News Column

Time Warner Cable Reports 2014 Second-Quarter Results

July 31, 2014

Best Second-Quarter Subscriber Performance in Years

Strong Sequential Revenue and ARPU Growth

“TWC Maxx” Rollout Accelerated to Include Austin, Texas in 2014

NEW YORK--(BUSINESS WIRE)-- Time Warner Cable Inc. (NYSE:TWC) today reported financial results for its second quarter ended June 30, 2014.

Time Warner Cable Chairman and CEO Rob Marcus said: “Time Warner Cable posted another very good quarter. We delivered the best second-quarter subscriber volumes in years, accelerated ARPU growth and made terrific progress on our strategic and operating initiatives. I want to commend our team for remaining laser focused on executing our operating plan, while at the same time working hard to complete our merger with Comcast.”

                                             

SELECTED CONSOLIDATED FINANCIAL RESULTS

 
 
(in millions, except per share data;2nd QuarterYear-to-Date 6/30
unaudited)ChangeChange
20142013$%20142013$%
Revenue $ 5,726 $ 5,550 $ 176 3.2 % $ 11,308 $ 11,025 $ 283 2.6 %
Adjusted OIBDA(a) $ 2,054 $ 2,037 $ 17 0.8 % $ 4,034 $ 3,949 $ 85 2.2 %
Operating Income(b) $ 1,163 $ 1,187 $ (24 ) (2.0 %) $ 2,255 $ 2,247 $ 8 0.4 %
Diluted EPS(c) $ 1.76 $ 1.64 $ 0.12 7.3 % $ 3.46 $ 2.98 $ 0.48 16.1 %
Adjusted Diluted EPS(a) $ 1.89 $ 1.69 $ 0.20 11.8 % $ 3.68 $ 3.10 $ 0.58 18.7 %
Cash provided by operating activities(b) $ 1,695 $ 1,551 $ 144 9.3 % $ 3,092 $ 2,945 $ 147 5.0 %
Capital expenditures $ 1,240 $ 827 $ 413 49.9 % $ 2,074 $ 1,597 $ 477 29.9 %
Free Cash Flow(a)(b)     $ 459     $ 732     $ (273 )     (37.3 %)       $ 1,088     $ 1,393     $ (305 )     (21.9 %)

(a)

  Refer to Note 4 to the accompanying consolidated financial statements for definitions of Adjusted OIBDA, Adjusted Diluted EPS and Free Cash Flow and below for reconciliations.

(b)

Operating Income is reduced by merger-related and restructuring costs of $61 million and $27 million for the second quarters of 2014 and 2013, respectively, and $141 million and $58 million for the six months ended June 30, 2014 and 2013, respectively. Cash provided by operating activities and Free Cash Flow are reduced by merger-related and restructuring payments of $29 million and $35 million for the second quarters of 2014 and 2013, respectively, and $87 million and $64 million for the six months ended June 30, 2014 and 2013, respectively.

(c)

Diluted EPS represents net income per diluted common share attributable to TWC common shareholders.
 


HIGHLIGHTS

Financial Highlights

  • Second-quarter 2014 revenue grew 3.2% year over year, driven primarily by growth of 22.3% in business services revenue and 12.8% growth in residential high-speed data revenue. Sequential quarterly revenue growth of $144 million was the highest organic growth in seven years.
  • Adjusted Diluted EPS increased 11.8% to $1.89. Diluted EPS increased 7.3% to $1.76.
  • Second-quarter 2014 average monthly revenue per residential customer relationship (ARPU) grew 1.7% to $106.98. Residential high-speed data ARPU increased 9.7% to $46.92.

    Operational Highlights

  • Overall second-quarter subscriber performance was the best in years.
  • Residential customer relationship net declines of 34,000 – best second quarter in five years
  • Residential triple play net additions of 42,000 – best second quarter in two years
  • Residential high-speed data net additions of 67,000 – best second quarter in four years
  • Residential voice net additions of 79,000 – best second quarter in five years
  • Residential video net declines of 152,000 – best second quarter in three years
  • Business primary service unit and customer relationship net additions of 37,000 and 21,000, respectively – highest quarter ever
  • “TWC Maxx” rollout, including conversion to an all-digital network and high-speed data speed increases to as much as 300 Mbps, continues to progress in New York City and Los Angeles and has recently begun in Austin, Texas.
  • TWC’s cloud-based guide with an advanced VOD portal was installed on 5.8 million set-top boxes at the end of the second quarter.
  • Business Services continued to benefit from the addition of buildings and cell towers to the network, expansion of the sales force and improved sales rep productivity.
  • The Company accelerated its pace of investment in advanced set-top boxes, cable modems capable of supporting TWC Maxx speeds, expanded VOD capacity and network reliability.

    CHANGES IN BASIS OF PRESENTATION

    Effective in the first quarter of 2014, the Company determined it has three reportable segments: Residential Services, Business Services and Other Operations. Additionally, during the first quarter of 2014, the Company revised its categorization of operating costs and expenses to be consistent with how such costs and expenses are presented to management and to provide a more meaningful presentation. The Company has recast its financial information and disclosures for the prior periods to include (i) disclosure of segment results, which are discussed further below in “Detailed Segment Results” and Note 3 to the accompanying consolidated financial statements, and (ii) the revised categorization of operating costs and expenses, which had no impact on total operating costs and expenses, Operating Income or net income attributable to TWC shareholders for any period presented.

    CONSOLIDATED REVENUE AND PROFITABILITY RESULTS

    Revenue for the second quarter of 2014 increased 3.2% year over year as a result of revenue growth at all segments.

    Adjusted Operating Income before Depreciation and Amortization (“Adjusted OIBDA”) for thesecond quarter of 2014increased 0.8% driven by revenue growth, partially offset by a 4.5% year-over-year increase in operating expenses.

