MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
INTRODUCTION
Management's discussion and analysis of results of operations and financial
condition ("MD&A") is a supplement to the accompanying consolidated financial
statements and provides additional information on Time Warner Cable Inc.'s
(together with its subsidiaries, "TWC" or the "Company") business, current
developments, financial condition, cash flows and results of operations. MD&A is
organized as follows:
• Overview. This section provides a general description of TWC's business, as
well as recent developments the Company believes are important in
understanding the results of operations and financial condition or in
understanding anticipated future trends.
• Financial statement presentation. This section provides a summary of how the
Company's operations are presented in the accompanying consolidated financial
statements.
• Results of operations. This section provides an analysis of the Company's
results of operations for the three and nine months ended September 30, 2009.
• Financial condition and liquidity. This section provides an analysis of the
Company's financial condition as of September 30, 2009 and cash flows for the
nine months ended September 30, 2009.
• Market risk management. This section discusses how the Company monitors and
manages exposure to certain potential gains and losses arising from changes
in market rates and prices, such as interest rates. Refer to the Company's
Current Report on Form 8-K dated, and filed with the Securities and Exchange
Commission (the "SEC") on, June 24, 2009 (the "June 2009 Form 8-K"), which
recasts certain information in the Company's Annual Report on Form 10-K for
the year ended December 31, 2008, for a discussion of additional market risks
applicable to the Company.
• Caution concerning forward-looking statements. This section provides a
description of the use of forward-looking information appearing in this
report, including in MD&A and the consolidated financial statements. Such
information is based on management's current expectations about future
events, which are inherently susceptible to uncertainty and changes in
circumstances. Refer to the Company's Annual Report on Form 10-K for the year
ended December 31, 2008 (the "2008 Form 10-K") for a discussion of the risk
factors applicable to the Company.
OVERVIEW
TWC is the second-largest cable operator in the U.S., with technologically
advanced, well-clustered systems located mainly in five geographic areas - New
York State (including New York City), the Carolinas, Ohio, southern California
(including Los Angeles) and Texas. As of September 30, 2009, TWC served
approximately 14.6 million residential and commercial customers who subscribed
to one or more of its video, high-speed data and voice services, which totaled
approximately 26.3 million primary service units and approximately 35.1 million
revenue generating units (each as defined in "Results of Operations").
As of December 31, 2008, Time Warner Inc. ("Time Warner") owned approximately
84% of the common stock of TWC (representing a 90.6% voting interest), and also
owned an indirect 12.43% non-voting common stock interest in TW NY Cable Holding
Inc. ("TW NY"), a subsidiary of TWC. Additionally, the financial results of TWC
were consolidated by Time Warner. As discussed further in "-Recent
Developments," on March 12, 2009, TWC completed its separation from Time Warner.
As a result of the separation, Time Warner no longer has an ownership interest
in TWC.
TWC principally offers three services - video, high-speed data and voice -
over its broadband cable systems. TWC markets its services separately and in
"bundled" packages of multiple services and features. As of September 30, 2009,
56% of TWC's customers subscribed to two or more of its primary services,
including 23% of its customers who subscribed to all three primary services. In
addition to its residential services, TWC offers commercial customers video,
high-speed data, voice and networking and transport services. In addition, TWC
sells advertising to a variety of national, regional and local advertising
customers.
TIME WARNER CABLE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Video is TWC's largest service in terms of revenues generated and, as of
September 30, 2009, TWC had approximately 13.0 million video subscribers, of
which approximately 8.8 million received video service via digital
transmissions. TWC expects to continue to increase video revenues for the
foreseeable future through the offering of digital video services, including
related equipment rentals, as well as through price increases; however, future
video revenue growth rates will depend on video subscriber and penetration
levels, competition, pricing and the state of the economy. Video programming
costs represent a major component of TWC's expenses and are expected to continue
to increase, reflecting rate increases on existing programming services, costs
associated with retransmission consent agreements, digital video subscriber
growth and the expansion of service offerings (e.g., new network channels). TWC
expects that its video programming costs as a percentage of video revenues will
continue to increase over the next few years as increases in programming costs
outpace growth in video revenues.
As of September 30, 2009, TWC had approximately 8.9 million residential
high-speed data subscribers. TWC expects continued growth in residential
high-speed data subscribers and revenues for the foreseeable future; however,
future high-speed data subscriber and revenue growth rates will depend on
high-speed data penetration levels, competition, pricing and the state of the
economy. TWC also offers commercial high-speed data services and had 293,000
commercial high-speed data subscribers as of September 30, 2009.
