Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
FORM 10-Q
______________
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| | |
(Mark One) |
x | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| | |
For the quarterly period ended March 31, 2018 |
or |
| | |
o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition Period From to
Commission File Number: 001-33664
Charter Communications, Inc.
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 84-1496755 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification Number) |
| | |
400 Atlantic Street Stamford, Connecticut 06901 | | (203) 905-7801 |
(Address of principal executive offices including zip code) | | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrants were required to submit and post such files). Yes x No o
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.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Number of shares of Class A common stock outstanding as of March 31, 2018: 237,463,449
Number of shares of Class B common stock outstanding as of March 31, 2018: 1
CHARTER COMMUNICATIONS, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2018
TABLE OF CONTENTS
This quarterly report on Form 10-Q is for the three months ended March 31, 2018. The United States Securities and Exchange Commission (“SEC”) allows us to “incorporate by reference” information that we file with the SEC, which means that we can disclose important information to you by referring you directly to those documents. In this quarterly report, “Charter,” “we,” “us” and “our” refer to Charter Communications, Inc. and its subsidiaries.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in the “Results of Operations” and “Liquidity and Capital Resources” sections under Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this quarterly report. Although we believe that our plans, intentions and expectations as reflected in or suggested by these forward-looking statements are reasonable, we cannot assure you that we will achieve or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties and assumptions including, without limitation, the factors described under “Risk Factors” under Part I, Item 1A of our most recent Form 10-K filed with the SEC. Many of the forward-looking statements contained in this quarterly report may be identified by the use of forward-looking words such as “believe,” “expect,” “anticipate,” “should,” “planned,” “will,” “may,” “intend,” “estimated,” “aim,” “on track,” “target,” “opportunity,” “tentative,” “positioning,” “designed,” “create,” “predict,” “project,” “initiatives,” “seek,” “would,” “could,” “continue,” “ongoing,” “upside,” “increases” and “potential,” among others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in this quarterly report are set forth in this quarterly report on Form 10-Q, in our annual report on Form 10-K, and in other reports or documents that we file from time to time with the SEC, and include, but are not limited to:
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• | our ability to efficiently and effectively integrate acquired operations; |
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• | our ability to sustain and grow revenues and cash flow from operations by offering video, Internet, voice, mobile, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our markets and to maintain and grow our customer base, particularly in the face of increasingly aggressive competition, the need for innovation and the related capital expenditures; |
| |
• | the impact of competition from other market participants, including but not limited to incumbent telephone companies, direct broadcast satellite operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, fiber to the home providers, video provided over the Internet by (i) market participants that have not historically competed in the multichannel video business, (ii) traditional multichannel video distributors, and (iii) content providers that have historically licensed cable networks to multichannel video distributors, and providers of advertising over the Internet; |
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• | general business conditions, economic uncertainty or downturn, unemployment levels and the level of activity in the housing sector; |
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• | our ability to obtain programming at reasonable prices or to raise prices to offset, in whole or in part, the effects of higher programming costs (including retransmission consents); |
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• | our ability to develop and deploy new products and technologies including mobile products, our cloud-based user interface, Spectrum Guide®, and downloadable security for set-top boxes, and any other cloud-based consumer services and service platforms; |
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• | the effects of governmental regulation on our business including costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply with, regulatory conditions applicable to us as a result of the Time Warner Cable Inc. and Bright House Networks, LLC transactions; |
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• | any events that disrupt our networks, information systems or properties and impair our operating activities or our reputation; |
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• | the ability to retain and hire key personnel; |
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• | the availability and access, in general, of funds to meet our debt obligations prior to or when they become due and to fund our operations and necessary capital expenditures, either through (i) cash on hand, (ii) free cash flow, or (iii) access to the capital or credit markets; and |
| |
• | our ability to comply with all covenants in our indentures and credit facilities, any violation of which, if not cured in a timely manner, could trigger a default of our other obligations under cross-default provisions. |
All forward-looking statements attributable to us or any person acting on our behalf are expressly qualified in their entirety by this cautionary statement. We are under no duty or obligation to update any of the forward-looking statements after the date of this quarterly report.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data) |
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| (unaudited) | | |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 576 |
| | $ | 621 |
|
Accounts receivable, less allowance for doubtful accounts of | | | |
$120 and $113, respectively | 1,409 |
| | 1,635 |
|
Prepaid expenses and other current assets | 413 |
| | 299 |
|
Total current assets | 2,398 |
| | 2,555 |
|
| | | |
INVESTMENT IN CABLE PROPERTIES: | | | |
Property, plant and equipment, net of accumulated | | | |
depreciation of $19,796 and $18,077, respectively | 34,002 |
| | 33,888 |
|
Customer relationships, net | 11,315 |
| | 11,951 |
|
Franchises | 67,319 |
| | 67,319 |
|
Goodwill | 29,554 |
| | 29,554 |
|
Total investment in cable properties, net | 142,190 |
| | 142,712 |
|
| | | |
OTHER NONCURRENT ASSETS | 1,563 |
| | 1,356 |
|
| | | |
Total assets | $ | 146,151 |
| | $ | 146,623 |
|
| | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
CURRENT LIABILITIES: | | | |
Accounts payable and accrued liabilities | $ | 8,262 |
| | $ | 9,045 |
|
Current portion of long-term debt | 3,340 |
| | 2,045 |
|
Total current liabilities | 11,602 |
| | 11,090 |
|
| | | |
LONG-TERM DEBT | 67,609 |
| | 68,186 |
|
DEFERRED INCOME TAXES | 17,351 |
| | 17,314 |
|
OTHER LONG-TERM LIABILITIES | 2,464 |
| | 2,502 |
|
| | | |
SHAREHOLDERS’ EQUITY: | | | |
Class A common stock; $.001 par value; 900 million shares authorized; | | | |
239,234,204 and 238,506,059 shares issued, respectively | — |
| | — |
|
Class B common stock; $.001 par value; 1,000 shares authorized; | | | |
1 share issued and outstanding | — |
| | — |
|
Preferred stock; $.001 par value; 250 million shares authorized; | | | |
no shares issued and outstanding | — |
| | — |
|
Additional paid-in capital | 35,352 |
| | 35,253 |
|
Retained earnings | 4,034 |
| | 3,832 |
|
Treasury stock at cost; 1,770,755 and no shares, respectively | (617 | ) | | — |
|
Accumulated other comprehensive loss | (1 | ) | | (1 | ) |
Total Charter shareholders’ equity | 38,768 |
| | 39,084 |
|
Noncontrolling interests | 8,357 |
| | 8,447 |
|
Total shareholders’ equity | 47,125 |
| | 47,531 |
|
| | | |
Total liabilities and shareholders’ equity | $ | 146,151 |
| | $ | 146,623 |
|
The accompanying notes are an integral part of these consolidated financial statements.