     
         
    (in millions; unaudited)2nd QuarterYear-to-Date 6/30
                      Change         Change
    20142013$     %20142013$     %
    Operating costs and expenses:
    Programming and content $ 1,341 $ 1,234 $ 107 8.7 % $ 2,650 $ 2,509 $ 141 5.6 %
    Sales and marketing 544 496 48 9.7 % 1,099 969 130 13.4 %
    Technical operations 371 363 8 2.2 % 742 735 7 1.0 %
    Customer care 207 187 20 10.7 % 412 384 28 7.3 %
    Other operating   1,209 1,233   (24 ) (1.9 %)   2,371 2,479   (108 ) (4.4 %)
    Total operating costs and expenses $ 3,672 $ 3,513 $ 159 4.5 % $ 7,274 $ 7,076 $ 198 2.8 %
     


    The increase in operating expenses was primarily due to the following (each of which is discussed further below under “Detailed Segment Results”):

  • increased programming and content costs associated with SportsNet LA, a regional sports network carrying the Los Angeles Dodgers’ baseball games and other sports programming, at the Residential Services and Other Operations segments;
  • higher third-party programming costs at the Residential Services segment;
  • growth in sales and marketing costs at the Business Services and Residential Services segments;
  • higher customer care costs at the Residential Services segment; and
  • growth in costs associated with advertising inventory sold on behalf of other video distributors at the Other Operations segment;
  • partially offset by a decline in voice costs at the Residential Services and Business Services segments.

    The growth in total operating costs and expenses was reduced by a $27 million decrease in pension expense.

    Operating Income for the second quarter of 2014 decreased 2.0% primarily due to higher merger-related and restructuring costs, partially offset by higher Adjusted OIBDA. Merger-related and restructuring costs for the second quarter of 2014 included Comcast merger-related costs of $49 million (employee retention costs of $40 million and advisory and legal fees of $9 million), DukeNet Communications merger-related costs of $3 million and restructuring costs primarily associated with employee terminations and other exit costs of $9 million.

    DETAILED SEGMENT RESULTS

    Residential Services

    Residential Services revenue increased as a result of an increase in high-speed data revenue, partially offset by decreases in video and voice revenue.

  • Residential video revenue decreased primarily due to a year-over-year decline in video subscribers, partially offset by an increase in average revenue per subscriber as a result of price increases.
  • The growth in residential high-speed data revenue was the result of an increase in average revenue per subscriber, primarily due to increases in prices and equipment rental charges and a greater percentage of subscribers purchasing higher-priced tiers of service, as well as growth in high-speed data subscribers.
  • Residential voice revenue decreased due to lower average revenue per subscriber.
     

    Selected Residential Services Financial Results

     
     
    (in millions; unaudited)   2nd Quarter     Year-to-Date 6/30
                      Change         Change
    20142013$     %20142013$     %
    Revenue:
    Video $ 2,546 $ 2,674 $ (128 ) (4.8 %) $ 5,041 $ 5,345 $ (304 ) (5.7 %)
    High-speed data 1,606 1,424 182 12.8 % 3,164 2,830 334 11.8 %
    Voice 490 517 (27 ) (5.2 %) 986 1,036 (50 ) (4.8 %)
    Other   20   17   3   17.6 %   39   32   7   21.9 %
    Total revenue $ 4,662 $ 4,632 $ 30 0.6 % $ 9,230 $ 9,243 $ (13 ) (0.1 %)
     
    Adjusted OIBDA(a)   $ 2,192     $ 2,200     $ (8 )     (0.4 %)     $ 4,324     $ 4,371     $ (47 )     (1.1 %)

    (a)

      Refer to Note 4 to the accompanying consolidated financial statements for a definition of Adjusted OIBDA.
     


    The slight decrease in Adjusted OIBDA was driven by a 1.6% increase in operating costs, partially offset by the increase in revenue discussed above. The increase in operating costs was the result of increases in programming costs, sales and marketing costs and customer care costs, partially offset by lower other operating costs.

  • Programming costs (which include intercompany expense from the Other Operations segment for programming costs associated with the Company’s Los Angeles Lakers’ regional sports networks, local sports, news and lifestyle channels and, beginning in 2014, SportsNet LA) grew 3.9% to $1.3 billion primarily due to an increase in average monthly programming costs per video subscriber, partially offset by a decline in video subscribers. Average monthly programming costs per residential video subscriber grew 10.8% year over year to $38.29 for the second quarter of 2014, primarily driven by contractual rate increases and the carriage of SportsNet LA.
  • Sales and marketing costs increased 5.4% to $353 million primarily due to headcount growth and higher compensation costs per employee, including customer retention.
  • Customer care costs increased 9.4% to $174 million primarily due to higher employee costs.
  • Other operating costs decreased 15.9% to $217 million primarily due to declines in voice costs, partially offset by higher bad debt expense. Voice costs decreased $63 million primarily due to the in-sourcing of voice transport, switching and interconnection services.
     

    Residential Services Subscriber Metrics

     
     
    (in thousands)         Net      
    Additions
    3/31/2014(Declines)(a)6/30/2014
    Video   11,163   (152 ) 11,011
    High-speed data 11,358 67 11,415
    Voice 4,913 79 4,975
     
    Single play 5,695 (20 ) 5,656
    Double play 4,772 (56 ) 4,712
    Triple play   4,065   42     4,107
    Customer relationships       14,532       (34 )       14,475

    For definitions related to the Company’s subscriber metrics, refer to the Trending Schedules posted on the Company’s website at www.twc.com/investors.

    (a)

      During the second quarter of 2014, the Company recorded adjustments related to the treatment of employee accounts that decreased residential high-speed data subscribers by 10,000, residential voice subscribers by 17,000, residential single play subscribers by 19,000, residential double play subscribers by 4,000 and residential customer relationships by 23,000. The adjustments are reflected in the Company’s subscriber numbers as of June 30, 2014; however, they are not reflected in net additions (declines) for the second quarter of 2014.
     