As of September 30, 2009, TWC had approximately 4.1 million residential
Digital Phone subscribers. TWC expects increases in Digital Phone subscribers
and revenues for the foreseeable future; however, future Digital Phone
subscriber and revenue growth rates will depend on Digital Phone penetration
levels, competition, pricing, the rate of wireless substitution of wireline
phone service and the state of the economy. TWC also offers its commercial
Digital Phone service, Business Class Phone, in nearly all of its operating
areas and had 58,000 commercial Digital Phone subscribers as of September 30,
2009.
TWC faces intense competition for customers from a variety of alternative
information and entertainment delivery sources, principally from direct-to-home
satellite video providers and certain telephone companies, each of which offers
a broad range of services that provide features and functions comparable to
those provided by TWC. The services are also offered in bundles of video,
high-speed data and voice services similar to TWC's and, in certain cases, these
offerings include wireless services. The availability of these bundled service
offerings and of wireless offerings, whether as a single offering or as part of
a bundle, has intensified competition. In addition, technological advances and
product innovations have increased and will likely continue to increase the
number of alternatives available to TWC's customers, further intensifying
competition. The more competitive environment may negatively affect the growth
of revenue generating units and average monthly subscription revenues per
revenue generating unit and, additionally, may increase TWC's cost to obtain
certain video programming.
Since the end of the third quarter of 2008, the Company has experienced a
slowdown in growth across all revenue generating unit categories, which the
Company believes is partly a result of a challenging economic environment and a
related reduction in consumer spending and increase in housing foreclosures. The
impact of a continuing economic downturn on the Company's financial and
subscriber results is difficult to estimate; however, the Company believes that
the slower growth in revenue generating units and the lower growth or declines
in other video services (e.g., digital video recorders, premium channels and
transactional video-on-demand) experienced during the first nine months of 2009
will result in lower revenue growth for the full year of 2009 as compared to
2008. In addition, the Company expects that Advertising revenues will decline in
the fourth quarter of 2009 as compared to the fourth quarter of 2008 due to
lower political advertising revenues and continued weakness in Advertising
revenues from national, regional and local businesses.
Management believes that cash generated by or available to TWC should be
sufficient to fund its capital and liquidity needs for the foreseeable future.
As of September 30, 2009, the Company had approximately $4.0 billion of unused
committed capacity (including cash and equivalents). Additionally, there are no
maturities of the Company's long-term debt prior to February 2011. See
"Financial Condition and Liquidity" for further details regarding the Company's
committed capacity.
During the first quarter of 2009, TWC began a significant restructuring,
primarily consisting of headcount reductions. TWC expects to incur total
restructuring charges of approximately $75 million, including $64 million
incurred through September 30, 2009.
TIME WARNER CABLE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Recent Developments
Separation from Time Warner, Recapitalization and TWC Reverse Stock Split
On March 12, 2009, the separation of TWC from Time Warner was completed
pursuant to a Separation Agreement dated as of May 20, 2008 (the "Separation
Agreement") between TWC and its subsidiaries, Time Warner Entertainment Company,
L.P. ("TWE") and TW NY, and Time Warner and its subsidiaries, Warner
Communications Inc. ("WCI"), Historic TW Inc. ("Historic TW") and American
Television and Communications Corporation ("ATC"). In accordance with the
Separation Agreement, on February 25, 2009, Historic TW transferred its 12.43%
non-voting common stock interest in TW NY to TWC in exchange for 80 million
newly issued shares (approximately 27 million shares after giving effect to the
1-for-3 reverse stock split discussed below) of TWC's Class A common stock (the
"TW NY Exchange"). On March 12, 2009, TWC paid a special cash dividend of $10.27
per share ($30.81 per share after giving effect to the 1-for-3 reverse stock
split, aggregating $10.856 billion) to holders of record on March 11, 2009 of
TWC's outstanding Class A common stock and Class B common stock, which included
Time Warner (the "Special Dividend"). Following the receipt by Time Warner of
its share of the Special Dividend, TWC filed with the Secretary of State of the
State of Delaware an amended and restated certificate of incorporation, pursuant
to which, among other things, each outstanding share of TWC Class A common stock
(including the shares of Class A common stock issued in the TW NY Exchange) and
TWC Class B common stock was automatically converted (the "Recapitalization")
into one share of common stock, par value $0.01 per share (the "TWC Common
Stock"). After the Recapitalization, TWC's separation from Time Warner (the
"Separation") was effected as a pro rata dividend of all shares of TWC Common
Stock held by Time Warner to holders of record of Time Warner's common stock
(the "Spin-Off Dividend" or the "Distribution") as of 8:00 pm on March 12, 2009,
the record date for the Spin-Off Dividend. On March 12, 2009, Time Warner
deposited its shares of TWC Common Stock with an agent and, at the record date
for the Spin-Off Dividend, was deemed to no longer beneficially own such shares.