1
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in millions, except per share data)
Unaudited
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
REVENUES | $ | 10,657 |
| | $ | 10,164 |
|
| | | |
COSTS AND EXPENSES: | | | |
Operating costs and expenses (exclusive of items shown separately below) | 6,836 |
| | 6,579 |
|
Depreciation and amortization | 2,710 |
| | 2,550 |
|
Other operating expenses, net | 69 |
| | 94 |
|
| 9,615 |
| | 9,223 |
|
Income from operations | 1,042 |
| | 941 |
|
| | | |
OTHER EXPENSES: | | | |
Interest expense, net | (851 | ) | | (713 | ) |
Loss on extinguishment of debt | — |
| | (34 | ) |
Gain on financial instruments, net | 63 |
| | 38 |
|
Other income (expense), net | (3 | ) | | 4 |
|
| (791 | ) | | (705 | ) |
| | | |
Income before income taxes | 251 |
| | 236 |
|
Income tax expense | (28 | ) | | (25 | ) |
Consolidated net income | 223 |
| | 211 |
|
Less: Net income attributable to noncontrolling interests | (55 | ) | | (56 | ) |
Net income attributable to Charter shareholders | $ | 168 |
| | $ | 155 |
|
| | | |
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: | | | |
Basic | $ | 0.71 |
| | $ | 0.58 |
|
Diluted | $ | 0.70 |
| | $ | 0.57 |
|
| | | |
Weighted average common shares outstanding, basic | 237,762,295 |
| | 269,004,817 |
|
Weighted average common shares outstanding, diluted | 241,420,722 |
| | 273,199,509 |
|
The accompanying notes are an integral part of these consolidated financial statements.
2
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in millions)
Unaudited
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Consolidated net income | $ | 223 |
| | $ | 211 |
|
Net impact of interest rate derivative instruments | — |
| | 1 |
|
Consolidated comprehensive income | 223 |
| | 212 |
|
Less: Comprehensive income attributable to noncontrolling interests | (55 | ) | | (56 | ) |
Comprehensive income attributable to Charter shareholders | $ | 168 |
| | $ | 156 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
Unaudited
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Consolidated net income | $ | 223 |
| | $ | 211 |
|
Adjustments to reconcile consolidated net income to net cash flows from operating activities: | | | |
Depreciation and amortization | 2,710 |
| | 2,550 |
|
Stock compensation expense | 72 |
| | 69 |
|
Accelerated vesting of equity awards | 5 |
| | 17 |
|
Noncash interest income, net | (89 | ) | | (108 | ) |
Loss on extinguishment of debt | — |
| | 34 |
|
Gain on financial instruments, net | (63 | ) | | (38 | ) |
Deferred income taxes | 28 |
| | 16 |
|
Other, net | 18 |
| | (7 | ) |
Changes in operating assets and liabilities, net of effects from acquisitions: | | | |
Accounts receivable | 226 |
| | 236 |
|
Prepaid expenses and other assets | (131 | ) | | (83 | ) |
Accounts payable, accrued liabilities and other | (300 | ) | | (54 | ) |
Net cash flows from operating activities | 2,699 |
| | 2,843 |
|
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of property, plant and equipment | (2,183 | ) | | (1,555 | ) |
Change in accrued expenses related to capital expenditures | (565 | ) | | (150 | ) |
Other, net | 10 |
| | (7 | ) |
Net cash flows from investing activities | (2,738 | ) | | (1,712 | ) |
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Borrowings of long-term debt | 2,929 |
| | 4,640 |
|
Repayments of long-term debt | (2,185 | ) | | (3,475 | ) |
Payments for debt issuance costs | — |
| | (21 | ) |
Purchase of treasury stock | (617 | ) | | (895 | ) |
Proceeds from exercise of stock options | 36 |
| | 72 |
|
Purchase of noncontrolling interest | (127 | ) | | (27 | ) |
Distributions to noncontrolling interest | (39 | ) | | (38 | ) |
Other, net | (3 | ) | | (2 | ) |
Net cash flows from financing activities | (6 | ) | | 254 |
|
| | | |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (45 | ) | | 1,385 |
|
CASH AND CASH EQUIVALENTS, beginning of period | 621 |
| | 1,535 |
|
CASH AND CASH EQUIVALENTS, end of period | $ | 576 |
| | $ | 2,920 |
|
| | | |
CASH PAID FOR INTEREST | $ | 1,007 |
| | $ | 892 |
|
CASH PAID FOR TAXES | $ | 1 |
| | $ | 1 |
|
The accompanying notes are an integral part of these consolidated financial statements.
4
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
1. Organization and Basis of Presentation
Organization
Charter Communications, Inc. (together with its controlled subsidiaries, “Charter,” or the “Company”) is the second largest cable operator in the United States and a leading broadband communications company providing video, Internet and voice services to residential and business customers. In addition, the Company sells video and online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology solutions to larger enterprise customers. The Company also owns and operates regional sports networks and local sports, news and lifestyle channels and sells security and home management services to the residential marketplace.
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 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 one reportable segment, cable services.
Basis of Presentation
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; purchase accounting valuations of assets and liabilities including, but not limited to, property, plant and equipment, intangibles and goodwill; pension benefits; income taxes; contingencies and programming expense. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the 2018 presentation.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
2. Franchises, Goodwill and Other Intangible Assets
Indefinite-lived and finite-lived intangible assets consist of the following as of March 31, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived intangible assets: | | | | | | | | | | | | |
Franchises | | $ | 67,319 |
| | $ | — |
| | $ | 67,319 |
| | $ | 67,319 |
| | $ | — |
| | $ | 67,319 |
|
Goodwill | | 29,554 |
| | — |
| | 29,554 |
| | 29,554 |
| | — |
| | 29,554 |
|
Trademarks | | 159 |
| | — |
| | 159 |
| | 159 |
| | — |
| | 159 |
|
| | $ | 97,032 |
| | $ | — |
| | $ | 97,032 |
| | $ | 97,032 |
| | $ | — |
| | $ | 97,032 |
|
| | | | | | | | | | | | |
Finite-lived intangible assets: | | | | | | | | | | | | |
Customer relationships | | $ | 18,229 |
| | $ | (6,914 | ) | | $ | 11,315 |
| | $ | 18,229 |
| | $ | (6,278 | ) | | $ | 11,951 |
|
Other intangible assets | | 341 |
| | (63 | ) | | 278 |
| | 731 |
| | (201 | ) | | 530 |
|
| | $ | 18,570 |
| | $ | (6,977 | ) | | $ | 11,593 |
| | $ | 18,960 |
| | $ | (6,479 | ) | | $ | 12,481 |
|
Amortization expense related to customer relationships and other intangible assets for the three months ended March 31, 2018 and 2017 was $645 million and $726 million, respectively. Effective January 1, 2018 with the adoption of Accounting Standards Update (“ASU”) 2014-09, up-front fees paid to market and serve customers who reside in residential multiple dwelling units (“MDUs”) are no longer recorded as intangibles and amortized to depreciation and amortization expense, but are now being recorded as noncurrent assets and are amortized to operating costs and expenses. See Note 17.