    Business Services

    Business Services revenue growth was primarily due to increases in high-speed data and voice subscribers, organic growth in cell tower backhaul revenue and $29 million of revenue from DukeNet, which was acquired on December 31, 2013.

     

    Selected Business Services Financial Results

     
           
    (in millions; unaudited)2nd QuarterYear-to-Date 6/30
            Change         Change
    20142013$     %20142013$     %
    Revenue:
    Video $ 90 $ 87 $ 3 3.4 % $ 179 $ 171 $ 8 4.7 %
    High-speed data 331 268 63 23.5 % 637 524 113 21.6 %
    Voice 123 102 21 20.6 % 241 198 43 21.7 %
    Wholesale transport 97 61 36 59.0 % 198 116 82 70.7 %
    Other   50   47   3 6.4 %   104   93   11 11.8 %
    Total revenue $ 691 $ 565 $ 126 22.3 % $ 1,359 $ 1,102 $ 257 23.3 %
     
    Adjusted OIBDA(a)     $ 409     $ 326     $ 83     25.5 %     $ 811     $ 638     $ 173     27.1 %

    (a)

      Refer to Note 4 to the accompanying consolidated financial statements for a definition of Adjusted OIBDA.
     


    The increase in Adjusted OIBDA was driven by growth in revenue, partially offset by an 18.0% increase in operating costs, primarily as a result of an increase in sales and marketing costs due to increased headcount and higher compensation costs per employee, as well as costs associated with DukeNet. This increase was partially offset by lower voice costs due to the in-sourcing of voice transport, switching and interconnection services.

     

    Business Services Subscriber Metrics

     
     
    (in thousands)         Net      
    3/31/2014Additions6/30/2014
    Video   196   5 201
    High-speed data 531 19 550
    Voice 289 13 302
     
    Single play 328 8 336
    Double play 239 10 249
    Triple play   70   3   73
    Customer relationships       637       21       658

    For definitions related to the Company’s subscriber metrics, refer to the Trending Schedules posted on the Company’s website at www.twc.com/investors.

     


    Other Operations

    Advertising revenue increased primarily due to growth in political advertising revenue. Other revenue increased primarily due to affiliate fees from the Residential Services segment as well as other distributors of the Los Angeles regional sports networks.

     

    Selected Other Operations Financial Results

     
     
    (in millions; unaudited)   2nd Quarter     Year-to-Date 6/30
            Change         Change
    20142013$   %20142013$   %
    Revenue:
    Advertising $ 272 $ 260 $ 12 4.6 % $ 519 $ 488 $ 31 6.4 %
    Other   164   143   21   14.7 %   317   292   25   8.6 %
    Total revenue $ 436 $ 403 $ 33 8.2 % $ 836 $ 780 $ 56 7.2 %
     
    Adjusted OIBDA(a)   $ 173     $ 234     $ (61 )   (26.1 %)     $ 346     $ 399     $ (53 )   (13.3 %)

    (a)

      Refer to Note 4 to the accompanying consolidated financial statements for a definition of Adjusted OIBDA.
     


    The decrease in Adjusted OIBDA was driven by a 55.6% increase in operating costs, primarily related to SportsNet LA content costs and growth in costs associated with advertising inventory sold on behalf of other video distributors, partially offset by growth in revenue.

    Shared Functions

    Operating costs associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) as well as other activities not directly attributable to a reportable segment decreased 0.4% year over year to $720 million for the second quarter of 2014. This decrease was driven by operating efficiencies, including decreased headcount.

    CONSOLIDATED NET INCOME

    Net Income Attributable to TWC Shareholders was $499 million, or $1.77 per basic common share and $1.76 per diluted common share, for the second quarter of 2014 compared to $481 million, or $1.65 per basic common share and $1.64 per diluted common share, for the second quarter of 2013.

    Adjusted Net Income Attributable to TWC Shareholders and Adjusted Diluted EPS, which exclude certain items affecting the comparability of TWC’s results for 2014 and 2013 detailed in Note 2 to the accompanying consolidated financial statements, were $536 million and $1.89, respectively, for the second quarter of 2014 compared to $497 million and $1.69, respectively, for the second quarter of 2013. Adjusted Diluted EPS for the second quarter of 2014 benefited year over year from lower average common shares outstanding as a result of share repurchases under the Company’s stock repurchase program, which was suspended in connection with the announcement of the Company’s merger with Comcast.

     
     
    (in millions, except per share data;   2nd Quarter     Year-to-Date 6/30
    unaudited)         Change         Change
    20142013$     %20142013$     %
    Net income attributable to TWC  
    shareholders $ 499 $ 481 $ 18 3.7 % $ 978 $ 882 $ 96 10.9 %
    Adjusted net income attributable to TWC
    shareholders(a) $ 536 $ 497 $ 39 7.8 % $ 1,039 $ 920 $ 119 12.9 %
     
    Net income per common share attributable
    to TWC common shareholders:
    Basic $ 1.77 $ 1.65 $ 0.12 7.3 % $ 3.48 $ 3.00 $ 0.48 16.0 %
    Diluted $ 1.76 $ 1.64 $ 0.12 7.3 % $ 3.46 $ 2.98 $ 0.48 16.1 %
    Adjusted Diluted EPS(a)   $ 1.89     $ 1.69     $ 0.20     11.8 %     $ 3.68     $ 3.10     $ 0.58     18.7 %

    (a)

      Refer to Note 4 to the accompanying consolidated financial statements for a definition of Adjusted net income attributable to TWC shareholders and Adjusted Diluted EPS.
     


