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Shareholders' Equity
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(Exact name of registrant as specified in its charter)
iDelaware
i84-1496755
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i400 Washington Blvd.
iStamford
iConnecticut
i06902
(Address
of Principal Executive Offices)
(Zip Code)
(i203) i905-7801
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of
the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common Stock $.001 Par Value
iCHTR
iNASDAQ
Global Select Market
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. iYesx
No o
Indicate by check mark whether the registrant has submitted electronically 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 registrant was required to submit and post such files). iYesx
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.
iLarge accelerated filerx Accelerated
filer o Non-accelerated filer oSmaller reporting company i☐Emerging growth company i☐
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 i☐No x
Number of shares of Class A common stock outstanding as of September 30, 2022: i155,672,281
Number of shares of Class B common stock outstanding as of September 30, 2022: i1
This quarterly report on Form 10-Q is for the three and nine months ended September 30, 2022. 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.
This quarterly report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, regarding, among other things, our plans, strategies and prospects, both business and financial including, without limitation, the forward-looking statements set forth in 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” in 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,”“grow,”“focused on” 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:
•our ability to sustain and grow revenues and cash flow from operations by offering Internet, video, voice, mobile, advertising and other services to residential and commercial customers, to adequately meet the customer experience demands in our service areas 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 ("DBS") operators, wireless broadband and telephone providers, digital subscriber line (“DSL”) providers, fiber to the home providers and providers of video content over broadband Internet connections;
•general business conditions, unemployment levels and the level of activity in the housing sector and economic uncertainty or downturn, including the impacts of the Novel Coronavirus (“COVID-19”) pandemic to sales opportunities from residential move activity, our customers, our vendors and local, state and federal governmental responses to
the pandemic;
•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 and distribution requirements);
•our ability to develop and deploy new products and technologies including consumer services and service platforms;
•any events that disrupt our networks, information systems or properties and impair our operating activities or our reputation;
•the effects of governmental regulation on our business including subsidies to consumers, subsidies and incentives for competitors, costs, disruptions and possible limitations on operating flexibility related to, and our ability to comply
with, regulatory conditions applicable to us;
•the ability to hire and retain key personnel;
•our ability to procure necessary services and equipment from our vendors in a timely manner and at reasonable costs;
•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.
(dollars in millions, except per share amounts and where indicated)
1. iOrganization
and Basis of Presentation
Organization
Charter Communications, Inc. (together with its controlled subsidiaries, “Charter,” or the “Company”) is a leading broadband connectivity company and cable operator. Over an advanced high-capacity, two-way telecommunications network, the Company offers a full range of state-of-the-art residential and business services including Spectrum Internet®, TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business® delivers the same suite
of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise provides highly customized, fiber-based solutions. Spectrum Reach® delivers tailored advertising and production for the modern media landscape. The Company also distributes award-winning news coverage and sports programming to its customers through Spectrum Networks.
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 ione
reportable segment.
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 the Company'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, pension benefits and income taxes. Actual results could differ from those estimates.
Comprehensive income equaled net income attributable to Charter shareholders for the three and nine months ended September 30,
2022 and 2021.
2. iInvestments
In June 2022, the Company and Comcast Corporation ("Comcast") entered into a 50/50 joint venture
to develop and offer a next-generation streaming platform on a variety of streaming devices and smart TVs. Comcast licensed its streaming platform and hardware to the joint venture and contributed the retail business for XClass TVs and Xumo, a streaming service it acquired in 2020. The Company's investment is approximately $i981 million with $i175 million
paid in June 2022 and with the remaining non-cancelable required contributions to be paid over multiple years and recorded as accrued obligations as of September 30, 2022. The Company accounts for the investment as an equity method investment and records investment income (loss) on its share of the joint venture income (loss).
(a)Includes
the Company's £i625 million and £i650 million fixed-rate British pound sterling denominated notes
(the “Sterling Notes”) remeasured using the exchange rate at the respective dates.
/
(b)The Company has availability under the Charter Operating credit facilities of approximately $i4.6 billion as of September 30,
2022.
The estimated fair value of the Company’s senior unsecured and secured notes and debentures as of September 30, 2022 and December 31, 2021 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.
In January 2022, CCO Holdings, LLC ("CCO Holdings") and CCO Holdings Capital Corp. jointly issued $i1.2 billion
of i4.750% senior unsecured notes due February 2032 at par. The net proceeds were used for general corporate purposes, including to fund buybacks of Charter Class A common stock and Charter Holdings common units, to repay certain indebtedness and to pay related fees and expenses.
In March 2022, Charter Operating and Charter Communications Operating Capital Corp. jointly issued $i1.0 billion
aggregate principal amount of i4.400% senior secured notes due April 2033 at a price of i99.634% of the aggregate principal amount, $i1.5 billion
aggregate principal amount of i5.250% senior secured notes due April 2053 at a price of i99.300% of the aggregate principal amount and $i1.0 billion
aggregate principal amount of i5.500% senior secured notes due April 2063 at a price of i99.255% of the aggregate principal amount. The net proceeds were used for general corporate purposes, including
to fund
(dollars in millions, except per share amounts and where indicated)
buybacks of Charter Class A common stock and Charter Holdings common units, to repay certain indebtedness and to pay related fees and expenses.
In May and June 2022,
Charter Operating and Charter Communications Operating Capital Corp. redeemed all of their outstanding i4.464% senior notes due July 2022.
In May 2022, Charter Operating entered into an amendment to its credit agreement (the "Amendment") to: (i) upsize term A loans by $i2.3 billion
to $i6.05 billion and extend the maturity to August 31, 2027 from March 31, 2023 and February 1, 2025, (ii) create and borrow a new tranche of $i500 million
of term A-6 loans maturing August 31, 2028, (iii) increase the size of Charter Operating's revolving credit facility and extend the maturity date to August 31, 2027 from March 31, 2023 and February 1, 2025 and (iv) make certain other amendments to the credit agreement. The Company used a portion of the proceeds from the Amendment to repay all of the term A-2 loans, term A-4 loans and borrowings under the revolving credit facility outstanding prior to the effective date of the Amendment.
