 | | | |
2023 | 201 | | | |
2024 | 164 | | | |
Thereafter | 412 | | | |
Undiscounted lease cash flow commitments | 1,468 | | | |
Reconciling impact from discounting | (266) | | | |
Lease liabilities on consolidated balance sheet as of March 31, 2020 | $ | 1,202 | | | |
The Company has $60 million and $62 million of finance lease liabilities recognized in the consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively, included within accounts payable and accrued liabilities and other long-term liabilities.The related finance lease right-of-use assets are recorded in property, plant and equipment, net.The Company’s finance leases were not considered material for further supplemental lease disclosures.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Maturities of lease liabilities are as follows.
|
| | | | | | | |
| Operating leases | | Finance leases |
Six months ended December 31, 2019 | $ | 146 |
| | $ | 5 |
|
2020 | 278 |
| | 11 |
|
2021 | 243 |
| | 12 |
|
2022 | 207 |
| | 12 |
|
2023 | 178 |
| | 12 |
|
Thereafter | 516 |
| | 95 |
|
Undiscounted lease cash flow commitments | 1,568 |
| | 147 |
|
Reconciling impact from discounting | (308 | ) | | (44 | ) |
Lease liabilities on consolidated balance sheet as of June 30, 2019 | $ | 1,260 |
| | $ | 103 |
|
The following table presents the Company’s unadjusted lease commitments as of December 31, 2018 as a required disclosure for companies adopting the lease standard prospectively without revising comparative period information.
|
| | | | | | | |
| Operating leases | | Finance leases |
2019 | $ | 286 |
| | $ | 10 |
|
2020 | 254 |
| | 9 |
|
2021 | 207 |
| | 9 |
|
2022 | 170 |
| | 9 |
|
2023 | 143 |
| | 10 |
|
Thereafter | 440 |
| | 64 |
|
| $ | 1,500 |
| | $ | 111 |
|
6. Long-Term Debt
Long-term debt consists of the following as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| | | | | | | | | | | | | | | |
| June 30, 2019 | | December 31, 2018 |
| Principal Amount | | Accreted Value | | Principal Amount | | Accreted Value |
CCO Holdings, LLC: | | | | | | | |
5.250% senior notes due March 15, 2021 | $ | 500 |
| | $ | 498 |
| | $ | 500 |
| | $ | 498 |
|
5.250% senior notes due September 30, 2022 | 1,250 |
| | 1,239 |
| | 1,250 |
| | 1,238 |
|
5.125% senior notes due February 15, 2023 | 1,000 |
| | 995 |
| | 1,000 |
| | 994 |
|
4.000% senior notes due March 1, 2023 | 500 |
| | 497 |
| | 500 |
| | 496 |
|
5.125% senior notes due May 1, 2023 | 1,150 |
| | 1,144 |
| | 1,150 |
| | 1,144 |
|
5.750% senior notes due September 1, 2023 | 500 |
| | 497 |
| | 500 |
| | 497 |
|
5.750% senior notes due January 15, 2024 | 1,000 |
| | 994 |
| | 1,000 |
| | 993 |
|
5.875% senior notes due April 1, 2024 | 1,700 |
| | 1,689 |
| | 1,700 |
| | 1,688 |
|
5.375% senior notes due May 1, 2025 | 750 |
| | 746 |
| | 750 |
| | 745 |
|
5.750% senior notes due February 15, 2026 | 2,500 |
| | 2,469 |
| | 2,500 |
| | 2,467 |
|
5.500% senior notes due May 1, 2026 | 1,500 |
| | 1,491 |
| | 1,500 |
| | 1,490 |
|
5.875% senior notes due May 1, 2027 | 800 |
| | 795 |
| | 800 |
| | 795 |
|
5.125% senior notes due May 1, 2027 | 3,250 |
| | 3,221 |
| | 3,250 |
| | 3,219 |
|
5.000% senior notes due February 1, 2028 | 2,500 |
| | 2,467 |
| | 2,500 |
| | 2,466 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2020 | | | | December 31, 2019 | | |
| Principal Amount | | Accreted Value | | Principal Amount | | Accreted Value |
CCO Holdings, LLC: | | | | | | | |
5.250% senior notes due September 30, 2022 | 1,105 | | | 1,097 | | | 1,250 | | | 1,241 | |
5.125% senior notes due February 15, 2023 | — | | | — | | | 1,000 | | | 995 | |
4.000% senior notes due March 1, 2023 | 500 | | | 497 | | | 500 | | | 497 | |
5.125% senior notes due May 1, 2023 | 1,105 | | | 1,101 | | | 1,150 | | | 1,145 | |
5.750% senior notes due September 1, 2023 | — | | | — | | | 500 | | | 497 | |
5.750% senior notes due January 15, 2024 | — | | | — | | | 150 | | | 149 | |
5.875% senior notes due April 1, 2024 | 1,700 | | | 1,691 | | | 1,700 | | | 1,690 | |
5.375% senior notes due May 1, 2025 | 750 | | | 746 | | | 750 | | | 746 | |
5.750% senior notes due February 15, 2026 | 2,500 | | | 2,472 | | | 2,500 | | | 2,471 | |
5.500% senior notes due May 1, 2026 | 1,500 | | | 1,491 | | | 1,500 | | | 1,491 | |
5.875% senior notes due May 1, 2027 | 800 | | | 796 | | | 800 | | | 796 | |
5.125% senior notes due May 1, 2027 | 3,250 | | | 3,223 | | | 3,250 | | | 3,222 | |
5.000% senior notes due February 1, 2028 | 2,500 | | | 2,469 | | | 2,500 | | | 2,469 | |
5.375% senior notes due June 1, 2029 | 1,500 | | | 1,501 | | | 1,500 | | | 1,501 | |
4.750% senior notes due March 1, 2030 | 3,050 | | | 3,041 | | | 3,050 | | | 3,041 | |
4.500% senior notes due August 15, 2030 | 2,750 | | | 2,750 | | | — | | | — | |
4.500% senior notes due May 1, 2032 | 1,400 | | | 1,387 | | | — | | | — | |
Charter Communications Operating, LLC: | | | | | | | |
3.579% senior notes due July 23, 2020 | 2,000 | | | 1,998 | | | 2,000 | | | 1,997 | |
4.464% senior notes due July 23, 2022 | 3,000 | | | 2,988 | | | 3,000 | | | 2,987 | |
Senior floating rate notes due February 1, 2024 | 900 | | | 902 | | | 900 | | | 902 | |
4.500% senior notes due February 1, 2024 | 1,100 | | | 1,093 | | | 1,100 | | | 1,093 | |
4.908% senior notes due July 23, 2025 | 4,500 | | | 4,472 | | | 4,500 | | | 4,471 | |
3.750% senior notes due February 15, 2028 | 1,000 | | | 988 | | | 1,000 | | | 987 | |
4.200% senior notes due March 15, 2028 | 1,250 | | | 1,241 | | | 1,250 | | | 1,240 | |
5.050% senior notes due March 30, 2029 | 1,250 | | | 1,241 | | | 1,250 | | | 1,241 | |
6.384% senior notes due October 23, 2035 | 2,000 | | | 1,983 | | | 2,000 | | | 1,982 | |
5.375% senior notes due April 1, 2038 | 800 | | | 786 | | | 800 | | | 786 | |
6.484% senior notes due October 23, 2045 | 3,500 | | | 3,467 | | | 3,500 | | | 3,467 | |
5.375% senior notes due May 1, 2047 | 2,500 | | | 2,506 | | | 2,500 | | | 2,506 | |
5.750% senior notes due April 1, 2048 | 2,450 | | | 2,391 | | | 2,450 | | | 2,391 | |
5.125% senior notes due July 1, 2049 | 1,250 | | | 1,240 | | | 1,250 | | | 1,240 | |
4.800% senior notes due March 1, 2050 | 2,800 | | | 2,797 | | | 2,800 | | | 2,798 | |
6.834% senior notes due October 23, 2055 | 500 | | | 495 | | | 500 | | | 495 | |
Credit facilities | 10,357 | | | 10,279 | | | 10,427 | | | 10,345 | |
Time Warner Cable, LLC: | | | | | | | |
5.000% senior notes due February 1, 2020 | — | | | — | | | 1,500 | | | 1,503 | |
4.125% senior notes due February 15, 2021 | 700 | | | 709 | | | 700 | | | 711 | |
4.000% senior notes due September 1, 2021 | 1,000 | | | 1,018 | | | 1,000 | | | 1,021 | |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
| | | | | | | | | | | | | | | | | | | | | | | |
5.750% sterling senior notes due June 2, 2031 (a) | 776 | | | 830 | | | 828 | | | 886 | |
6.550% senior debentures due May 1, 2037 | 1,500 | | | 1,673 | | | 1,500 | | | 1,675 | |
7.300% senior debentures due July 1, 2038 | 1,500 | | | 1,770 | | | 1,500 | | | 1,772 | |
6.750% senior debentures due June 15, 2039 | 1,500 | | | 1,711 | | | 1,500 | | | 1,713 | |
5.875% senior debentures due November 15, 2040 | 1,200 | | | 1,254 | | | 1,200 | | | 1,255 | |
5.500% senior debentures due September 1, 2041 | 1,250 | | | 1,258 | | | 1,250 | | | 1,258 | |
5.250% sterling senior notes due July 15, 2042 (b) | 807 | | | 779 | | | 861 | | | 831 | |
4.500% senior debentures due September 15, 2042 | 1,250 | | | 1,143 | | | 1,250 | | | 1,142 | |
Time Warner Cable Enterprises LLC: | | | | | | | |
8.375% senior debentures due March 15, 2023 | 1,000 | | | 1,137 | | | 1,000 | | | 1,148 | |
8.375% senior debentures due July 15, 2033 | 1,000 | | | 1,281 | | | 1,000 | | | 1,284 | |
Total debt | 79,050 | | | 79,692 | | | 78,416 | | | 79,078 | |
Less current portion: | | | | | | | |
5.000% senior notes due February 1, 2020 | — | | | — | | | (1,500) | | | (1,503) | |
3.579% senior notes due July 23, 2020 | (2,000) | | | (1,998) | | | (2,000) | | | (1,997) | |
4.125% senior notes due February 15, 2021 | (700) | | | (709) | | | — | | | — | |
5.250% senior notes due September 30, 2022 | (1,105) | | | (1,097) | | | — | | | — | |
5.125% senior notes due May 1, 2023 | (1,105) | | | (1,101) | | | — | | | — | |
Long-term debt | 74,140 | | | 74,787 | | | 74,916 | | | 75,578 | |
|
| | | | | | | | | | | | | | | |
5.375% senior notes due June 1, 2029 | 750 |
| | 743 |
| | — |
| | — |
|
Charter Communications Operating, LLC: | | | | | | | |
3.579% senior notes due July 23, 2020 | 2,000 |
| | 1,995 |
| | 2,000 |
| | 1,992 |
|
4.464% senior notes due July 23, 2022 | 3,000 |
| | 2,984 |
| | 3,000 |
| | 2,982 |
|
Senior floating rate notes due February 1, 2024 | 900 |
| | 902 |
| | 900 |
| | 903 |
|
4.500% senior notes due February 1, 2024 | 1,100 |
| | 1,092 |
| | 1,100 |
| | 1,091 |
|
4.908% senior notes due July 23, 2025 | 4,500 |
| | 4,468 |
| | 4,500 |
| | 4,466 |
|
3.750% senior notes due February 15, 2028 | 1,000 |
| | 987 |
| | 1,000 |
| | 986 |
|
4.200% senior notes due March 15, 2028 | 1,250 |
| | 1,240 |
| | 1,250 |
| | 1,240 |
|
5.050% senior notes due March 30, 2029 | 1,250 |
| | 1,240 |
| | — |
| | — |
|
6.384% senior notes due October 23, 2035 | 2,000 |
| | 1,982 |
| | 2,000 |
| | 1,982 |
|
5.375% senior notes due April 1, 2038 | 800 |
| | 786 |
| | 800 |
| | 785 |
|
6.484% senior notes due October 23, 2045 | 3,500 |
| | 3,467 |
| | 3,500 |
| | 3,467 |
|
5.375% senior notes due May 1, 2047 | 2,500 |
| | 2,506 |
| | 2,500 |
| | 2,506 |
|
5.750% senior notes due April 1, 2048 | 2,450 |
| | 2,390 |
| | 1,700 |
| | 1,683 |
|
6.834% senior notes due October 23, 2055 | 500 |
| | 495 |
| | 500 |
| | 495 |
|
Credit facilities | 11,167 |
| | 11,089 |
| | 10,038 |
| | 9,959 |
|
Time Warner Cable, LLC: | | | | | | | |
8.750% senior notes due February 14, 2019 | — |
| | — |
| | 1,250 |
| | 1,260 |
|
8.250% senior notes due April 1, 2019 | — |
| | — |
| | 2,000 |
| | 2,030 |
|
5.000% senior notes due February 1, 2020 | 1,500 |
| | 1,522 |
| | 1,500 |
| | 1,541 |
|
4.125% senior notes due February 15, 2021 | 700 |
| | 716 |
| | 700 |
| | 721 |
|
4.000% senior notes due September 1, 2021 | 1,000 |
| | 1,027 |
| | 1,000 |
| | 1,033 |
|
5.750% sterling senior notes due June 2, 2031 (a) | 794 |
| | 851 |
| | 796 |
| | 855 |
|
6.550% senior debentures due May 1, 2037 | 1,500 |
| | 1,678 |
| | 1,500 |
| | 1,680 |
|
7.300% senior debentures due July 1, 2038 | 1,500 |
| | 1,776 |
| | 1,500 |
| | 1,780 |
|
6.750% senior debentures due June 15, 2039 | 1,500 |
| | 1,716 |
| | 1,500 |
| | 1,719 |
|
5.875% senior debentures due November 15, 2040 | 1,200 |
| | 1,256 |
| | 1,200 |
| | 1,256 |
|
5.500% senior debentures due September 1, 2041 | 1,250 |
| | 1,258 |
| | 1,250 |
| | 1,258 |
|
5.250% sterling senior notes due July 15, 2042 (b) | 825 |
| | 796 |
| | 827 |
| | 798 |
|
4.500% senior debentures due September 15, 2042 | 1,250 |
| | 1,141 |
| | 1,250 |
| | 1,140 |
|
Time Warner Cable Enterprises LLC: | | | | | | | |
8.375% senior debentures due March 15, 2023 | 1,000 |
| | 1,170 |
| | 1,000 |
| | 1,191 |
|
8.375% senior debentures due July 15, 2033 | 1,000 |
| | 1,291 |
| | 1,000 |
| | 1,298 |
|
Total debt | 72,586 |
| | 73,306 |
| | 71,961 |
| | 72,827 |
|
Less current portion: | | | | | | | |
8.750% senior notes due February 14, 2019 | — |
| | — |
| | (1,250 | ) | | (1,260 | ) |
8.250% senior notes due April 1, 2019 | — |
| | — |
| | (2,000 | ) | | (2,030 | ) |
5.000% senior notes due February 1, 2020 | (1,500 | ) | | (1,522 | ) | | — |
| | — |
|
Long-term debt | $ | 71,086 |
| | $ | 71,784 |
| | $ | 68,711 |
| | $ | 69,537 |
|
(a)Principal amount includes £625 million remeasured at $776 million and $828 million as of March 31, 2020 and December 31, 2019, respectively, using the exchange rate at the respective dates.
(b)Principal amount includes £650 million remeasured at $807 million and $861 million as of March 31, 2020 and December 31, 2019, respectively, using the exchange rate at the respective dates.
| |
(a)
| Principal amount includes £625 million remeasured at $794 million and $796 million as of June 30, 2019 and December 31, 2018, respectively, using the exchange rate at the respective dates. |
| |
(b)
| Principal amount includes £650 million remeasured at $825 million and $827 million as of June 30, 2019 and December 31, 2018, respectively, using the exchange rate at the respective dates. |
The accreted values presented in the table above represent the principal amount of the debt less theadjusted for original issue discount or premium at the time of sale, deferred financing costs, and, in regards to Time Warner Cable, LLC and Time Warner Cable Enterprises LLC debt
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars assumed in millions, except per share amounts and where indicated)
assumed,acquisitions, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the fixed-rate British pound sterling denominated notes (the “Sterling Notes”), the principal amount of the debt and any premium or discount is remeasured into U.S.US dollars as of each balance sheet date. See Note 9. The Company has availability under the Charter Operating credit facilities of approximately $4.1$4.7 billion as of June 30, 2019.March 31, 2020.
In January 2019, Charter OperatingFebruary 2020, CCO Holdings, LLC ("CCO Holdings") and Charter Communications OperatingCCO Holdings Capital Corp. jointly issued $1.25$1.65 billion aggregate principal amount of 5.050%4.500% senior unsecured notes due 20292030 at par and in March 2020, an additional $1.1 billion of the same series of notes were issued at a price of 99.935% of the aggregate principal amount and an additional $750 million aggregate principal amount of 5.750% senior notes due 2048 at a price of 94.970%102.5% of the aggregate principal amount. Also in March 2020, CCO Holdings and CCO Holdings Capital Corp. issued $1.4 billion aggregate principal amount of 4.500% senior unsecured notes due 2032 at par. The net proceeds were or will be used to pay related fees and expenses and for general corporate purposes, including fundingrepaying certain indebtedness, including repayment of all of CCO Holdings' 5.250% senior notes due September 30, 2022, 5.125% senior notes due February 15, 2023, 5.125% senior notes due May 1, 2023, 5.750% senior notes due September 1, 2023 and 5.750% senior notes due January 15, 2024, as well as to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness, including repayingunits. The Company recorded a loss on extinguishment of debt of $27 million during the three months ended March 31, 2020 related to these transactions.
The CCO Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings Capital and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings.
CCO Holdings may redeem some or all of the notes at maturity Time Warner Cable, LLC's 8.750% senior notes due 2019.any time at a premium. Beginning in 2028 and 2029, the optional redemption price declines to 100% of the principal amount, plus accrued and unpaid interest, if any.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
In July 2019,addition, at any time prior to varying dates in 2023, CCO Holdings may redeem up to 40% of the aggregate principal amount of the notes at a premium plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided that certain conditions are met. In the event of specified change of control events, CCO Holdings must offer to purchase the outstanding notes from the holders at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest.
In April 2020, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.25$1.6 billion aggregate principal amount of 5.125%2.800% senior secured notes due 2049April 2031 at a price of 99.880%99.561% of the aggregate principal amount and $1.4 billion aggregate principal amount of 3.700% senior secured notes due April 2051 at a price of 99.217% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness, which may include Time Warner Cable, LLC's 5.000% senior notes due 2020.purposes.
The Charter Operating notes are guaranteed by CCO Holdings LLC (“CCO Holdings”) and substantially all of the operating subsidiaries of Charter Operating. In addition, the Charter Operating notes are secured by a perfected first priority security interest in substantially all of the assets of Charter Operating to the extent such liens can be perfected under the Uniform Commercial Code by the filing of a financing statement and the liens rank equally with the liens on the collateral securing obligations under the Charter Operating credit facilities. Charter Operating may redeem some or all of the Charter Operating notes at any time at a premium.
The Charter Operating notes are subject to the terms and conditions of the indenturesindenture governing the Charter Operating notes. The Charter Operating notes contain customary representations and warranties and affirmative covenants with limited negative covenants. The Charter Operating indenturesindenture also contains customary events of default.
In January 2019, Charter Operating entered into an amendment to its Credit Agreement raising $1.7 billion of new term loan A-3 and increasing revolving loan capacity to $4.75 billion. In addition, the majority of term loan A-2 holders converted to term loan A-3 and a substantial portion of revolver commitments were extended to 2024. Pricing on the new term loan A-3 is LIBOR plus 1.50%. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness, including repaying at maturity Time Warner Cable, LLC's 8.250% senior notes due 2019.
In May 2019, CCO Holdings and CCO Holdings Capital Corp. jointly issued $750 million aggregate principal amount of 5.375% senior unsecured notes due 2029 at par and in July 2019, an additional $750 million of the same series of notes were issued at a price of 102.000% of the aggregate principal amount. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.
The CCO Holdings notes are senior debt obligations of CCO Holdings and CCO Holdings Capital and rank equally with all other current and future unsecured, unsubordinated obligations of CCO Holdings and CCO Holdings Capital. They are structurally subordinated to all obligations of subsidiaries of CCO Holdings.
CCO Holdings may redeem some or all of the notes at any time at a premium. Beginning in 2027, the optional redemption price declines to 100% of the principal amount, plus accrued and unpaid interest, if any.
