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Time Warner Cable Reports 2012 Third-Quarter Results

TIME WARNER CABLE INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. ITEMS AFFECTING COMPARABILITY

The following items affected the comparability of Time Warner Cable Inc.'s ("TWC" or the "Company") results for the three and nine months ended September 30, 2012 and 2011:

(in millions, except per share data)
  Operating     Income Tax   TWC Net   Diluted
                OIBDA (a)   D&A (a) Income Other (a) Provision Income (a) EPS (a)
3rd Quarter 2012:                                          
As reported $ 1,914 $ (820 ) $ 1,094 $ 93 $ (379 ) $ 808 $ 2.60
Year-over-year change, as reported:
$ $ 153 $ (61 ) $ 92 $ 498 $ (138 ) $ 452 $ 1.52
  %   8.7 %   8.0 %   9.2 %   (123.0 %)   57.3 %   127.0 %     140.7 %
 
Items affecting comparability:
Merger-related and restructuring costs 32 32 (14 ) 18 0.06
Gain on sale of SpectrumCo licenses (b) (430 ) 169 (261 ) (0.84 )
Gain on sale of investment in Clearwire (c) (64 ) (19 ) (83 ) (0.27 )

Loss on equity award reimbursement obligation to Time Warner (d)
7 (3 ) 4 0.01

Change in net deferred income tax liability effective tax rate (e)
(63 ) (63 ) (0.20 )
Impact of partnership basis difference (f)                   15     15     0.05  
                                           
As adjusted $ 1,946 $ (820 ) $ 1,126 $ (394 ) $ (294 ) $ 438 $ 1.41
Year-over-year change, as adjusted:
$ $ 164 $ (61 ) $ 103 $ 19 $ (50 ) $ 72 $ 0.30
  %   9.2 %   8.0 %   10.1 %   (4.6 %)   20.5 %   19.7 %     27.0 %
 
3rd Quarter 2011:                                          
As reported   $ 1,761     $ (759 )   $ 1,002     $ (405 )   $ (241 )   $ 356     $ 1.08  
 
Items affecting comparability:
Merger-related and restructuring costs 21 21 (8 ) 13 0.04

Gain on equity award reimbursement obligation to Time Warner (d)
(8 ) 3 (5 ) (0.02 )

Impact of expired Time Warner stock options, net (g)
2 2 0.01
                                           
As adjusted   $ 1,782     $ (759 )   $ 1,023     $ (413 )   $ (244 )   $ 366     $ 1.11  
 

(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.

(b)  On August 24, 2012, SpectrumCo, LLC (“SpectrumCo”), of which TWC owns 31.2%, sold all of its advanced wireless spectrum licenses to Cellco Partnership (doing business as Verizon Wireless).

(c)  On September 27, 2012, the Company sold all of its investment in Clearwire Corporation (“Clearwire”), the proceeds of which were received on October 3, 2012. Income tax provision amount includes a $46 million benefit related to the reversal of a valuation allowance against a deferred income tax asset associated with the Company’s investment in Clearwire as a result of the Company’s ability to fully realize the capital losses from the sale of its Clearwire interests by offsetting capital gains related to SpectrumCo’s sale of spectrum licenses.

(d)  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 or vesting 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.

(e)  Amount represents a benefit related to a change in the tax rate applied to calculate the Company’s net deferred income tax liability as a result of an internal reorganization effective on September 30, 2012.

(f)  Amount represents a charge related to the recording of a deferred income tax liability associated with a partnership basis difference.

(g)  Amount represents the impact of the reversal of deferred income tax assets associated with Time Warner stock option awards held by TWC employees, net of excess tax benefits realized upon the exercise of TWC stock options or vesting of TWC restricted stock units.