    SELECTED BALANCE SHEET AND CASH FLOW INFORMATION

    Free Cash Flow for the first six months of 2014 decreased 21.9% to $1.1 billion from $1.4 billion in the first six months of 2013, due mainly to an increase in capital expenditures, partially offset by an increase in cash provided by operating activities. Capital Expenditures, whichtotaled $2.1 billion for the first six months of 2014, increased primarily due to the Company’s investments (including TWC Maxx) to improve network reliability, upgrade older customer premise equipment and expand its network to additional residences, commercial buildings and cell towers. Cash Provided by Operating Activities for the first six months of 2014 was $3.1 billion, a 5.0% increase from the first six months of 2013. This increase was primarily driven by lower income tax payments, higher Adjusted OIBDA and lower interest payments, partially offset by an increase in working capital requirements. Income tax payments benefited from certain capital expenditure-related deductions, including the tangible repair regulations (e.g., de minimus expensing) released in late 2013, partially offset by the continued reversal of bonus depreciation benefits recorded in prior years.

     
     
    (in millions; unaudited)   2nd Quarter     Year-to-Date 6/30
            Change         Change
    20142013 $     %20142013 $     %
    Adjusted OIBDA(a) $ 2,054 $ 2,037 $ 17 0.8 % $ 4,034 $ 3,949 $ 85 2.2 %
    Interest payments, net (330 ) (345 ) 15 (4.3 %) (745 ) (802 ) 57 (7.1 %)
    Income tax payments, net (97 ) (173 ) 76 (43.9 %) (95 ) (190 ) 95 (50.0 %)
    All other, net, including working capital
    changes(b)   68     32     36   112.5 %   (102 )   (12 )   (90 ) NM
    Cash provided by operating activities(b) 1,695 1,551 144 9.3 % 3,092 2,945 147 5.0 %
    Add: Excess tax benefit from exercise of  
    stock options 21 17 4 23.5 % 99 66 33 50.0 %
    Less:
    Capital expenditures (1,240 ) (827 ) (413 ) 49.9 % (2,074 ) (1,597 ) (477 ) 29.9 %
    Cash paid for other intangible assets (12 ) (8 ) (4 ) 50.0 % (24 ) (20 ) (4 ) 20.0 %
    Other   (5 )   (1 )   (4 ) 400.0 %   (5 )   (1 )   (4 ) 400.0 %
    Free Cash Flow(a)(b) 459 732 (273 ) (37.3 %) 1,088 1,393 (305 ) (21.9 %)
    Economic Stimulus Act impacts(c)   195     39     156   400.0 %   195     39     156   400.0 %
    Free Cash Flow excluding Economic
    Stimulus Act impacts   $ 654       $ 771       $ (117 )     (15.2 %)     $ 1,283       $ 1,432       $ (149 )     (10.4 %)
    NM—Not meaningful.

    (a)

      Refer to Note 4 to the accompanying consolidated financial statements for a definition of Adjusted OIBDA and Free Cash Flow.

    (b)

    All other, net, including working capital changes includes merger-related and restructuring payments of $29 million and $35 million for the second quarters of 2014 and 2013, respectively, and $87 million and $64 million for the six months ended June 30, 2014 and 2013, respectively, which reduced cash provided by operating activities and Free Cash Flow for the respective periods.

    (c)

    Additional information on the Economic Stimulus Acts is available in the Trending Schedules posted on the Company’s website at www.twc.com/investors.

     


    Net Debt, which totaled $24.2 billion as of June 30, 2014, decreased from December 31, 2013 as Free Cash Flow more than offset the cash used for dividends and share repurchases (prior to the suspension of the stock repurchase program in connection with the announcement of the Company’s merger with Comcast).

     
     
    (in millions; unaudited)     6/30/2014     12/31/2013
    Long-term debt $ 22,917 $ 23,285
    Debt due within one year   1,663     1,767  
    Total debt 24,580 25,052
    Cash and equivalents   (403 )   (525 )
    Net debt(a) $ 24,177 $ 24,527

    (a)

    Net debt is defined as total debt less cash and equivalents.
     


    Non-GAAP Financial Measures

    The Company refers to certain financial measures that are not presented in accordance with U.S. generally accepted accounting principles (“GAAP”), including OIBDA, Adjusted OIBDA, Adjusted net income attributable to TWC shareholders, Adjusted Diluted EPS and Free Cash Flow. Refer to Note 4 to the accompanying consolidated financial statements for a discussion of the Company’s use of non-GAAP financial measures.

    About Time Warner Cable

    Time Warner Cable Inc. (NYSE:TWC) is among the largest providers of video, high-speed data and voice services in the United States, connecting 15 million customers to entertainment, information and each other. Time Warner Cable Business Class offers data, video and voice services to businesses of all sizes, cell tower backhaul services to wireless carriers and enterprise-class, cloud-enabled hosting, managed applications and services. Time Warner Cable Media, the advertising sales arm of Time Warner Cable, offers national, regional and local companies innovative advertising solutions. More information about the services of Time Warner Cable is available at www.twc.com, www.twcbc.com and www.twcmedia.com.

    Additional details on financial and subscriber metrics are included in the Trending Schedules posted on the Company’s Investor Relations website at www.twc.com/investors.

    Information on Conference Call

    Time Warner Cable’s earnings conference call can be heard live at 8:30 am ET on Thursday, July 31, 2014. To listen to the call, visit www.twc.com/investors.

    Caution Concerning Forward-Looking Statements

    This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs, and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological, strategic and/or regulatory factors, and other factors affecting the operations of Time Warner Cable Inc., including its proposed merger with Comcast Corporation. More detailed information about these factors may be found in filings by Time Warner Cable Inc. with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Time Warner Cable is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.

     

    TIME WARNER CABLE INC.