The Company expects amortization expense on its finite-lived intangible assets will be as follows:
|
| | | | |
Nine months ended December 31, 2018 | | $ | 1,776 |
|
2019 | | 2,146 |
|
2020 | | 1,864 |
|
2021 | | 1,589 |
|
2022 | | 1,319 |
|
Thereafter | | 2,899 |
|
| | $ | 11,593 |
|
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.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
3. Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following as of March 31, 2018 and December 31, 2017:
|
| | | | | | | |
| March 31, 2018 | | December 31, 2017 |
Accounts payable – trade | $ | 622 |
| | $ | 740 |
|
Deferred revenue | 472 |
| | 395 |
|
Accrued liabilities: | | | |
Programming costs | 2,070 |
| | 1,907 |
|
Labor | 895 |
| | 1,109 |
|
Capital expenditures | 1,363 |
| | 1,935 |
|
Interest | 985 |
| | 1,054 |
|
Taxes and regulatory fees | 514 |
| | 556 |
|
Property and casualty | 423 |
| | 408 |
|
Other | 918 |
| | 941 |
|
| $ | 8,262 |
| | $ | 9,045 |
|
4. Long-Term Debt
Long-term debt consists of the following as of March 31, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | |
| March 31, 2018 | | December 31, 2017 |
| Principal Amount | | Accreted Value | | Principal Amount | | Accreted Value |
CCO Holdings, LLC: | | | | | | | |
5.250% senior notes due March 15, 2021 | $ | 500 |
| | $ | 497 |
| | $ | 500 |
| | $ | 497 |
|
5.250% senior notes due September 30, 2022 | 1,250 |
| | 1,235 |
| | 1,250 |
| | 1,235 |
|
5.125% senior notes due February 15, 2023 | 1,000 |
| | 993 |
| | 1,000 |
| | 993 |
|
4.000% senior notes due March 1, 2023 | 500 |
| | 496 |
| | 500 |
| | 495 |
|
5.125% senior notes due May 1, 2023 | 1,150 |
| | 1,143 |
| | 1,150 |
| | 1,143 |
|
5.750% senior notes due September 1, 2023 | 500 |
| | 496 |
| | 500 |
| | 496 |
|
5.750% senior notes due January 15, 2024 | 1,000 |
| | 992 |
| | 1,000 |
| | 992 |
|
5.875% senior notes due April 1, 2024 | 1,700 |
| | 1,687 |
| | 1,700 |
| | 1,687 |
|
5.375% senior notes due May 1, 2025 | 750 |
| | 745 |
| | 750 |
| | 745 |
|
5.750% senior notes due February 15, 2026 | 2,500 |
| | 2,465 |
| | 2,500 |
| | 2,464 |
|
5.500% senior notes due May 1, 2026 | 1,500 |
| | 1,489 |
| | 1,500 |
| | 1,489 |
|
5.875% senior notes due May 1, 2027 | 800 |
| | 795 |
| | 800 |
| | 794 |
|
5.125% senior notes due May 1, 2027 | 3,250 |
| | 3,217 |
| | 3,250 |
| | 3,216 |
|
5.000% senior notes due February 1, 2028 | 2,500 |
| | 2,463 |
| | 2,500 |
| | 2,462 |
|
Charter Communications Operating, LLC: | | | | | | | |
3.579% senior notes due July 23, 2020 | 2,000 |
| | 1,989 |
| | 2,000 |
| | 1,988 |
|
4.464% senior notes due July 23, 2022 | 3,000 |
| | 2,979 |
| | 3,000 |
| | 2,977 |
|
4.908% senior notes due July 23, 2025 | 4,500 |
| | 4,463 |
| | 4,500 |
| | 4,462 |
|
3.750% senior notes due February 15, 2028 | 1,000 |
| | 985 |
| | 1,000 |
| | 985 |
|
4.200% senior notes due March 15, 2028 | 1,250 |
| | 1,238 |
| | 1,250 |
| | 1,238 |
|
6.384% senior notes due October 23, 2035 | 2,000 |
| | 1,981 |
| | 2,000 |
| | 1,981 |
|
6.484% senior notes due October 23, 2045 | 3,500 |
| | 3,466 |
| | 3,500 |
| | 3,466 |
|
5.375% senior notes due May 1, 2047 | 2,500 |
| | 2,506 |
| | 2,500 |
| | 2,506 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
|
| | | | | | | | | | | | | | | |
6.834% senior notes due October 23, 2055 | 500 |
| | 495 |
| | 500 |
| | 495 |
|
Credit facilities | 10,223 |
| | 10,135 |
| | 9,479 |
| | 9,387 |
|
Time Warner Cable, LLC: | | | | | | | |
6.750% senior notes due July 1, 2018 | 2,000 |
| | 2,023 |
| | 2,000 |
| | 2,045 |
|
8.750% senior notes due February 14, 2019 | 1,250 |
| | 1,317 |
| | 1,250 |
| | 1,337 |
|
8.250% senior notes due April 1, 2019 | 2,000 |
| | 2,119 |
| | 2,000 |
| | 2,148 |
|
5.000% senior notes due February 1, 2020 | 1,500 |
| | 1,569 |
| | 1,500 |
| | 1,579 |
|
4.125% senior notes due February 15, 2021 | 700 |
| | 728 |
| | 700 |
| | 730 |
|
4.000% senior notes due September 1, 2021 | 1,000 |
| | 1,042 |
| | 1,000 |
| | 1,045 |
|
5.750% sterling senior notes due June 2, 2031 (a) | 876 |
| | 945 |
| | 845 |
| | 912 |
|
6.550% senior debentures due May 1, 2037 | 1,500 |
| | 1,685 |
| | 1,500 |
| | 1,686 |
|
7.300% senior debentures due July 1, 2038 | 1,500 |
| | 1,786 |
| | 1,500 |
| | 1,788 |
|
6.750% senior debentures due June 15, 2039 | 1,500 |
| | 1,723 |
| | 1,500 |
| | 1,724 |
|
5.875% senior debentures due November 15, 2040 | 1,200 |
| | 1,257 |
| | 1,200 |
| | 1,258 |
|
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) | 912 |
| | 879 |
| | 879 |
| | 847 |
|
4.500% senior debentures due September 15, 2042 | 1,250 |
| | 1,138 |
| | 1,250 |
| | 1,137 |
|
Time Warner Cable Enterprises LLC: | | | | | | | |
8.375% senior debentures due March 15, 2023 | 1,000 |
| | 1,222 |
| | 1,000 |
| | 1,232 |
|
8.375% senior debentures due July 15, 2033 | 1,000 |
| | 1,308 |
| | 1,000 |
| | 1,312 |
|
Total debt | 69,811 |
| | 70,949 |
| | 69,003 |
| | 70,231 |
|
Less current portion: | | | | | | | |
6.750% senior notes due July 1, 2018 | (2,000 | ) | | (2,023 | ) | | (2,000 | ) | | (2,045 | ) |
8.750% senior notes due February 14, 2019 | (1,250 | ) | | (1,317 | ) | | — |
| | — |
|
Long-term debt | $ | 66,561 |
| | $ | 67,609 |
| | $ | 67,003 |
| | $ | 68,186 |
|
| |
(a) | Principal amount includes £625 million valued at $876 million and $845 million as of March 31, 2018 and December 31, 2017, respectively, using the exchange rate at the respective dates. |
| |
(b) | Principal amount includes £650 million valued at $912 million and $879 million as of March 31, 2018 and December 31, 2017, 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 the original issue discount at the time of sale, deferred financing costs, and, in regards to Time Warner Cable, LLC and Time Warner Cable Enterprises LLC debt assumed, 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 into US dollars is remeasured as of each balance sheet date. See Note 7. The Company has availability under the Charter Operating credit facilities of approximately $2.8 billion as of March 31, 2018.
During the three months ended March 31, 2017, CCO Holdings, LLC (“CCO Holdings”) and CCO Holdings Capital Corp. jointly issued $2.0 billion aggregate principal amount of 5.125% senior notes due May 1, 2027. The net proceeds, as well as cash on hand, were used in February and April 2017 to repurchase $2.75 billion of various series of senior unsecured notes, pay related fees and expenses as well as for general corporate purposes. For the three months ended March 31, 2017, the Company recorded a loss on extinguishment of debt of $33 million related to the notes repurchased in February 2017.