After giving effect to the Amendment: (i) the aggregate principal amount of term A-5 loans outstanding as of September 30,
2022 is $i6.0 billion with a pricing of Secured Overnight Financing Rate ("SOFR") plus i1.25%, (ii) the aggregate principal amount of term A-6 loans outstanding as
of September 30, 2022 is $i494 million with a pricing of SOFR plus i1.50% and (iii) the aggregate amount of the revolving credit
facility increased to a total capacity of $i5.5 billion and the interest rate benchmark changed from London Interbank Offering Rate ("LIBOR") to SOFR, with a pricing of SOFR plus i1.25%.
The aggregate principal amount of term B-1 loans (maturing April 30, 2025) and term B-2 loans (maturing February 1, 2027) outstanding as of September 30, 2022 are $i2.4 billion and $i3.7 billion,
respectively, with LIBOR-based pricing unchanged.
The Amendment also removed mandatory prepayment requirements upon asset sales and property or casualty insurance recoveries, made changes to the affirmative covenants, including changes to the financial reporting covenants, and made changes to the negative covenants, including removal of certain negative covenants in their entirety.
In August 2022, CCO Holdings and CCO Holdings Capital Corp. jointly issued $i1.5 billion
of i6.375% senior unsecured notes due September 2029 at par. The net proceeds were used for general corporate purposes, including to fund buybacks of Charter Class A common stock and Charter Holdings common units, to repay certain indebtedness and to pay related fees and expenses.
i
Losses
on extinguishment of debt are recorded in other income (expenses), net in the consolidated statements of operations and consisted of the following.
(dollars in millions, except per share amounts and where indicated)
5. iCommon Stock
i
The
following represents the Company's purchase of Charter Class A common stock and the effect on the consolidated statements of cash flows during the three and nine months ended September 30, 2022 and 2021.
In
October 2022, the Company purchased from Liberty Broadband an additional i0.5 million shares of Charter Class A common stock for approximately $i183 million.
As
of September 30, 2022, Charter had remaining board authority to purchase an additional $i680 million of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. 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 2021, Charter’s board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2021. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity.
6. iNoncontrolling
Interests
Noncontrolling interests represents consolidated subsidiaries of which the Company owns less than i100%. 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 consist primarily of Advance/Newhouse Partnership's (“A/N”) equity interests in Charter Holdings, which is comprised of a common ownership interest and prior to June 18, 2021, 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 weighted average effective common ownership interest of approximately i11%
during 2022 and i7% prior to conversion of the preferred units and 11% after conversion during 2021, and was $i182
million and $i604 million for the three and nine months ended September 30, 2022, respectively, and $i190
million and $i371 million for the three and nine months ended September 30, 2021, respectively. Net income of Charter Holdings attributable to A/N's preferred noncontrolling interest for financial reporting purposes is based on the preferred dividend which was $i70
million for the nine months ended September 30, 2021. In June 2021, the Company caused the conversion of all of A/N's Charter Holdings convertible preferred units into Charter Holdings common units.
(dollars in millions, except per share amounts
and where indicated)
i
The following table represents Charter Holdings' purchase of Charter Holdings common units from A/N and the effect on total shareholders' equity during the three and nine months ended September 30, 2022 and 2021.
Decrease
in noncontrolling interest based on carrying value
$
(i179)
$
(i148)
$
(i573)
$
(i553)
Decrease
in additional paid-in-capital, net of tax
$
(i155)
$
(i197)
$
(i608)
$
(i713)
/
i
Total
shareholders' equity was also adjusted during the three and nine months ended September 30, 2022 and 2021 due to the changes in Charter Holdings' ownership including the impact of the preferred unit conversion in June 2021 as follows.
Increase
in additional paid-in-capital, net of tax
$
i96
$
i219
$
i468
$
i1,353
/
7.
iAccounting for Derivative Instruments and Hedging Activities
Cross-currency derivative instruments are used to manage foreign exchange risk on the Sterling Notes by effectively converting £i1.275
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 fair value of the Company's cross-currency derivatives, which are classified within Level 2 of the valuation hierarchy, was $i772 million and $i290
million and is included in other long-term liabilities on its consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
i
The effect of financial instruments are recorded in other income (expenses), net in the consolidated statements of operations and consisted of the following.
As
of September 30, 2022 and December 31, 2021, accounts receivable, net on the consolidated balance sheets includes approximately $i492 million and $i391 million
of current equipment installment plan receivables, respectively, and other noncurrent assets includes approximately $i225 million and $i189 million of noncurrent equipment installment plan receivables, respectively.
9.
iOperating Costs and Expenses
i
Operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, consist of the following
for the periods presented:
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 contract period. Costs to service customers include costs related to field operations, network operations and customer care for the
Company’s residential and SMB customers, including internal and third-party labor for the non-capitalizable portion of installations, service and repairs, maintenance, bad debt expense, billing and collection, occupancy and
(dollars in millions, except per share amounts and where indicated)
vehicle costs. Marketing costs
represent the costs of marketing to current and potential residential and commercial customers including labor costs. Mobile costs represent costs associated with the Company's mobile service such as device and service costs, marketing, sales and commissions, retail stores, personnel costs, taxes, among others. Other includes corporate overhead, advertising sales expenses, indirect costs associated with the Company’s enterprise business customers and regional sports and news networks, property tax and insurance expense and stock compensation expense, among others.
10. iOther
Operating (Income) Expenses, Net
i
Other operating (income) expenses, net consist of the following for the periods presented:
Special charges, net for the three and nine months ended September 30, 2022 primarily includes litigation settlements and the nine months ended September 30, 2022 also includes a $i54 million gain related to the settlement of a multiemployer pension plan. For the nine months ended September
30, 2021, special charges, net includes net amounts of litigation settlements, including the $i220 million settlement with Sprint Communications Company L.P. and T-Mobile USA, Inc., and employee termination costs.
11. iOther
Income (Expenses), Net
i
Other income (expenses), net consist of the following for the periods presented:
During the three and nine months ended September 30, 2022 and nine months ended September 30, 2021, settlements for lump-sum distributions to pension plan participants exceeded the estimated annual interest cost of the plans. As a result, the pension liability and pension asset values were reassessed utilizing remeasurement date assumptions in accordance with the Company's mark-to-market pension accounting policy to record gains and losses in the period in which a remeasurement event occurs. Net periodic pension benefits includes a $ii189/ million
remeasurement gain recorded during the three and nine months ended September 30, 2022 and a $i155 million remeasurement gain recorded during the nine months ended September 30, 2021 which were primarily driven by changes in the discount rate offset by losses to record assets to fair value.