(in millions, except per share data)
  Operating     Income Tax   TWC Net   Diluted
                OIBDA (a)   D&A (a) Income Other (a) Provision Income (a) EPS (a)
Year-to-Date 9/30/2012:                                          
As reported $ 5,732 $ (2,456 ) $ 3,276 $ (714 ) $ (920 ) $ 1,642 $ 5.22
Year-over-year change, as reported:
$ $ 431 $ (195 ) $ 236 $ 484 $ (179 ) $ 541 $ 1.98
  %   8.1 %   8.6 %   7.8 %   (40.4 %)   24.2 %   49.1 %     61.1 %
 
Items affecting comparability:
Merger-related and restructuring costs 98 98 (40 ) 58 0.18
Asset impairments (b) 12 (5 ) 7 0.02
Gain on sale of SpectrumCo licenses (c) (430 ) 169 (261 ) (0.83 )
Gain on sale of investment in Clearwire (d) (64 ) (19 ) (83 ) (0.26 )

Loss on equity award reimbursement obligation to Time Warner (e)
5 (2 ) 3 0.01

Change in net deferred income tax liability effective tax rate (f)
(63 ) (63 ) (0.20 )
Impact of partnership basis difference (g)                   15     15     0.05  
                                                         
As adjusted $ 5,830 $ (2,456 ) $ 3,374 $ (1,191 ) $ (865 ) $ 1,318 $ 4.19
Year-over-year change, as adjusted:
$ $ 493 $ (195 ) $ 298 $ 10 $ (116 ) $ 192 $ 0.87
  %   9.2 %   8.6 %   9.7 %   (0.8 %)   15.5 %   17.1 %     26.2 %
 
Year-to-Date 9/30/2011:                                          
As reported   $ 5,301     $ (2,261 )   $ 3,040     $ (1,198 )   $ (741 )   $ 1,101     $ 3.24  
 
Items affecting comparability:
Merger-related and restructuring costs 36 36 (14 ) 22 0.07

Gain on equity award reimbursement obligation to Time Warner (e)
(3 ) 1 (2 )

Impact of domestic production activities deduction
(9 ) (9 ) (0.03 )

Impact of expired Time Warner stock options, net (h)
14 14 0.04
                                                         
As adjusted   $ 5,337     $ (2,261 )   $ 3,076     $ (1,201 )   $ (749 )   $ 1,126     $ 3.32  
 

(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.

(b)  Amount represents an impairment of TWC’s investment in Canoe Ventures LLC, an equity-method investee engaged in the development of advanced advertising platforms.

(c)  On August 24, 2012, SpectrumCo, of which TWC owns 31.2%, sold all of its advanced wireless spectrum licenses to Verizon Wireless.

(d)  On September 27, 2012, the Company sold all of its investment in Clearwire, the proceeds of which were received on October 3, 2012. Income tax provision amount includes a $46 million benefit related to the reversal of a valuation allowance against a deferred income tax asset associated with the Company’s investment in Clearwire as a result of the Company’s ability to fully realize the capital losses from the sale of its Clearwire interests by offsetting capital gains related to SpectrumCo’s sale of spectrum licenses.

(e)  Pursuant to an agreement with Time Warner, TWC is obligated to reimburse Time Warner for the cost of certain Time Warner equity awards held by TWC employees upon exercise or vesting 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.

(f)  Amount represents a benefit related to a change in the tax rate applied to calculate the Company’s net deferred income tax liability as a result of an internal reorganization effective on September 30, 2012.

(g)  Amount represents a charge related to the recording of a deferred income tax liability associated with a partnership basis difference.

(h)  Amount represents the impact of the reversal of deferred income tax assets associated with Time Warner stock option awards held by TWC employees, net of excess tax benefits realized upon the exercise of TWC stock options or vesting of TWC restricted stock units.

2. USE OF NON-GAAP FINANCIAL MEASURES

In discussing its 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 OIBDA less capital expenditures, 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; merger-related and restructuring costs; and costs associated with certain equity awards granted to employees to offset value lost as a result of the Company’s separation from Time Warner (the “Separation”).
  • Adjusted OIBDA less capital expenditures means Adjusted OIBDA minus capital expenditures.
  • 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; certain changes to income tax provision; and costs associated with certain equity awards granted to employees to offset value lost as a result of the Separation; as well as the impact of taxes and noncontrolling interests 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 performance of the Company’s business 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 net income attributable to noncontrolling interests, 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. Adjusted OIBDA less capital expenditures also allows management to evaluate performance including the effect of capital spending decisions. Adjusted OIBDA and Adjusted OIBDA less capital expenditures are also significant performance measures 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.

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