In January 2017, Charter Operating entered into an amendment to its Amended and Restated Credit Agreement dated May 18, 2016 (the “Credit Agreement”) decreasing the applicable LIBOR margins and eliminating the LIBOR floors on certain term loans outstanding at that time. The Company recorded a loss on extinguishment of debt of $1 million for the three months ended March 31, 2017 related to these transactions.
In April 2018, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $800 million aggregate
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
principal amount of 5.375% senior notes due April 1, 2038 at a price of 98.846% of the aggregate principal amount and $1.7 billion aggregate principal amount of 5.750% senior notes due April 1, 2048 at a price of 99.706% of the aggregate principal amount. The net proceeds, together with cash on hand, will be used to repay certain existing indebtedness, including to repurchase or redeem all of the outstanding $2.0 billion in aggregate principal amount of Time Warner Cable, LLC’s 6.750% notes due July 1, 2018, to pay related fees and expenses and for general corporate purposes, including to fund potential buybacks of Charter Class A common stock or Charter Holdings common units.
5. 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 months ended March 31, 2018 and 2017.
|
| | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
| Shares | | $ | | Shares | | $ |
Share buybacks | 1,593,046 |
| | $ | 556 |
| | 2,465,570 |
| | $ | 799 |
|
Income tax withholding | 173,046 |
| | 61 |
| | 304,037 |
| | 96 |
|
Exercise cost | 4,663 |
| | | | 39,154 |
| | |
| 1,770,755 |
| | $ | 617 |
| | 2,808,761 |
| | $ | 895 |
|
As of March 31, 2018, Charter had remaining board authority to purchase an additional $554 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 2017, Charter’s board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2017. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity.
6. 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 Company’s cable systems. Noncontrolling interests on the Company’s balance sheet primarily includes Advance/Newhouse Partnership's (“A/N”) 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 9% and 10%, and was $17 million and $18 million for the three months ended March 31, 2018 and 2017, respectively. Net income of Charter Holdings attributable to the preferred noncontrolling interest for financial reporting purposes is based on the preferred dividend which was $38 million for each of the three months ended March 31, 2018 and 2017.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The following table represents Charter Holdings' purchase of Charter Holdings common units from A/N pursuant to the Letter Agreement (see Note 13) and the effect on total shareholders' equity during the three months ended March 31, 2018 and 2017.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Number of units purchased | 369,475 |
| | 83,416 |
|
Average price per unit | $ | 343.88 |
| | $ | 324.63 |
|
Amount of units purchased | $ | 127 |
| | $ | 27 |
|
Decrease in noncontrolling interest based on carrying value | $ | (90 | ) | | $ | (19 | ) |
Decrease in additional paid-in-capital (net of $9 million and $3 million of deferred income taxes, respectively) | $ | (28 | ) | | $ | (5 | ) |
Total shareholders' equity was also adjusted during the three months ended March 31, 2018 and 2017 due to the changes in Charter Holdings' ownership as follows.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Decrease in noncontrolling interest | $ | (20 | ) | | $ | (43 | ) |
Increase in additional paid-in-capital (net of $6 million and $16 million of deferred income taxes, respectively) | $ | 14 |
| | $ | 27 |
|
7. 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 May 2016, the Company entered into a collateral holiday agreement for 80% of both the 2031 and 2042 cross-currency swaps, which eliminates the requirement to post collateral for three years. The fair value of the Company's cross-currency derivatives on its consolidated balance sheets was $103 million included in other noncurrent assets and $25 million included in other long-term liabilities as of March 31, 2018 and December 31, 2017, 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.
The effect of financial instruments on the consolidated statements of operations is presented in the table below.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Gain on Financial Instruments, Net: | | | |
Change in fair value of cross-currency derivative instruments | $ | 128 |
| | $ | 65 |
|
Foreign currency remeasurement of Sterling Notes to U.S. dollars | (65 | ) | | (28 | ) |
Other, net | — |
| | 1 |
|
| $ | 63 |
| | $ | 38 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
8. Fair Value Measurements
The 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. |
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of March 31, 2018 and December 31, 2017 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, receivables, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
A portion of the Company’s cash and cash equivalents as of March 31, 2018 and December 31, 2017 were invested in money market funds. The money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange which approximates fair value. The money market funds potentially subject the Company to concentration of credit risk. The amount invested within any one financial instrument did not exceed $300 million as of March 31, 2018 and December 31, 2017. As of March 31, 2018 and December 31, 2017, there were no significant concentrations of financial instruments in a single investee, industry or geographic location.
Financial instruments accounted for at fair value on a recurring basis are presented in the table below.
|
| | | | | | | | | | | | | | | |
| March 31, 2018 | December 31, 2017 |
| Level 1 | | Level 2 | | Level 1 | | Level 2 |
Assets | | | | | | | |
Money market funds | $ | 285 |
| | $ | — |
| | $ | 291 |
| | $ | — |
|
Cross-currency derivative instruments | $ | — |
| | $ | 103 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
Liabilities | | | | | | | |
Cross-currency derivative instruments | $ | — |
| | $ | — |
| | $ | — |
| | $ | 25 |
|
A summary of the carrying value and fair value of debt as of March 31, 2018 and December 31, 2017 is as follows:
|
| | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Senior notes and debentures | | $ | 60,814 |
| | $ | 61,350 |
| | $ | 60,844 |
| | $ | 63,443 |
|
Credit facilities | | $ | 10,135 |
| | $ | 10,235 |
| | $ | 9,387 |
| | $ | 9,440 |
|
The estimated fair value of the Company’s senior notes and debentures as of March 31, 2018 and December 31, 2017 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.
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. No material impairments were recorded during the three months ended March 31, 2018 and 2017.
9. 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 March 31, |
| 2018 | | 2017 |
Programming | $ | 2,752 |
| | $ | 2,604 |
|
Regulatory, connectivity and produced content | 533 |
| | 498 |
|
Costs to service customers | 1,855 |
| | 1,801 |
|
Marketing | 751 |
| | 765 |
|
Mobile | 8 |
| | — |
|
Other | 937 |
| | 911 |
|
| $ | 6,836 |
| | $ | 6,579 |
|
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 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 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 and residential customers including labor costs. Mobile costs represent incremental costs incurred to launch the Company's mobile service. 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.
10. Other Operating Expenses, Net
Other operating expenses, net consist of the following for the periods presented:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Merger and restructuring costs | $ | 48 |
| | $ | 95 |
|
Special charges, net | 28 |
| | 2 |
|
Gain on sale of assets, net | (7 | ) | | (3 | ) |
| $ | 69 |
| | $ | 94 |
|
Merger and restructuring costs
Merger and restructuring costs represent costs incurred in connection with merger and acquisition transactions and related restructuring, such as advisory, legal and accounting fees, employee retention costs, employee termination costs related to the acquisition in 2016 of Time Warner Cable Inc. ("TWC") and Bright House Networks, LLC ("Bright House") and other exit costs.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The Company expects to incur additional merger and restructuring costs in connection with the acquisition of TWC and Bright House. Changes in accruals for merger and restructuring costs are presented below:
|
| | | | | | | | | | | | | | | | | | | |
| Employee Retention Costs | | Employee Termination Costs | | Transaction and Advisory Costs | | Other Costs | | Total |
Liability, December 31, 2016 | $ | 7 |
| | $ | 244 |
| | $ | 25 |
| | $ | — |
| | $ | 276 |
|
Costs incurred | 4 |
| | 226 |
| | 4 |
| | 68 |
| | 302 |
|
Cash paid | (10 | ) | | (298 | ) | | (12 | ) | | (60 | ) | | (380 | ) |
Remaining liability, December 31, 2017 | 1 |
| | 172 |
| | 17 |
| | 8 |
| | 198 |
|
Costs incurred | — |
| | 37 |
| | — |
| | 6 |
| | 43 |
|
Cash paid | — |
| | (90 | ) | | — |
| | — |
| | (90 | ) |
Remaining liability, March 31, 2018 | $ | 1 |
| | $ | 119 |
| | $ | 17 |
| | $ | 14 |
| | $ | 151 |
|
In addition to the costs incurred indicated above, the Company recorded $5 million and $17 million of expense related to accelerated vesting of equity awards of terminated employees during the three months ended March 31, 2018 and 2017, respectively.