In addition, at any time prior to June 1, 2022, CCO Holdings may redeem up to 40% of the aggregate principal amount of the notes at a premium plus accrued and unpaid interest to the redemption date, with the net cash proceeds of one or more equity offerings (as defined in the indenture); provided that certain conditions are met. In the event of specified change of control events, CCO Holdings must offer to purchase the outstanding notes from the holders at a purchase price equal to 101% of the total principal amount of the notes, plus any accrued and unpaid interest.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
7. Common Stock
The following represents the Company's purchase of Charter Class A common stock and the effect on the consolidated statements of cash flows during the three and six months ended June 30, 2019March 31, 2020 and 2018.2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
| Shares | | $ | | Shares | | $ | | Shares | | $ | | Shares | | $ |
Share buybacks | 2,247,279 |
| | $ | 837 |
| | 5,710,247 |
| | $ | 1,657 |
| | 4,862,996 |
| | $ | 1,707 |
| | 7,303,293 |
| | $ | 2,213 |
|
Income tax withholding | 63,425 |
| | 24 |
| | 23,645 |
| | 7 |
| | 278,040 |
| | 94 |
| | 196,691 |
| | 68 |
|
Exercise cost | 90,951 |
| | | | 1,752 |
| | | | 185,170 |
| | | | 6,415 |
| | |
| 2,401,655 |
| | $ | 861 |
| | 5,735,644 |
| | $ | 1,664 |
| | 5,326,206 |
| | $ | 1,801 |
| | 7,506,399 |
| | $ | 2,281 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended March 31, | | | | | | |
| | | | | | | | | 2020 | | | | 2019 | | |
| | | | | | | | | Shares | | $ | | Shares | | $ |
Share buybacks | | | | | | | | | 4,452,549 | | | $ | 2,176 | | | 2,615,717 | | | $ | 870 | |
Income tax withholding | | | | | | | | | 335,654 | | | 176 | | | 214,615 | | | 70 | |
Exercise cost | | | | | | | | | 241,752 | | | | | 94,219 | | | |
| | | | | | | | | 5,029,955 | | | $ | 2,352 | | | 2,924,551 | | | $ | 940 | |
As of June 30, 2019,March 31, 2020, Charter had remaining board authority to purchase an additional $769$286 million of Charter’s Class A common stock and/or Charter Holdings common units. The Company also withholds shares of its Class A common stock in payment of income tax withholding owed by employees upon vesting of equity awards as well as exercise costs owed by employees upon exercise of stock options.
In 2018,2019, Charter’s board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2018.2019. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity.
In March 2020, pursuant to the terms of the Amended and Restated Stockholders Agreement with Liberty Broadband Corporation (“Liberty Broadband”), Advance/Newhouse Partnership (“A/N”) and Charter, dated May 23, 2015, Charter, Liberty and A/N closed on transactions in which Liberty Broadband and A/N exercised their preemptive right to purchase 35,112 and 20,182 shares, respectively, of Charter Class A common stock for a total purchase price of approximately $23 million.
8. Noncontrolling Interests
Noncontrolling interests represents consolidated subsidiaries of which the Company owns less than 100%. The Company is a holding company whose principal asset is a controlling equity interest in Charter Holdings, the indirect owner of the
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Company’s cable systems. Noncontrolling interests on the Company’s balance sheet consist primarily of Advance/Newhouse Partnership's (“A/N”)N's equity interests in Charter Holdings, which is comprised of a common ownership interest and a convertible preferred ownership interest.
Net income of Charter Holdings attributable to A/N’s common noncontrolling interest for financial reporting purposes is based on the effective common ownership interest of approximately 8%, and was $34$33 million and $60$26 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $28 million and $45 million for the three and six months ended June 30, 2018, respectively. Net income of Charter Holdings attributable to A/N's preferred noncontrolling interest for financial reporting purposes is based on the preferred dividend which was $37 million and $75$38 million for each of the three and six months ended June 30, 2019March 31, 2020 and 2018, respectively.2019.
The following table represents Charter Holdings' purchase of Charter Holdings common units from A/N pursuant to the Letter Agreement (see Note 18) and the effect on total shareholders' equity during the three and six months ended June 30, 2019March 31, 2020 and 2018.2019.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Number of units purchased | 447,793 |
| | 681,553 |
| | 750,735 |
| | 1,051,028 |
|
Average price per unit | $ | 358.21 |
| | $ | 295.31 |
| | $ | 338.12 |
| | $ | 312.38 |
|
Amount of units purchased | $ | 161 |
| | $ | 201 |
| | $ | 254 |
| | $ | 328 |
|
Decrease in noncontrolling interest based on carrying value | $ | (111 | ) | | $ | (164 | ) | | $ | (185 | ) | | $ | (254 | ) |
Decrease in additional paid-in-capital, net of tax | $ | (37 | ) | | $ | (28 | ) | | $ | (52 | ) | | $ | (56 | ) |
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Number of units purchased | | | | | 795,607 | | | 302,942 | |
Average price per unit | | | | | $ | 494.54 | | | $ | 308.42 | |
Amount of units purchased | | | | | $ | 393 | | | $ | 93 | |
Decrease in noncontrolling interest based on carrying value | | | | | $ | (195) | | | $ | (74) | |
Decrease in additional paid-in-capital, net of tax | | | | | $ | (149) | | | $ | (15) | |
Total shareholders' equity was also adjusted during the three and six months ended June 30,March 31, 2020 and 2019 and 2018 due to the changes in
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Charter Holdings' ownership as follows.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Decrease in noncontrolling interest | $ | (23 | ) | | $ | (23 | ) | | $ | (52 | ) | | $ | (43 | ) |
Increase in additional paid-in-capital, net of tax | $ | 17 |
| | $ | 18 |
| | $ | 39 |
| | $ | 32 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Decrease in noncontrolling interest | | | | | $ | (109) | | | $ | (29) | |
Increase in additional paid-in-capital, net of tax | | | | | $ | 82 | | | $ | 22 | |
9. Accounting for Derivative Instruments and Hedging Activities
The Company uses derivative instruments to manage foreign exchange risk on the Sterling Notes, and does not hold or issue derivative instruments for speculative trading purposes.
Cross-currency derivative instruments are used to effectively convert £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency swaps have maturities of June 2031 and July 2042. The Company is required to post collateral on the cross-currency derivative instruments when the derivative contracts are in a liability position. In April 2019, the Company entered into a collateral holiday agreement for 60% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years, as well as a ten year collateral cap on the remaining 40% of the cross-currency swaps which limits the required collateral posting on that 40% of the cross-currency swaps to $150 million. The fair value of the Company's cross-currency derivatives was $323$650 million and $237$224 million and is included in other long-term liabilities on its consolidated balance sheets as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
The Company’s derivative instruments are not designated as hedges and are marked to fair value each period, with the impact recorded as a gain or loss on financial instruments, net in the consolidated statements of operations. While these derivative instruments are not designated as hedges for accounting purposes, management continues to believe such instruments are closely correlated with the respective debt, thus managing associated risk.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The effect of financial instruments on the consolidated statements of operations is presented in the table below.
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended March 31, | |
| 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 |
Gain (Loss) on Financial Instruments, Net: | | | | | | | | Gain (Loss) on Financial Instruments, Net: | | | | |
Change in fair value of cross-currency derivative instruments | $ | (163 | ) | | $ | (181 | ) | | $ | (86 | ) | | $ | (53 | ) | Change in fair value of cross-currency derivative instruments | | $ | (426) | | | $ | 77 | |
Foreign currency remeasurement of Sterling Notes to U.S. dollars | 44 |
| | 106 |
| | 4 |
| | 41 |
| Foreign currency remeasurement of Sterling Notes to U.S. dollars | | 108 | | | (40) | |
| $ | (119 | ) | | $ | (75 | ) | | $ | (82 | ) | | $ | (12 | ) | | | $ | (318) | | | $ | 37 | |
10. Fair Value Measurements
Accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based on the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:
•Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of June 30, 2019March 31, 2020 and December 31, 20182019 using available market information or other appropriate valuation methodologies. Considerable judgment, however, is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented in the accompanying consolidated financial statements are not necessarily indicative of the amounts the Company would realize in a current market exchange.
The carrying amounts of cash and cash equivalents, restricted cash, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
Financial instruments accounted for at fair value on a recurring basis and classified within Level 2 of the valuation hierarchy include the Company's cross-currency derivative instruments and were valued at $323$650 million and $237$224 million as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
The estimated fair value of the Company’s senior notes and debentures as of June 30, 2019March 31, 2020 and December 31, 20182019 is based on quoted market prices in active markets and is classified within Level 1 of the valuation hierarchy, while the estimated fair value of the Company’s credit facilities is based on quoted market prices in inactive markets and is classified within Level 2. The carrying amount of the consolidated variable interest entity's mortgage note liability approximates fair value.
A summary of the carrying value and fair value of debt as of June 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
|
| | | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Senior notes and debentures | | $ | 62,217 |
| | $ | 66,122 |
| | $ | 62,868 |
| | $ | 61,087 |
|
Credit facilities | | $ | 11,089 |
| | $ | 11,123 |
| | $ | 9,959 |
| | $ | 9,608 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | December 31, 2019 | | |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Senior notes and debentures | | $ | 69,413 | | | $ | 72,108 | | | $ | 68,733 | | | $ | 74,938 | |
Credit facilities | | $ | 10,279 | | | $ | 9,610 | | | $ | 10,345 | | | $ | 10,448 | |
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Nonfinancial Assets and Liabilities
The Company’s nonfinancial assets such as equity-method investments, franchises, property, plant, and equipment, and other intangible assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. When such impairments are recorded, fair values are generally classified within Level 3 of the valuation hierarchy.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
11. RevenueRevenues
The Company’s revenues by product line are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Video | $ | 4,391 |
| | $ | 4,363 |
| | $ | 8,775 |
| | $ | 8,655 |
|
Internet | 4,103 |
| | 3,770 |
| | 8,127 |
| | 7,477 |
|
Voice | 489 |
| | 531 |
| | 993 |
| | 1,087 |
|
Residential revenue | 8,983 |
| | 8,664 |
| | 17,895 |
| | 17,219 |
|
| | | | | | | |
Small and medium business | 963 |
| | 915 |
| | 1,908 |
| | 1,815 |
|
Enterprise | 652 |
| | 627 |
| | 1,295 |
| | 1,249 |
|
Commercial revenue | 1,615 |
| | 1,542 |
| | 3,203 |
| | 3,064 |
|
| | | | | | | |
Advertising sales | 395 |
| | 427 |
| | 740 |
| | 783 |
|
Mobile | 158 |
| | — |
| | 298 |
| | — |
|
Other | 196 |
| | 221 |
| | 417 |
| | 445 |
|
| $ | 11,347 |
| | $ | 10,854 |
| | $ | 22,553 |
| | $ | 21,511 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Internet | | | | | $ | 4,407 | | | $ | 4,024 | |
Video | | | | | 4,422 | | | 4,384 | |
Voice | | | | | 457 | | | 504 | |
Residential revenue | | | | | 9,286 | | | 8,912 | |
| | | | | | | |
Small and medium business | | | | | 996 | | | 945 | |
Enterprise | | | | | 622 | | | 643 | |
Commercial revenue | | | | | 1,618 | | | 1,588 | |
| | | | | | | |
Advertising sales | | | | | 365 | | | 345 | |
Mobile | | | | | 258 | | | 140 | |
Other | | | | | 211 | | | 221 | |
| | | | | $ | 11,738 | | | $ | 11,206 | |
12. Operating Costs and Expenses
Operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, consist of the following for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Programming | $ | 2,827 |
| | $ | 2,803 |
| | $ | 5,692 |
| | $ | 5,555 |
|
Regulatory, connectivity and produced content | 597 |
| | 560 |
| | 1,158 |
| | 1,093 |
|
Costs to service customers | 1,767 |
| | 1,784 |
| | 3,589 |
| | 3,638 |
|
Marketing | 768 |
| | 769 |
| | 1,503 |
| | 1,520 |
|
Mobile | 277 |
| | 33 |
| | 537 |
| | 41 |
|
Other | 1,008 |
| | 924 |
| | 2,001 |
| | 1,862 |
|
| $ | 7,244 |
| | $ | 6,873 |
| | $ | 14,480 |
| | $ | 13,709 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Programming | | | | | | $ | 2,892 | | | $ | 2,865 | |
Regulatory, connectivity and produced content | | | | | | 551 | | | 561 | |
Costs to service customers | | | | | | 1,848 | | | 1,822 | |
Marketing | | | | | | 766 | | | 735 | |
Mobile | | | | | | 374 | | | 260 | |
Other | | | | | | 1,001 | | | 993 | |
| | | | | $ | 7,432 | | | $ | 7,236 | |
Programming costs consist primarily of costs paid to programmers for basic, premium, digital, video on demand and pay-per-view programming. Regulatory, connectivity and produced content costs represent payments to franchise and regulatory authorities, costs directly related to providing Internet, video Internet and voice services as well as payments for sports, local and news content produced by the Company. Included in regulatory, connectivity and produced content costs is content acquisition costs for the Los Angeles Lakers’ basketball games and Los Angeles Dodgers’ baseball games, which are recorded as games are exhibited over the applicable season. Costs to service customers include costs related to field operations, network operations and customer care for the Company’s residential and small and medium business customers, including internal and third-party labor for the non-capitalizable portion of installations, service and repairs, maintenance, bad debt expense, billing and collection, occupancy and vehicle costs. Marketing costs represent the costs of marketing to current and potential commercial
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
and residential customers including labor costs. Mobile costs represent costs associated with the Company's mobile service such as device and service costs, marketing, sales and commissions, retail stores, personnel costs and taxes, among others. Other includes corporate overhead, advertising sales expenses, indirect costs associated with the Company’s enterprise business customers and regional sports and news networks, property tax and insurance expense and stock compensation expense, among others.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
13. Other Operating (Income) Expenses, Net
Other operating expenses, net consist of the following for the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Special charges, net | $ | 23 |
| | $ | 35 |
| | $ | 19 |
| | $ | 111 |
|
(Gain) loss on sale of assets, net | 39 |
| | (6 | ) | | 38 |
| | (13 | ) |
| $ | 62 |
| | $ | 29 |
| | $ | 57 |
| | $ | 98 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Special charges, net | | | | | $ | 16 | | | (4) | |
(Gain) loss on sale of assets, net | | | | | (9) | | | (1) | |
| | | | | $ | 7 | | | $ | (5) | |
Special charges, net
Special charges, net primarily includes employee termination costs and net amounts of litigation settlements. The three and six months ended June 30, 2018 includes $28 million and $71 million of merger and restructuring costs, respectively. The six months ended June 30, 2018 also includes a $22 million charge related to the Company's withdrawal liability from a multiemployer pension plan.
Gain (loss)(Gain) loss on sale of assets, net
Gain (loss)(Gain) loss on sale of assets, net represents the net gain (loss)(gain) loss recognized on the sales and disposals of fixed assets and cable systems. The three and six months ended June 30, 2019 includes a $41 million impairment of non-strategic assets.
14. Stock Compensation Plans
Charter’s stock incentive plans provide for grants of nonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock, restricted stock units and restricted stock. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting services for the Company, are eligible for grants under the stock incentive plans.
Charter granted the following equity awards for the periods presented.
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Stock options | 31,500 |
| | 36,700 |
| | 1,782,400 |
| | 1,466,500 |
|
Restricted stock | 8,100 |
| | 9,700 |
| | 8,100 |
| | 9,700 |
|
Restricted stock units | 13,200 |
| | 21,700 |
| | 686,900 |
| | 505,400 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Stock options | | | | | 1,253,700 | | | 1,750,900 | |
| | | | | | | |
Restricted stock units | | | | | 408,300 | | | 673,700 | |
Charter stock options and restricted stock units generally cliff vest uponthree years from the three year anniversarydate of each grant. Certain stock options and restricted stock units vest based on achievement of stock price hurdles. Stock options generally expire ten years from the grant date and restricted stock units have no voting rights. Restricted stock generally vests one year from the date of grant. Time Warner Cable Inc. ("TWC") restricted stock units that were converted into Charter restricted stock units generally vest 50% on each of the third and fourth anniversary of the grant date.
As of June 30, 2019,March 31, 2020, total unrecognized compensation remaining to be recognized in future periods totaled $252$307 million for stock options, $2$0.2 million for restricted stock and $290$358 million for restricted stock units and the weighted average period over which they are expected to be recognized is two years for stock options, ten monthsone month for restricted stock and two years for restricted stock units.
The Company recorded $82stock compensation expense of $90 million and $167$85 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $70 million and $142 million of stock compensation expense for the three and six months ended June 30, 2018, respectively, which is included in operating costs and expenses. The Company also recorded $5 million of expense related to accelerated vesting of equity awards of terminated employees, which is recorded in other operating expenses, net in the consolidated statements of operations for the six months ended June 30, 2018.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
15. Income Taxes
Substantially all of the Company’s operations are held through Charter Holdings and its direct and indirect subsidiaries. Charter Holdings and the majority of its subsidiaries are limited liability companies that are generally not subject to income tax. However, certain of these limited liability companies are subject to state income tax. In addition, the subsidiaries that are corporations are subject to income tax. Generally, the taxable income, gains, losses, deductions and credits of Charter Holdings are passed through to its members, Charter and A/N. Charter is responsible for its share of taxable income or loss of Charter Holdings allocated to it in accordance with the Charter Holdings Limited Liability Company Agreement (“LLC Agreement”) and partnership tax rules and regulations. As a result, Charter's primary deferred tax component recorded in the consolidated balance sheets relates to its excess financial reporting outside basis, excluding amounts attributable to nondeductible goodwill, over Charter's tax basis in the investment in Charter Holdings.
The Company recorded income tax expense of $84$29 million and $203$119 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $41 million and $69 million for the three and six months ended June 30, 2018, respectively. Income tax expense increased year over yeardecreased during the three months ended March 31, 2020 compared to the corresponding period in 2019 primarily as a result of higher pretax incomeincreased recognition of excess tax benefits resulting from share-based compensation during 2020 and lower benefit from statean internal entity simplification that increased expense in 2019.
On March 18, 2020, the Families First Coronavirus Response Act ("FFCR Act"), and on March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") were each enacted in response to the COVID-19 pandemic. The FFCR Act and the CARES Act contain numerous tax law changes. provisions, such as deferring payroll payments, establishing a credit for the retention of certain employees, relaxing limitations on the deductibility of interest, and updating the definition of qualified improvement property. This legislation currently has no material impact to the Company’s financial statements.
Charter Holdings, the indirect owner of the Company’s cable systems, generally allocates its taxable income, gains, losses, deductions and credits proportionately according to the members’ respective ownership interests, except for special allocations required under Section 704(c) of the Internal Revenue Code and the Treasury Regulations (“Section 704(c)”). Pursuant to Section 704(c) and the LLC Agreement, each item of income, gain, loss and deduction with respect to any property contributed to the capital of the partnership shall, solely for tax purposes, be allocated among the members so as to take into account any variation between the adjusted basis of such property to the partnership for U.S. federal income tax purposes and its initial gross asset value using the “traditional method” as described in the Treasury Regulations.
In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be “more likely than not” of being sustained upon examination, based on their technical merits. There is considerable judgment involved in making such a determination. The Company has recorded unrecognized tax benefits totaling approximately $182$244 million and $180$230 million, excluding interest and penalties, as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. The Company does not currently anticipate that its reserve for uncertain tax positions will significantly increase or decrease during 2019;2020; however, various events could cause the Company’s current expectations to change in the future. These uncertain tax positions, if ever recognized in the financial statements, would be recorded in the consolidated statements of operations as part of the income tax provision.