On March 27, 2009, the distribution date for the Spin-Off Dividend, all of these
shares of TWC Common Stock were distributed. The TW NY Exchange, the Special
Dividend, the Recapitalization, the Separation and the Distribution collectively
are referred to as the "Separation Transactions."
To pay a portion of the Special Dividend, on March 12, 2009, TWC borrowed
(i) the full committed amount of $1.932 billion under its 364-day senior
unsecured term loan facility (the "2008 Bridge Facility") and (ii) approximately
$3.3 billion under its senior unsecured five-year revolving credit facility (the
"Revolving Credit Facility"). The Company funded the remainder of the Special
Dividend with approximately $5.6 billion of cash on hand. See "-2009 Bond
Offerings and Termination of Lending Commitments" below for further details
regarding the termination of the 2008 Bridge Facility.
In connection with the Separation Transactions, on March 12, 2009, the
Company implemented a reverse stock split of the TWC Common Stock (the "TWC
reverse stock split") at a 1-for-3 ratio, effective immediately after the
Recapitalization. The shares of TWC Common Stock distributed in the Spin-Off
Dividend gave effect to both the Recapitalization and the TWC reverse stock
split.
During the three and nine months ended September 30, 2009 and 2008, the
Company incurred pretax costs related to the Separation, which have been
reflected in the Company's consolidated statement of operations as follows (in
millions):
Three Months Ended Nine Months Ended
September 30, September 30,
2009 2008 2009 2008
Other income (expense), net $ - $ (3 ) $ (28 ) $ (15 )
Interest expense, net - (2 ) (13 ) (33 )
Pretax costs related to the Separation $ - $ (5 ) $ (41 ) $ (48 )
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The Separation-related costs recorded in other income (expense), net, consist
of direct transaction costs (e.g., legal and professional fees) and such costs
recorded in interest expense, net, consist of debt issuance costs. The debt
issuance costs for the nine months ended September 30, 2009 primarily relate to
the portion of the upfront loan fees for the 2008 Bridge Facility that was
expensed due to the repayment of all borrowings outstanding under, and the
resulting termination of, such facility with a portion of the net proceeds of
the March 2009 Bond Offering (as defined below).
TIME WARNER CABLE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
2009 Bond Offerings and Termination of Lending Commitments
On March 26, 2009, TWC issued $3.0 billion in aggregate principal amount of
senior unsecured notes (the "March 2009 Bond Offering") and, on June 29, 2009,
TWC issued $1.5 billion in aggregate principal amount of senior unsecured
debentures (the "June 2009 Bond Offering" and, together with the March 2009 Bond
Offering, the "2009 Bond Offerings") under a shelf registration statement on
Form S-3 filed during 2008 (the "Shelf Registration Statement") with the SEC
that allows TWC to offer and sell from time to time senior and subordinated debt
securities and debt warrants. The March 2009 Bond Offering consisted of
$1.0 billion principal amount of 7.50% notes due 2014 and $2.0 billion principal
amount of 8.25% notes due 2019. The June 2009 Bond Offering consisted of
$1.5 billion principal amount of 6.75% debentures due 2039. TWC's obligations
under the debt securities issued in the 2009 Bond Offerings are guaranteed by
TWE and TW NY.
The Company used $1.934 billion of the net proceeds from the March 2009 Bond
Offering to repay all of the borrowings outstanding under the 2008 Bridge
Facility, as well as accrued interest and commitment fees, and such facility was
terminated by the parties thereto in accordance with its terms. Additionally, as
a result of the March 2009 Bond Offering and the termination of the 2008 Bridge
Facility, the Company terminated Time Warner's commitment (as lender) under a
two-year $1.535 billion senior unsecured supplemental term loan facility, and
the credit agreement governing such facility was terminated in accordance with
its terms. The Company used the remaining net proceeds from the March 2009 Bond
Offering to repay a portion of the borrowings outstanding under the Revolving
Credit Facility.