Special charges, net
Special charges, net primarily includes a $22 million charge related to the Company's withdrawal liability from a multiemployer pension plan, employee termination costs not related to the acquisition of TWC and Bright House and net amounts of litigation settlements.
Gain on sale of assets, net
Gain on sale of assets, net represents the net gain recognized on the sales and disposals of fixed assets and cable systems.
11. 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.
For the three months ended March 31, 2018 and 2017, the Company recorded income tax expense of $28 million and $25 million, respectively. Income tax expense is generally recognized through increases in deferred tax liabilities as well as through current federal and state income tax expense. Income tax expense for the three months ended March 31, 2018 and 2017 was reduced by approximately $22 million and $56 million, respectively, due to the recognition of excess tax benefits resulting from share-based compensation.
The Company has reported provisional amounts for the income tax effects of Tax Cuts & Jobs Act (“Tax Reform”) for which the accounting is incomplete but a reasonable estimate could be determined. There were no specific impacts of Tax Reform that could not be reasonably estimated which the Company accounted for under prior tax law. Based on a continued analysis of the estimates and further guidance on the application of the law, it is anticipated that additional revisions may occur throughout the allowable measurement period.
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
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
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 $155 million and $164 million, excluding interest and penalties, as of March 31, 2018 and December 31, 2017, respectively. The Company does not currently anticipate that its reserve for uncertain tax positions will significantly increase or decrease during 2018; 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, Charter Holdings, or Charter Communications Holding Company, LLC for income tax purposes, are currently under examination by the Internal Revenue Service ("IRS"). Charter and Charter Holdings' 2016 and 2017 tax years remain open for examination and assessment. Charter’s tax years ending 2014 through the short period return dated May 17, 2016 (prior to the acquisition of TWC and Bright House) remain subject to examination and assessment. Years prior to 2014 remain open solely for purposes of examination of Charter’s loss and credit carryforwards. 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 (the “Separation”), TWC was included in the consolidated U.S. federal and certain state income tax returns of Time Warner. The IRS is currently examining Time Warner’s 2008 through 2010 income tax returns. 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 months ended March 31, 2018, nor does the Company anticipate a material impact in the future.
12. 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 stock units, equity awards with market conditions and Charter Holdings convertible preferred units and common units. Charter Holdings common and convertible preferred units of 31 million and 38 million were not included in the computation of diluted earnings per share for the three months ended March 31, 2018 and 2017, respectively, as their effect would have been antidilutive. The following is the computation of diluted earnings per common share for the three months ended March 31, 2018 and 2017.
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Numerator: | | | |
Net income attributable to Charter shareholders | $ | 168 |
| | $ | 155 |
|
| | | |
Denominator: | | | |
Weighted average common shares outstanding, basic | 237,762,295 |
| | 269,004,817 |
|
Effect of dilutive securities: | | | |
Assumed exercise or issuance of shares relating to stock plans | 3,658,427 |
| | 4,194,692 |
|
Weighted average common shares outstanding, diluted | 241,420,722 |
| | 273,199,509 |
|
| | | |
Basic earnings per common share attributable to Charter shareholders | $ | 0.71 |
| | $ | 0.58 |
|
Diluted earnings per common share attributable to Charter shareholders | $ | 0.70 |
| | $ | 0.57 |
|
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
13. 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 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 (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 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 once Charter or Charter Holdings have repurchased shares of Class A common stock or Charter Holdings common units from A/N and its affiliates for an aggregate purchase price of $400 million.
The Company is aware that Dr. John Malone may be deemed to have a 37.5% voting interest in Qurate Retail, Inc. (formerly known as Liberty Interactive Corporation (“Liberty Interactive”)) and is chairman of the board of directors, an executive officer position, of Liberty Interactive. Liberty Interactive wholly owns HSN, Inc. (“HSN”) and QVC, Inc. (“QVC”). The Company has programming relationships with HSN and QVC. For the three months ended March 31, 2018 and 2017, the Company recorded revenue in aggregate of approximately $16 million and $17 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, each 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 93.6% of the series B common stock of Discovery, 6% of the series C common stock of Discovery and has a 28% 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 in which Mr. Miron is the CEO, owns 100% of the Series A preferred stock of Discovery and 100% of the Series C preferred stock of Discovery and has a 24.2% voting interest for the election of directors. A/N PP has the right to appoint three directors out of a total of eleven directors to Discovery’s board to be elected by the holders of Discovery’s Series A preferred stock. In addition, Dr. Malone is a member of the board of directors of Lions Gate Entertainment Corp. (“Lions Gate”, parent company of Starz, Inc.) and owns approximately 5.5% in the aggregate of the common stock of Lions Gate and has 7.9% of the voting power, pursuant to his ownership of Lions Gate Class A voting shares. The Company purchases programming from both Discovery and Lions Gate pursuant to agreements entered into prior to Dr. Malone and Mr. Miron joining Charter’s board of directors. Based on publicly available information, the Company does not believe that either Discovery or Lions Gate would currently be considered related parties. The amounts paid in the aggregate to Discovery and Lions Gate represent less than 3% of total operating costs and expenses for the three months ended March 31, 2018 and 2017.
Equity Investments
The Company has agreements with certain equity-method investees pursuant to which the Company has made or received related
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
party transaction payments. The Company recorded payments to equity-method investees totaling $63 million and $68 million during the three months ended March 31, 2018 and 2017, respectively.
14. 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 between Charter, TWC, A/N, and Liberty Broadband announced by Charter on May 26, 2015. The lawsuit names as defendants Liberty Broadband, the board of directors of Charter and Charter. Plaintiff alleges that the transactions with Liberty improperly benefit Liberty Broadband at the expense of other Charter shareholders. Charter filed a motion to dismiss this litigation. The Court of Chancery has not yet made a final ruling on the motion to dismiss. Charter denies any liability, believes that it has substantial defenses, and intends to vigorously defend this suit. 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 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. District Court for the District of Kansas alleging that TWC infringed certain U.S. patents purportedly relating to Voice over Internet Protocol (“VoIP”) services. A trial began on February 13, 2017. On March 3, 2017 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 has appealed the case to the United States Court of Appeals for the Federal Circuit. 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. District Court for the District of Delaware implicating Sprint's LTE technology. The impact of the Sprint verdict was reflected in the measurement period adjustments to net current liabilities. The Company does not expect that the outcome of this litigation will have a material adverse effect on its operations or financial condition. The ultimate outcome of this litigation or the pursuit of indemnity against the Company’s vendor cannot be predicted.