No tax years for Charter are currently under examination by the Internal Revenue Service ("IRS") for income tax purposes. Charter's 2016 through 20182019 tax years remain open for examination and assessment. Charter’s tax years ending 2015 through the short period return dated May 17, 2016 (prior to the acquisition of TWCTime Warner Cable Inc. ("TWC") and Bright House Networks, LLC) remain subject to examinationLLC ("Bright House") transactions) and assessment. Years prior to 2015years remain open solely for purposes of examination of Charter’s loss and credit carryforwards. The IRS is currently examining Charter Holdings’ income tax return for 2016. Charter Holdings’ 2017 and 2018through 2019 tax years remainsremain open for examination and assessment. The IRS is currently examining TWC’s income tax returns for 2011 through 2014. TWC’s tax year 2015 remains subject to examination and assessment. Prior to TWC’s separation from Time Warner Inc. (“Time Warner”) in March 2009, TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS has examined Time Warner’s 2008 through 2010 income tax returns and the results are under appeal. The Company does not anticipate that these examinations will have a material impact on the Company’s consolidated financial position or results of operations. In addition, the Company is also subject to ongoing examinations of the Company’s tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on the Company’s consolidated financial position or results of operations during the three and six months ended June 30, 2019,March 31, 2020, nor does the Company anticipate a material impact in the future.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
16. Earnings Per Share
Basic earnings per common share is computed by dividing net income attributable to Charter shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share considers the impact of potentially dilutive securities using the treasury stock and if-converted methods and is based on the weighted average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of stock options, restricted stock, restricted
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
stock units, equity awards with market conditions and Charter Holdings convertible preferred units and common units. Charter Holdings common and convertible preferred units of 2927 million for each of the three and six months ended June 30, 2019 and 31 million for each of the three and six months ended June 30, 2018March 31, 2020 and 2019, respectively, were not included in the computation of diluted earnings per share as their effect would have been antidilutive. The following is the computation of diluted earnings per common share for the three and six months ended June 30, 2019March 31, 2020 and 2018.2019.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Numerator: | | | | | | | |
Net income attributable to Charter shareholders | $ | 314 |
| | $ | 273 |
| | $ | 567 |
| | $ | 441 |
|
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares outstanding, basic | 222,392,274 |
| | 234,241,769 |
| | 223,505,016 |
| | 235,992,306 |
|
Effect of dilutive securities: | | | | | | | |
Assumed exercise or issuance of shares relating to stock plans | 3,549,898 |
| | 2,831,797 |
| | 3,384,729 |
| | 3,254,421 |
|
Weighted average common shares outstanding, diluted | 225,942,172 |
| | 237,073,566 |
| | 226,889,745 |
| | 239,246,727 |
|
| | | | | | | |
Basic earnings per common share attributable to Charter shareholders | $ | 1.41 |
| | $ | 1.17 |
| | $ | 2.54 |
| | $ | 1.87 |
|
Diluted earnings per common share attributable to Charter shareholders | $ | 1.39 |
| | $ | 1.15 |
| | $ | 2.50 |
| | $ | 1.84 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Numerator: | | | | | | | |
Net income attributable to Charter shareholders | | | | | $ | 396 | | | $ | 253 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Denominator: | | | | | | | |
Weighted average common shares outstanding, basic | | | | | 207,831,305 | | | 224,630,122 | |
Effect of dilutive securities: | | | | | | | |
Assumed exercise or issuance of shares relating to stock plans | | | | | 4,979,308 | | | 2,965,243 | |
| | | | | | | |
| | | | | | | |
Weighted average common shares outstanding, diluted | | | | | 212,810,613 | | | 227,595,365 | |
| | | | | | | |
Basic earnings per common share attributable to Charter shareholders | | | | | $ | 1.91 | | | $ | 1.13 | |
Diluted earnings per common share attributable to Charter shareholders | | | | | $ | 1.86 | | | $ | 1.11 | |
17. Comprehensive Income
Comprehensive income equaled net income attributable to Charter shareholders for each of the three and six months ended June 30,March 31, 2020 and 2019. The following table sets forth the consolidated statements of comprehensive income for the periods presented.
|
| | | | | | | |
| Three Months Ended June 30, 2018 | | Six Months Ended June 30, 2018 |
Consolidated net income | $ | 339 |
| | $ | 562 |
|
Foreign currency translation adjustment | (1 | ) | | (1 | ) |
Consolidated comprehensive income | 338 |
| | 561 |
|
Less: Comprehensive income attributable to noncontrolling interest | (66 | ) | | (121 | ) |
Comprehensive income attributable to Charter shareholders | $ | 272 |
| | $ | 440 |
|
18. Related Party Transactions
The following sets forth certain transactions in which the Company and the directors, executive officers, and affiliates of the Company are involved.
Liberty Broadband and A/N
Under the terms of the Amended and Restated Stockholders Agreement with Liberty Broadband, Corporation (“Liberty Broadband”), A/N and Charter, dated May 23, 2015, the number of Charter’s directors is fixed at 13, and includes its CEO. Two designees selected by A/N are members of the board of directors of Charter and three designees selected by Liberty Broadband are members of the board of directors of Charter. The remaining eight directors are not affiliated with either A/N or Liberty Broadband. Each of A/N and Liberty Broadband is entitled to nominate at least one director to each of the committees of Charter’s board of directors, subject to applicable stock exchange listing rules and certain specified voting or equity ownership thresholds for each of A/N and Liberty Broadband, and provided that the Nominating and Corporate Governance Committee and the Compensation and Benefit Committee each have at least a majority of directors independent from A/N, Liberty Broadband and
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Charter (referred to as the “unaffiliated directors”). Each of the Nominating and Corporate Governance Committee and the Compensation and Benefits Committee is currently comprised of three unaffiliated directors and one designee of each of A/N and Liberty Broadband. A/N and Liberty Broadband also have certain other committee designation and other governance rights. Mr. Thomas Rutledge, the Company’s CEO, is the chairman of the board of Charter.
In December 2017, Charter and A/N entered into an amendment to the letter agreement (the “Letter Agreement”) that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis.
The Company is aware that Dr. John Malone, a director emeritus of Charter and Chairman of the board of directors and holder of 49.0%48.8% of voting interest in Liberty Broadband, may be deemed to have a 39.9%40.9% voting interest in Qurate Retail, Inc. ("Qurate") and is on the board of directors of Qurate. Qurate wholly owns HSN, Inc. (“HSN”) and QVC, Inc. (“QVC”). The Company has programming relationships with HSN and QVC. For each of the three and six months ended June 30,March 31, 2020 and 2019, the Company recorded revenue in aggregate of approximately $12 million and $24 million, respectively, and for the three and six months ended June 30, 2018, the Company recorded revenue in aggregate of approximately $17 million and $33 million, respectively, from HSN and QVC as part of channel carriage fees and revenue sharing arrangements for home shopping sales made to customers in the Company’s footprint.
Dr. Malone and Mr. Steven Miron, a member of Charter’s board of directors, also serve on the board of directors of Discovery Communications, Inc., (“Discovery”). The Company is aware that Dr. Malone owns 1.2% of the series A common stock, 93.6% of the series B common stock and 2.6%3.6% of the series C common stock of Discovery and has a 28.2%27.9% voting interest in Discovery for the election of directors. The Company is aware that Advance/Newhouse Programming Partnership (“A/N PP”), an affiliate of A/N and of which Mr. Miron is the CEO, owns 100% of the Series A-1 preferred stock of Discovery and 100% of the Series C-1 preferred stock of Discovery and has a 24.1%23.9% voting interest for matters other than the election of directors. A/N PP also has the right to appoint three directors out of a total of eleventwelve directors to Discovery’s board to be elected by the holders of Discovery’s Series A-1 preferred stock.board. The Company purchases programming from Discovery pursuant to agreements entered into prior to Dr. Malone and Mr. Miron joining Charter’s board of directors.Discovery. Based on publicly available information, the Company does not believe that Discovery would currently be considered a related party. The amount paid in the aggregate to Discovery represents less than 2% of total operating costs and expenses for the three and six months ended June 30, 2019March 31, 2020 and 2018.2019.
Equity Investments
The Company has agreements with certain equity investees pursuant to which the Company has made or received related party transaction payments. The Company recorded payments to equity investees totaling $81$63 million and $167$86 million during the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $86 million and $149 million during the three and six months ended June 30, 2018, respectively.
19. Contingencies
In August 2015, a purported stockholder of Charter, Matthew Sciabacucchi, filed a lawsuit in the Delaware Court of Chancery, on behalf of a putative class of Charter stockholders, challenging the transactions involving Charter, TWC, A/N, and Liberty Broadband announced by Charter on May 26, 2015. The lawsuit, which named as defendants Charter and its board of directors, alleged that the transactions resulted from breaches of fiduciary duty by Charter’s directors and that Liberty Broadband improperly benefited from the challenged transactions at the expense of other Charter stockholders. The lawsuit has proceeded to the discovery phase. Charter denies any liability, believes that it has substantial defenses, and intends tois vigorously defenddefending this lawsuit. Although Charter is unable to predict the outcome of this lawsuit, it does not expect the outcome will have a material effect on its operations, financial condition or cash flows.
The California Attorney General and the Alameda County, California District Attorney are investigating whether certain of Charter’s waste disposal policies, procedures and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. That investigation was commenced in January 2014. A similar investigation involving TWC was initiated
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
in February 2012. Charter is cooperating with these investigations. While the Company is unable to predict the outcome of these investigations, it does not expect that the outcome will have a material effect on its operations, financial condition, or cash flows.
On December 19, 2011, Sprint Communications Company L.P. (“Sprint”) filed a complaint in the U.S.United States District Court for the District of Kansas alleging that TWC infringed certain U.S. patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. At the trial, the jury returned a verdict of $140 million against TWC and further concluded that TWC had willfully infringed Sprint’s patents. The court subsequently declined to enhance the damage award as a result of the purported willful infringement and awarded Sprint an additional $6 million, representing pre-judgment interest on the damages award. The Company appealedhas now paid the case to the United States Court of Appeals for the Federal Circuit where the Company lost the appeal.verdict, interest and costs in full. The Company expects to petition the Supreme Court as the Company continues to pursue its appeal rights. In addition to its appeal, the Company continues to pursue indemnity from one of its vendors and has brought a patent suit against Sprint (TC Tech, LLC v. Sprint) in the U.S.United States District Court for the District of Delaware implicating Sprint's LTE technology. The expected financial impactultimate outcomes of the Sprint verdict has been reflectedpursuit of indemnity against the Company’s
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
vendor and the Company's financial statements.TC Tech litigation cannot be predicted. The Company does not expect that the outcome of thisits indemnity claim nor the outcome of the TC Tech litigation will have a material adverse effect on its operations or financial condition. The ultimate outcomes of the appeal of the Sprint Kansas case, the pursuit of indemnity against the Company’s vendor and the TC Tech litigation cannot be predicted.
Sprint filed a second patent suit against Charter and Bright House Networks, LLC on December 2, 2017 in the United States District Court for the District of Delaware. This suit alleges infringement of 1511 patents related to the Company's provision of VoIP services (ten of which were asserted against Legacy TWC in the matter described above).
On February 18, 2020 Sprint filed a lawsuit against Charter, is vigorously defendingBright House, and TWC in the District Court for Johnson County, Kansas. Sprint alleges that Charter misappropriated trade secrets from Sprint years ago through employees hired by Bright House. Sprint asserts that the alleged trade secrets relate to the VoIP business of Charter and Bright House. Charter has removed this case. Whilecase to the Company is unable to predictUnited States District Court for the outcomeDistrict of this Sprint suit, it does not expect that this litigation will have a material effect on its operations, financial condition, or cash flows.Kansas.
Sprint filed a third patent suit against Charter on May 17, 2018 in the United States District Court for the Eastern District of Virginia. This suit alleges infringement of threetwo patents related to the Company's video on demand services. The Company is vigorously defending this case. The parties recently agreed to transfercourt transferred this case to the United States District Court for the District of Delaware. Delaware on December 20, 2018 pursuant to an agreement between the parties.
While the Company is vigorously defending these suits and is unable to predict the outcome of this litigation, itthe Sprint lawsuits, the Company does not expect that thisthe litigation will have a material effect on its operations, financial condition, or cash flows.
The New York Public Service Commission (the “PSC”), the regulator for the cable and telecommunication industries in New York (whose Chair directs and operates as the Chief Executive Officer of the New York State Department of Public Service (“DPS”)), issued multiple orders against Charter including two orders on July 27, 2018 relating to the agreement by which the PSC approved Charter’s merger with TWC. One order determined that Charter had failed to satisfy one of its merger conditions by not extending its high speed broadband network according to the PSC’s interpretation of which homes and businesses Charter built to should count. The order further directed the initiation of a court action to impose financial and other penalties on Charter which the PSC initiated. The second order purported to rescind the PSC’s January 2016 approval of Charter’s merger with TWC’s New York operations and directed Charter to submit a plan to effect an orderly transition to a successor provider or providers and for Charter to cease operations in New York within six months of the order which deadline was extended as the DPS and Charter negotiated a resolution of these matters.
On April 19, 2019, DPS and Charter jointly presented to the PSC a proposed settlement to resolve these disputes, and on July 11, 2019, the PSC approved the settlement. The settlement resolved all outstanding matters regarding these disputes. No penalties or forfeiture were assessed as a result of the agreement, and the Company was not found to have committed, nor did it admit to, any violation. The incremental operating and capital expenditures to be incurred by the Company to meet the buildout and other requirements of the settlement agreement will not have a material impact on the Company’s consolidated financial condition, results of operations or liquidity.
In addition to the Sprint litigation described above, the Company is a defendant or co-defendant in several additional lawsuits involving alleged infringement of various intellectual property relating to various aspects of its businesses. Other industry participants are also defendants in certain of these cases or related cases. In the event that a court ultimately determines that the Company infringes on any intellectual property, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the intellectual property at issue. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company’s consolidated financial condition, results of operations, or liquidity. The Company cannot predict the outcome of any such claims nor can it reasonably estimate a range of possible loss.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The Company is party to other lawsuits, claims and regulatory inquiries that arise in the ordinary course of conducting its business. The ultimate outcome of these other legal matters pending against the Company cannot be predicted, and although such lawsuits and claims are not expected individually to have a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity, such lawsuits could have, in the aggregate, a material adverse effect on the Company’s consolidated financial condition, results of operations or liquidity. Whether or not the Company ultimately prevails in any particular lawsuit or claim, litigation can be time consuming and costly and injure the Company’s reputation.
20. Employee Benefit Plans
The Company sponsors twothree qualified defined benefit pension plans the TWC Pension Plan and the TWC Union Pension Plan,one nonqualified defined benefit pension plan that provide pension benefits to a majority of employees who were employed by TWC before the acquisition ofmerger with TWC. The Company also provides a nonqualified defined benefit pension plan for certain employees under the TWC Excess Pension Plan.
Pension benefits are based on formulas that reflect the employees’ years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. The Company has elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period. No future compensation increases or future service will be credited to participants of the pension plans given the frozen nature of the plans.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The components of net periodic pension benefit (costs) for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 are recorded in other pension benefits, net in the consolidated statements of operations and consisted of the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Interest cost | $ | (32 | ) | | $ | (32 | ) | | $ | (64 | ) | | $ | (64 | ) |
Expected return on plan assets | 41 |
| | 52 |
| | 82 |
| | 104 |
|
Net periodic pension benefits | $ | 9 |
| | $ | 20 |
| | $ | 18 |
| | $ | 40 |
|
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Interest cost | | | | | $ | (28) | | | $ | (32) | |
Expected return on plan assets | | | | | 38 | | | 41 | |
Net periodic pension benefits | | | | | $ | 10 | | | $ | 9 | |
The Company made no cash contributions to the qualified pension plans during the three and six months ended June 30, 2019March 31, 2020 and 2018;2019; however, the Company may make discretionary cash contributions to the qualified pension plans in the future. 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 unfunded pension plan, the Company will continue to make contributions during 20192020 to the extent benefits are paid.
21. Recently Issued Accounting Standards
Accounting Standards Adopted January 1, 20182020
ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”)
Upon adoption of ASU 2014-09, the Company recorded a cumulative-effect adjustment which included an increase to total shareholders’ equity of $38 million as of January 1, 2018.
Accounting Standards Adopted January 1, 2019
ASU No. 2016-02, Leases (“ASU 2016-02”)
In February 2016, the FASB issued ASU 2016-02 which requires lessees to recognize almost all leases on their balance sheet as a lease asset and a lease liability. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification is based on criteria largely similar to the criteria applied under legacy lease accounting, but without explicit bright lines.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The Company adopted ASU 2016-02 using the modified retrospective approach with a cumulative-effect adjustment recorded at the beginning of the period of adoption (January 1, 2019). Therefore, the Company recognized and measured operating leases on the consolidated balance sheet without revising comparative period information or disclosure. At transition, the Company elected the package of practical expedients permitted under the transition guidance within the standard, which eliminates the reassessment of past leases, classification and initial direct costs. The Company did not elect to use hindsight to reassess lease terms or impairment at the adoption date. The Company elected the land easements practical expedient which allows the Company not to retrospectively treat land easements as leases; however, must apply lease accounting prospectively to land easements if they meet the definition of a lease.
The Company implemented internal controls and key system functionality to enable the preparation of financial information on adoption. The new standard resulted in the recording of leased assets and lease liabilities for the Company’s operating leases of approximately $1.1 billion and $1.2 billion, respectively, as of January 1, 2019. The difference between the leased assets and lease liabilities primarily represents the prior year end deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the leased assets. The adoption of the standard did not have an impact on the Company’s shareholders equity and is not anticipated to have an impact on the Company’s results from operations and cash flows. The adoption of the new standard resulted in additional interim and annual lease disclosures. See Note 5 for interim lease disclosures for the three and six months ended June 30, 2019.
Accounting Standards Not Yet Adopted
ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”)
In June 2016, the FASBFinancial Accounting Standards Board ("FASB") issued ASUAccounting Standards Update ("ASU") 2016-13, which requires a financial asset (or a group of financial assets) measured at amortized cost basis to be assessed for impairment under the current expected credit loss model rather than an incurred loss model. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions and reasonable and supportable forecasts that affect the collectability of the reported amount. The primary financial assets of the Company in scope of ASU 2016-13 will be effective for interiminclude accounts receivables and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). Early adoption is permitted.equipment installment plan notes receivables. The Company is currently in the process of evaluating the impact theadopted ASU 2016-13 on January 1, 2020. The adoption of ASU 2016-13 willdid not have on itsa material impact to the Company's consolidated financial statements.
ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”)
In January 2017, the FASB issued ASU 2017-04 which eliminates step two from the goodwill impairment test. Under the new standard, to the extent the carrying amount of a reporting unit exceeds the fair value, the Company will record an impairment charge equal to the difference. The impairment charge recognized should not exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 will be effective for interim and annual periods beginning after December 15, 2019 (January 1, 2020 for the Company). Early adoption is permitted. The Company does not expect the adoption of ASU 2017-04 to have a material impact on its consolidated financial statements.
ASU No. 2018-15, Customer’s Accounting for Implementation Costs in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15")
In August 2018, the FASB issued ASU 2018-15 which requires upfront implementation costs incurred in a cloud computing arrangement (or hosting arrangement) that is a service contract to be amortized to hosting expense over the term of the arrangement.arrangement, beginning when the module or component of the hosting arrangement is ready for its intended use. The Company adopted ASU 2018-15 will be effective for interim and annual periods beginning after December 15, 2019 (Januaryon January 1, 2020 for the Company). Early adoption is permitted.2020. The Company is currently in the process of evaluating the impact that the adoption of ASU 2018-15 willdid not have on itsa material impact to the Company's consolidated financial statements.
ASU No. 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials ("ASU 2019-02")
In March 2019, the FASB issued ASU 2019-02 which aligns the accounting for production costs of an episodic television series with the accounting for production costs of films regarding cost capitalization, amortization, impairment, presentation and disclosure. The Company adopted ASU 2019-02 on January 1, 2020. The adoption of ASU 2019-02 did not have a material impact to the Company's consolidated financial statements.
ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”)
In December 2019, the FASB issued ASU 2019-12, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 will be effective for interim and annual periods beginning after December 15, 2019 (January2020. Early adoption is permitted. The Company elected to early adopt ASU 2019-12 on January 1, 2020
2020. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
for the Company). Early adoption is permitted. The Company is currently in the process of evaluating the impact that the adoption of ASU 2019-02 will have on its consolidated financial statements.
22. Consolidating Schedules
Each of Charter Operating, TWC, LLC, TWCE, CCO Holdings and certain subsidiaries jointly, severally, fully and unconditionally guarantee the outstanding debt securities of the others (other than the CCO Holdings notes) on an unsecured senior basis and the condensed consolidating financial information has been prepared and presented pursuant to SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Certain Charter Operating subsidiaries that are regulated telephone entities only become guarantor subsidiaries upon approval by regulators. This information is not intended to present the financial position, results of operations and cash flows of the individual companies or groups of companies in accordance with generally accepted accounting principles.
The "Intermediate Holding Companies" column includes the assets and liabilities of the captive insurance company, a company wholly-owned by Charter outside of Charter Holdings and which does not, directly or indirectly, own any interest in Charter Holdings. The “Charter Operating and Restricted Subsidiaries” column is presented to comply with the terms of the Credit Agreement.
Comprehensive income equaled net income attributable to Charter shareholders for the sixthree months ended June 30,March 31, 2020 and 2019. Condensed consolidating financial statements as of June 30, 2019March 31, 2020 and December 31, 20182019 and for the sixthree months ended June 30,March 31, 2020 and 2019 and 2018 follow.