The Company used the net proceeds of $1.444 billion from the June 2009 Bond
Offering to repay a portion of the outstanding indebtedness under its five-year
term loan facility.
See Note 4 to the accompanying consolidated financial statements for further
details regarding the 2009 Bond Offerings.
Recent Regulatory Developments
On October 22, 2009, the Federal Communications Commission (the "FCC")
initiated a proceeding in which it proposes to adopt so-called "net neutrality"
rules that it describes as intended to preserve the openness of the Internet.
The proposed rules would apply to all providers of broadband Internet access
services, whether wireline or wireless, but would not apply to providers of
applications, content or other services. The FCC indicated that its comment
process will seek comment both on its rationales for the draft proposals as well
as their form and scope. Initial comments are due in January 2010. Any final
rules that ultimately may be adopted, depending upon their scope and terms,
could have a significant adverse effect on the Company's high-speed data
services.
FINANCIAL STATEMENT PRESENTATION
Revenues
The Company's revenues consist of Subscription and Advertising revenues.
Subscription revenues consist of revenues from video, high-speed data and voice
services.
Video revenues include subscriber fees for any tier of video service from
both residential and commercial subscribers. Video revenues from digital
services, or digital video revenues, include revenues from digital tiers,
premium channels, transactional video-on-demand (e.g., events, movies and
pay-per-view) and digital video recorder services. Video revenues also include
related equipment rental charges, installation charges and franchise fees
collected on behalf of local franchising authorities. Several ancillary items
are also included within video revenues, such as commissions earned on the sale
of merchandise by home shopping services and rental income earned on the leasing
of antenna attachments on transmission towers owned by the Company.
High-speed data revenues include subscriber fees from both residential and
commercial subscribers, along with related home networking fees and installation
charges. Additionally, high-speed data revenues include fees received from
certain distributors of TWC's Road RunnerTM high-speed data service (including
cable systems managed by the Advance/Newhouse Partnership). High-speed data
revenues also include fees paid to TWC by the Advance/Newhouse Partnership for
managing certain functions for the Advance/Newhouse Partnership, including,
among others, programming and engineering. In addition, high-speed data revenues
include fees received from third-party internet service providers whose on-line
services are provided to some of TWC's customers and revenues generated by the
sale of commercial networking and transport services (e.g., cellular backhaul).
Voice revenues include subscriber fees from residential and commercial
Digital Phone subscribers, along with related installation charges.
Advertising revenues primarily include the fees charged to local, regional
and national advertising customers for advertising placed on the Company's video
and high-speed data services. Nearly all Advertising revenues are attributable
to advertising placed on the Company's video service.
TIME WARNER CABLE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
Costs and Expenses
Costs of revenues include the following costs directly associated with the
delivery of services to subscribers or the maintenance of the Company's delivery
systems: video programming costs; high-speed data connectivity costs and certain
high-speed data customer care support service costs; voice network costs; other
service-related expenses, including non-administrative labor; franchise fees;
and other related costs.
Selling, general and administrative expenses include amounts not directly
associated with the delivery of services to subscribers or the maintenance of
the Company's delivery systems, such as administrative labor costs, marketing
expenses, billing system charges, non-plant repair and maintenance costs, other
administrative overhead costs and, prior to the Separation, fees paid to Time
Warner for reimbursement of certain administrative support functions.
Use of Operating Income (Loss) before Depreciation and Amortization and Free
Cash Flow
Operating Income (Loss) before Depreciation and Amortization is a financial
measure not calculated and presented in accordance with U.S. generally accepted
accounting principles ("GAAP"). The Company defines Operating Income (Loss)
before Depreciation and Amortization as Operating Income (Loss) before
depreciation of tangible assets and amortization of intangible assets.