Gain (loss) on equity investments, net
Gain
(loss) on equity investments, net includes impairments on equity investments of approximately $i165 million for the nine months ended September 30, 2021.
(dollars in millions, except per share amounts and where indicated)
12.iStock Compensation
Plans
Charter’s stock incentive plans provide for grants of nonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock, restricted stock units and restricted stock. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting services for the Company, are eligible for grants under the stock incentive plans.
i
Charter
granted the following equity awards for the periods presented.
Stock
options and restricted stock units generally cliff vest iithree years/
from the date of grant. Stock options generally expire iten years from the grant date and restricted stock units have no voting rights. Restricted stock generally vests ione
year from the date of grant.
As of September 30, 2022, total unrecognized compensation remaining to be recognized in future periods totaled $i268 million for stock options, $i2
million for restricted stock and $i329 million for restricted stock units and the weighted average period over which they are expected to be recognized is itwo
years for stock options, iseven months for restricted stock and itwo
years for restricted stock units.
The Company recorded stock compensation expense of $i109 million and $i360
million for the three and nine months ended September 30, 2022, respectively, and $i98 million and $i332
million for the three and nine months ended September 30, 2021, respectively, which is included in operating costs and expenses.
13. iEarnings 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 units of i19
million and i20 million for the three and nine months ended September 30, 2022, respectively, and i23 million
and i18 million for the three and nine months ended September 30, 2021, respectively, were not included in the computation of diluted earnings per share as their effect would have been antidilutive.
Net
income attributable to Charter shareholders after assumed conversions
$
i1,185
$
i1,217
$
i3,859
$
i3,114
Denominator:
Weighted
average common shares outstanding, basic
i157,971,109
i181,925,180
i164,189,703
i186,380,681
Effect
of dilutive securities:
Assumed exercise or issuance of shares relating to stock plans
i2,667,077
i5,240,891
i3,162,074
i5,158,105
Weighted
average Charter Holdings convertible preferred units
i—
i—
i—
i5,777,881
Weighted
average common shares outstanding, diluted
i160,638,186
i187,166,071
i167,351,777
i197,316,667
Basic
earnings per common share attributable to Charter shareholders
$
i7.51
$
i6.69
$
i23.51
$
i16.33
Diluted
earnings per common share attributable to Charter shareholders
$
i7.38
$
i6.50
$
i23.06
$
i15.78
/
14.iContingencies
In
March 2020, Charter Communications, LLC (“CC, LLC”), an indirect subsidiary of the Company, was named as a defendant in a lawsuit filed in Dallas, Texas related to the fatal stabbing of an individual in her home by an off duty CC, LLC technician: William Goff, as Personal Representative of Betty Jo McClain Thomas, deceased, et al. v. Roy James Holden, Jr. and Charter Communications, LLC, Case No. CC-20-01579-E, pending in County Court at Law No. 5 for Dallas County, Texas. The complaint alleged that CC, LLC was responsible for Mrs. Thomas' death. Following a two phase trial, the jury returned a verdict finding CC, LLC ninety percent at fault for Mrs. Thomas’ death, and awarded compensatory damages of $i375 million
to plaintiffs and then awarded $i7.0 billion in punitive damages to plaintiffs on July 26, 2022. On October 7, 2022, plaintiffs filed a motion for a judgment that proposed a reduced total award of $i1.144 billion. The
trial judge signed the judgment, and CC, LLC posted a $i25 million bond to stay the judgment pending appeals. CC, LLC will continue to vigorously defend this lawsuit including pursuing all available appeals.
The Company has considered various factors, including the legal and factual circumstances of the case, the trial record, the jury verdicts, the status of the proceedings, applicable law, the views of legal counsel,
the court’s rulings in advance of and during the trial, along with post-trial motions of the parties in determining the various grounds for appeal that the Company expects to vigorously pursue and the likelihood of a successful appeal. Based on these factors, the Company has concluded that a loss from this case is not probable and reasonably estimable. Therefore, the Company has not accrued a liability for the adverse verdict in its financial statements as of September 30, 2022.
The Company is a defendant
or co-defendant in several lawsuits involving alleged infringement of various intellectual property relating to various aspects of its businesses. Other industry participants are also defendants in certain of these cases or related cases. In the event that a court ultimately determines that the Company infringes on any intellectual property, the Company may be subject to substantial damages and/or an injunction that could require the Company or its vendors to modify certain products and services the Company offers to its subscribers, as well as negotiate royalty or license agreements with respect to the
(dollars in millions, except per share amounts and where indicated)
intellectual property at issue. While the Company believes the lawsuits are without merit and intends to defend the actions vigorously, no assurance can be given that any adverse outcome would not be material to the Company’s consolidated financial condition, results of operations, or liquidity. The
Company cannot predict the outcome of any such claims nor can it reasonably estimate a range of possible loss.
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
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
General
Charter Communications, Inc. (together with its controlled subsidiaries, “Charter”) is a leading broadband connectivity company and cable operator serving more than 32 million customers in 41 states through our Spectrum brand. Over an advanced high-capacity, two-way telecommunications network, we offer a full range of state-of-the-art residential and business services including Spectrum Internet, TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise provides highly customized, fiber-based
solutions. Spectrum Reach delivers tailored advertising and production for the modern media landscape. We also distribute award-winning news coverage and sports programming to our customers through Spectrum Networks.
Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated.