21
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries | | | | | | | | | | | |
Condensed Consolidating Balance Sheets | | | | | | | | | | | |
As of March 31, 2020 | | | | | | | | | | | |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | |
Cash and cash equivalents | $ | — | | | $ | 248 | | | $ | 200 | | | $ | 2,460 | | | $ | — | | | $ | 2,908 | |
Accounts receivable, net | — | | | 34 | | | — | | | 2,057 | | | — | | | 2,091 | |
Receivables from related party | 18 | | | 143 | | | 41 | | | — | | | (202) | | | — | |
Prepaid expenses and other current assets | 4 | | | 57 | | | — | | | 699 | | | — | | | 760 | |
Total current assets | 22 | | | 482 | | | 241 | | | 5,216 | | | (202) | | | 5,759 | |
| | | | | | | | | | | |
RESTRICTED CASH | — | | | 28 | | | — | | | — | | | — | | | 28 | |
| | | | | | | | | | | |
INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | | |
Property, plant and equipment, net | — | | | 719 | | | — | | | 33,377 | | | — | | | 34,096 | |
Customer relationships, net | — | | | — | | | — | | | 6,955 | | | — | | | 6,955 | |
Franchises | — | | | — | | | — | | | 67,322 | | | — | | | 67,322 | |
Goodwill | — | | | — | | | — | | | 29,554 | | | — | | | 29,554 | |
Total investment in cable properties, net | — | | | 719 | | | — | | | 137,208 | | | — | | | 137,927 | |
| | | | | | | | | | | |
INVESTMENT IN SUBSIDIARIES | 47,193 | | | 53,157 | | | 76,925 | | | — | | | (177,275) | | | — | |
LOANS RECEIVABLE – RELATED PARTY | 278 | | | 727 | | | 567 | | | — | | | (1,572) | | | — | |
OTHER NONCURRENT ASSETS | 2 | | | 372 | | | — | | | 2,464 | | | — | | | 2,838 | |
| | | | | | | | | | | |
Total assets | $ | 47,495 | | | $ | 55,485 | | | $ | 77,733 | | | $ | 144,888 | | | $ | (179,049) | | | $ | 146,552 | |
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 26 | | | $ | 656 | | | $ | 314 | | | $ | 7,314 | | | $ | — | | | $ | 8,310 | |
Payables to related party | — | | | — | | | — | | | 202 | | | (202) | | | — | |
Current portion of long-term debt | — | | | — | | | 2,198 | | | 2,707 | | | — | | | 4,905 | |
Total current liabilities | 26 | | | 656 | | | 2,512 | | | 10,223 | | | (202) | | | 13,215 | |
| | | | | | | | | | | |
LONG-TERM DEBT | — | | | — | | | 22,064 | | | 52,723 | | | — | | | 74,787 | |
LOANS PAYABLE – RELATED PARTY | — | | | — | | | — | | | 1,572 | | | (1,572) | | | — | |
DEFERRED INCOME TAXES | 17,591 | | | 19 | | | — | | | 55 | | | — | | | 17,665 | |
OTHER LONG-TERM LIABILITIES | 250 | | | 545 | | | — | | | 3,368 | | | — | | | 4,163 | |
| | | | | | | | | | | |
SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
Controlling interest | 29,628 | | | 47,193 | | | 53,157 | | | 76,925 | | | (177,275) | | | 29,628 | |
Noncontrolling interests | — | | | 7,072 | | | — | | | 22 | | | — | | | 7,094 | |
Total shareholders’/member’s equity | 29,628 | | | 54,265 | | | 53,157 | | | 76,947 | | | (177,275) | | | 36,722 | |
| | | | | | | | | | | |
Total liabilities and shareholders’/member’s equity | $ | 47,495 | | | $ | 55,485 | | | $ | 77,733 | | | $ | 144,888 | | | $ | (179,049) | | | $ | 146,552 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Balance Sheets |
As of June 30, 2019 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 198 |
| | $ | — |
| | $ | 498 |
| | $ | — |
| | $ | 696 |
|
Accounts receivable, net | 1 |
| | 34 |
| | — |
| | 2,035 |
| | — |
| | 2,070 |
|
Receivables from related party | 24 |
| | 411 |
| | 51 |
| | — |
| | (486 | ) | | — |
|
Prepaid expenses and other current assets | 9 |
| | 40 |
| | — |
| | 525 |
| | — |
| | 574 |
|
Total current assets | 34 |
| | 683 |
| | 51 |
| | 3,058 |
| | (486 | ) | | 3,340 |
|
| | | | | | | | | | | |
RESTRICTED CASH | — |
| | 150 |
| | — |
| | — |
| | — |
| | 150 |
|
| | | | | | | | | | | |
INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | |
Property, plant and equipment, net | — |
| | 599 |
| | — |
| | 33,876 |
| | — |
| | 34,475 |
|
Customer relationships, net | — |
| | — |
| | — |
| | 8,461 |
| | — |
| | 8,461 |
|
Franchises | — |
| | — |
| | — |
| | 67,319 |
| | — |
| | 67,319 |
|
Goodwill | — |
| | — |
| | — |
| | 29,554 |
| | — |
| | 29,554 |
|
Total investment in cable properties, net | — |
| | 599 |
| | — |
| | 139,210 |
| | — |
| | 139,809 |
|
| | | | | | | | | | | |
INVESTMENT IN SUBSIDIARIES | 52,689 |
| | 59,452 |
| | 78,628 |
| | — |
| | (190,769 | ) | | — |
|
OPERATING LEASE RIGHT-OF-USE ASSETS | — |
| | 177 |
| | — |
| | 989 |
| | — |
| | 1,166 |
|
LOANS RECEIVABLE – RELATED PARTY | 260 |
| | 699 |
| | 545 |
| | — |
| | (1,504 | ) | | — |
|
OTHER NONCURRENT ASSETS | — |
| | 230 |
| | — |
| | 1,390 |
| | — |
| | 1,620 |
|
| | | | | | | | | | | |
Total assets | $ | 52,983 |
| | $ | 61,990 |
| | $ | 79,224 |
| | $ | 144,647 |
| | $ | (192,759 | ) | | $ | 146,085 |
|
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 20 |
| | $ | 873 |
| | $ | 287 |
| | $ | 6,965 |
| | $ | — |
| | $ | 8,145 |
|
Operating lease liabilities | — |
| | 30 |
| | — |
| | 178 |
| | — |
| | 208 |
|
Payables to related party | — |
| | — |
| | — |
| | 486 |
| | (486 | ) | | — |
|
Current portion of long-term debt | — |
| | — |
| | — |
| | 1,522 |
| | — |
| | 1,522 |
|
Total current liabilities | 20 |
| | 903 |
| | 287 |
| | 9,151 |
| | (486 | ) | | 9,875 |
|
| | | | | | | | | | | |
LONG-TERM DEBT | — |
| | — |
| | 19,485 |
| | 52,299 |
| | — |
| | 71,784 |
|
LOANS PAYABLE – RELATED PARTY | — |
| | — |
| | — |
| | 1,504 |
| | (1,504 | ) | | — |
|
DEFERRED INCOME TAXES | 17,457 |
| | 13 |
| | — |
| | 52 |
| | — |
| | 17,522 |
|
LONG-TERM OPERATING LEASE LIABILITIES | — |
| | 201 |
| | — |
| | 851 |
| | — |
| | 1,052 |
|
OTHER LONG-TERM LIABILITIES | 220 |
| | 400 |
| | — |
| | 2,138 |
| | — |
| | 2,758 |
|
| | | | | | | | | | | |
SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
Controlling interest | 35,286 |
| | 52,689 |
| | 59,452 |
| | 78,628 |
| | (190,769 | ) | | 35,286 |
|
Noncontrolling interests | — |
| | 7,784 |
| | — |
| | 24 |
| | — |
| | 7,808 |
|
Total shareholders’/member’s equity | 35,286 |
| | 60,473 |
| | 59,452 |
| | 78,652 |
| | (190,769 | ) | | 43,094 |
|
| | | | | | | | | | | |
Total liabilities and shareholders’/member’s equity | $ | 52,983 |
| | $ | 61,990 |
| | $ | 79,224 |
| | $ | 144,647 |
| | $ | (192,759 | ) | | $ | 146,085 |
|
22
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries | | | | | | | | | | | |
Condensed Consolidating Balance Sheets | | | | | | | | | | | |
As of December 31, 2019 | | | | | | | | | | | |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | | | | | | |
Cash and cash equivalents | $ | — | | | $ | 234 | | | $ | 500 | | | $ | 2,749 | | | $ | — | | | $ | 3,483 | |
Accounts receivable, net | 1 | | | 31 | | | — | | | 2,195 | | | — | | | 2,227 | |
Receivables from related party | 34 | | | 264 | | | 59 | | | — | | | (357) | | | — | |
Prepaid expenses and other current assets | 10 | | | 40 | | | — | | | 711 | | | — | | | 761 | |
Total current assets | 45 | | | 569 | | | 559 | | | 5,655 | | | (357) | | | 6,471 | |
| | | | | | | | | | | |
RESTRICTED CASH | — | | | 66 | | | — | | | — | | | — | | | 66 | |
| | | | | | | | | | | |
INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | | |
Property, plant and equipment, net | — | | | 683 | | | — | | | 33,908 | | | — | | | 34,591 | |
Customer relationships, net | — | | | — | | | — | | | 7,453 | | | — | | | 7,453 | |
Franchises | — | | | — | | | — | | | 67,322 | | | — | | | 67,322 | |
Goodwill | — | | | — | | | — | | | 29,554 | | | — | | | 29,554 | |
Total investment in cable properties, net | — | | | 683 | | | — | | | 138,237 | | | — | | | 138,920 | |
| | | | | | | | | | | |
INVESTMENT IN SUBSIDIARIES | 49,024 | | | 55,266 | | | 76,409 | | | — | | | (180,699) | | | — | |
LOANS RECEIVABLE – RELATED PARTY | 260 | | | 699 | | | 545 | | | — | | | (1,504) | | | — | |
OTHER NONCURRENT ASSETS | 2 | | | 378 | | | — | | | 2,351 | | | — | | | 2,731 | |
| | | | | | | | | | | |
Total assets | $ | 49,331 | | | $ | 57,661 | | | $ | 77,513 | | | $ | 146,243 | | | $ | (182,560) | | | $ | 148,188 | |
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 18 | | | $ | 725 | | | $ | 296 | | | $ | 7,846 | | | $ | — | | | $ | 8,885 | |
Payables to related party | — | | | — | | | — | | | 357 | | | (357) | | | — | |
Current portion of long-term debt | — | | | — | | | — | | | 3,500 | | | — | | | 3,500 | |
Total current liabilities | 18 | | | 725 | | | 296 | | | 11,703 | | | (357) | | | 12,385 | |
| | | | | | | | | | | |
LONG-TERM DEBT | — | | | — | | | 21,951 | | | 53,627 | | | — | | | 75,578 | |
LOANS PAYABLE – RELATED PARTY | — | | | — | | | — | | | 1,504 | | | (1,504) | | | — | |
DEFERRED INCOME TAXES | 17,641 | | | 15 | | | — | | | 55 | | | — | | | 17,711 | |
OTHER LONG-TERM LIABILITIES | 227 | | | 554 | | | — | | | 2,922 | | | — | | | 3,703 | |
| | | | | | | | | | | |
SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
Controlling interest | 31,445 | | | 49,024 | | | 55,266 | | | 76,409 | | | (180,699) | | | 31,445 | |
Noncontrolling interests | — | | | 7,343 | | | — | | | 23 | | | — | | | 7,366 | |
Total shareholders’/member’s equity | 31,445 | | | 56,367 | | | 55,266 | | | 76,432 | | | (180,699) | | | 38,811 | |
| | | | | | | | | | | |
Total liabilities and shareholders’/member’s equity | $ | 49,331 | | | $ | 57,661 | | | $ | 77,513 | | | $ | 146,243 | | | $ | (182,560) | | | $ | 148,188 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Balance Sheets |
As of December 31, 2018 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
ASSETS | | | | | | | | | | | |
CURRENT ASSETS: | | | | | | �� | | | | | |
Cash and cash equivalents | $ | — |
| | $ | 251 |
| | $ | — |
| | $ | 300 |
| | $ | — |
| | $ | 551 |
|
Accounts receivable, net | 1 |
| | 33 |
| | — |
| | 1,699 |
| | — |
| | 1,733 |
|
Receivables from related party | 27 |
| | 518 |
| | 57 |
| | — |
| | (602 | ) | | — |
|
Prepaid expenses and other current assets | 14 |
| | 32 |
| | — |
| | 400 |
| | — |
| | 446 |
|
Total current assets | 42 |
| | 834 |
| | 57 |
| | 2,399 |
| | (602 | ) | | 2,730 |
|
| | | | | | | | | | | |
RESTRICTED CASH | — |
| | 214 |
| | — |
| | — |
| | — |
| | 214 |
|
| | | | | | | | | | | |
INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | |
Property, plant and equipment, net | — |
| | 468 |
| | — |
| | 34,658 |
| | — |
| | 35,126 |
|
Customer relationships, net | — |
| | — |
| | — |
| | 9,565 |
| | — |
| | 9,565 |
|
Franchises | — |
| | — |
| | — |
| | 67,319 |
| | — |
| | 67,319 |
|
Goodwill | — |
| | — |
| | — |
| | 29,554 |
| | — |
| | 29,554 |
|
Total investment in cable properties, net | — |
| | 468 |
| | — |
| | 141,096 |
| | — |
| | 141,564 |
|
| | | | | | | | | | | |
INVESTMENT IN SUBSIDIARIES | 53,592 |
| | 60,530 |
| | 78,960 |
| | — |
| | (193,082 | ) | | — |
|
LOANS RECEIVABLE – RELATED PARTY | 251 |
| | 674 |
| | 526 |
| | — |
| | (1,451 | ) | | — |
|
OTHER NONCURRENT ASSETS | — |
| | 222 |
| | — |
| | 1,403 |
| | (3 | ) | | 1,622 |
|
| | | | | | | | | | | |
Total assets | $ | 53,885 |
| | $ | 62,942 |
| | $ | 79,543 |
| | $ | 144,898 |
| | $ | (195,138 | ) | | $ | 146,130 |
|
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 9 |
| | $ | 893 |
| | $ | 283 |
| | $ | 7,620 |
| | $ | — |
| | $ | 8,805 |
|
Payables to related party | — |
| | — |
| | — |
| | 602 |
| | (602 | ) | | — |
|
Current portion of long-term debt | — |
| | — |
| | — |
| | 3,290 |
| | — |
| | 3,290 |
|
Total current liabilities | 9 |
| | 893 |
| | 283 |
| | 11,512 |
| | (602 | ) | | 12,095 |
|
| | | | | | | | | | | |
LONG-TERM DEBT | — |
| | — |
| | 18,730 |
| | 50,807 |
| | — |
| | 69,537 |
|
LOANS PAYABLE – RELATED PARTY | — |
| | — |
| | — |
| | 1,451 |
| | (1,451 | ) | | — |
|
DEFERRED INCOME TAXES | 17,376 |
| | 16 |
| | — |
| | — |
| | (3 | ) | | 17,389 |
|
OTHER LONG-TERM LIABILITIES | 215 |
| | 478 |
| | — |
| | 2,144 |
| | — |
| | 2,837 |
|
| | | | | | | | | | | |
SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
Controlling interest | 36,285 |
| | 53,592 |
| | 60,530 |
| | 78,960 |
| | (193,082 | ) | | 36,285 |
|
Noncontrolling interests | — |
| | 7,963 |
| | — |
| | 24 |
| | — |
| | 7,987 |
|
Total shareholders’/member’s equity | 36,285 |
| | 61,555 |
| | 60,530 |
| | 78,984 |
| | (193,082 | ) | | 44,272 |
|
| | | | | | | | | | | |
Total liabilities and shareholders’/member’s equity | $ | 53,885 |
| | $ | 62,942 |
| | $ | 79,543 |
| | $ | 144,898 |
| | $ | (195,138 | ) | | $ | 146,130 |
|
23
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries | | | | | | | | | | | |
Condensed Consolidating Statements of Operations | | | | | | | | | | | |
For the three months March 31, 2020 | | | | | | | | | | | |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
REVENUES | $ | 13 | | | $ | 303 | | | $ | — | | | $ | 11,736 | | | $ | (314) | | | $ | 11,738 | |
| | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | |
Operating costs and expenses (exclusive of items shown separately below) | 13 | | | 278 | | | — | | | 7,452 | | | (311) | | | 7,432 | |
Depreciation and amortization | — | | | 4 | | | — | | | 2,493 | | | — | | | 2,497 | |
Other operating expense, net | — | | | — | | | — | | | 10 | | | (3) | | | 7 | |
| 13 | | | 282 | | | — | | | 9,955 | | | (314) | | | 9,936 | |
Income from operations | — | | | 21 | | | — | | | 1,781 | | | — | | | 1,802 | |
| | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | | | | | | | | | |
Interest income (expense), net | 5 | | | 7 | | | (297) | | | (695) | | | — | | | (980) | |
Loss on extinguishment of debt | — | | | — | | | (27) | | | — | | | — | | | (27) | |
Loss on financial instruments, net | — | | | — | | | — | | | (318) | | | — | | | (318) | |
Other pension benefits, net | — | | | — | | | — | | | 10 | | | — | | | 10 | |
Other income (expense), net | — | | | (2) | | | — | | | 11 | | | — | | | 9 | |
Equity in income of subsidiaries | 405 | | | 459 | | | 783 | | | — | | | (1,647) | | | — | |
| 410 | | | 464 | | | 459 | | | (992) | | | (1,647) | | | (1,306) | |
| | | | | | | | | | | |
Income before income taxes | 410 | | | 485 | | | 459 | | | 789 | | | (1,647) | | | 496 | |
Income tax expense | (14) | | | (9) | | | — | | | (6) | | | — | | | (29) | |
Consolidated net income | 396 | | | 476 | | | 459 | | | 783 | | | (1,647) | | | 467 | |
Less: Net income attributable to noncontrolling interests | — | | | (71) | | | — | | | — | | | — | | | (71) | |
Net income | $ | 396 | | | $ | 405 | | | $ | 459 | | | $ | 783 | | | $ | (1,647) | | | $ | 396 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Statements of Operations |
For the six months ended June 30, 2019 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
REVENUES | $ | 23 |
| | $ | 575 |
| | $ | — |
| | $ | 22,548 |
| | $ | (593 | ) | | $ | 22,553 |
|
| | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | |
Operating costs and expenses (exclusive of items shown separately below) | 23 |
| | 556 |
| | — |
| | 14,500 |
| | (599 | ) | | 14,480 |
|
Depreciation and amortization | — |
| | 8 |
| | — |
| | 5,042 |
| | — |
| | 5,050 |
|
Other operating (income) expense, net | — |
| | (8 | ) | | — |
| | 59 |
| | 6 |
| | 57 |
|
| 23 |
| | 556 |
| | — |
| | 19,601 |
| | (593 | ) | | 19,587 |
|
Income from operations | — |
| | 19 |
| | — |
| | 2,947 |
| | — |
| | 2,966 |
|
| | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | | | | | | | | | |
Interest income (expense), net | 5 |
| | 17 |
| | (511 | ) | | (1,381 | ) | | — |
| | (1,870 | ) |
Loss on financial instruments, net | — |
| | — |
| | — |
| | (82 | ) | | — |
| | (82 | ) |
Other pension benefits, net | — |
| | — |
| | — |
| | 18 |
| | — |
| | 18 |
|
Other expense, net | — |
| | — |
| | — |
| | (126 | ) | | — |
| | (126 | ) |
Equity in income of subsidiaries | 685 |
| | 788 |
| | 1,299 |
| | — |
| | (2,772 | ) | | — |
|
| 690 |
| | 805 |
| | 788 |
| | (1,571 | ) | | (2,772 | ) | | (2,060 | ) |
| | | | | | | | | | | |
Income before income taxes | 690 |
| | 824 |
| | 788 |
| | 1,376 |
| | (2,772 | ) | | 906 |
|
Income tax expense | (123 | ) | | (4 | ) | | — |
| | (76 | ) | | — |
| | (203 | ) |
Consolidated net income | 567 |
| | 820 |
| | 788 |
| | 1,300 |
| | (2,772 | ) | | 703 |
|
Less: Net income attributable to noncontrolling interests | — |
| | (135 | ) | | — |
| | (1 | ) | | — |
| | (136 | ) |
Net income | $ | 567 |
| | $ | 685 |
| | $ | 788 |
| | $ | 1,299 |
| | $ | (2,772 | ) | | $ | 567 |
|
24
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Statements of Operations |
For the six months ended June 30, 2018 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
REVENUES | $ | 27 |
| | $ | 560 |
| | $ | — |
| | $ | 21,503 |
| | $ | (579 | ) | | $ | 21,511 |
|
| | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | |
Operating costs and expenses (exclusive of items shown separately below) | 27 |
| | 537 |
| | — |
| | 13,724 |
| | (579 | ) | | 13,709 |
|
Depreciation and amortization | — |
| | 5 |
| | — |
| | 5,297 |
| | — |
| | 5,302 |
|
Other operating expenses, net | — |
| | 4 |
| | — |
| | 94 |
| | — |
| | 98 |
|
| 27 |
| | 546 |
| | — |
| | 19,115 |
| | (579 | ) | | 19,109 |
|
Income from operations | — |
| | 14 |
| | — |
| | 2,388 |
| | — |
| | 2,402 |
|
| | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | | | | | | | | | |
Interest income (expense), net | 4 |
| | 13 |
| | (508 | ) | | (1,238 | ) | | — |
| | (1,729 | ) |
Loss on financial instruments, net | — |
| | — |
| | — |
| | (12 | ) | | — |
| | (12 | ) |
Other pension benefits, net | — |
| | — |
| | — |
| | 40 |
| | — |
| | 40 |
|
Other expense, net | — |
| | (25 | ) | | — |
| | (45 | ) | | — |
| | (70 | ) |
Equity in income of subsidiaries | 495 |
| | 619 |
| | 1,127 |
| | — |
| | (2,241 | ) | | — |
|
| 499 |
| | 607 |
| | 619 |
| | (1,255 | ) | | (2,241 | ) | | (1,771 | ) |
| | | | | | | | | | | |
Income before income taxes | 499 |
| | 621 |
| | 619 |
| | 1,133 |
| | (2,241 | ) | | 631 |
|
Income tax expense | (58 | ) | | (6 | ) | | — |
| | (5 | ) | | — |
| | (69 | ) |
Consolidated net income | 441 |
| | 615 |
| | 619 |
| | 1,128 |
| | (2,241 | ) | | 562 |
|
Less: Net income attributable to noncontrolling interests | — |
| | (120 | ) | | — |