Subsequently, on December 2, 2017, Sprint filed suit against Charter in the United States District Court for the District of Delaware. The new suit alleges infringement of 15 patents related to the Company's provision of voice services (ten of which were already asserted against Legacy TWC in the matter described above). Charter is investigating the allegations and will vigorously defend this case. While the Company is unable to predict the outcome of its investigations, it does not expect that this litigation will have a material effect on its operations, financial condition, or cash flows.
On October 23, 2015, the New York Office of the Attorney General (the “NY AG”) began an investigation of TWC's advertised Internet speeds and other Internet product advertising. On February 1, 2017, the NY AG filed suit in the Supreme Court for the State of New York alleging that TWC's advertising of Internet speeds was false and misleading. The suit seeks restitution and injunctive relief. The Company's motion to dismiss the NY AG’s complaint was denied by the trial court and the Company has appealed the ruling. The Company intends to defend itself vigorously. Although no assurances can be made that such defenses would ultimately be successful, the Company does not expect that the outcome of this litigation will have a material adverse effect on its operations, financial condition or cash flows.
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 patents relating to various aspects of its businesses. Other industry participants are also defendants in certain of these cases. In the event that a court ultimately determines that the Company infringes on any intellectual property rights, 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 patents 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.
15. Stock Compensation Plans
Charter’s 2009 Stock Incentive Plan provides 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 2009 Stock Incentive Plan.
Charter granted the following equity awards for the periods presented.
|
| | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Stock options | 1,429,800 |
| | 1,102,600 |
|
Restricted stock | — |
| | — |
|
Restricted stock units | 483,700 |
| | 268,200 |
|
Charter stock options and restricted stock units cliff vest upon the three year anniversary 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. 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 March 31, 2018, total unrecognized compensation remaining to be recognized in future periods totaled $309 million for stock options, $0.2 million for restricted stock and $301 million for restricted stock units and the weighted average period over which they are expected to be recognized is three years for stock options, one month for restricted stock and two years for restricted stock units.
The Company recorded $72 million and $69 million of stock compensation expense for the three months ended March 31, 2018 and 2017, respectively, which is included in operating costs and expenses. The Company also recorded $5 million and $17 million of expense for the three months ended March 31, 2018 and 2017, respectively, related to accelerated vesting of equity awards of terminated employees, which is recorded in merger and restructuring costs.
16. Employee Benefit Plans
The Company sponsors two qualified defined benefit pension plans, the TWC Pension Plan and the TWC Union Pension Plan, that provide pension benefits to a majority of employees who were employed by TWC before the acquisition of 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 for the three months ended March 31, 2018 and 2017 are recorded in other income (expense), net in the consolidated statements of operations and consisted of the following:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Interest cost | $ | 32 |
| | $ | 34 |
|
Expected return on plan assets | (52 | ) | | (47 | ) |
Net periodic pension benefit | $ | (20 | ) | | $ | (13 | ) |
The Company made no cash contributions to the qualified pension plans during the three months ended March 31, 2018 and 2017; 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 2018 to the extent benefits are paid.
17. Recently Issued Accounting Standards
Accounting Standards Adopted January 1, 2018
ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”)
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09 which is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under U.S. GAAP. ASU 2014-09 provides a single principles-based, five step model to be applied to all contracts with customers, which steps are to (1) identify the contract(s) with the customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract and (5) recognize revenue when each performance obligation is satisfied.
Charter adopted ASU 2014-09 as of January 1, 2018 using the modified retrospective transition method with a cumulative-effect adjustment to equity. The adoption of ASU 2014-09 did not have a material impact on the Company’s financial position or results of operation. Previously reported results will not be restated under this transition method. The adoption results in the deferral of residential and small and medium business installation revenues and enterprise commission expenses over a period of time instead of recognized immediately. The adoption also results in the reclassification of the amortization of up-front fees paid to market and serve customers who reside in residential MDUs to operating costs and expenses instead of amortized as an intangible to depreciation and amortization expense.
The January 1, 2018 adoption cumulative-effect adjustment consisted of an increase to other noncurrent assets of $120 million, an increase to accounts payable and accrued liabilities of $71 million, an increase to deferred income tax liabilities of $11 million and an increase to total shareholders’ equity of $38 million. Charter applied the cumulative-effect method to all contracts as of January 1, 2018. Operating results for the three months ended March 31, 2018 are not materially different than results that would have been reported under guidance in effect before application of ASU 2014-09.
Nature of Services
Residential Services
Residential customers are offered video, Internet and voice services primarily on a subscription basis. Residential customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over a one month service period as the subscription services are delivered. Each optional service purchased is generally accounted for as a distinct performance obligation when purchased and revenue is recognized when the service is provided.
Residential video customers have the option to purchase additional tiers of services, as well as video-on-demand (“VOD”)
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
programming and pay-per-view programming on a per-event basis. Video revenues consist primarily of revenues from the selected programming service tier, as well as VOD fees, pay-per-view fees, retransmission fees, regulatory fees, equipment service fees and video installation fees.
Residential Internet customers receive data download and upload services with speeds dependent on the selected tier of service. Customers are also offered a security suite, an in-home WiFi product, and an out-of-home WiFi service. Internet revenues consist primarily of data services, WiFi service fees and Internet installation fees.
Residential voice customers receive unlimited local and long distance calling to United States, Canada, Mexico, and Puerto Rico, voicemail, call waiting, caller ID, call forward and other features. Customers may also purchase international calling either by the minute, or through packages of minutes per month. Voice revenues consist primarily of voice services and regulatory fees.
Small and Medium Business
Small and medium business customers are offered video, Internet and voice services similar to those provided to residential customers. Small and medium business customers may generally cancel their subscriptions at any time without penalty. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over a one month service period as the subscription services are delivered.
Enterprise Solutions
Enterprise Solutions include fiber-delivered communications and managed information technology solutions to larger businesses, as well as high-capacity last-mile data connectivity services to wireless and wireline carriers, Internet service providers, and other competitive carriers on a wholesale basis. Services are primarily offered on a subscription basis with a contractually specified and non-cancelable service period. The non-cancelable contract terms for enterprise services generally range from two to seven years. Each subscription service provided is accounted for as a distinct performance obligation and revenue is recognized ratably over the contract period as the subscription services are delivered. Enterprise subscription services are billed as monthly reoccurring charges to customers and related installation services, if applicable, are billed upon completion of the customer installation. Installation services are not accounted for as distinct performance obligations, but rather a component of the connectivity services, and therefore upfront installation fees are deferred and recognized as revenue over the related contract period.
Advertising Services
The Company offers local, regional and national businesses the opportunity to advertise in individual and multiple markets on cable television networks and digital outlets. Placement of advertising is accounted for as a distinct performance obligation and revenue is recognized at the point in time when the advertising is distributed. In some markets, the Company has formed advertising interconnects or entered into representation agreements with other video distributors, under which the Company sells advertising on behalf of those distributors. In other markets, the Company has entered into representation agreements under which another operator in the area will sell advertising on the Company’s behalf. For representation arrangements in which the Company controls the sale of advertising and acts as the principal to the transaction, the Company recognizes revenue earned from the advertising customer on a gross basis and the amount remitted to the distributor as an operating expense. For other representation arrangements in which the Company does not control the sale of advertising and acts as an agent to the transaction, the Company recognizes revenue net of any fee remitted to the distributor.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
The Company’s revenues by product line are as follows:
|
| | | | | | | |
| Three Months Ended March 31, |
| 2018 | | 2017 |
Video | $ | 4,297 |
| | $ | 4,079 |
|
Internet | 3,708 |
| | 3,398 |
|
Voice | 556 |
| | 694 |
|
Residential revenue | 8,561 |
| | 8,171 |
|
| | | |
Small and medium business | 937 |
| | 900 |
|
Enterprise | 579 |
| | 539 |
|
Commercial revenue | 1,516 |
| | 1,439 |
|
| | | |
Advertising sales | 356 |
| | 337 |
|
Other | 224 |
| | 217 |
|
| $ | 10,657 |
| | $ | 10,164 |
|
Fees imposed on the Company by various governmental authorities are passed through on a monthly basis to the Company’s customers and are periodically remitted to authorities. Fees of $246 million and $235 million for the three months ended March 31, 2018 and 2017, respectively, are reported in video, voice and commercial revenues, on a gross basis with a corresponding operating expense because the Company is acting as a principal. Certain taxes, such as sales taxes imposed on the Company’s customers, collected and remitted to state and local authorities, are recorded on a net basis because the Company is acting as an agent in such situation.