Overview
In 2022, we remain focused on driving customer relationship growth. Residential and small and medium
business ("SMB") customer relationships increased by 17,000 during the third quarter of 2022 and 192,000 from September 30, 2021 to September 30, 2022, which excludes mobile-only customers. We continue to see lower customer move rates and switching behavior among providers, which has reduced our selling opportunities. Our rural construction initiative is underway which we expect will expand our footprint by approximately 1 million homes and businesses over the next six years, and we expect to participate in additional government subsidy programs that would further expand our footprint. We continue to evolve our network to provide increased Internet speeds and reliability and invest in our products and customer service platforms. We offer Spectrum Internet products with speeds up to 1 Gbps across our entire footprint. Our Advanced WiFi, a managed WiFi service
that provides customers an optimized home network while providing greater control of their connected devices with enhanced security and privacy, is available to nearly all Internet customers. We continue to invest in our ability to provide a differentiated Internet connectivity experience for our mobile and fixed Internet customers with the availability of over 500,000 out of home WiFi access points across our footprint. In October, we introduced Spectrum One, which brings together Spectrum Internet, Advanced WiFi and Unlimited Spectrum Mobile™, to offer consumers faster, more reliable and secure online connections on their favorite devices at home and on the go in a high-value package. In addition, we continue to work towards the construction of our own 5G mobile data-only network leveraging the Citizens Broadband Radio Service (“CBRS”) Priority Access Licenses (“PALs”) purchased in 2020. By continually improving our product set and offering consumers
the opportunity to save money by switching to our services, we believe we can continue to penetrate our expanding footprint and attract more spend on additional products for our existing customers. During the nine months ended September 30, 2022, we added 1,113,000 mobile lines and 239,000 Internet customers, and for the quarter ended September 30, 2022, we added 396,000 mobile lines and 75,000 Internet customers.
We believe Spectrum-branded mobile services will drive higher sales of our core products, create longer customer lives and increase profitability and cash flow over time. During the three and nine months ended September 30, 2022, our mobile product line increased revenues by $750 million and $2.2 billion, respectively, reduced Adjusted
EBITDA by approximately $96 million and $237 million, respectively, and reduced free cash flow by approximately $208 million and $768 million, respectively. During the three and nine months ended September 30, 2021, our mobile product line increased revenues by $535 million and $1.5 billion, respectively, reduced Adjusted EBITDA by approximately $72 million and $219 million, respectively, and reduced free cash flow by approximately $145 million and $606 million, respectively. Mobile Adjusted EBITDA may continue to be negative primarily as a result of growth-related sales and marketing and other customer acquisition costs for mobile services, and depending on the pace of that growth. We also expect to continue to see negative free cash flow from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans and capital expenditures related to CBRS build-out.
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We
realized revenue, Adjusted EBITDA and income from operations during the periods presented as follows (in millions; all percentages are calculated using whole numbers; minor differences may exist due to rounding):
Adjusted
EBITDA is defined as net income attributable to Charter shareholders plus net income attributable to noncontrolling interest, net interest expense, income taxes, depreciation and amortization, stock compensation expense, other income (expenses), net and other operating (income) expenses, net, such as special charges and (gain) loss on sale or retirement of assets. See “Use of Adjusted EBITDA and Free Cash Flow” for further information on Adjusted EBITDA and free cash flow.
Growth in total revenue was primarily due to growth in our residential Internet, mobile and commercial customers and price adjustments. Adjusted EBITDA growth and changes in income from operations were impacted by growth in revenue and increases in operating costs and expenses, primarily mobile, costs to service customers and marketing.
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The
following table summarizes our customer statistics for Internet, video, voice and mobile as of September 30, 2022 and 2021 (in thousands except per customer data and footnotes).
Monthly
Residential Revenue per Residential Customer (c)
$
115.16
$
115.15
Monthly SMB Revenue per SMB Customer (d)
$
164.89
$
167.29
Internet
Residential
28,320
27,965
SMB
2,008
1,934
Total
Internet Customers
30,328
29,899
Video
Residential
14,642
15,287
SMB
649
604
Total
Video Customers
15,291
15,891
Voice
Residential
7,929
8,784
SMB
1,287
1,273
Total
Voice Customers
9,216
10,057
Mobile Lines (e)
Residential
4,516
3,085
SMB
161
99
Total
Mobile Lines
4,677
3,184
Enterprise Primary Service Units ("PSUs") (f)
282
269
(a)We calculate the aging of customer accounts based on the monthly billing cycle for each account. On that basis, as of September 30, 2022 and 2021,
customers include approximately 151,700 and 119,200 customers, respectively, whose accounts were over 60 days past due, approximately 55,500 and 21,100 customers, respectively, whose accounts were over 90 days past due and approximately 149,300 and 31,800 customers, respectively, whose accounts were over 120 days past due. Bad debt expense associated with these past due accounts has been reflected in our consolidated statements of operations. The increase in past due accounts is predominately due to pre-existing and incremental unsubsidized amounts of customers’ bills for those customers participating in government assistance programs, including video services. These customers are downgraded to a fully subsidized Internet-only service.
(b)Customer relationships include the number of customers that receive one or more levels of service, encompassing Internet, video and voice services, without regard
to which service(s) such customers receive. Customers who reside in residential multiple dwelling units (“MDUs”) and that are billed under bulk contracts are counted based on the number of billed units within each bulk MDU. Total customer relationships exclude enterprise and mobile-only customer relationships.
(c)Monthly residential revenue per residential customer is calculated as total residential quarterly revenue divided by three divided by average residential customer relationships during the respective quarter and excludes mobile revenue and customers.
(d)Monthly SMB revenue per SMB customer is calculated as total SMB quarterly revenue divided by three divided by average SMB customer relationships during the respective quarter
and excludes mobile revenue and customers.
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(e)Mobile lines include phones and tablets which require one of our standard rate plans (e.g., "Unlimited" or "By the Gig"). Mobile lines exclude wearables and other devices that do not require standard phone rate plans.
(f)Enterprise PSUs represent the aggregate number of fiber service offerings counting each separate service offering at each customer location as an individual PSU.
Critical Accounting Policies and Estimates
For
a discussion of our critical accounting policies and the means by which we develop estimates therefore, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K. There have been no material changes from the critical accounting policies described in our Form 10-K.