| | (1 | ) | | — |
| | (121 | ) |
Net income | $ | 441 |
| | $ | 495 |
| | $ | 619 |
| | $ | 1,127 |
| | $ | (2,241 | ) | | $ | 441 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries | | | | | | | | | | | |
Condensed Consolidating Statements of Operations | | | | | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | | | | |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
REVENUES | $ | 12 | | | $ | 282 | | | $ | — | | | $ | 11,203 | | | $ | (291) | | | $ | 11,206 | |
| | | | | | | | | | | |
COSTS AND EXPENSES: | | | | | | | | | | | |
Operating costs and expenses (exclusive of items shown separately below) | 12 | | | 282 | | | — | | | 7,242 | | | (300) | | | 7,236 | |
Depreciation and amortization | — | | | 3 | | | — | | | 2,547 | | | — | | | 2,550 | |
Other operating income, net | — | | | (10) | | | — | | | (4) | | | 9 | | | (5) | |
| 12 | | | 275 | | | — | | | 9,785 | | | (291) | | | 9,781 | |
Income from operations | — | | | 7 | | | — | | | 1,418 | | | — | | | 1,425 | |
| | | | | | | | | | | |
OTHER INCOME (EXPENSES): | | | | | | | | | | | |
Interest income (expense), net | 3 | | | 9 | | | (254) | | | (683) | | | — | | | (925) | |
Gain on financial instruments, net | — | | | — | | | — | | | 37 | | | — | | | 37 | |
Other pension benefits, net | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Other expense, net | — | | | — | | | — | | | (110) | | | — | | | (110) | |
Equity in income of subsidiaries | 302 | | | 350 | | | 604 | | | — | | | (1,256) | | | — | |
| 305 | | | 359 | | | 350 | | | (747) | | | (1,256) | | | (989) | |
| | | | | | | | | | | |
Income before income taxes | 305 | | | 366 | | | 350 | | | 671 | | | (1,256) | | | 436 | |
Income tax expense | (52) | | | — | | | — | | | (67) | | | — | | | (119) | |
Consolidated net income | 253 | | | 366 | | | 350 | | | 604 | | | (1,256) | | | 317 | |
Less: Net income attributable to noncontrolling interests | — | | | (64) | | | — | | | — | | | — | | | (64) | |
Net income | $ | 253 | | | $ | 302 | | | $ | 350 | | | $ | 604 | | | $ | (1,256) | | | $ | 253 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Statements of Comprehensive Income |
For the six months ended June 30, 2018 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
Consolidated net income | $ | 441 |
| | $ | 615 |
| | $ | 619 |
| | $ | 1,128 |
| | $ | (2,241 | ) | | $ | 562 |
|
Foreign currency translation adjustment | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | 3 |
| | (1 | ) |
Consolidated comprehensive income | $ | 440 |
| | $ | 614 |
| | $ | 618 |
| | $ | 1,127 |
| | $ | (2,238 | ) | | $ | 561 |
|
Less: Comprehensive income attributable to noncontrolling interests | — |
| | (120 | ) | | — |
| | (1 | ) | | — |
| | (121 | ) |
Comprehensive income | $ | 440 |
| | $ | 494 |
| | $ | 618 |
| | $ | 1,126 |
| | $ | (2,238 | ) | | $ | 440 |
|
25
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries | | | | | | | | | | | |
Condensed Consolidating Statements of Cash Flows | | | | | | | | | | | |
For the three months ended March 31, 2020 | | | | | | | | | | | |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
NET CASH FLOWS FROM OPERATING ACTIVITIES | $ | 6 | | | $ | 24 | | | $ | (276) | | | $ | 3,466 | | | $ | — | | | $ | 3,220 | |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchases of property, plant and equipment | — | | | — | | | — | | | (1,461) | | | — | | | (1,461) | |
Change in accrued expenses related to capital expenditures | — | | | — | | | — | | | (388) | | | — | | | (388) | |
Real estate investments through variable interest entities | — | | | (38) | | | — | | | — | | | — | | | (38) | |
Contributions to subsidiaries | (117) | | | (27) | | | (4,273) | | | — | | | 4,417 | | | — | |
Distributions from subsidiaries | 2,352 | | | 2,685 | | | 4,629 | | | — | | | (9,666) | | | — | |
Other, net | — | | | (2) | | | — | | | 39 | | | — | | | 37 | |
Net cash flows from investing activities | 2,235 | | | 2,618 | | | 356 | | | (1,810) | | | (5,249) | | | (1,850) | |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
Borrowings of long-term debt | — | | | — | | | 4,177 | | | 162 | | | — | | | 4,339 | |
Repayments of long-term debt | — | | | — | | | (1,858) | | | (1,731) | | | — | | | (3,589) | |
Borrowings (repayments) of loans payable - related parties | (5) | | | — | | | — | | | 5 | | | — | | | — | |
Payments for debt issuance costs | — | | | — | | | (41) | | | — | | | — | | | (41) | |
Issuance of equity | 23 | | | — | | | — | | | — | | | — | | | 23 | |
Purchase of treasury stock | (2,352) | | | — | | | — | | | — | | | — | | | (2,352) | |
Proceeds from exercise of stock options | 93 | | | — | | | — | | | — | | | — | | | 93 | |
Purchase of noncontrolling interest | — | | | (393) | | | — | | | — | | | — | | | (393) | |
Distributions to noncontrolling interest | — | | | (38) | | | — | | | (1) | | | — | | | (39) | |
Contributions from parent | — | | | 117 | | | 27 | | | 4,273 | | | (4,417) | | | — | |
Distributions to parent | — | | | (2,352) | | | (2,685) | | | (4,629) | | | 9,666 | | | — | |
Other, net | — | | | — | | | — | | | (24) | | | — | | | (24) | |
Net cash flows from financing activities | (2,241) | | | (2,666) | | | (380) | | | (1,945) | | | 5,249 | | | (1,983) | |
| | | | | | | | | | | |
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | — | | | (24) | | | (300) | | | (289) | | | — | | | (613) | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | — | | | 300 | | | 500 | | | 2,749 | | | — | | | 3,549 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | — | | | $ | 276 | | | $ | 200 | | | $ | 2,460 | | | $ | — | | | $ | 2,936 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Statements of Cash Flows |
For the six months ended June 30, 2019 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
NET CASH FLOWS FROM OPERATING ACTIVITIES | $ | (18 | ) | | $ | 55 |
| | $ | (509 | ) | | $ | 5,919 |
| | $ | — |
| | $ | 5,447 |
|
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchases of property, plant and equipment | — |
| | (67 | ) | | — |
| | (3,262 | ) | | 67 |
| | (3,262 | ) |
Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | (428 | ) | | — |
| | (428 | ) |
Real estate investments through variable interest entities | — |
| | (64 | ) | | — |
| | — |
| | — |
| | (64 | ) |
Contributions to subsidiaries | (91 | ) | | (51 | ) | | (792 | ) | | — |
| | 934 |
| | — |
|
Distributions from subsidiaries | 1,829 |
| | 2,084 |
| | 2,591 |
| | — |
| | (6,504 | ) | | — |
|
Other, net | — |
| | (5 | ) | | — |
| | 80 |
| | (67 | ) | | 8 |
|
Net cash flows from investing activities | 1,738 |
| | 1,897 |
| | 1,799 |
| | (3,610 | ) | | (5,570 | ) | | (3,746 | ) |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
Borrowings of long-term debt | — |
| | — |
| | 750 |
| | 9,964 |
| | — |
| | 10,714 |
|
Repayments of long-term debt | — |
| | — |
| | — |
| | (10,123 | ) | | — |
| | (10,123 | ) |
Payments for debt issuance costs | — |
| | — |
| | (7 | ) | | (25 | ) | | — |
| | (32 | ) |
Purchase of treasury stock | (1,801 | ) | | — |
| | — |
| | — |
| | — |
| | (1,801 | ) |
Proceeds from exercise of stock options | 81 |
| | — |
| | — |
| | — |
| | — |
| | 81 |
|
Purchase of noncontrolling interest | — |
| | (254 | ) | | — |
| | — |
| | — |
| | (254 | ) |
Distributions to noncontrolling interest | — |
| | (77 | ) | | — |
| | (1 | ) | | — |
| | (78 | ) |
Contributions from parent | — |
| | 91 |
| | 51 |
| | 792 |
| | (934 | ) | | — |
|
Distributions to parent | — |
| | (1,829 | ) | | (2,084 | ) | | (2,591 | ) | | 6,504 |
| | — |
|
Other, net | — |
| | — |
| | — |
| | (127 | ) | | — |
| | (127 | ) |
Net cash flows from financing activities | (1,720 | ) | | (2,069 | ) | | (1,290 | ) | | (2,111 | ) | | 5,570 |
| | (1,620 | ) |
| | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | — |
| | (117 | ) | | — |
| | 198 |
| | — |
| | 81 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | — |
| | 465 |
| | — |
| | 300 |
| | — |
| | 765 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | — |
| | $ | 348 |
| | $ | — |
| | $ | 498 |
| | $ | — |
| | $ | 846 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries | | | | | | | | | | | |
Condensed Consolidating Statements of Cash Flows | | | | | | | | | | | |
For the three months ended March 31, 2019 | | | | | | | | | | | |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | | | Guarantor Subsidiaries | | | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
NET CASH FLOWS FROM OPERATING ACTIVITIES | $ | (1) | | | $ | — | | | $ | (226) | | | $ | 2,913 | | | $ | — | | | $ | 2,686 | |
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchases of property, plant and equipment | — | | | (67) | | | — | | | (1,665) | | | 67 | | | (1,665) | |
Change in accrued expenses related to capital expenditures | — | | | — | | | — | | | (376) | | | — | | | (376) | |
Real estate investments through variable interest entities | — | | | (39) | | | — | | | — | | | — | | | (39) | |
Contribution to subsidiaries | (44) | | | (9) | | | (9) | | | — | | | 62 | | | — | |
Distributions from subsidiaries | 941 | | | 1,040 | | | 1,266 | | | — | | | (3,247) | | | — | |
Other, net | — | | | — | | | — | | | 67 | | | (67) | | | — | |
Net cash flows from investing activities | 897 | | | 925 | | | 1,257 | | | (1,974) | | | (3,185) | | | (2,080) | |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
Borrowings of long-term debt | — | | | — | | | — | | | 6,884 | | | — | | | 6,884 | |
Repayments of long-term debt | — | | | — | | | — | | | (5,572) | | | — | | | (5,572) | |
Payments for debt issuance costs | — | | | — | | | — | | | (25) | | | — | | | (25) | |
Purchase of treasury stock | (940) | | | — | | | — | | | — | | | — | | | (940) | |
Proceeds from exercise of stock options | 44 | | | — | | | — | | | — | | | — | | | 44 | |
Purchase of noncontrolling interest | — | | | (93) | | | — | | | — | | | — | | | (93) | |
Distributions to noncontrolling interest | — | | | (38) | | | — | | | (1) | | | — | | | (39) | |
Contributions from parent | — | | | 44 | | | 9 | | | 9 | | | (62) | | | — | |
Distributions to parent | — | | | (941) | | | (1,040) | | | (1,266) | | | 3,247 | | | — | |
Other, net | — | | | — | | | — | | | (4) | | | — | | | (4) | |
Net cash flows from financing activities | (896) | | | (1,028) | | | (1,031) | | | 25 | | | 3,185 | | | 255 | |
| | | | | | | | | | | |
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | — | | | (103) | | | — | | | 964 | | | — | | | 861 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | — | | | 465 | | | — | | | 300 | | | — | | | 765 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | — | | | $ | 362 | | | $ | — | | | $ | 1,264 | | | $ | — | | | $ | 1,626 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Statements of Cash Flows |
For the six months ended June 30, 2018 |
| | | | | | | | | | | |
| Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | | | |
| Charter | | Intermediate Holding Companies | | CCO Holdings | | Charter Operating and Restricted Subsidiaries | | Eliminations | | Charter Consolidated |
NET CASH FLOWS FROM OPERATING ACTIVITIES | $ | 6 |
| | $ | 73 |
| | $ | (502 | ) | | $ | 6,218 |
| | $ | — |
| | $ | 5,795 |
|
| | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | |
Purchases of property, plant and equipment | — |
| | — |
| | — |
| | (4,574 | ) | | — |
| | (4,574 | ) |
Change in accrued expenses related to capital expenditures | — |
| | — |
| | — |
| | (466 | ) | | — |
| | (466 | ) |
Contribution to subsidiaries | (43 | ) | | (77 | ) | | (77 | ) | | — |
| | 197 |
| | — |
|
Distributions from subsidiaries | 2,282 |
| | 2,656 |
| | 3,158 |
| | — |
| | (8,096 | ) | | — |
|
Other, net | — |
| | (12 | ) | | — |
| | (55 | ) | | — |
| | (67 | ) |
Net cash flows from investing activities | 2,239 |
| | 2,567 |
| | 3,081 |
| | (5,095 | ) | | (7,899 | ) | | (5,107 | ) |
| | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | |
Borrowings of long-term debt | — |
| | — |
| | — |
| | 5,628 |
| | — |
| | 5,628 |
|
Repayments of long-term debt | — |
| | — |
| | — |
| | (3,500 | ) | | — |
| | (3,500 | ) |
Borrowings (repayments) loans payable - related parties | (7 | ) | | — |
| | — |
| | 7 |
| | — |
| | — |
|
Payments for debt issuance costs | — |
| | — |
| | — |
| | (17 | ) | | — |
| | (17 | ) |
Purchase of treasury stock | (2,281 | ) | | — |
| | — |
| | — |
| | — |
| | (2,281 | ) |
Proceeds from exercise of stock options | 43 |
| | — |
| | — |
| | — |
| | — |
| | 43 |
|
Purchase of noncontrolling interest | — |
| | (328 | ) | | — |
| | — |
| | — |
| | (328 | ) |
Distributions to noncontrolling interest | — |
| | (75 | ) | | — |
| | (1 | ) | | — |
| | (76 | ) |
Contributions from parent | — |
| | 43 |
| | 77 |
| | 77 |
| | (197 | ) | | — |
|
Distributions to parent | — |
| | (2,282 | ) | | (2,656 | ) | | (3,158 | ) | | 8,096 |
| | — |
|
Other, net | — |
| | — |
| | — |
| | (5 | ) | | — |
| | (5 | ) |
Net cash flows from financing activities | (2,245 | ) | | (2,642 | ) | | (2,579 | ) | | (969 | ) | | 7,899 |
| | (536 | ) |
| | | | | | | | | | | |
NET INCRASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | — |
| | (2 | ) | | — |
| | 154 |
| | — |
| | 152 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period | — |
| | 291 |
| | — |
| | 330 |
| | — |
| | 621 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period | $ | — |
| | $ | 289 |
| | $ | — |
| | $ | 484 |
| | $ | — |
| | $ | 773 |
|
27
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Charter Communications, Inc. (together with its controlled subsidiaries, “Charter”) is the second largest cable operator in the United States and a leading broadband connectivity company and cable operator serving more than 29 million customers in 41 states through its Spectrum brand. Over an advanced communications services company providing video, Internet and voice services to approximately 28.7 millionnetwork, we offer a full range of state-of-the-art residential and business services including Spectrum Internet, TV, Mobile and Voice. For small and medium business customers at June 30, 2019.medium-sized companies, Spectrum Business® delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise provides highly customized, fiber-based solutions. Spectrum Reach® delivers tailored advertising and production for the modern media landscape. We also recently launcheddistribute award-winning news coverage, sports and high-quality original programming to our mobile service to residential customers. In addition, we sell videocustomers through Spectrum Networks and online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology solutions to larger enterprise customers. We also own and operate regional sports networks and local sports, news and community channels.Spectrum Originals.
Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.
Overview
SinceAs the close ofCOVID-19 pandemic develops and significantly impacts the acquisitions in 2016 of Time Warner Cable Inc. ("TWC") and Bright House Networks, LLC ("Bright House"),United States, we have been focused on integratingcontinued to deliver services uninterrupted by the practicespandemic. Because we have invested significantly in our network and systems of Charter, TWCthrough normal course capacity increases, we expect to be able to continue to respond to the significant increase in network activity from the private and Bright House, centralizing our product, marketing, sales andpublic response to COVID-19. Our front-line service operations, insourcing the TWC and Bright House workforcesinfrastructure in our call centers and field operations is experiencing higher service transaction volume and rolling out Spectrum pricingis performing well although we have seen increased wait times for customer calls to our call centers. Much of that increase in activity is being driven by increased demand for our connectivity services to residential, healthcare, government and packagingeducational customers. The response to our Remote Education Offer ("SPP"REO") pursuant to TWCwhich new customers with students or educators in the household are eligible to receive our Internet service for free for 60 days has generated 119,000 new Internet accounts in March, while new connects for our residential Internet services, when excluding the REO, were also up in March as compared to March 2019. We are also participating in the Federal Communications Commission's ("FCC") Keep Americans Connected pledge, pausing collection efforts and Bright Houserelated disconnects for residential and small and medium business customers with COVID-19 related payment challenges. In addition, we have offered a seasonal plan at reduced rates to small and medium business customers that have temporarily closed or because these customers have reduced their service areas. In 2018,offerings to their own customers ("SMB Seasonal Plan"). As we completeddo our part as a major provider of Internet services in the conversion of the remaining TWCUnited States by, among other things, enabling social distancing through telecommuting and Bright House analog service areas to an all-digital platform enabling us to deliver more HD channels and higher Internet speeds. Nearly all ofe-learning across our footprint is now all-digital. Additionally, we have doubled minimum Internet speeds to 200 Mbps in a number of service areas at no additional cost to new and existing SPP Internet customers. In 2018, leveraging DOCSIS 3.1 technology, we also expanded the availability of our Spectrum Internet Gig service to nearly all of our footprint. With our integration nearly complete,41 states, we are focused on operating as one company, with a unified product, marketingpromoting the health and servicesafety of our employees and customers. We have invested significantly in our self-service infrastructure, which will allow us to accelerate growth and innovate faster. With significantly less customer-facing change expected in 2019, we are seeing an accelerated adoption by customers of our self-installation and digital self-service capabilities.