Management utilizes Operating Income (Loss) before Depreciation and
Amortization, among other measures, in evaluating the performance of the
Company's business because Operating Income (Loss) before Depreciation and
Amortization eliminates the uneven effect across its business of considerable
amounts of depreciation of tangible assets and amortization of intangible assets
recognized in business combinations. Additionally, management utilizes Operating
Income (Loss) before Depreciation and Amortization because it believes this
measure provides valuable insight into the underlying performance of the
Company's individual cable systems by removing the effects of items that are not
within the control of local personnel charged with managing these systems such
as net income (loss) attributable to noncontrolling interests, income tax
benefit (provision), other income (expense), net, and interest expense, net. In
this regard, Operating Income (Loss) before Depreciation and Amortization is a
significant component of measures used in the Company's annual incentive
compensation programs.
A limitation of this measure, however, is that it does not reflect the
periodic costs of certain capitalized tangible and intangible assets used in
generating revenues in the Company's business. To compensate for this
limitation, management evaluates the investments in such tangible and intangible
assets through other financial measures, such as capital expenditure budget
variances, investment spending levels and return on capital analyses. Another
limitation of this measure is that it does not reflect the significant costs
borne by the Company for income taxes, debt servicing costs, the share of
Operating Income (Loss) before Depreciation and Amortization related to
noncontrolling interests, the results of the Company's equity investments or
other non-operational income or expense. Management compensates for this
limitation through other financial measures such as a review of net income
(loss) attributable to TWC and net income (loss) attributable to TWC per common
share.
Free Cash Flow is a non-GAAP financial measure. The Company defines Free Cash
Flow as cash provided by operating activities (as defined under GAAP) plus
excess tax benefits from the exercise of stock options, less cash provided by
(used by) discontinued operations, capital expenditures, cash paid for other
intangible assets, partnership distributions and principal payments on capital
leases. Management uses Free Cash Flow to evaluate the Company's business. The
Company believes this measure is an important indicator of its liquidity,
including its ability to reduce net debt and make strategic investments, because
it reflects the Company's operating cash flow after considering the significant
capital expenditures required to operate its business. A limitation of this
measure, however, is that it does not reflect payments made in connection with
investments and acquisitions, which reduce liquidity. To compensate for this
limitation, management evaluates such expenditures through other financial
measures such as return on investment analyses.
Both Operating Income (Loss) before Depreciation and Amortization and Free
Cash Flow should be considered in addition to, not as a substitute for, the
Company's Operating Income (Loss), net income (loss) attributable to TWC and
various cash flow measures (e.g., cash provided by operating activities), as
well as other measures of financial performance and liquidity reported in
accordance with GAAP, and may not be comparable to similarly titled measures
used by other companies. A reconciliation of Operating Income (Loss) before
Depreciation and Amortization to Operating Income (Loss) is presented under
"Results of Operations." A reconciliation of Free Cash Flow to cash provided by
operating activities is presented under "Financial Condition and Liquidity."
TIME WARNER CABLE INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION-(Continued)
RESULTS OF OPERATIONS
Changes in Basis of Presentation
Noncontrolling Interests
In December 2007, the Financial Accounting Standards Board issued
authoritative guidance that establishes accounting and reporting standards for a
noncontrolling interest in a subsidiary, including the accounting treatment upon
the deconsolidation of a subsidiary. This guidance became effective for TWC on
January 1, 2009 and has been applied prospectively, except for the provisions
related to the presentation of noncontrolling interests, which have been applied
retrospectively for all periods presented. As required by this guidance, the
Company has recast the presentation of noncontrolling interests in the prior
year financial statements so that they are comparable to those of 2009. During
the first quarter of 2009, noncontrolling interests of $1.110 billion as of
December 31, 2008 were reclassified to a component of total equity as reflected
in the accompanying consolidated balance sheet. For the three and nine months
ended September 30, 2008, minority interest expense of $57 million and
$144 million, respectively ($34 million and $86 million, respectively, net of
tax), is excluded from net income in the accompanying consolidated statement of
operations. Net income attributable to TWC per common share for prior periods is
not impacted.
Reverse Stock Split
In connection with the Separation Transactions, on March 12, 2009, the
Company implemented the TWC reverse stock split at a 1-for-3 ratio. The Company
has recast the presentation of share and per share data in the prior year
financial statements to reflect the TWC reverse stock split.
Reclassifications
Certain reclassifications have been made to the prior year financial
information to conform to the September 30, 2009 presentation.
Recent Accounting Standards
See Note 2 to the accompanying consolidated financial statements for other
accounting standards adopted in 2009 and accounting standards not yet adopted.
Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months
Ended September 30, 2008
The following discussion provides an analysis of the Company's results of
. . .
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