Results of Operations
The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions, except per share data):
Operating costs and expenses (exclusive of items shown separately below)
8,247
7,958
24,574
23,551
Depreciation and amortization
2,177
2,270
6,711
7,065
Other
operating (income) expenses, net
202
(9)
141
284
10,626
10,219
31,426
30,900
Income from operations
2,924
2,927
8,922
7,570
Other
Income (Expenses):
Interest expense, net
(1,160)
(1,016)
(3,329)
(3,003)
Other income (expenses), net
(37)
(157)
65
(237)
(1,197)
(1,173)
(3,264)
(3,240)
Income
before income taxes
1,727
1,754
5,658
4,330
Income tax expense
(360)
(347)
(1,194)
(844)
Consolidated
net income
1,367
1,407
4,464
3,486
Less: Net income attributable to noncontrolling interests
(182)
(190)
(605)
(442)
Net
income attributable to Charter shareholders
$
1,185
$
1,217
$
3,859
$
3,044
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS:
Basic
$
7.51
$
6.69
$
23.51
$
16.33
Diluted
$
7.38
$
6.50
$
23.06
$
15.78
Weighted
average common shares outstanding, basic
157,971,109
181,925,180
164,189,703
186,380,681
Weighted average common shares outstanding, diluted
160,638,186
187,166,071
167,351,777
197,316,667
Revenues. Total revenues grew $404 million and $1.9 billion for the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 primarily due to increases in the number of residential Internet, mobile and commercial customers and price adjustments.
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Revenues by service offering were as follows (dollars in millions; all percentages are calculated using whole numbers; minor differences may exist due to rounding):
Increase in average residential Internet customers
84
425
$
208
$
915
The
increase related to rate and product mix was primarily due to reduced bundle discounts and promotional roll-off. Residential Internet customers grew by 355,000 customers from September 30, 2021 to September 30, 2022.
Video revenues consist primarily of revenues from basic and digital video services provided to our residential customers, as well as franchise fees, equipment service fees and video installation revenue. The decrease in video revenues is attributable to the following (dollars in millions):
Residential video customers decreased by 645,000 from September 30, 2021
to September 30, 2022. The increase related to rate and product mix was primarily due to price adjustments and promotional roll-off and was partly offset by a higher mix of lower cost video packages within our video customer base.
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The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions):
Enterprise revenues increased $17 million and $73 million during the three and nine months ended September 30,
2022, respectively, compared to the corresponding periods in 2021 primarily due to an increase in Internet PSUs offset by a $16 million one-time benefit incurred during the three and nine months ended September 30, 2021 as well as lower wholesale PSUs. Enterprise PSUs increased 13,000 from September 30, 2021 to September 30, 2022.
Advertising sales revenues consist primarily of revenues from commercial advertising customers, programmers and other vendors, as well as local cable and advertising on regional sports and news channels. Advertising sales revenues increased $90 million and $178 million during the three and nine months ended September 30, 2022, respectively, as compared to
the corresponding periods in 2021 primarily due to an increase in political revenue.
During the three and nine months ended September 30, 2022, mobile revenues included approximately $303 million and $894 million of device revenues, respectively, and approximately $447 million and $1.3 billion of service revenues, respectively. During the three and nine months ended September 30, 2021, mobile revenues included approximately $201 million and $643 million of device revenues, respectively, and approximately $334 million and $903 million of service revenues, respectively. The increases in revenues are a result of an increase of 1,493,000 mobile lines from September 30, 2021 to September 30, 2022.
Other
revenues consist of revenue from processing fees, regional sports and news channels (excluding intercompany charges or advertising sales on those channels), subsidy revenue, home shopping, video device sales, wire maintenance fees and other miscellaneous revenues. Other revenues decreased $5 million and increased $24 million during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021. The increase during the nine months ended September 30, 2022 compared to the corresponding prior period in 2021 is primarily due to subsidy revenue related to our rural construction initiative and an increase in processing fees offset by a decrease in sales of video devices.
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Operating
costs and expenses. The increase in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, are attributable to the following (dollars in millions):
Programming
costs were approximately $2.9 billion and $3.0 billion for the three months ended September 30, 2022 and 2021, representing 35% and 37% of total operating costs and expenses, respectively, and $8.8 billion and $8.9 billion for the nine months ended September 30, 2022 and 2021, representing 36% and 38% of total operating costs and expenses, respectively. Programming costs consist primarily of costs paid to programmers for basic, digital, premium, video on demand, and pay-per-view programming. Programming costs decreased as a result of fewer customers and a higher mix of lower cost video packages within our video customer base along with favorable one-time impacts offset by contractual rate adjustments, including renewals and increases in amounts paid for retransmission consent. We
expect programming rates per customer will continue to increase due to a variety of factors, including annual increases imposed by programmers with additional selling power as a result of media and broadcast station groups consolidation, increased demands by owners of broadcast stations for payment for retransmission consent or linking carriage of other services to retransmission consent, and additional programming. We have been unable to fully pass these increases on to our customers and do not expect to be able to do so in the future without a potential loss of customers.
Regulatory, connectivity and produced content decreased $47 million and $160 million during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 primarily due to lower costs of video devices sold to customers
and regulatory pass-through fees. Regulatory, connectivity and produced content for the nine months ended September 30, 2022 compared to the corresponding prior period also decreased due to lower sports rights costs as a result of more basketball games during 2021 as compared to 2022 as the prior period had additional games due to the delayed start of the 2020 - 2021 NBA season as a result of COVID-19.
Costs to service customers increased $83 million and $271 million during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 primarily due to higher bad debt and higher fuel costs offset by lower labor costs as a result of productivity improvements driven by improved network performance and digital self-service platforms.
Marketing
increased $73 million and $213 million during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 primarily due to higher labor costs associated with higher staffing levels and our commitment to a minimum $20 per hour wage in 2022 as well as insourcing of inbound sales and retention call centers.
Mobile costs of $846 million and $2.4 billion for the three and nine months ended September 30, 2022, respectively, and $607 million and $1.8 billion for the three and nine months ended September 30, 2021, respectively, were comprised of mobile device costs and mobile service, customer acquisition and operating costs. The increase is attributable to an increase in the number of mobile
lines.
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The increase in other expense is attributable to the following (dollars in millions):
Corporate costs increased during the nine months ended September 30, 2022 compared to the corresponding prior period primarily due to higher labor costs and computer and software expense. Advertising sales expense increased due to higher costs of sales fees driven by higher political revenue and higher labor costs.