    CONSOLIDATED BALANCE SHEET

    (Unaudited)

     
      June 30,     December 31,
    20142013
    (in millions)
    ASSETS
    Current assets:
    Cash and equivalents $ 403 $ 525
    Receivables, less allowances of $131 million and $77 million as of June 30, 2014 and December 31, 2013, respectively 906 954
    Deferred income tax assets 348 334
    Other current assets   331     331  
    Total current assets 1,988 2,144
    Investments 68 56
    Property, plant and equipment, net 15,604 15,056
    Intangible assets subject to amortization, net 576 552
    Intangible assets not subject to amortization 26,012 26,012
    Goodwill 3,137 3,196
    Other assets   1,071     1,257  
    Total assets $ 48,456   $ 48,273  
     
    LIABILITIES AND EQUITY
    Current liabilities:
    Accounts payable $ 565 $ 565
    Deferred revenue and subscriber-related liabilities 195 188
    Accrued programming and content expense 895 869
    Current maturities of long-term debt 1,663 1,767
    Other current liabilities   1,956     1,837  
    Total current liabilities 5,274 5,226
    Long-term debt 22,917 23,285
    Deferred income tax liabilities, net 12,162 12,098
    Other liabilities 689 717
    TWC shareholders’ equity:

    Common stock, $0.01 par value, 279.3 million and 277.9 million shares issued and outstanding as of June 30, 2014 and December 31, 2013, respectively

    3 3
    Additional paid-in capital 6,940 6,951
    Retained earnings (accumulated deficit) 539 (55 )
    Accumulated other comprehensive income (loss), net   (72 )   44  
    Total TWC shareholders’ equity 7,410 6,943
    Noncontrolling interests   4     4  
    Total equity   7,414     6,947  
    Total liabilities and equity $ 48,456   $ 48,273  
     

    See accompanying notes.

     
     

    TIME WARNER CABLE INC.

    CONSOLIDATED STATEMENT OF OPERATIONS

    (Unaudited)

     
      Three Months Ended     Six Months Ended
    June 30,June 30,
    2014     20132014     2013

     (recast)

     (recast)

    (in millions, except per share data)
    Revenue $ 5,726 $ 5,550 $ 11,308 $ 11,025
    Costs and expenses:
    Programming and content 1,341 1,234 2,650 2,509
    Sales and marketing 544 496 1,099 969
    Technical operations 371 363 742 735
    Customer care 207 187 412 384
    Other operating 1,209 1,233 2,371 2,479
    Depreciation 795 792 1,570 1,581
    Amortization 35 31 68 63
    Merger-related and restructuring costs   61     27     141     58  
    Total costs and expenses   4,563     4,363     9,053     8,778  
    Operating Income 1,163 1,187 2,255 2,247
    Interest expense, net (349 ) (398 ) (713 ) (796 )
    Other income, net   8     11     23     10  
    Income before income taxes 822 800 1,565 1,461
    Income tax provision   (323 )   (319 )   (587 )   (579 )
    Net income 499 481 978 882
    Less: Net income attributable to noncontrolling interests                
    Net income attributable to TWC shareholders $ 499   $ 481   $ 978   $ 882  
     
    Net income per common share attributable to
    TWC common shareholders:
    Basic $ 1.77   $ 1.65   $ 3.48   $ 3.00  
    Diluted $ 1.76   $ 1.64   $ 3.46   $ 2.98  
    Average common shares outstanding:
    Basic   278.8     289.6     278.3     292.4  
    Diluted   282.4     293.3     282.1     296.3  
     
    Cash dividends declared per share of common stock $ 0.75   $ 0.65   $ 1.50   $ 1.30  
     

    See accompanying notes.

     
     

    TIME WARNER CABLE INC.

    CONSOLIDATED STATEMENT OF CASH FLOWS

    (Unaudited)

     
      Six Months Ended
    June 30,
    2014     2013
    (in millions)
    OPERATING ACTIVITIES
    Net income $ 978 $ 882
    Adjustments for noncash and nonoperating items:
    Depreciation 1,570 1,581
    Amortization 68 63
    Income from equity-method investments, net of cash distributions (16 ) (9 )
    Deferred income taxes 123 224
    Equity-based compensation expense 93 74
    Excess tax benefit from equity-based compensation (99 ) (66 )
    Changes in operating assets and liabilities, net of acquisitions and dispositions:
    Receivables 41 30
    Accounts payable and other liabilities 326 138
    Other changes   8     28  
    Cash provided by operating activities   3,092     2,945  
     
    INVESTING ACTIVITIES
    Capital expenditures (2,074 ) (1,597 )
    Purchases of investments (2 ) (581 )
    Return of capital from investees 7
    Proceeds from sale, maturity and collection of investments 18 151
    Acquisition of intangible assets (24 ) (20 )
    Other investing activities   15     13  
    Cash used by investing activities   (2,067 )   (2,027 )
     
    FINANCING ACTIVITIES
    Short-term borrowings, net 1,147
    Repayments of long-term debt (1,750 )
    Dividends paid (428 ) (386 )
    Repurchases of common stock (259 ) (1,304 )
    Proceeds from exercise of stock options 118 88
    Excess tax benefit from equity-based compensation 99 66
    Taxes paid in cash in lieu of shares issued for equity-based compensation (68 ) (55 )
    Other financing activities   (6 )   (8 )
    Cash used by financing activities   (1,147 )   (1,599 )
     
    Decrease in cash and equivalents (122 ) (681 )
    Cash and equivalents at beginning of period   525     3,304  
    Cash and equivalents at end of period $ 403   $ 2,623  
     

    See accompanying notes.

     

    TIME WARNER CABLE INC.

    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

    (Unaudited)

    1.COMCAST MERGER

    On February 12, 2014, Time Warner Cable Inc. (“TWC” or the “Company”) entered into an Agreement and Plan of Merger with Comcast Corporation (“Comcast”) whereby the Company agreed to merge with and into a 100% owned subsidiary of Comcast (the “Comcast merger”). Upon completion of the Comcast merger, all of the outstanding shares of the Company will be cancelled and each issued and outstanding share will be converted into the right to receive 2.875 shares of Class A common stock of Comcast. Merger integration planning is underway, with the Company and Comcast working toward a closing by year-end 2014, subject to receipt of shareholder and regulatory approvals, as well as satisfaction of certain other closing conditions.