However, we cannot predict the ultimate impact of COVID-19 on our business, including the depth and duration of the economic impact to our residential and business customers’ ability to pay for our products and services including the impact of extended unemployment benefits and other stimulus packages and what assistance we may provide to our customers. In addition, there is uncertainty regarding the impact of government emergency declarations, the ability of our suppliers and vendors to provide products and services to us, the pace of new housing construction, changes in business spend in our local and national ad sales business, the effects to our employees’ health and safety and resulting reorientation of our work activities, and the risk of limitations on the deployment and maintenance of our services (including by limiting our customer support and on-site service repairs and installations).
Although the ultimate impact of the COVID-19 pandemic cannot be predicted, we remain focused on driving customer relationship growth by deploying superior products and serviceservices packaged with minimal service disruptions. We expect our growing levels of productivity will result in lower customer churn, longer customer lifetimes and improved productivity with fewer customer calls and truck rolls per customer relationship. With over 80% of our residential customer base now in SPP packages, we expect additional benefits from lower legacy package migration activity, combined with SPP customers rolling off introductory pricing and modest price increases.attractive pricing. Further, we expect to continue to drive customer relationship growth through sales of bundled services and improving customer retention despite the expectation for continued losses of video Internet,and wireline voice and mobile packaged services. Additionally, withcustomers. With the completion of our all-digital conversion, roll-out of DOCSIS 3.1 technology across our footprint, and the integration of TWC and Bright House mostlysubstantially complete, we have experienced a meaningful reductionexpect continued lower cable capital intensity in capital expenditures in dollars and as a percent of revenue in 2019 and expect these reductions to continue for the remainder of 2019.2020.
At the end of the second quarter of 2018, we launched our mobile product, Spectrum Mobile, under our mobile virtual network operator ("MVNO") reseller agreement with Verizon. Our Spectrum Mobile service is offered to our residential customers subscribing to our Internet service and runs on Verizon's mobile network combined with Spectrum WiFi. We began mass market advertisingIn March 2020, we launched 5G service offerings and we expect that, along with broader availability of Spectrum Mobile in September 2018. In the second quarter of 2019, we expanded our Spectrum Mobile bring-your-own-device ("BYOD") program, across all sales channels to include a broader set of devices. We believe our BYOD program will lower the cost for consumers of switching mobile carriers, and will reduce the short-term working capital impact of selling new mobile devices on installment plans. We expect these developments to contribute to the growth of our mobile business. We also continue to explore ways to manage our own network and drive even more mobile traffic to our network through our continued deployment of in-home and outdoor WiFi hotspots. In addition, wenetwork. We plan to use our WiFi network in
conjunction with additional unlicensed, orand potentially licensed, spectrum to improve network performance and expand capacity to offer consumers a superior mobile service at a lower total cost to us. Further, we have experimental wireless licenses from the Federal Communications CommissionFCC that we are utilizing to test next generation mobile services in several service areas around the country. In 2018, we invested in our mobile operating partnership with Comcast Corporation, with a portion representing our equity investment in the partnership and a portion representing a prepayment of software development and related services for the mobile back office platform. As the partnership delivers services, we will reflect such services as capital or operating expense depending on the nature of services delivered.
We believe Spectrum-branded mobile services will drive higher sales of our core products, create longer customer lives and increase profitability and cash flow over time. As a result of growth costs associated with our new mobile product line, we cannot be certain that we will be able to grow revenues or maintain our margins at recent historical rates. During the three and six months
ended June 30,March 31, 2020 and 2019, our mobile product line increased revenues by $158$258 million and $298$140 million, respectively, reduced Adjusted EBITDA by approximately $119$116 million and $239$120 million, respectively, and reduced free cash flow by approximately $297$260 million and $588 million, respectively. During the three and six months ended June 30, 2018, our mobile product line reduced Adjusted EBITDA by approximately $33 million and $41 million, respectively, and reduced free cash flow by $116 million and $141$291 million, respectively. As we continue to launchgrow our mobile service and scale the business, we expect continued negative impacts to Adjusted EBITDA, as well as negative working capital impacts from the timing of device-related cash flows when we providesell the handset or tablet to customers pursuant to equipment installment plans.
We realized revenue, Adjusted EBITDA and income from operations during the periods presented as follows (in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | |
| | | | | | | 2020 | | 2019 | | % Change |
Revenues | | | | | | | $ | 11,738 | | | $ | 11,206 | | | 4.8 | % |
Adjusted EBITDA | | | | | | | $ | 4,396 | | | $ | 4,055 | | | 8.4 | % |
Income from operations | | | | | | | $ | 1,802 | | | $ | 1,425 | | | 26.5 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
Revenues | $ | 11,347 |
| | $ | 10,854 |
| | 4.5 | % | | $ | 22,553 |
| | $ | 21,511 |
| | 4.8 | % |
Adjusted EBITDA | $ | 4,185 |
| | $ | 4,051 |
| | 3.3 | % | | $ | 8,240 |
| | $ | 7,944 |
| | 3.7 | % |
Income from operations | $ | 1,541 |
| | $ | 1,360 |
| | 13.3 | % | | $ | 2,966 |
| | $ | 2,402 |
| | 23.5 | % |
Adjusted EBITDA is defined as net income attributable to Charter shareholders plus net income attributable to noncontrolling interest, net interest expense, income taxes, depreciation and amortization, stock compensation expense, (gain) loss on financial instruments, net, other pension (benefits) costs, other (income) expense, net and other operating (income) expenses, such as special charges and (gain) loss on sale or retirement of assets. See “—Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow.
Growth in total revenue Adjusted EBITDA and income from operations for the three and six months ended June 30, 2019March 31, 2020 compared to the corresponding prior periodsperiod was primarily due to growth in our residential Internet, mobile and commercial business customers. Adjusted EBITDA and income from operations growth was additionally affectedimpacted by growth in revenue and increases in operating costs and expenses, primarily programmingmobile, marketing and mobile.programming. Income from operations was also affected by a decrease in depreciation and amortization expense.
The following table summarizes our customer statistics for Internet, video, Internetmobile and voice as of June 30,March 31, 2020 and 2019 and 2018 (in thousands except per customer data and footnotes).
| | | | | | | | | | | |
| Approximate as of | | |
| March 31, | | |
| 2020 (a) | | 2019 (a) |
Customer Relationships (b) | | | |
Residential | 27,745 | | | 26,591 | |
Small and Medium Business | 1,976 | | | 1,863 | |
Total Customer Relationships | 29,721 | | | 28,454 | |
| | | |
Residential Primary Service Units (“PSU”) | | | |
Internet | 25,471 | | | 24,023 | |
Video | 15,550 | | | 15,952 | |
Voice | 9,360 | | | 10,015 | |
| | | |
Monthly Residential Revenue per Residential Customer (c) | $ | 112.73 | | | $ | 112.47 | |
| | | |
Small and Medium Business PSUs | | | |
Internet | 1,775 | | | 1,664 | |
Video | 524 | | | 509 | |
Voice | 1,162 | | | 1,072 | |
| | | |
Monthly Small and Medium Business Revenue per Customer (d) | $ | 168.83 | | | $ | 170.64 | |
| | | |
Mobile Lines | 1,372 | | | 310 | |
| | | |
Enterprise PSUs (e) | 269 | | | 253 | |
(a)We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of March 31, 2020 and 2019, customers include approximately 140,800 and 171,100 customers, respectively, whose accounts were over 60 days past due, approximately 12,500 and 19,500 customers, respectively, whose accounts were over 90 days past due and approximately 8,200 and 20,800 customers, respectively, whose accounts were over 120 days past due. As detailed in the table below, our customer counts include those customers who connected as part of our Remote Education Offer and those customers who we have not disconnected in our normal timelines associated with our Keep Americans Connected pledge.
(b)Customer relationships include the number of customers that receive one or more levels of service, encompassing Internet, video and voice services, without regard to which service(s) such customers receive. Customers who reside in residential multiple dwelling units (“MDUs”) and that are billed under bulk contracts are counted based on the number of billed units within each bulk MDU. Total customer relationships exclude enterprise and mobile-only customer relationships.
(c)Monthly residential revenue per residential customer is calculated as total residential Internet, video and voice quarterly revenue divided by three divided by average residential customer relationships during the respective quarter. Monthly residential revenue per residential customers excludes mobile revenue and customers.
(d)Monthly small and medium business revenue per customer is calculated as total small and medium business quarterly revenue divided by three divided by average small and medium business customer relationships during the respective quarter. Monthly small and medium business revenue per small and medium customer excludes mobile revenue and customers.
(e)Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering at each customer location as an individual PSU.
|
| | | | | | | |
| Approximate as of |
| June 30, |
| 2019 (a) | | 2018 (a) |
Customer Relationships (b) | | | |
Residential | 26,755 |
| | 25,871 |
|
Small and Medium Business | 1,902 |
| | 1,750 |
|
Total Customer Relationships | 28,657 |
| | 27,621 |
|
| | | |
Residential Primary Service Units (“PSU”) | | | |
Video | 15,802 |
| | 16,206 |
|
Internet | 24,244 |
| | 23,070 |
|
Voice | 9,808 |
| | 10,325 |
|
| | | |
Monthly Residential Revenue per Residential Customer (c) | $ | 112.20 |
| | $ | 111.88 |
|
| | | |
Small and Medium Business PSUs | | | |
Video | 518 |
| | 476 |
|
Internet | 1,701 |
| | 1,552 |
|
Voice | 1,097 |
| | 994 |
|
| | | |
Monthly Small and Medium Business Revenue per Customer (d) | $ | 170.42 |
| | $ | 176.96 |
|
| | | |
Enterprise PSUs (e) | 258 |
| | 235 |
|
30
The table above includes the impact on ending customers of COVID-19 related offers and programs launched by us in the first quarter of 2020 as follows (in thousands).
| |
(a) | | | | | | | | | | | | | | | | | | | | | | | | | Remote Education Offer (a) | | Keep Americans Connected (b) | | Small and Medium Business Seasonal Plan (c) | | Total | Residential | | | | | | | | Customer Relationships | 119 | | | | 1 | | | | n/a | | | | 120 | | Internet PSUs | 119 | | | | 1 | | | | n/a | | | | 120 | | Video PSUs | 46 | | (d) | 1 | | | | n/a | | | | 47 | | Voice PSUs | 34 | | (d) | — | | | | n/a | | | | 34 | | Mobile Lines | 3 | | (d) | — | | | | n/a | | | | 3 | | | | | | | | | | | | | | | | | Small and Medium Business | | | | | | | | | | | | | | | Customer Relationships | n/a | | | | — | | | | 5 | | | | 5 | | Internet PSUs | n/a | | | | — | | | | 4 | | | | 4 | | Video PSUs | n/a | | | | — | | | | 2 | | | | 2 | | Voice PSUs | n/a | | | | — | | | | 3 | | | | 3 | | Mobile Lines | n/a | | | | — | | | | — | | | | — | |
(a)The REO represents residential customers participating in our free 60-day Internet offer available to households with K-12 and/or college students or educators who are not currently Spectrum Internet customers. These residential customers are generally eligible to purchase additional products and services (i.e., video, voice and mobile) at current promotional rates. (b)As part of our pledge to the FCC, Keep Americans Connected customers represents customers who would have been disconnected by quarter end as a result of non-payment under our normal policies, but were not disconnected and collection efforts paused due to COVID-19 related payment challenges. As of quarter end, approximately 140,000 residential customers had requested protection from disconnection under the pledge of which 1,000 would have been disconnected for non-payment under our normal policies. At the end of April, 36,000 of those 140,000 customers’ outstanding balance is now fully current, and in total nearly 50% have made partial or full payments since entering disconnection protection. However, at the end of April, 67,000 of those 140,000 customers now have past due balances beyond the point of normal disconnection. (c)Small and Medium Business Seasonal Plan represents small and medium business customers who have requested a reduced level of service and now pay a reduced price for their service due to temporary business closure or because these customers have reduced their service offering to their own customers. (d)Customers that connected as part of the REO who have subscribed to products in addition to Spectrum Internet (i.e., video, voice, mobile) during the 60-day free Internet offer. Billings are not deferred for these additional services. Approximately 5,000 and 1,000 of the REO customers were current video and voice customers, respectively.
| Customer statistics do not include mobile. We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of June 30, 2019 and 2018, customers include approximately 152,900 and 227,500 customers, respectively, whose accounts were over 60 days past due, approximately 13,800 and 19,300 customers, respectively, whose accounts were over 90 days past due and approximately 15,800 and 13,200 customers, respectively, whose accounts were over 120 days past due. |
| |
(b)
| Customer relationships include the number of customers that receive one or more levels of service, encompassing video, Internet and voice services, without regard to which service(s) such customers receive. Customers who reside in residential multiple dwelling units (“MDUs”) and that are billed under bulk contracts are counted based on the number of billed units within each bulk MDU. Total customer relationships exclude enterprise customer relationships. |
| |
(c)
| Monthly residential revenue per residential customer is calculated as total residential video, Internet and voice quarterly revenue divided by three divided by average residential customer relationships during the respective quarter. |
| |
(d)
| Monthly small and medium business revenue per customer is calculated as total small and medium business quarterly revenue divided by three divided by average small and medium business customer relationships during the respective quarter. |
| |
(e)
| Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering as an individual PSU. |
Critical Accounting Policies and Estimates
For a discussion of our critical accounting policies and the means by which we develop estimates therefore, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20182019 Annual Report on Form 10-K. There have been no material changes from the critical accounting policies described in our Form 10-K.
Results of Operations
The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions, except per share data):
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Revenues | | | | | $ | 11,738 | | | $ | 11,206 | |
| | | | | | | |
Costs and Expenses: | | | | | | | |
Operating costs and expenses (exclusive of items shown separately below) | | | | | 7,432 | | | 7,236 | |
Depreciation and amortization | | | | | 2,497 | | | 2,550 | |
Other operating (income) expenses, net | | | | | 7 | | | (5) | |
| | | | | 9,936 | | | 9,781 | |
Income from operations | | | | | 1,802 | | | 1,425 | |
| | | | | | | |
Other Income (Expenses): | | | | | | | |
Interest expense, net | | | | | (980) | | | (925) | |
Loss on extinguishment of debt | | | | | (27) | | | — | |
Gain (loss) on financial instruments, net | | | | | (318) | | | 37 | |
Other pension benefits, net | | | | | 10 | | | 9 | |
Other income (expense), net | | | | | 9 | | | (110) | |
| | | | | (1,306) | | | (989) | |
| | | | | | | |
Income before income taxes | | | | | 496 | | | 436 | |
Income tax expense | | | | | (29) | | | (119) | |
Consolidated net income | | | | | 467 | | | 317 | |
Less: Net income attributable to noncontrolling interests | | | | | (71) | | | (64) | |
| | | | | | | |
Net income attributable to Charter shareholders | | | | | $ | 396 | | | $ | 253 | |
| | | | | | | |
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: | | | | | | | |
Basic | | | | | $ | 1.91 | | | $ | 1.13 | |
Diluted | | | | | $ | 1.86 | | | $ | 1.11 | |
| | | | | | | |
Weighted average common shares outstanding, basic | | | | | 207,831,305 | | | 224,630,122 | |
Weighted average common shares outstanding, diluted | | | | | 212,810,613 | | | 227,595,365 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Revenues | $ | 11,347 |
| | $ | 10,854 |
| | $ | 22,553 |
| | $ | 21,511 |
|
| | | | | | | |
Costs and Expenses: | | | | | | | |
Operating costs and expenses (exclusive of items shown separately below) | 7,244 |
| | 6,873 |
| | 14,480 |
| | 13,709 |
|
Depreciation and amortization | 2,500 |
| | 2,592 |
| | 5,050 |
| | 5,302 |
|
Other operating expenses, net | 62 |
| | 29 |
| | 57 |
| | 98 |
|
| 9,806 |
| | 9,494 |
| | 19,587 |
| | 19,109 |
|
Income from operations | 1,541 |
| | 1,360 |
| | 2,966 |
| | 2,402 |
|
| | | | | | | |
Other Income (Expenses): | | | | | | | |
Interest expense, net | (945 | ) | | (878 | ) | | (1,870 | ) | | (1,729 | ) |
Loss on financial instruments, net | (119 | ) | | (75 | ) | | (82 | ) | | (12 | ) |
Other pension benefits, net | 9 |
| | 20 |
| | 18 |
| | 40 |
|
Other expense, net | (16 | ) | | (47 | ) | | (126 | ) | | (70 | ) |
| (1,071 | ) | | (980 | ) | | (2,060 | ) | | (1,771 | ) |
| | | | | | | |
Income before income taxes | 470 |
| | 380 |
| | 906 |
| | 631 |
|
Income tax expense | (84 | ) | | (41 | ) | | (203 | ) | | (69 | ) |
Consolidated net income | 386 |
| | 339 |
| | 703 |
| | 562 |
|
Less: Net income attributable to noncontrolling interests | (72 | ) | | (66 | ) | | (136 | ) | | (121 | ) |
| | | | | | | |
Net income attributable to Charter shareholders | $ | 314 |
| | $ | 273 |
| | $ | 567 |
| | $ | 441 |
|
| | | | | | |
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: | | | | | | | |
Basic | $ | 1.41 |
| | $ | 1.17 |
| | $ | 2.54 |
| | $ | 1.87 |
|
Diluted | $ | 1.39 |
| | $ | 1.15 |
| | $ | 2.50 |
| | $ | 1.84 |
|
| | | | | | | |
Weighted average common shares outstanding, basic | 222,392,274 |
| | 234,241,769 |
| | 223,505,016 |
| | 235,992,306 |
|
Weighted average common shares outstanding, diluted | 225,942,172 |
| | 237,073,566 |
| | 226,889,745 |
| | 239,246,727 |
|
Revenues. Total revenues grew $493$532 million and $1.0 billion for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily due to increases in the number of residential Internet and commercial business customers, price adjustments as well as the launch ofan increase in our mobile service in the second half of 2018 offset by a decrease in video customers.
Revenues by service offering were as follows (dollars in millions; all percentages are calculated using whole numbers. Minor differences may exist due to rounding):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, | | | | |
| | | | | | | 2020 | | 2019 | | % Change |
Internet | | | | | | | $ | 4,407 | | | $ | 4,024 | | | 9.5 | % |
Video | | | | | | | 4,422 | | | 4,384 | | | 0.9 | % |
Voice | | | | | | | 457 | | | 504 | | | (9.4) | % |
Residential revenue | | | | | | | 9,286 | | | 8,912 | | | 4.2 | % |
| | | | | | | | | | | |
Small and medium business | | | | | | | 996 | | | 945 | | | 5.4 | % |
Enterprise | | | | | | | 622 | | | 643 | | | (3.2) | % |
Commercial revenue | | | | | | | 1,618 | | | 1,588 | | | 1.9 | % |
| | | | | | | | | | | |
Advertising sales | | | | | | | 365 | | | 345 | | | 5.7 | % |
Mobile | | | | | | | 258 | | | 140 | | | 85.0 | % |
Other | | | | | | | 211 | | | 221 | | | (4.4) | % |
| | | | | | | $ | 11,738 | | | $ | 11,206 | | | 4.8 | % |
|
| | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | % Change | | 2019 | | 2018 | | % Change |
Video | $ | 4,391 |
| | $ | 4,363 |
| | 0.6 | % | | $ | 8,775 |
| | $ | 8,655 |
| | 1.4 | % |
Internet | 4,103 |
| | 3,770 |
| | 8.8 | % | | 8,127 |
| | 7,477 |
| | 8.7 | % |
Voice | 489 |
| | 531 |
| | (7.8 | )% | | 993 |
| | 1,087 |
| | (8.6 | )% |
Residential revenue | 8,983 |
| | 8,664 |
| | 3.7 | % | | 17,895 |
| | 17,219 |
| | 3.9 | % |
| | | | | | | | | | | |
Small and medium business | 963 |
| | 915 |
| | 5.3 | % | | 1,908 |
| | 1,815 |
| | 5.1 | % |
Enterprise | 652 |
| | 627 |
| | 4.0 | % | | 1,295 |
| | 1,249 |
| | 3.7 | % |
Commercial revenue | 1,615 |
| | 1,542 |
| | 4.7 | % | | 3,203 |
| | 3,064 |
| | 4.5 | % |
| | | | | | | | | | | |
Advertising sales | 395 |
| | 427 |
| | (7.5 | )% | | 740 |
| | 783 |
| | (5.5 | )% |
Mobile | 158 |
| | — |
| | NM |
| | 298 |
| | — |
| | NM |
|
Other | 196 |
| | 221 |
| | (11.3 | )% | | 417 |
| | 445 |
| | (6.3 | )% |
| $ | 11,347 |
| | $ | 10,854 |
| | 4.5 | % | | $ | 22,553 |
| | $ | 21,511 |
| | 4.8 | % |
The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Increase in average residential Internet customers | | | $ | 225 | |
Increase related to rate changes | | | 158 | |
| | | $ | 383 | |
Residential Internet customers grew by 1,448,000 customers from March 31, 2019 to March 31, 2020 of which 119,000 were added pursuant to the REO program. The increase related to rate changes was primarily due to price adjustments including promotional roll-off.