Depreciation
and amortization.Depreciation and amortization expense decreased by $93 million and $354 million during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 primarily due to certain assets acquired in acquisitions becoming fully depreciated offset by an increase in depreciation as a result of more recent capital expenditures.
Other operating (income) expenses, net. The change in other operating (income) expenses, net is attributable to the following (dollars in millions):
See
Note 10 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information.
Interest expense, net. Net interest expense increased by $144 million and $326 million for the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021. The increase in net interest expense is the result of an increase in weighted average debt outstanding of approximately $8.4 billion and $9.0 billion during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021 as well as an increase in weighted average interest rates. The increase in weighted average debt outstanding is primarily due to the issuance
of notes throughout 2021 and 2022.
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Other income (expenses), net. The change in other income (expenses), net is attributable to the following (dollars in millions):
See Note 11 and the Notes referenced above to the accompanying consolidated financial
statements contained in “Item 1. Financial Statements” for more information.
Income tax expense.We recognized income tax expense of $360 million and $1.2 billion for the three and nine months ended September 30, 2022, respectively, and $347 million and $844 million for the three and nine months ended September 30, 2021, respectively. The increase is primarily a result of decreased recognition of excess tax benefits resulting from share-based compensation during 2021 and the change in pretax income.
Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting
purposes represents Advance/Newhouse Partnership's (“A/N”) portion of Charter Holdings’ net income based on its effective common unit ownership interest and the preferred dividend of $70 million for the nine months ended September 30, 2021. For more information, see Note 6 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements.”
Net income attributable to Charter shareholders. Net income attributable to Charter shareholders decreased $32 million and increased $815 million during the three and nine months ended September 30, 2022, respectively, compared to the corresponding periods in 2021, primarily as a result of the factors described above.
Use
of Adjusted EBITDAand Free Cash Flow
We use certain measures that are not defined by U.S. generally accepted accounting principles ("GAAP") to evaluate various aspects of our business. Adjusted EBITDA and free cash flow are non-GAAP financial measures and should be considered in addition to, not as a substitute for, net income attributable to Charter shareholders and net cash flows from operating activities reported in accordance with GAAP. These terms, as defined by us, may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA and free cash flow are reconciled to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, below.
Adjusted EBITDA eliminates the significant
non-cash depreciation and amortization expense that results from the capital-intensive nature of our businesses as well as other non-cash or special items, and is unaffected by our capital structure or investment activities. However, this measure is limited in that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues and our cash cost of financing. These costs are evaluated through other financial measures.
Free cash flow is defined as net cash flows from operating activities, less capital expenditures and changes in accrued expenses related to capital expenditures.
Management and Charter’s board of directors use Adjusted EBITDA and free cash flow to assess our performance and our ability to service our debt, fund operations and make
additional investments with internally generated funds. In addition, Adjusted EBITDA generally correlates to the leverage ratio calculation under our credit facilities or outstanding notes to determine compliance with the covenants contained in the facilities and notes (all such documents have been previously filed with the Securities and Exchange Commission (the “SEC”)). For the purpose of calculating compliance with leverage covenants, we use Adjusted EBITDA, as presented, excluding certain expenses paid by our operating subsidiaries to other Charter entities. Our debt covenants refer to these expenses as management fees, which were $342 million and $1.0 billion for
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the
three and nine months ended September 30, 2022, respectively, and $337 million and $979 million for the three and nine months ended September 30, 2021, respectively.
A reconciliation of Adjusted EBITDA and free cash flow to net income attributable to Charter shareholders and net cash flows from operating activities, respectively, is as follows (dollars in millions):
Plus: Net
income attributable to noncontrolling interest
182
190
605
442
Interest expense, net
1,160
1,016
3,329
3,003
Income
tax expense
360
347
1,194
844
Depreciation and amortization
2,177
2,270
6,711
7,065
Stock
compensation expense
109
98
360
332
Other expenses, net
239
148
76
521
Adjusted EBITDA
$
5,412
$
5,286
$
16,134
$
15,251
Net
cash flows from operating activities
$
3,757
$
4,263
$
11,138
$
12,013
Less: Purchases of property, plant and equipment
(2,406)
(1,861)
(6,456)
(5,563)
Change
in accrued expenses related to capital expenditures
156
74
284
(51)
Free cash flow
$
1,507
$
2,476
$
4,966
$
6,399
Liquidity
and Capital Resources
Introduction
This section contains a discussion of our liquidity and capital resources, including a discussion of our cash position, sources and uses of cash, access to credit facilities and other financing sources, historical financing activities, cash needs, capital expenditures and outstanding debt.
Recent Events
In August 2022, CCO Holdings, LLC ("CCO Holdings") and CCO Holdings Capital Corp. jointly issued $1.5 billion of 6.375% senior unsecured notes due September 2029 at par. The net proceeds were used for general corporate purposes, including to fund
buybacks of Charter Class A common stock and Charter Holdings common units, to repay certain indebtedness and to pay related fees and expenses.
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt. The principal amount of our debt as of September 30, 2022 was $96.8 billion, consisting of $13.4 billion of credit facility debt, $56.7 billion of investment grade senior secured notes and $26.7 billion of high-yield senior unsecured notes. Our business requires significant cash to fund principal and interest payments on our debt.
Our projected cash needs and projected sources of liquidity depend upon, among other things, our actual results,
and the timing and amount of our expenditures. As we continue to grow our market penetration of our mobile product, we will continue to experience negative working capital impacts from the timing of device-related cash flows when we sell devices to customers pursuant to equipment installment plans. Further, in 2022, Charter has become a meaningful federal cash tax payer as the majority of our net operating losses have been utilized. Free cash flow was $1.5 billion and $5.0 billion for the three and nine months ended September 30, 2022, respectively, and $2.5 billion and $6.4 billion for the three and nine months ended September 30, 2021, respectively. See table below for factors impacting free cash flow during the three and nine months ended September 30, 2022 compared to the corresponding prior periods. As of September 30,
2022, the amount available under our credit facilities was approximately $4.6 billion and cash on hand was approximately $480 million. We expect to utilize free cash flow, cash on hand and availability under our credit facilities as well as future refinancing transactions to further extend the
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maturities of our obligations. The timing and terms of any refinancing transactions will be subject to market conditions among other considerations. Additionally, we may, from time to time, and depending on market conditions and other factors, use cash on hand and the proceeds from securities offerings or other borrowings to retire our debt through open market purchases, privately negotiated purchases, tender offers or redemption provisions.