    On April 25, 2014, Comcast entered into a binding agreement with Charter Communications, Inc., (“Charter”), which contemplates three transactions (the “divestiture transactions”): (1) a contribution, spin-off and merger transaction, (2) an asset exchange and (3) a sale of assets. The completion of the divestiture transactions will result in the combined company divesting a net total of approximately 3.9 million video subscribers, a portion of which are TWC subscribers (primarily in the Midwest). The divestiture transactions are expected to occur contemporaneously with one another and are conditioned upon and will occur following the closing of the Comcast merger. They are also subject to a number of other conditions. The Comcast merger is not conditioned upon the closing of the divestiture transactions and, accordingly, the Comcast merger can be completed regardless of whether the divestiture transactions are ultimately completed.

    2.ITEMS AFFECTING COMPARABILITY

    The following items affected the comparability of TWC’s results for the three and six months ended June 30, 2014 and 2013:

    (in millions, except per share data)     Operating         Income Tax     TWC Net     Diluted
      OIBDA(a)     D&A(a)IncomeOther(a)ProvisionIncome(a)EPS(a)
    2nd Quarter 2014:                                                      
    As reported $ 1,993 $ (830 ) $ 1,163 $ (341 ) $ (323 ) $ 499 $ 1.76
    Year-over-year change, as reported:

       $

    $(17)$(7)$(24)$46$(4)$18$0.12

       %

      (0.8%)     0.9%     (2.0%)     (11.9%)     1.3%     3.7%     7.3%
     
    Items affecting comparability:
    Merger-related and restructuring costs   61         61         (24 )   37     0.13  
                                                           
    As adjusted $ 2,054 $ (830 ) $ 1,224 $ (341 ) $ (347 ) $ 536 $ 1.89
    Year-over-year change, as adjusted:

       $

    $17$(7)$10$46$(17)$39$0.20

       %

      0.8%     0.9%     0.8%     (11.9%)     5.2%     7.8%     11.8%
     
    2nd Quarter 2013:                                                      
    As reported   $ 2,010       $ (823 )     $ 1,187       $ (387 )     $ (319 )     $ 481       $ 1.64  
     
    Items affecting comparability:
    Merger-related and restructuring costs   27         27         (11 )   16     0.05  
                                                           
    As adjusted   $ 2,037       $ (823 )     $ 1,214       $ (387 )     $ (330 )     $ 497       $ 1.69  

    ________________

    (a)

      OIBDA represents Operating Income before Depreciation and Amortization. D&A represents depreciation and amortization. Other consists of interest expense, net, other income (expense), net, and net income attributable to noncontrolling interests. TWC net income represents net income attributable to TWC shareholders. Diluted EPS represents net income per diluted common share attributable to TWC common shareholders. Diluted EPS reflects the more dilutive earnings per share amount calculated using the treasury stock method or the two-class method.
     
     
    (in millions, except per share data)     Operating         Income Tax     TWC Net     Diluted
      OIBDA(a)     D&A(a)IncomeOther(a)ProvisionIncome(a)EPS(a)
    Year-to-Date 6/30/2014:                                                      
    As reported $ 3,893 $ (1,638 ) $ 2,255 $ (690 ) $ (587 ) $ 978 $ 3.46
    Year-over-year change, as reported:

       $

    $2$6$8$96$(8)$96$0.48

       %

      0.1%     (0.4%)     0.4%     (12.2%)     1.4%     10.9%     16.1%
     
    Items affecting comparability:
    Merger-related and restructuring costs 141 141 (55 ) 86 0.31
    Gain on equity award reimbursement
    obligation to Time Warner(b) (1 ) (1 )
    Impact of certain state and local tax matters(c)                   (24 )   (24 )   (0.09 )
                                                           
    As adjusted $ 4,034 $ (1,638 ) $ 2,396 $ (691 ) $ (666 ) $ 1,039 $ 3.68
    Year-over-year change, as adjusted:

       $

    $85$6$91$90$(62)$119$0.58

       %

      2.2%     (0.4%)     3.9%     (11.5%)     10.3%     12.9%     18.7%
     
    Year-to-Date 6/30/2013:                                                      
    As reported   $ 3,891       $ (1,644 )     $ 2,247       $ (786 )     $ (579 )     $ 882       $ 2.98  
     
    Items affecting comparability:
    Merger-related and restructuring costs 58 58 (23 ) 35 0.11
    Loss on equity award reimbursement
    obligation to Time Warner(b)               5     (2 )   3     0.01  
                                                           
    As adjusted   $ 3,949       $ (1,644 )     $ 2,305       $ (781 )     $ (604 )     $ 920       $ 3.10  

    _________________

    (a)

      OIBDA represents Operating Income before Depreciation and Amortization. D&A represents depreciation and amortization. Other consists of interest expense, net, other income (expense), net, and net income attributable to noncontrolling interests. TWC net income represents net income attributable to TWC shareholders. Diluted EPS represents net income per diluted common share attributable to TWC common shareholders. Diluted EPS reflects the more dilutive earnings per share amount calculated using the treasury stock method or the two-class method.

    (b)

    Pursuant to an agreement with Time Warner Inc. (“Time Warner”), TWC is obligated to reimburse Time Warner for the cost of certain Time Warner equity awards held by TWC employees upon exercise of such awards. Amounts represent the change in the reimbursement obligation, which fluctuates primarily with the fair value and expected volatility of Time Warner common stock, and changes in fair value are recorded in other income (expense), net, in the period of change.

    (c)

    Amount represents the impact of the passage of the New York State budget during the first quarter of 2014 that, in part, lowers the New York State business tax rate beginning in 2016.
     