Video revenues consist primarily of revenues from basic and digital video services provided to our residential customers, as well as franchise fees, equipment service fees and video installation revenue. The increase in video revenues is attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Increase related to rate changes | | | $ | 178 | |
Decrease in average residential video customers | | | (126) | |
Decrease in video on demand and pay-per-view | | | (14) | |
| | | $ | 38 | |
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Increase related to rate changes | $ | 149 |
| | $ | 330 |
|
Decrease in average residential video customers | (97 | ) | | (181 | ) |
Decrease in video on demand and pay-per-view | (24 | ) | | (29 | ) |
| $ | 28 |
| | $ | 120 |
|
The increasesincrease related to rate changes werewas primarily due to price adjustments including annual increases and promotional roll-off.roll-off partly offset by a higher mix of streaming and lighter video packages within our video customer base. Residential video customers decreased by 404,000402,000 from June 30, 2018March 31, 2019 to June 30, 2019.
The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions):
March 31, 2020.
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Increase in average residential Internet customers | $ | 192 |
| | $ | 378 |
|
Increase related to rate changes | 141 |
| | 272 |
|
| $ | 333 |
| | $ | 650 |
|
33
Residential Internet customers grew by 1,174,000 customers from June 30, 2018 to June 30, 2019. The increases related to rate changes were primarily due to price adjustments including promotional roll-off.
The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Decrease in average residential voice customers | | | $ | (34) | |
Decrease related to rate changes | | | (13) | |
| | | $ | (47) | |
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Decrease related to rate changes | $ | (20 | ) | | $ | (55 | ) |
Decrease in average residential voice customers | (22 | ) | | (39 | ) |
| $ | (42 | ) | | $ | (94 | ) |
The decreases related to rate changes were primarily due to value-based pricing. Residential wireline voice customers decreased by 517,000655,000 customers from June 30, 2018March 31, 2019 to June 30, 2019.March 31, 2020. The decrease related to rate changes was primarily due to value-based pricing.
The increase in small and medium business commercial revenues is attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Increase in small and medium business customers | | | $ | 62 | |
Decrease related to rate changes | | | (11) | |
| | | $ | 51 | |
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Increase in small and medium business customers | $ | 85 |
| | $ | 175 |
|
Decrease related to rate changes | (37 | ) | | (82 | ) |
| $ | 48 |
| | $ | 93 |
|
Small and medium business customers grew by 152,000113,000 from June 30, 2018March 31, 2019 to June 30, 2019.March 31, 2020. The decreasesdecrease related to rate changes werewas primarily due to value-based pricing related to SPP,Spectrum pricing and packaging ("SPP"), net of promotional roll-off and price adjustments.
Enterprise revenues increased $25 million and $46decreased $21 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily due to the sale of non-strategic assets in the third quarter of 2019 offset by growth in customers. Enterprise PSUs increased 23,00016,000 from June 30, 2018March 31, 2019 to June 30, 2019.March 31, 2020.
Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues decreased $32 million and $43increased $20 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily due to a decreasean increase in political revenue.revenue partially offset by lower local ad revenues due to COVID-19.
During the three and six months ended June 30,March 31, 2020 and 2019, mobile revenues representrepresented approximately $111$131 million and $225$116 million respectively, of device revenues, respectively, and approximately $47$127 million and $73$24 million of service revenues, related to our mobile service, respectively. As of June 30, 2019,March 31, 2020, we had 518,0001,372,000 mobile lines.
Other revenues consist of revenue from regional sports and news channels (excluding intercompany charges or advertising sales on those channels), home shopping, late payment fees, wire maintenance fees and other miscellaneous revenues. Other revenues decreased $25 million and $28$10 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily due to a decrease in home security revenue, late payment fees and home shoppingregional sports and news channels revenue offset by the sale of video devices.
Operating costs and expenses. The increases in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, are attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Programming | | | $ | 27 | |
Regulatory, connectivity and produced content | | | (10) | |
Costs to service customers | | | 26 | |
Marketing | | | 31 | |
Mobile | | | 114 | |
Other | | | 8 | |
| | | $ | 196 | |
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Programming | $ | 24 |
| | $ | 137 |
|
Regulatory, connectivity and produced content | 37 |
| | 65 |
|
Costs to service customers | (17 | ) | | (49 | ) |
Marketing | (1 | ) | | (17 | ) |
Mobile | 244 |
| | 496 |
|
Other | 84 |
| | 139 |
|
| $ | 371 |
| | $ | 771 |
|
Programming costs were approximately $2.8 billion and $5.7$2.9 billion for both the three and six months ended June 30,March 31, 2020 and 2019, respectively, representing 39% and 40% of total operating costs and expenses, for both time periods, and $2.8 billion and $5.6 billion for the three and six months ended June 30, 2018, respectively, representing 41% of total operating costs and expenses for both time periods.respectively. Programming costs consist primarily of costs paid to programmers for basic, digital, premium, VOD,video on demand, and pay-per-view programming. The increase in programming costs is primarily a result of contractual rate adjustments, including renewals and increases in amounts paid for retransmission consents partly offset by lower video customers, pay-per-view and pay-per-view.nonrecurring benefits. We expect programming expensesrates will continue to increase due to a variety of factors, including annual increases imposed by programmers with additional selling power as a result of media consolidation, increased demands by owners of broadcast stations for payment for retransmission consent or linking carriage of other services to retransmission consent, and additional programming, particularly new services. We have been unable to fully pass these increases on to our customers and do not expect to be able to do so in the future without a potential loss of customers.
Regulatory, connectivity and produced content increased $37 million and $65decreased $10 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily due to lower regulatory pass-through fees and sports and news rights fees driven by fewer games due to COVID-19 postponements offset by higher original programming costs and costs of video devices sold to customers, higher regulatory pass-through fees and original programming costs.customers.
Costs to service customers decreased $17 million and $49increased $26 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily due to a decrease inhigher bad debt expense. Bad debt expense increased due to higher expected losses as a result of COVID-19, recognized in accordance with the new credit loss accounting standard. For more information, see Note 21 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements”.
Mobile costs of $277$374 million and $537$260 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $33 million and $41 million for the three and six months ended June 30, 2018, respectively, were comprised of mobile device costs mobile launch costs and mobile service and operating costs.
The increase in other expense is attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Corporate costs | | | $ | 14 | |
Advertising sales expense | | | 11 | |
Stock compensation expense | | | 5 | |
Enterprise | | | (23) | |
Other | | | 1 | |
| | | $ | 8 | |
Enterprise costs decreased primarily due to the sale of non-strategic assets in the third quarter of 2019.
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Corporate costs | $ | 23 |
| | $ | 39 |
|
Property tax and insurance | 19 |
| | 39 |
|
Stock compensation expense | 12 |
| | 25 |
|
Enterprise | 8 |
| | 14 |
|
Advertising sales expense | 10 |
| | 5 |
|
Other | 12 |
| | 17 |
|
| $ | 84 |
| | $ | 139 |
|
35
Depreciation and amortization. Depreciation and amortization expense decreased by $92 million and $252$53 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 2018. The decrease was2019 primarily due to a decrease in depreciation and amortization as certain assets acquired from TWC and Bright Housein acquisitions become fully depreciated offset by an increase in depreciation as a result of more recent capital expenditures.
Other operating (income) expenses, net. The changeschange in other operating (income) expenses, net areis attributable to the following (dollars in millions):
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Special charges, net | | | $ | 20 | |
(Gain) loss on sale of assets, net | | | (8) | |
| | | $ | 12 | |
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Special charges, net | $ | (12 | ) | | $ | (92 | ) |
(Gain) loss on sale of assets, net | 45 |
| | 51 |
|
| $ | 33 |
| | $ | (41 | ) |
Special charges, net decreased during the three and six months ended June 30, 2019, respectively, compared to the corresponding periods in 2018 primarily due to a decrease in merger and restructuring costs. The six months ended June 30, 2018 also included a $22 million charge related to a withdrawal liability from a multiemployer pension plan. Loss on sale of assets, net increased primarily due to a $41 million impairment of non-strategic assets recognized during the three and six months ended June 30, 2019. See Note 13 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”Statements” for more information.
Interest expense, net. Net interest expense increased by $67 million and $141$55 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 20182019 primarily as a result of an increase in weighted average debt outstanding of approximately $1.2$4.5 billion and $2.4 billion, respectively, primarily due to the issuance of notes throughout 20182019 and 20192020 for general corporate purposes including stock buybacks and debt repayments.repayments offset by a reduction in weighted average interest rates.
Loss on extinguishment of debt. Loss on extinguishment of debt of $27 million for the three months ended March 31, 2020 represents losses recognized as a result of the purchase of CCO Holdings notes. For more information, see Note 6 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Gain (loss) on financial instruments, net. We recorded lossesa loss on financial instruments of $119 million and $82$318 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 and $75 million and $12a gain of $37 million during the three and six months ended June 30, 2018, respectively.March 31, 2019. Gains and losses on financial instruments are primarily recognized due to changes in the fair value of our cross-currency derivative instruments and the foreign currency remeasurement of the fixed-rate British pound sterling denominated notes (the “Sterling Notes”) into U.S. dollars. For more information, see Note 9 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Other pension benefits, net. Net other pension benefits decreasedincreased by $11 million and $22$1 million during the three and six months ended June 30, 2019, respectively,March 31, 2020 compared to the corresponding periodsperiod in 2018 due to lower expected return on plan assets.2019. For more information, see Note 20 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Other expense,income (expense), net. Other expense,income (expense), net primarily represents equity lossesgains (losses) on our equity investments. Other expense,income (expense), net also includes impairmentsan impairment on equity investments of approximately $11 million and $121$110 million during the three and six months ended June 30, 2019, respectively, and $39 million and $58 million during the three and six months ended June 30, 2018, respectively.March 31, 2019.
Income tax expense. We recognized income tax expense of $84$29 million and $203$119 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $41 million and $69 million for the three and six months ended June 30, 2018, respectively. Income tax expense increased year over yeardecreased during the three months ended March 31, 2020 compared to the corresponding period in 2019 primarily as a result of higher pretax incomeincreased recognition of excess tax benefits resulting from share-based compensation during 2020 and lower benefit from state tax law changesan internal entity simplification that increased expense in 2019.. For more information, see Note 15 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting purposes represents A/N’s portion of Charter Holdings’ net income based on its effective common unit ownership interest and the preferred dividend of $37 million and $75$38 million for each of the three and six months ended June 30, 2019March 31, 2020 and 2018, respectively.2019. For more information, see Note 8 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Net income attributable to Charter shareholders. Net income attributable to Charter shareholders increased from $273 million and $441$253 million for the three and six months ended June 30, 2018, respectively,March 31, 2019 to $314 million and $567$396 million for the three and six months ended June 30, 2019, respectively,March 31, 2020 primarily as a result of the factors described above.
Use of Adjusted EBITDA and Free Cash Flow
We use certain measures that are not defined by GAAPU.S. generally accepted accounting principles ("GAAP") to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income attributable to Charter shareholders and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, below.
Adjusted EBITDA eliminates the significant non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial measures.
Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.
Management and Charter’s board of directors use Adjusted EBITDA and free cash flow to assess our performance and our ability to service our debt, fund operations and make additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the Securities and Exchange Commission (the “SEC”)). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which were $299$311 million and $599$300 million for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $265 million and $538 million for the three and six months ended June 30, 2018, respectively.
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Net income attributable to Charter shareholders | | | | | $ | 396 | | | $ | 253 | |
Plus: Net income attributable to noncontrolling interest | | | | | 71 | | | 64 | |
Interest expense, net | | | | | 980 | | | 925 | |
Income tax expense | | | | | 29 | | | 119 | |
Depreciation and amortization | | | | | 2,497 | | | 2,550 | |
Stock compensation expense | | | | | 90 | | | 85 | |
Loss on extinguishment of debt | | | | | 27 | | | — | |
(Gain) loss on financial instruments, net | | | | | 318 | | | (37) | |
Other pension benefits, net | | | | | (10) | | | (9) | |
Other, net | | | | | (2) | | | 105 | |
Adjusted EBITDA | | | | | $ | 4,396 | | | $ | 4,055 | |
| | | | | | | |
Net cash flows from operating activities | | | | | $ | 3,220 | | | $ | 2,686 | |
Less: Purchases of property, plant and equipment | | | | | (1,461) | | | (1,665) | |
Change in accrued expenses related to capital expenditures | | | | | (388) | | | (376) | |
Free cash flow | | | | | $ | 1,371 | | | $ | 645 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Net income attributable to Charter shareholders | $ | 314 |
| | $ | 273 |
| | $ | 567 |
| | $ | 441 |
|
Plus: Net income attributable to noncontrolling interest | 72 |
| | 66 |
| | 136 |
| | 121 |
|
Interest expense, net | 945 |
| | 878 |
| | 1,870 |
| | 1,729 |
|
Income tax expense | 84 |
| | 41 |
| | 203 |
| | 69 |
|
Depreciation and amortization | 2,500 |
| | 2,592 |
| | 5,050 |
| | 5,302 |
|
Stock compensation expense | 82 |
| | 70 |
| | 167 |
| | 142 |
|
Loss on financial instruments, net | 119 |
| | 75 |
| | 82 |
| | 12 |
|
Other pension benefits, net | (9 | ) | | (20 | ) | | (18 | ) | | (40 | ) |
Other, net | 78 |
| | 76 |
| | 183 |
| | 168 |
|
Adjusted EBITDA | $ | 4,185 |
| | $ | 4,051 |
| | $ | 8,240 |
| | $ | 7,944 |
|
| | | | | | | |
Net cash flows from operating activities | $ | 2,761 |
| | $ | 3,096 |
| | $ | 5,447 |
| | $ | 5,795 |
|
Less: Purchases of property, plant and equipment | (1,597 | ) | | (2,391 | ) | | (3,262 | ) | | (4,574 | ) |
Change in accrued expenses related to capital expenditures | (52 | ) | | 99 |
| | (428 | ) | | (466 | ) |
Free cash flow | $ | 1,112 |
| | $ | 804 |
| | $ | 1,757 |
| | $ | 755 |
|
37
Liquidity and Capital Resources
Introduction
This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.
Recent Events
In May 2019,February 2020, CCO Holdings LLC and CCO Holdings Capital Corp. jointly issued $750 million$1.65 billion aggregate principal amount of 5.375%4.500% senior unsecured notes due 20292030 at par and in July 2019,March 2020, an additional $750 million$1.1 billion of the same series of notes were issued at a price of 102.000%102.5% of the aggregate principal amount. Also in March 2020, CCO Holdings and CCO Holdings Capital Corp. issued $1.4 billion aggregate principal amount of 4.500% senior unsecured notes due 2032 at par. The net proceeds were or will be used to pay related fees and expenses and for general corporate purposes, including fundingrepaying certain indebtedness, including repayment of all of CCO Holdings' 5.250% senior notes due September 30, 2022, 5.125% senior notes due February 15, 2023, 5.125% senior notes due May 1, 2023, 5.750% senior notes due September 1, 2023 and 5.750% senior notes due January 15, 2024, as well as to fund potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness.units.
In July 2019,April 2020, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $1.25$1.6 billion aggregate principal amount of 5.125%2.800% senior secured notes due 2049April 2031 at a price of 99.880%99.561% of the aggregate principal amount and $1.4 billion aggregate principal amount of 3.700% senior secured notes due April 2051 at a price of 99.217% of the aggregate principal amount. The net proceeds will be used to pay related fees and expenses and for general corporate purposes, including funding potential buybacks of Charter Class A common stock and Charter Holdings common units as well as repaying certain indebtedness, which may include Time Warner Cable, LLC's 5.000% senior notes due 2020.purposes.
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt. The principal amount of our debt as of June 30, 2019March 31, 2020 was $72.6$79.1 billion, consisting of $11.2$10.4 billion of credit facility debt, $41.8$44.3 billion of investment grade senior secured notes and $19.7$24.4 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt.
Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results, and the timing and amount of our expenditures. As we launchcontinue to grow our new mobile services, we expect an initial funding period to grow a new product as well as negative working capital impacts from the timing of device-related cash flows when we providesell the handset or tablet to customers pursuant to equipment installment plans. Free cash flow was $1.1$1.4 billion and $1.8 billion for the three and six months ended June 30, 2019, respectively, and $804 million and $755$645 million for the three and six months ended June 30, 2018,March 31, 2020 and 2019, respectively. The increase inSee table below for factors impacting free cash flow forduring the three and six months ended June 30, 2019March 31, 2020 compared to the corresponding prior periods is primarily due to a decrease in capital expenditures and higher Adjusted EBITDA offset by an unfavorable change in working capital as well as an increase in cash paid for interest.period. As of June 30, 2019,March 31, 2020, the amount available under our credit facilities was approximately $4.1$4.7 billion and cash on hand was approximately $696 million.$2.9 billion. We expect to utilize free cash flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the maturities of our obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions. We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating’s revolving credit facility as well as access to the capital markets to fund our projected cash needs.
We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including mergers and acquisitions as well as stock repurchases and dividends. Charter's target leverage of net debt to the last twelve months Adjusted EBITDA remains at 4 to 4.5 times Adjusted EBITDA, and up to 3.5 times Adjusted EBITDA at the Charter Operating level. Our leverage ratio was 4.4 times Adjusted EBITDA as of June 30, 2019. WeMarch 31, 2020. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. During the three and six months ended June 30,March 31, 2020 and 2019, Charter purchased approximately 2.24.5 million and 4.92.6 million shares, respectively, of Charter Class A common stock for approximately $837 million and $1.7 billion, respectively, and during the three and six months ended June 30, 2018, Charter purchased 5.7 million and 7.3 million shares, respectively, of Charter Class A common stock for approximately $1.7$2.2 billion and $2.2 billion,$870 million, respectively.
In December 2017, Charter and A/N entered into an amendment to the letter agreement (the "Letter Agreement") that requires A/N to sell to Charter or to Charter Holdings, on a monthly basis, a number of shares of Charter Class A common stock or Charter Holdings common units that represents a pro rata participation by A/N and its affiliates in any repurchases of shares of Charter Class A common stock from persons other than A/N effected by Charter during the immediately preceding calendar month, at a purchase price equal to the average price paid by Charter for the shares repurchased from persons other than A/N during such
during such immediately preceding calendar month. A/N and Charter both have the right to terminate or suspend the pro rata repurchase arrangement on a prospective basis. Charter Holdings purchased from A/N 0.40.8 million and 0.80.3 million Charter Holdings common units at an average price per unit of $358.21$494.54 and $338.12,$308.42, or $161$393 million and $254$93 million, during the three and six months ended June 30,March 31, 2020 and March 31, 2019, respectively, and 0.7 million and 1.1 million Charter Holdings common units at an average price per unit of $295.31 and $312.38, or $201 million and $328 million, during the three and six months ended June 30, 2018, respectively.
As of June 30, 2019,March 31, 2020, Charter had remaining board authority to purchase an additional $769$286 million of Charter’s Class A common stock and/or Charter Holdings common units. Although Charter expects to continue to buy back its common stock consistent with its leverage target range, Charter is not obligated to acquire any particular amount of common stock, and the timing of any purchases that may occur cannot be predicted and will largely depend on market conditions and other potential uses of capital.Purchases may include open market purchases, tender offers or negotiated transactions.
As possible acquisitions, swaps or dispositions arise, we actively review them against our objectives including, among other considerations, improving the operational efficiency, geographic clustering of assets, product development or technology capabilities of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisitions, dispositions or system swaps, or that any such transactions will be material to our operations or results.