We believe we have sufficient liquidity from cash on hand, free cash flow and Charter Operating’s revolving credit facility as well as access to the capital markets to fund our projected cash needs.
We continue to evaluate the deployment of our cash on hand and anticipated future free cash flow including to invest in our business growth and other strategic opportunities, including expanding the capacity of our network, the expansion of our network through our rural broadband construction initiative, the build-out and deployment of our CBRS spectrum, and mergers and acquisitions as well as stock repurchases and dividends. Charter's target leverage of net debt to the last twelve months Adjusted EBITDA remains at 4 to 4.5 times Adjusted EBITDA, and up to 3.5 times Adjusted EBITDA at the Charter Operating first lien level. Our leverage ratio was 4.5 times Adjusted EBITDA as of September 30,
2022. As Adjusted EBITDA grows, we expect to increase the total amount of our indebtedness to maintain leverage within Charter's target leverage range. Excluding purchases from Liberty Broadband Corporation (“Liberty Broadband”) discussed below, during the three and nine months ended September 30, 2022, Charter purchased in the public market approximately 3.3 million and 12.6 million shares of Charter Class A common stock, respectively, for approximately $1.4 billion and $6.5 billion, respectively, and during the three and nine months ended September 30, 2021, Charter purchased in the public market approximately 3.5 million and 11.5 million shares of Charter Class A common stock, respectively, for approximately $2.7 billion and $7.8 billion, respectively. Since the beginning of its buyback program in September 2016 through September 30,
2022, Charter has purchased approximately 145.7 million shares of Class A common stock and Charter Holdings common units for approximately $67.2 billion, including purchases from Liberty Broadband and A/N discussed below.
In February 2021, Charter and Liberty Broadband entered into a letter agreement (the “LBB Letter Agreement”). The LBB Letter Agreement implements Liberty Broadband’s obligations under the Amended and Restated Stockholders Agreement among Charter, Liberty Broadband and A/N, dated as of May 23, 2015 (as amended, the “Stockholders Agreement”) to participate in share repurchases by Charter. Under the LBB Letter Agreement, Liberty Broadband will sell to Charter, generally on a monthly basis, a number of shares of Charter Class A common stock representing an amount sufficient for Liberty Broadband’s ownership
of Charter to be reduced such that it does not exceed the ownership cap then applicable to Liberty Broadband under the Stockholders Agreement at a purchase price per share equal to the volume weighted average price per share paid by Charter for shares repurchased during such immediately preceding calendar month other than (i) purchases from A/N, (ii) purchases in privately negotiated transactions or (iii) purchases for the withholding of shares of Charter Class A common stock pursuant to equity compensation programs of Charter. Charter purchased from Liberty Broadband 1.7 million and 5.0 million shares of Charter Class A common stock for approximately $796 million and $2.6 billion during the three and nine months ended September 30, 2022, respectively, and 1.2 million and 4.0 million shares of Charter Class A common stock for approximately $880 million and $2.6 billion during the three and nine months ended September 30,
2021, respectively. In October 2022, Charter purchased from Liberty Broadband an additional 0.5 million shares of Charter Class A common stock for approximately $183 million.
In December 2016, Charter and A/N entered into a letter agreement, as amended in December 2017 (the "A/N 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. During the three and nine months ended September 30, 2022, Charter Holdings purchased from A/N 0.8 million and 2.6 million Charter Holdings common units for approximately $385 million and $1.4 billion, respectively, and during the three and nine months ended September 30, 2021, Charter Holdings purchased from A/N 0.6 million and 2.3 million Charter Holdings common units for approximately $410 million and $1.5 billion, respectively.
As of September 30, 2022, Charter had remaining board authority to purchase an additional $680 million of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. Although
Charter expects to continue to buy back its common stock consistent with its leverage target range, Charter is not obligated to acquire any particular amount of common stock, and the timing of any purchases that may occur cannot be predicted and will largely depend on market conditions and other potential uses of capital.Purchases may include open market purchases, tender offers or negotiated transactions.
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As possible acquisitions, swaps or dispositions arise, we actively review them against our objectives including, among other considerations, improving the operational efficiency, geographic clustering of assets, product development or technology
capabilities of our business and achieving appropriate return targets, and we may participate to the extent we believe these possibilities present attractive opportunities. However, there can be no assurance that we will actually complete any acquisitions, dispositions or system swaps, or that any such transactions will be material to our operations or results.
Free Cash Flow
Free cash flow decreased $969 million and $1.4 billion during the three and nine months ended September 30, 2022 compared to the corresponding prior periods in 2021 due to the following (dollars in millions):
Changes in working capital, excluding change in accrued interest and taxes
96
(38)
Other,
net
(206)
(387)
$
(969)
$
(1,433)
Free cash flow was reduced by $208 million and $768 million during the three and nine months ended September 30, 2022, respectively, and $145 million and $606 million during the three and nine months ended September 30, 2021, respectively, due to mobile impacts negatively affecting working
capital, capital expenditures and Adjusted EBITDA. The increase in capital expenditures is primarily due to the rural construction initiative of $525 million and $1.1 billion during the three and nine months ended September 30, 2022, respectively. Cash paid for taxes, net increased as Charter has become a meaningful federal cash tax payer in 2022. Other, net for the three and nine months ended September 30, 2022 includes the payment of litigation settlements including the payment of a previously recorded litigation settlement with Sprint Communications Company L.P. and T-Mobile USA, Inc for the nine months ended September 30, 2022. See Note 10 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for more information.
Limitations
on Distributions
Distributions by our subsidiaries to a parent company for payment of principal on parent company notes are restricted under CCO Holdings indentures governing CCO Holdings' indebtedness, unless there is no default under the applicable indenture, and unless CCO Holdings' leverage ratio test is met at the time of such distribution. As of September 30, 2022, there was no default under any of these indentures, and CCO Holdings met its leverage ratio test based on September 30,
2022 financial results. There can be no assurance that CCO Holdings will satisfy its leverage ratio test at the time of the contemplated distribution.