A significant portion of our revenue is derived from customers who may generally cancel their subscriptions at any time without penalty. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of the future revenue to be recognized from our existing customer base. Revenue from customers with a contractually specified term and non-cancelable service period will be recognized over the term of such contracts, which is generally two to seven years for our enterprise contracts.
Significant Judgments
The Company often provides multiple services to a customer. Provision of customer premise equipment, installation services, and additional service tiers may have a significant level of integration and interdependency with the subscription video, Internet, voice, or connectivity services provided. Judgment is required to determine whether provision of customer premise equipment, installation services, and additional service tiers are considered distinct and accounted for separately, or not distinct and accounted for together with the subscription services.
Allocation of the transaction price to the distinct performance obligations in bundled residential service subscriptions requires judgment. The transaction price for a bundle of residential services is frequently less than the sum of the standalone selling prices of each individual service. The Company allocates the residential services bundle discount among the services to which the discount relates based on the relative standalone selling prices of those services. Standalone selling prices for the Company’s residential video and Internet services are directly observable, while standalone selling price for the Company’s residential voice service is estimated using the adjusted market assessment approach which relies upon information from peers and competitors who sell residential voice services individually.
The Company believes residential and small and medium business non-refundable upfront installation fees charged to customers result in a material right to renew the contract as such fees are not required to be paid upon subsequent renewals. The residential and small and medium business upfront fee is deferred over the period the fee remains material to the customer, which the Company has estimated to be approximately six months. Estimation of the period the fee remains material to the customer requires consideration of both quantitative and qualitative factors including average installation fee, average revenue per customer, and customer behavior, among others.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Contract Liabilities
Timing of revenue recognition may differ from the timing of invoicing to customers. Residential, small and medium business, and enterprise customers are invoiced for subscription services in advance of the service period. Deferred revenue liabilities, or contract liabilities, are recorded when the Company collects payments in advance of performing the services. Deferred revenue liabilities, or contract liabilities, are also recorded when the Company invoices customers upfront for installation services that are recognized as revenue over time. Residential and small and medium business installation revenues are deferred over the period the fee remains material to the customer. Enterprise installation revenues are deferred using a portfolio approach over the average contract life of each enterprise service category. As of March 31, 2018, current deferred revenue liabilities consisting of refundable customer prepayments of $386 million and upfront installation fees of $86 million were included in accounts payable and accrued liabilities. As of March 31, 2018, long-term deferred revenue liabilities consisting of enterprise upfront installation fees of $33 million were included in other long-term liabilities.
Contract Costs
The Company recognizes an asset for incremental costs of obtaining a contract with a customer if the amortization period of those costs is expected to be longer than one year and the costs are expected to be recovered. Enterprise sales commission costs meet the requirements to be deferred and, as a result, are recognized using a portfolio approach over a commission expense weighted-average enterprise contract period. Deferred enterprise commission costs are included in other noncurrent assets in the consolidated balance sheet and totaled $127 million as of March 31, 2018. As the amortization period of residential and small and medium business commissions costs is less than one year, the Company applies the practical expedient that allows such costs to be expensed as incurred. The Company has determined that the amortization period associated with residential and small and medium business commission costs is less than one year based on qualitative and quantitative factors.
The Company recognizes an asset for costs incurred to fulfill a contract when those costs are directly related to services provided under the contract, generate or enhance resources of the entity that will be used in performing service obligations under the contract, and are expected to be recovered. Up-front fees paid to MDUs, such as apartment building owners, in order to gain access to market and serve tenants who reside within the MDU meet the requirements to be deferred and, as a result, are recognized over the term of the MDU contract. Deferred upfront MDU fees are amortized on a straight-line basis and are included in other noncurrent assets in the consolidated balance sheet and totaled $247 million as of March 31, 2018. Amortization expense of $15 million was included in regulatory, connectivity and produced content within operating expenses in the consolidated statements of operations for the three months ended March 31, 2018. Residential and small and medium business installation costs not capitalized into property, plant and equipment are expensed as incurred under cable industry-specific guidance.
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”)
In August 2016, the FASB issued ASU No. 2016-15 which clarifies how entities should classify cash receipts and cash payments related to eight specific cash flow matters on the statement of cash flows, with the objective of reducing existing diversity in practice. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact to the Company’s consolidated financial statements.
ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”)
In November 2016, the FASB issued ASU No. 2016-18 which requires that amounts generally described as restricted cash to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 does not provide a definition of restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 on January 1, 2018. The new guidance will only be applicable to amounts described by the Company as restricted cash. The Company currently does not have amounts described as restricted cash; however, the Company's consolidated statement of cash flows for the year ended December 31, 2016 will be recast to present $22.3 billion of restricted cash as beginning of period cash and cash equivalents.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
ASU No. 2017-09, Scope of Modification Accounting ("ASU 2017-09")
In May 2017, the FASB issued ASU No. 2017-09 which amends the scope of modification accounting for share-based payment arrangements. The ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. ASU 2017-09 is applied prospectively to awards modified on or after the effective date. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact to the Company’s consolidated financial statements.
Accounting Standards Not Yet Adopted
ASU No. 2016-02, Leases (“ASU 2016-02”)
In February 2016, the FASB issued ASU No. 2016-02 which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. Lessees are allowed to account for short-term leases (i.e., leases with a term of 12 months or less) off-balance sheet, consistent with current operating lease accounting. For income statement purposes, the FASB retained a dual model, requiring leases to be classified as either operating or finance. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. ASU 2016-02 will be effective for interim and annual periods beginning after December 15, 2018 (January 1, 2019 for the Company). The new standard currently requires a modified retrospective transition through a cumulative-effect adjustment as of the beginning of the earliest period presented in the financial statements, although the FASB recently approved an option for transition relief to not restate or make required disclosures under the new standard in comparative periods in the period of adoption. Along with that transition relief, the FASB also recently approved a practical expedient for lessors to allow for the combined presentation of lease and non-lease revenues when certain conditions are met.
The Company’s adoption process of ASU 2016-02 is ongoing, including evaluating and quantifying the impact on its consolidated financial statements, identifying the population of leases (and embedded leases), implementing a selected technology solution and collecting and validating lease data. The Company expects its lease obligations designated as operating leases (as disclosed in Note 20 to the audited consolidated financial statements in its most recent Annual Report on Form 10-K) will be reported on the consolidated balance sheets upon adoption, and is currently evaluating the impact to its consolidated financial statements as it relates to other potential embedded lease arrangements of the business that have otherwise been previously disclosed as a contractual commitment.