Free Cash Flow
Free cash flow increased $308$726 million and $1.0 billion during the three and six months ended June 30, 2019March 31, 2020 compared to the corresponding prior periodsperiod in 20182019 due to the following (dollars in millions).
| | | | | | | |
| | | Three months ended March 31, 2020 compared to three months ended March 31, 2019 Increase / (Decrease) |
Increase in Adjusted EBITDA | | | $ | 341 | |
Changes in working capital, excluding change in accrued interest | | | 312 | |
Decrease in capital expenditures | | | 204 | |
Increase in cash paid for interest, net | | | (86) | |
Other, net | | | (45) | |
| | | $ | 726 | |
|
| | | | | | | |
| Three months ended June 30, 2019 compared to three months ended June 30, 2018 Increase / (Decrease) | | Six months ended June 30, 2019 compared to six months ended June 30, 2018 Increase / (Decrease) |
Decrease in capital expenditures | $ | 794 |
| | $ | 1,312 |
|
Increase in Adjusted EBITDA | 134 |
| | 296 |
|
Changes in working capital, excluding change in accrued interest | (438 | ) | | (540 | ) |
Increase in cash paid for interest, net | (167 | ) | | (114 | ) |
Other, net | (15 | ) | | 48 |
|
| $ | 308 |
| | $ | 1,002 |
|
Free cash flow was reduced by $297$260 million and $588$291 million during the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $116 million and $141 million during the three and six months ended June 30, 2018, respectively, due to mobile with impacts negatively affecting working capital, capital expenditures and Adjusted EBITDA.
Limitations on Distributions
Distributions by our subsidiaries to a parent company for payment of principal on parent company notes are restricted under indentures and credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable subsidiary’s leverage ratio test is met at the time of such distribution. As of June 30, 2019,March 31, 2020, there was no default under any of these indentures or credit facilities, and each subsidiary met its applicable leverage ratio tests based on June 30, 2019March 31, 2020 financial results. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on parent company notes are further restricted by the covenants in its credit facilities.
However, without regard to leverage, during any calendar year or any portion thereof during which the borrower is a flow-through entity for tax purposes, and so long as no event of default exists, the borrower may make distributions to the equity interests of the borrower in an amount sufficient to make permitted tax payments.
In addition to the limitation on distributions under the various indentures, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act.
Historical Operating, Investing, and Financing Activities
Cash, Cash Equivalents and Restricted Cash. We held $696 million$2.9 billion and $551 million$3.5 billion in cash and cash equivalents as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively. We also held $150$28 million and $214$66 million in restricted cash as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, representing escrowed funds of a consolidated variable interest entity. See Note 3 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Operating Activities. Net cash provided by operating activities decreased $348increased $534 million during the sixthree months ended June 30, 2019March 31, 2020 compared to the sixthree months ended June 30, 2018,March 31, 2019, primarily due to an increase in Adjusted EBITDA of $341 million and changes in working capital, excluding the change in accrued interest and accrued expenses related to capital expenditures, that used $578$324 million moreless cash as a result of a one-time impact from a standardization of bill cycles and lower payables offset by an increase in Adjusted EBITDAcash paid for interest, net of $296$86 million and cash paid for taxes, net of $33 million.
Investing Activities. Net cash used in investing activities was $3.7$1.9 billion and $5.1$2.1 billion for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively. The decrease in cash used was primarily due to a decrease in capital expenditures.
Financing Activities. Net cash used in financing activities was $1.6$2.0 billion for the three months ended March 31, 2020 and $536net cash provided by financing activities was $255 million for the sixthree months ended June 30, 2019 and 2018, respectively.March 31, 2019. The increase in cash used was primarily due to an increase in the purchase of treasury stock and noncontrolling interest and a decrease in the amount by which borrowings of long-term debt exceeded repayments offset by a decrease in the purchase of treasury stock and noncontrolling interest.repayments.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were $1.6$1.5 billion and $3.3$1.7 billion for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $2.4 billion and $4.6 billion for the three and six months ended June 30, 2018, respectively. The decrease was primarily due to lower customer premise equipment expenditures as a result of the completion of our all-digital conversion and fewer SPP migrations, lower scalable infrastructure as a result of the completiontiming of the roll-out of DOCSIS 3.1 technology across our footprint in 2018spend and lower support spending with the substantial completioncustomer premise equipment expenditures driven by a higher mix of the integration of TWCboxless video outlets, increasing customer self-installations and Bright House.fewer SPP migrations. See the table below for more details.
We currently expect 2020 cable capital expenditures excluding capital expenditures related to mobile, to be approximately $7 billion in 2019,decline as a percentage of cable revenue versus $8.9 billion in 2018. 2019.The actual amount of our capital expenditures in 20192020 will depend on a number of factors including further spend related to product development and growth rates of both our residential and commercial businesses.
Our capital expenditures are funded primarily from cash flows from operating activities and borrowings on our credit facility. In addition, our accrued liabilities related to capital expenditures decreased by $428$388 million and $466$376 million for the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, respectively.
The following tables present our major capital expenditures categories in accordance with National Cable and Telecommunications Association (“NCTA”) disclosure guidelines for the three and six months ended June 30, 2019March 31, 2020 and 2018.2019. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):
| | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| | | | | 2020 | | 2019 |
Customer premise equipment (a) | | | | | $ | 463 | | | $ | 565 | |
Scalable infrastructure (b) | | | | | 170 | | | 297 | |
Line extensions (c) | | | | | 343 | | | 321 | |
Upgrade/rebuild (d) | | | | | 129 | | | 131 | |
Support capital (e) | | | | | 356 | | | 351 | |
Total capital expenditures | | | | | $ | 1,461 | | | $ | 1,665 | |
| | | | | | | |
Capital expenditures included in total related to: | | | | | | | |
Mobile | | | | | $ | 87 | | | $ | 88 | |
Commercial services | | | | | $ | 261 | | | $ | 305 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2019 | | 2018 | | 2019 | | 2018 |
Customer premise equipment (a) | $ | 492 |
| | $ | 828 |
| | $ | 1,057 |
| | $ | 1,762 |
|
Scalable infrastructure (b) | 223 |
| | 587 |
| | 520 |
| | 1,073 |
|
Line extensions (c) | 363 |
| | 353 |
| | 684 |
| | 644 |
|
Upgrade/rebuild (d) | 155 |
| | 190 |
| | 286 |
| | 332 |
|
Support capital (e) | 364 |
| | 433 |
| | 715 |
| | 763 |
|
Total capital expenditures | $ | 1,597 |
| | $ | 2,391 |
| | $ | 3,262 |
| | $ | 4,574 |
|
| | | | | | | |
Capital expenditures included in total related to: | | | | | | | |
Mobile | $ | 93 |
| | $ | 53 |
| | $ | 181 |
| | $ | 70 |
|
Commercial services | $ | 324 |
| | $ | 309 |
| | $ | 629 |
| | $ | 592 |
|
All-digital transition | $ | — |
| | $ | 88 |
| | $ | — |
| | $ | 274 |
|
40
(a)Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems).
(b)Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment).
(c)Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
(d)Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.
(e)Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).
| |
(a) | Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems). |
| |
(b) | Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment). |
| |
(c) | Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering). |
| |
(d) | Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments. |
| |
(e) | Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles). |
Recently Issued Accounting Standards
See Note 21 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for a discussion of recently issued accounting standards.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We use derivative instruments to manage foreign exchange risk on the Sterling Notes, and do not hold or issue derivative instruments for speculative trading purposes.
Cross-currency derivative instruments are used to effectively convert £1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The cross-currency derivative instruments have maturities of June 2031 and July 2042. We are required to post collateral on the cross-currency derivative instruments when such instruments are in a liability position. In April 2019, we entered into a collateral holiday agreement for 60% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years, as well as a ten year collateral cap on the remaining 40% of the cross-currency swaps which limits the required collateral posting on that 40% of the cross-currency swaps to $150 million. For more information, see Note 9 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the weighted average interest rate on credit facility debt was approximately 4.1%2.6% and 4.3%3.3%, respectively, and the weighted average interest rate on the senior notes was approximately 5.4%5.3% and 5.6%5.4%, respectively, resulting in a blended weighted average interest rate of 5.2%5.0% and 5.4%5.1%, respectively. The interest rate on approximately 83% and 85%86% of the total principal amount of our debt was effectively fixed as of June 30, 2019March 31, 2020 and December 31, 2018, respectively.2019.
The table set forth below summarizes the fair values and contract terms of financial instruments subject to interest rate risk maintained by us as of June 30, 2019March 31, 2020 (dollars in millions).
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | Thereafter | | Total | | Fair Value |
Debt: | | | | | | | | | | | | | | | |
Fixed-Rate | $ | — |
| | $ | 3,500 |
| | $ | 2,200 |
| | $ | 4,250 |
| | $ | 4,150 |
| | $ | 46,419 |
| | $ | 60,519 |
| | $ | 65,215 |
|
Average Interest Rate | — | % | | 4.19 | % | | 4.32 | % | | 4.70 | % | | 5.85 | % | | 5.63 | % | | 5.45 | % | | |
| | | | | | | | | | | | | | | |
Variable Rate | $ | 143 |
| | $ | 286 |
| | $ | 286 |
| | $ | 286 |
| | $ | 566 |
| | $ | 10,500 |
| | $ | 12,067 |
| | $ | 12,030 |
|
Average Interest Rate | 3.46 | % | | 3.23 | % | | 3.57 | % | | 3.86 | % | | 3.93 | % | | 4.27 | % | | 4.13 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total | | Fair Value |
Debt: | | | | | | | | | | | | | | | |
Fixed-Rate | $ | 2,000 | | | $ | 1,700 | | | $ | 4,105 | | | $ | 2,605 | | | $ | 2,800 | | | $ | 54,583 | | | $ | 67,793 | | | $ | 71,223 | |
Average Interest Rate | 3.58 | % | | 4.05 | % | | 4.68 | % | | 6.16 | % | | 5.33 | % | | 5.45 | % | | 5.33 | % | | |
| | | | | | | | | | | | | | | |
Variable Rate | $ | 207 | | | $ | 277 | | | $ | 277 | | | $ | 436 | | | $ | 1,165 | | | $ | 8,895 | | | $ | 11,257 | | | $ | 10,494 | |
Average Interest Rate | 1.73 | % | | 1.60 | % | | 1.72 | % | | 1.82 | % | | 2.09 | % | | 2.28 | % | | 2.20 | % | | |
Interest rates on variable-rate debt are estimated using the average implied forward LIBOR for the year of maturity based on the yield curve in effect at June 30, 2019March 31, 2020 including applicable bank spread.
Item 4. Controls and Procedures.
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our design and operation of disclosure controls and procedures with respect to the information generated for use in this quarterly report. The evaluation was based upon reports and certifications provided by a number of executives. Based on, and as of the date of that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide
reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation, we believe that our controls provide such reasonable assurances.
DuringIn January 2020, we completed the implementation of an Enterprise Resource Planning ("ERP") system and related boundary systems which improved the efficiency of certain financial and related transactional processes. As a result of the implementation of a new ERP and related boundary systems, we designed, implemented and are operating new information technology general controls, and revised and updated certain process-level controls.
Except as described above in the preceding paragraph, during the quarter ended June 30, 2019,March 31, 2020, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Our Annual Report on Form 10-K for the year ended December 31, 2018 includes “Legal Proceedings” under Item 3 of Part I. Other than as described inSee Note 19 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements,” there have been no material changes from the legal proceedings described in our Form 10-K.Statements” for Legal Proceedings.
Item 1A. Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 20182019 includes "Risk Factors" under Item 1A of Part I. There have been no material changes from the updated risk factors described in our Form 10-K.10-K except as indicated below.
The ongoing COVID-19 pandemic could materially affect our financial condition and results of operations.
The ongoing COVID-19 pandemic has significantly increased economic and demand uncertainty. It is likely that the current pandemic or continued spread of COVID-19 will cause a significant economic recession. At this time, we cannot predict the duration of any business disruption and the ultimate impact of COVID-19 on our business, including the depth and duration of the economic impact to our residential and business customers’ ability to pay for our products and services including the impact of extended unemployment benefits and other stimulus packages and what assistance we may provide to our customers. In addition, there is uncertainty regarding the impact of government emergency declarations, the ability of our suppliers and vendors to provide products and services to us, the pace of new housing construction, changes in business spend in our local and national ad sales business, the effects to our employees’ health and safety and resulting reorientation of our work activities, and the risk of limitations on the deployment and maintenance of our services (including by limiting our customer support and on-site service repairs and installations). The degree to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration and spread of the outbreak, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On March 2, 2020, Charter sold: (1) 35,112 shares of Charter Class A common stock for an aggregate purchase price of approximately $14.91 million to Liberty Broadband; and (2) 20,182 shares of Charter Class A common stock for an aggregate purchase price of approximately $8.56 million to A/N. The shares were sold in private transactions pursuant to the exercise of preemptive rights by Liberty Broadband and A/N under the Second Amended and Restated Stockholders Agreement, dated May 23, 2015 by and among Charter, A/N and Liberty Broadband. These sales were exempt from registration under Section 4(a)(2) of the Securities Act of 1933.
(C) Purchases of Equity Securities by the Issuer
The following table presents Charter’s purchases of equity securities completed during the secondfirst quarter of 20192020 (dollars in millions, except per share amounts):
| | | | | | | | | | | | | | |
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
January 1 - 31, 2020 | 2,625,809 | $502.63 | 2,501,835 | $1,315 |
February 1 - 29, 2020 | 1,157,750 | $530.39 | 723,090 | $793 |
March 1 - 31, 2020 | 1,246,396 | $437.05 | 1,227,624 | $286 |
|
| | | | |
Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
April 1 - 30, 2019 | 742,193 | $353.38 | 738,856 | $902 |
May 1 - 31, 2019 | 962,037 | $376.20 | 822,793 | $808 |
June 1 - 30, 2019 | 697,425 | $389.27 | 685,630 | $769 |
| |
(1)
| Includes 3,337, 139,244 and 11,795(1)Includes 123,974, 434,660 and 18,772 shares withheld from employees for the payment of taxes and exercise costs upon the exercise of stock options or vesting of other equity awards for the months of April, May and June 2019, respectively. |
| |
(2)
| During the three months ended June 30, 2019, Charter purchased approximately 2.2 million shares of its Class A common stock for approximately $837 million. Charter Holdings purchased 0.4 million Charter Holdings common units from A/N at an average price per unit of $358.21, or $161 million, during the three months ended June 30, 2019. As of June 30, 2019, Charter had remaining board authority to purchase an additional $769 million of Charter’s Class A common stock and/or Charter Holdings common units. In addition to open market purchases including pursuant to Rule 10b5-1 plans adopted from time to time, Charter may also buy shares of Charter Class A common stock, from time to time, pursuant to private transactions outside of its Rule 10b5-1 plan and any such repurchases would also trigger the repurchases from A/N pursuant to and to the extent provided in the Letter Agreement. |
Item 5.Other Information.
On January 29, 2019, Charter’s Board of Directors adopted the Charter Communications, Inc. 2019 Stock Incentive Plan (the “2019 Plan”). The 2019 Plan became effective on April 23, 2019 upon its approval by Charter’s stockholders at its Annual Meeting. The terms of the 2019 Plan are summarized in Charter’s proxy statement for the 2019 Annual Meeting. The formspayment of taxes and exercise costs upon the exercise of stock option agreement, restrictedoptions or vesting of other equity awards for the months of January, February and March 2020, respectively.
(2)During the three months ended March 31, 2020, Charter purchased approximately 4.5 million shares of its Class A common stock for approximately $2.2 billion. Charter Holdings purchased 0.8 million Charter Holdings common units from A/N at an average price per unit agreementof $494.54, or $393 million, during the three months ended March 31, 2020. As of March 31, 2020, Charter had remaining board authority to purchase an additional $286 million of Charter’s Class A common stock and/or Charter Holdings common units. In addition to open market purchases including pursuant to Rule
10b5-1 plans adopted from time to time, Charter may also buy shares of Charter Class A common stock, from time to time, pursuant to private transactions outside of its Rule 10b5-1 plan and restricted stock agreement approved for grants underany such repurchases would also trigger the 2019 Plan are attached as Exhibits 10.2, 10.3repurchases from A/N pursuant to and 10.4 to this report.the extent provided in the Letter Agreement.
Item 6. Exhibits.
See Exhibit Index.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications, Inc. has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | | | | | | | |
| | CHARTER COMMUNICATIONS, INC., | | |
| Registrant | Registrant |
| | | | |
| | By: | | /s/ Kevin D. Howard |
| | | | Kevin D. Howard |
Date: July 26, 2019 | | | | Chief Accounting Officer and Controller |
Exhibit Index
|
| | |
Exhibit | | Description |
| By: | | /s/ Kevin D. Howard |
10.1 | | | Charter Communications, Inc. 2019 Stock Incentive Plan (incorporated by reference to Annex A to the proxy statement for the Charter Communications, Inc. 2019 Annual Meeting of Stockholders filed March 14, 2019 (File No. 001-33664)).Kevin D. Howard |
10.2*Date: May 1, 2020 | | | Executive Vice President, Chief Accounting Officer and Controller |
Exhibit Index
| | | | | | | | |
10.3*Exhibit | | |
10.4* | | | Form of Restricted Stock Agreement under the Charter Communications, Inc. 2019 Stock Incentive Plan. |
10.510.1 | | | |
10.6 | | FirstThird Supplemental Indenture, dated as of May 23, 2019,February 18, 2020, among CCO Holdings, LLC, CCO Holdings Capital Corp. and The Bank of New York Mellon Trust Company, N.A., as trustee (incorporated by reference to Exhibit 4.2 to the current reportCurrent Report on Form 8-K filed by Charter Communications, Inc. on May 30, 2019 (File No. 001-33664))February 21, 2020). |
10.710.2 | | | |
10.810.3 | | | Exchange and Registration Rights Agreement, dated May 23, 2019,February 18, 2020, relating to the 5.375%4.500% Senior Notes due 2029,2030, among CCO Holdings, LLC, CCO Holdings Capital Corp. and Deutsche Bank Securities, Inc., as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the current reportCurrent Report on Form 8-K filed by Charter Communications, Inc. on May 30, 2019 (File No. 001-33664))February 21, 2020). |
10.910.4 | | | |
10.5 | | | |
10.6 | | | 2030 Exchange and Registration Rights Agreement, dated March 18, 2020, relating to the 4.500% Senior Notes due 2030, among CCO Holdings, LLC, CCO Holdings Capital Corp. and Deutsche Bank Securities, Inc., as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by Charter Communications, Inc. on March 23, 2020). |
10.7 | | | 2032 Exchange and Registration Rights Agreement, dated March 18, 2020, relating to the 4.500% Senior Notes due 2032, among CCO Holdings, LLC, CCO Holdings Capital Corp. and Deutsche Bank Securities, Inc., as representative of the several Purchasers (as defined therein) (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by Charter Communications, Inc. on March 23, 2020). |
10.8 | | | Underwriting Agreement, dated as of June 25, 2019,April 14, 2020, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., CCO Holdings, LLC, as parent guarantor, the subsidiary guarantors party thereto and Citigroup Global MarketsBofA Securities, Inc., J.P. Morgan Securities LLC and Morgan Stanley & Co. LLC, as representatives of the several underwriters named in Schedule I thereto (incorporated by reference to Exhibit 99.1 to the current reportCurrent Report on Form 8-K filed by Charter Communications, Inc. on July 1, 2019 (File No. 001-33664))April 17, 2020). |
10.1010.9 | | | FourteenthSixteenth Supplemental Indenture, dated as of July 10, 2019,April 17, 2020, among Charter Communications Operating, LLC, Charter Communications Operating Capital Corp., as issuers, CCO Holdings, LLC, the subsidiary guarantors party thereto and The Bank of New York Mellon Trust Company, N.A., as trustee and collateral agent (incorporated by reference to Exhibit 4.54.2 to the current reportCurrent Report on Form 8-K filed by Charter Communications, Inc. on July 10, 2019 (File No. 001-33664))April 17, 2020). |
10.1110.10 | | | |
10.1210.11 | | | |
31.1*31.1 | | | |
31.2*31.2 | | | |
32.1*32.1 | | | |
32.2*32.2 | | | |
101.INS**101 | | XBRL Instance Document - | The following financial information from Charter Communications, Inc.’s Quarterly Report on Form 10-Q for the instance document does not appearthree months ended March 31, 2020, filed with the Securities and Exchange Commission on May 1, 2020, formatted in iXBRL (inline eXtensible Business Reporting Language) includes: (i) the Interactive Data File because its XBRL tags are embedded withinConsolidated Balance Sheets; (ii) the Inline XBRL document.Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Shareholders' Equity; (iv) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements. |
101.SCH**104 | | XBRL Taxonomy Extension Schema Document. |
101.CAL** | | XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF** | | XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB** | | XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE** | | XBRL Taxonomy Extension Presentation Linkbase Document.Cover Page, formatted in iXBRL and contained in Exhibit 101. |
_____________
| |
** | This exhibit will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (15 U.S.C. 78r) or otherwise subject to the liability of that section. Such exhibit will not be deemed to be incorporated by reference into any filing under the Securities Act or Securities Exchange Act, except to the extent that the company specifically incorporates it by reference.
|