    3.RECONCILIATION OF ADJUSTED OIBDA TO OPERATING INCOME AND OTHER SEGMENT INFORMATION

    Consolidated information for the three and six months ended June 30, 2014 and 2013 is as follows:

     
    (in millions)   2nd Quarter     Year-to-Date 6/30
            Change         Change
    20142013$     %20142013$     %
    Adjusted OIBDA(a) $ 2,054 $ 2,037 $ 17 0.8 % $ 4,034 $ 3,949 $ 85 2.2 %
    Adjusted OIBDA margin(b)35.9%36.7%35.7%35.8%
    Merger-related and restructuring costs   (61 )   (27 )   (34 ) 125.9 %   (141 )   (58 )   (83 ) 143.1 %
    OIBDA(a) 1,993 2,010 (17 ) (0.8 %) 3,893 3,891 2 0.1 %
    Depreciation (795 ) (792 ) (3 ) 0.4 % (1,570 ) (1,581 ) 11 (0.7 %)
    Amortization   (35 )   (31 )   (4 ) 12.9 % (68 ) (63 )   (5 ) 7.9 %
    Operating Income $ 1,163 $ 1,187 $ (24 ) (2.0 %) $ 2,255 $ 2,247 $ 8 0.4 %

    ________________

    (a)

      Refer to Note 4 for definitions of OIBDA and Adjusted OIBDA.

    (b)

    Adjusted OIBDA margin is defined as Adjusted OIBDA as a percentage of total revenue.
     


    Effective in the first quarter of 2014, the Company determined it has three reportable segments. The Company has recast its financial information and disclosures for the prior periods to reflect the segment disclosures as if the current presentation had been in effect throughout all periods presented.

    The Company classifies its operations into the following reportable segments:

    • Residential Services, which principally consists of video, high-speed data and voice services provided to residential customers as well as other residential services, including security and home management services.

    • Business Services, which principally consists of data, video and voice services provided to business customers as well as other business services, including enterprise-class, cloud-enabled hosting, managed applications and services.

    • Other Operations, which principally consists of (i) Time Warner Cable Media (“TWC Media”), the advertising sales arm of TWC, (ii) TWC-owned and/or operated regional sports networks (“RSNs”) and local sports, news and lifestyle channels (e.g., Time Warner Cable News NY1) and (iii) other operating revenues and costs, including those derived from the Advance/Newhouse Partnership and home shopping network-related services. The business units reflected in the Other Operations segment individually do not meet the thresholds to be reported as separate reportable segments.

    In addition to the above reportable segments, the Company has shared functions (referred to as “Shared Functions”) that include activities not attributable to a specific reportable segment. Shared Functions consists of operating costs and expenses associated with broad “corporate” functions (e.g., accounting and finance, information technology, executive management, legal and human resources) or functions supporting more than one reportable segment that are centrally managed (e.g., facilities, network operations, vehicles and procurement) as well as other activities not attributable to a reportable segment. As such, the reportable segment results reflect how management views such segments in assessing financial performance and allocating resources and are not necessarily indicative of the results of operations that each segment would have achieved had they operated as stand-alone entities during the periods presented.

    In evaluating the profitability of the Company’s segments, the components of net income (loss) below OIBDA, as defined below, are not separately evaluated by management at the segment level. Due to the nature of the Company’s operations, a majority of its assets, including its distribution systems, are utilized across the Company’s operations and are not segregated by segment. In addition, segment assets are not reported to, or used by, management to allocate resources or assess the performance of the Company’s segments. Accordingly, the Company has not disclosed asset information by segment.

    Segment information for the three and six months ended June 30, 2014 and 2013 is as follows:

     
    (in millions)2nd Quarter 2014
    Residential     Business     Other            
    ServicesServicesOperationsSharedIntersegmentTotal
    SegmentSegmentSegmentFunctionsEliminationsConsolidated
    Revenue(a) $ 4,662 $ 691 $ 436 $ $ (63 ) $ 5,726
    Operating costs and expenses   (2,470 )   (282 )   (263 )   (720 )   63     (3,672 )
    Adjusted OIBDA(b) 2,192 409 173 (720 ) 2,054
    Merger-related and restructuring costs               (61 )       (61 )
    OIBDA(b) $ 2,192   $ 409   $ 173   $ (781 ) $   1,993
    Depreciation (795 )
    Amortization   (35 )
    Operating Income $ 1,163  

    __________________

    (a)

      All revenue included in Intersegment Eliminations is associated with the Other Operations segment.

    (b)

    Refer to Note 4 for definitions of OIBDA and Adjusted OIBDA.
     
     
    (in millions)2nd Quarter 2013
    Residential     Business     Other            
    ServicesServicesOperationsSharedIntersegmentTotal
    SegmentSegmentSegmentFunctionsEliminationsConsolidated
    Revenue(a) $ 4,632 $ 565 $ 403 $ $ (50 ) $ 5,550
    Operating costs and expenses   (2,432 )   (239 )   (169 )   (723 )   50     (3,513 )
    Adjusted OIBDA(b) 2,200 326 234 (723 ) 2,037
    Merger-related and restructuring costs               (27 )       (27 )
    OIBDA(b) $ 2,200   $ 326   $ 234   $ (750 ) $   2,010
    Depreciation (792 )
    Amortization   (31 )
    Operating Income $ 1,187  
     

    __________________

    (a)

    All revenue included in Intersegment Eliminations is associated with the Other Operations segment.

    (b)

    Refer to Note 4 for definitions of OIBDA and Adjusted OIBDA.
     
     
    (in millions)Year-to-Date 6/30/2014
    Residential     Business     Other            
    ServicesServicesOperationsSharedIntersegmentTotal
    SegmentSegmentSegmentFunctionsEliminationsConsolidated
    Revenue(a) $ 9,230 $ 1,359 $ 836 $ $ (117 ) $ 11,308
    Operating costs and expenses   (4,906 )   (548 )   (490 )   (1,447 )   117     (7,274 )
    Adjusted OIBDA(b) 4,324 811 346 (1,447 ) 4,034
    Merger-related and restructuring costs               (141 )       (141 )
    OIBDA(b) $ 4,324   $ 811   $ 346   $ (1,588 ) $   3,893
    Depreciation (1,570 )
    Amortization   (68 )
    Operating Income $ 2,255  

    __________________

    (a)

      All revenue included in Intersegment Eliminations is associated with the Other Operations segment.