ASU No. 2017-04, Simplifying the Test for Goodwill Impairment (“ASU 2017-04”)
In January 2017, the FASB issued ASU No. 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 for interim or annual goodwill impairment tests performed after January 1, 2017. The Company is currently in the process of evaluating the impact that the adoption of ASU 2017-04 will have on its consolidated financial statements.
18. 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 not one of the holding companies that directly or indirectly own Charter Holdings. The “Charter Operating and Restricted Subsidiaries” column is presented to comply with the terms of the Credit Agreement.
CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(dollars in millions, except per share amounts and where indicated)
Comprehensive income equaled consolidated net income for the three months ended March 31, 2018. Condensed consolidating financial statements as of March 31, 2018 and December 31, 2017 and for the three months ended March 31, 2018 and 2017 follow.
|
| | | | | | | | | | | | | | | | | | | | | | | |
Charter Communications, Inc. and Subsidiaries |
Condensed Consolidating Balance Sheets |
As of March 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 | $ | — |
| | $ | 285 |
| | $ | — |
| | $ | 291 |
| | $ | — |
| | $ | 576 |
|
Accounts receivable, net | — |
| | 35 |
| | — |
| | 1,374 |
| | — |
| | 1,409 |
|
Receivables from related party | 26 |
| | 403 |
| | 43 |
| | — |
| | (472 | ) | | — |
|
Prepaid expenses and other current assets | 19 |
| | 43 |
| | — |
| | 351 |
| | — |
| | 413 |
|
Total current assets | 45 |
| | 766 |
| | 43 |
| | 2,016 |
| | (472 | ) | | 2,398 |
|
| | | | | | | | | | | |
INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | |
Property, plant and equipment, net | — |
| | 334 |
| | — |
| | 33,668 |
| | — |
| | 34,002 |
|
Customer relationships, net | — |
| | — |
| | — |
| | 11,315 |
| | — |
| | 11,315 |
|
Franchises | — |
| | — |
| | — |
| | 67,319 |
| | — |
| | 67,319 |
|
Goodwill | — |
| | — |
| | — |
| | 29,554 |
| | — |
| | 29,554 |
|
Total investment in cable properties, net | — |
| | 334 |
| | — |
| | 141,856 |
| | — |
| | 142,190 |
|
| | | | | | | | | | | |
INVESTMENT IN SUBSIDIARIES | 55,982 |
| | 63,272 |
| | 81,694 |
| | — |
| | (200,948 | ) | | — |
|
LOANS RECEIVABLE – RELATED PARTY | 237 |
| | 674 |
| | 526 |
| | — |
| | (1,437 | ) | | — |
|
OTHER NONCURRENT ASSETS | — |
| | 210 |
| | — |
| | 1,353 |
| | — |
| | 1,563 |
|
| | | | | | | | | | | |
Total assets | $ | 56,264 |
| | $ | 65,256 |
| | $ | 82,263 |
| | $ | 145,225 |
| | $ | (202,857 | ) | | $ | 146,151 |
|
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 5 |
| | $ | 800 |
| | $ | 278 |
| | $ | 7,179 |
| | $ | — |
| | $ | 8,262 |
|
Payables to related party | — |
| | — |
| | — |
| | 472 |
| | (472 | ) | | — |
|
Current portion of long-term debt | — |
| | — |
| | — |
| | 3,340 |
| | — |
| | 3,340 |
|
Total current liabilities | 5 |
| | 800 |
| | 278 |
| | 10,991 |
| | (472 | ) | | 11,602 |
|
| | | | | | | | | | | |
LONG-TERM DEBT | — |
| | — |
| | 18,713 |
| | 48,896 |
| | — |
| | 67,609 |
|
LOANS PAYABLE – RELATED PARTY | — |
| | — |
| | — |
| | 1,437 |
| | (1,437 | ) | | — |
|
DEFERRED INCOME TAXES | 17,307 |
| | 12 |
| | — |
| | 32 |
| | — |
| | 17,351 |
|
OTHER LONG-TERM LIABILITIES | 184 |
| | 128 |
| | — |
| | 2,152 |
| | — |
| | 2,464 |
|
| | | | | | | | | | | |
SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | | | | | | |
Controlling interest | 38,768 |
| | 55,982 |
| | 63,272 |
| | 81,694 |
| | (200,948 | ) | | 38,768 |
|
Noncontrolling interests | — |
| | 8,334 |
| | — |
| | 23 |
| | — |
| | 8,357 |
|
Total shareholders’/member’s equity | 38,768 |
| | 64,316 |
| | 63,272 |
| | 81,717 |
| | (200,948 | ) | | 47,125 |
|
| | | | | | | | | | | |
Total liabilities and shareholders’/member’s equity | $ | 56,264 |
| | $ | 65,256 |
| | $ | 82,263 |
| | $ | 145,225 |
| | $ | (202,857 | ) | | $ | 146,151 |
|
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, 2017 |
| | | | | | | | | | | |
| 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 | $ | — |
| | $ | 291 |
| | $ | — |
| | $ | 330 |
| | $ | — |
| | $ | 621 |
|
Accounts receivable, net | — |
| | 24 |
| | — |
| | 1,611 |
| | — |
| | 1,635 |
|
Receivables from related party | 22 |
| | 613 |
| | 55 |
| | — |
| | (690 | ) | | — |
|
Prepaid expenses and other current assets | 22 |
| | 34 |
| | — |
| | 243 |
| | — |
| | 299 |
|
Total current assets | 44 |
| | 962 |
| | 55 |
| | 2,184 |
| | (690 | ) | | 2,555 |
|
| | | | | | | | | | | |
INVESTMENT IN CABLE PROPERTIES: | | | | | | | | | | |
Property, plant and equipment, net | — |
| | 336 |
| | — |
| | 33,552 |
| | — |
| | 33,888 |
|
Customer relationships, net | — |
| | — |
| | — |
| | 11,951 |
| | — |
| | 11,951 |
|
Franchises | — |
| | — |
| | — |
| | 67,319 |
| | — |
| | 67,319 |
|
Goodwill | — |
| | — |
| | — |
| | 29,554 |
| | — |
| | 29,554 |
|
Total investment in cable properties, net | — |
| | 336 |
| | — |
| | 142,376 |
| | — |
| | 142,712 |
|
| | | | | | | | | | | |
INVESTMENT IN SUBSIDIARIES | 56,263 |
| | 63,558 |
| | 81,980 |
| | — |
| | (201,801 | ) | | — |
|
LOANS RECEIVABLE – RELATED PARTY | 233 |
| | 655 |
| | 511 |
| | — |
| | (1,399 | ) | | — |
|
OTHER NONCURRENT ASSETS | — |
| | 223 |
| | — |
| | 1,133 |
| | — |
| | 1,356 |
|
| | | | | | | | | | | |
Total assets | $ | 56,540 |
| | $ | 65,734 |
| | $ | 82,546 |
| | $ | 145,693 |
| | $ | (203,890 | ) | | $ | 146,623 |
|
| | | | | | | | | | | |
LIABILITIES AND SHAREHOLDERS’/MEMBER’S EQUITY | | | | | | |
CURRENT LIABILITIES: | | | | | | | | | | | |
Accounts payable and accrued liabilities | $ | 4 |
| | $ | 900 |
| | $ | 280 |
| | $ | 7,861 |
| | $ | — |
| | $ | 9,045 |
|
Payables to related party | — |
| | — |
| | — |
| | 690 |
| | (690 | ) | | — |
|