    (b)

    Refer to Note 4 for definitions of OIBDA and Adjusted OIBDA.
     
     
    (in millions)Year-to-Date 6/30/2013
    Residential     Business     Other            
    ServicesServicesOperationsSharedIntersegmentTotal
    SegmentSegmentSegmentFunctionsEliminationsConsolidated
    Revenue(a) $ 9,243 $ 1,102 $ 780 $ $ (100 ) $ 11,025
    Operating costs and expenses   (4,872 )   (464 )   (381 )   (1,459 )   100     (7,076 )
    Adjusted OIBDA(b) 4,371 638 399 (1,459 ) 3,949
    Merger-related and restructuring costs               (58 )       (58 )
    OIBDA(b) $ 4,371   $ 638   $ 399   $ (1,517 ) $   3,891
    Depreciation (1,581 )
    Amortization   (63 )
    Operating Income $ 2,247  

    __________________

    (a)

      All revenue included in Intersegment Eliminations is associated with the Other Operations segment.

    (b)

    Refer to Note 4 for definitions of OIBDA and Adjusted OIBDA.
     


    Intersegment Eliminations relates to the programming provided to the Residential Services and Business Services segments by the Company’s RSNs and local sports, news and lifestyle channels. These services are reflected as programming expense for the Residential Services and Business Services segments and as revenue for the Other Operations segment.

    4.USE OF NON-GAAP FINANCIAL MEASURES

    In discussing its consolidated and segment performance, the Company may use certain measures that are not calculated and presented in accordance with U.S. generally accepted accounting principles (“GAAP”). These measures include OIBDA, Adjusted OIBDA, Adjusted net income attributable to TWC shareholders, Adjusted Diluted EPS and Free Cash Flow, which the Company defines as follows:

  • OIBDA (Operating Income before Depreciation and Amortization)means Operating Income before depreciation of tangible assets and amortization of intangible assets.
  • Adjusted OIBDA means OIBDA excluding the impact, if any, of noncash impairments of goodwill, intangible and fixed assets; gains and losses on asset sales; and merger-related and restructuring costs.
  • Adjusted net income attributable to TWC shareholders means net income attributable to TWC shareholders (as defined under GAAP) excluding the impact, if any, of noncash impairments of goodwill, intangible and fixed assets and investments; gains and losses on asset sales; merger-related and restructuring costs; changes in the Company’s equity award reimbursement obligation to Time Warner; and certain changes to income tax provision; as well as the impact of taxes on the above items. Similarly, Adjusted Diluted EPS means net income per diluted common share attributable to TWC common shareholders excluding the above items.
  • Free Cash Flow means cash provided by operating activities (as defined under GAAP) excluding the impact, if any, of cash provided or used by discontinued operations, plus (i) any income taxes paid on investment sales and (ii) any excess tax benefit from equity-based compensation, less (i) capital expenditures, (ii) cash paid for other intangible assets (excluding those associated with business combinations), (iii) partnership distributions to third parties and (iv) principal payments on capital leases.

    Management uses OIBDA and Adjusted OIBDA, among other measures, in evaluating the Company’s consolidated and segment performance because they eliminate the effects of (i) considerable amounts of noncash depreciation and amortization and (ii) items not within the control of the Company’s operations managers (such as income tax provision, other income (expense), net, and interest expense, net). Adjusted OIBDA further eliminates the effects of certain noncash items identified in the definition of Adjusted OIBDA above. Management also uses these measures to allocate resources and capital to the segments. Adjusted OIBDA is also a significant performance measure used in the Company’s annual incentive compensation programs. Adjusted net income attributable to TWC shareholders and Adjusted Diluted EPS are considered important indicators of the operational strength of the Company as these measures eliminate amounts that do not reflect the fundamental performance of the Company. The Company utilizes Adjusted Diluted EPS, among other measures, to evaluate its performance both on an absolute basis and relative to its peers and the broader market. Management believes that Free Cash Flow is an important indicator of the Company’s ability to generate cash, reduce net debt, pay dividends, repurchase common stock and make strategic investments, after the payment of cash taxes, interest and other cash items. In addition, all of these measures are commonly used by analysts, investors and others in evaluating the Company’s performance and liquidity.

    These measures have inherent limitations. For example, OIBDA and Adjusted OIBDA do not reflect capital expenditures or the periodic costs of certain capitalized assets used in generating revenue. To compensate for such limitations, management evaluates performance through Free Cash Flow, which reflects capital expenditure decisions, and net income attributable to TWC shareholders, which reflects the periodic costs of capitalized assets. Adjusted OIBDA does not reflect any of the items noted as exclusions in the definition of Adjusted OIBDA above. To compensate for these limitations, management evaluates performance through OIBDA and net income attributable to TWC shareholders, which do reflect such items. OIBDA and Adjusted OIBDA also fail to reflect the significant costs borne by the Company for income taxes and debt servicing costs, the results of the Company’s equity investments and other non-operational income or expense. Additionally, Adjusted net income attributable to TWC shareholders and Adjusted Diluted EPS do not reflect certain charges that affect the operating results of the Company and they involve judgment as to whether items affect fundamental operating performance. Management compensates for these limitations by using other analytics such as a review of net income attributable to TWC shareholders. Free Cash Flow, a liquidity measure, does not reflect payments made in connection with investments and acquisitions, which reduce liquidity. To compensate for this limitation, management evaluates such investments and acquisitions through other measures such as return on investment analyses.

    These non-GAAP measures should be considered in addition to, not as substitutes for, the Company’s Operating Income, net income attributable to TWC shareholders 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.




    Time Warner Cable Inc.

    Corporate Communications

    Bobby Amirshahi, 212-364-8292

    Eric Mangan, 212-364-8297

    or

    Investor Relations

    Tom Robey, 212-364-8218


    Source: Time Warner Cable Inc.


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