In addition to the limitation on distributions under the various indentures, distributions by our subsidiaries may be limited by applicable law, including the Delaware Limited Liability Company Act, under which our subsidiaries may only make distributions if they have “surplus” as defined in the act.
Historical Operating, Investing, and Financing Activities
Cash and Cash Equivalents. We held $480 million and $601 million in cash and cash equivalents as of September 30, 2022 and December 31, 2021, respectively.
Operating Activities. Net cash provided by operating activities decreased $875 million during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily due to an increase in cash paid for taxes, changes in working capital, the payment of litigation settlements and higher cash paid for interest, offset by an increase in Adjusted EBITDA
of $883 million.
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Investing Activities.Net cash used in investing activities was $6.3 billion and $5.8 billion for the nine months ended September 30, 2022 and 2021, respectively. The increase in cash used was primarily due to an increase in capital expenditures, offset by changes in accrued expenses related to capital expenditures that increased by $335 million.
Financing Activities.Net cash used in financing activities
decreased $1.9 billion during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 primarily due to a decrease in the purchase of treasury stock and noncontrolling interest and an increase in the amount by which borrowings of long-term debt exceeded repayments.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were $2.4 billion and $6.5 billion for the three and nine months ended September 30, 2022, respectively, and $1.9 billion and $5.6 billion for the three and nine months ended September 30, 2021,
respectively. The increase was primarily due to an increase in line extensions and customer premise equipment, partly offset by a decrease in support capital. The increase in line extensions was primarily due to the rural construction initiative. See the table below for more details.
We currently expect full year 2022 cable capital expenditures, excluding capital expenditures associated with our rural construction initiative, to be between $7.1 billion and $7.3 billion. The actual amount of our capital expenditures in 2022 will depend on a number of factors including further spend related to product development, growth rates of both our residential and commercial businesses, supply chain timing and the pace of rural construction.
Our capital expenditures are funded primarily from cash flows
from operating activities and borrowings on our credit facility. In addition, our accrued liabilities related to capital expenditures increased by $284 million and decreased by $51 million for the nine months ended September 30, 2022 and 2021, respectively.
The following tables present our major capital expenditures categories in accordance with National Cable and Telecommunications Association (“NCTA”) disclosure guidelines for the three and nine months ended September 30, 2022 and 2021. These disclosure guidelines are not required disclosures under GAAP, nor do they impact our accounting for capital expenditures under GAAP (dollars in millions):
Capital
expenditures included in total related to:
Core cable (f)
$
1,785
$
1,742
$
5,077
$
5,208
Mobile
96
119
265
355
Rural
construction initiative (g)
525
—
1,114
—
Total capital expenditures
$
2,406
$
1,861
$
6,456
$
5,563
(a)Customer
premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units, including customer installation costs and customer premise equipment (e.g., digital receivers and cable modems).
(b)Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment).
(c)Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).
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(d)Upgrade/rebuild
includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.
(e)Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).
(f)Core cable represents total capital expenditures excluding mobile and rural construction initiative capital expenditures.
(g)The rural construction initiative subcategory includes expenditures associated with our Rural Construction Initiative (for which separate reporting was initiated in 2022), excluding customer premise equipment and installation.
Recently Issued Accounting
Standards
See Note 24 to the Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of recently issued accounting standards. There have been no material changes from the recently issued accounting standards described in our Form 10-K.
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes to the interest rate risk as previously disclosed in Part II, Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2021. See Note 4 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for a discussion of notes issued during the three and nine months ended September 30, 2022.
Item 4.Controls and Procedures.
As of the end of the period covered by this report, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our design and operation of disclosure
controls and procedures with respect to the information generated for use in this quarterly report. The evaluation was based upon reports and certifications provided by a number of executives. Based on, and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the evaluation, we believe that our controls provide such reasonable assurances.
During the quarter ended September 30, 2022, there was no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1.Legal
Proceedings.
See Note 14 to the accompanying consolidated financial statements contained in “Item 1. Financial Statements” for Legal Proceedings.
Item 1A.Risk Factors.
Our Annual Report on Form 10-K for the year ended December 31, 2021 includes "Risk Factors" under Item 1A of Part I. There have been no material changes from the risk factors described in our Form 10-K.
Item
2.Unregistered Sales of Equity Securities and Use of Proceeds.
Purchases of Equity Securities by the Issuer
The following table presents Charter’s purchases of equity securities completed during the third quarter of 2022 (dollars in millions, except per share amounts):
Period
Total
Number of Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
July 1 - 31, 2022
1,726,497
$464.89
1,724,115
$1,103
August 1 - 31, 2022
1,585,356
$458.11
1,540,855
$1,182
September
1 - 30, 2022
1,753,601
$407.61
1,741,973
$680
(1)Includes 2,382, 44,501 and 11,628 shares withheld from employees for the payment of taxes and exercise costs upon the exercise of stock options or vesting of other equity awards for the months of July, August and September 2022, respectively.
(2)During the three months ended September 30, 2022, Charter purchased approximately 5.0 million shares of its Class A common stock for approximately $2.2 billion, which includes 1.7 million Charter class A common shares purchased from Liberty
Broadband pursuant to the LBB Letter Agreement at an average price per unit of $461.73, or $796 million. Charter Holdings purchased 0.8 million Charter Holdings common units from A/N at an average price per unit of $460.59, or $385 million, during the three months ended September 30, 2022. As of September 30, 2022, Charter had remaining board authority to purchase an additional $680 million of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. In addition to open market purchases including pursuant to Rule 10b5-1 plans adopted from time to time, Charter may also buy shares of Charter Class A common stock, from time to time, pursuant to private transactions outside of its Rule 10b5-1 plan and any such repurchases may also trigger the repurchases from A/N pursuant to and to the extent provided in the A/N Letter
Agreement or Liberty Broadband pursuant to the LBB Letter Agreement.
Item 5.Other Information.
On October 27, 2022, Charter and David G. Ellen, Senior Executive Vice President of Charter, entered into an amended employment agreement (the “Amendment”) to amend the Amended and Restated Employment Agreement by and between Mr. Ellen and Charter, dated as of July 1, 2021 (the “Employment Agreement” and together with the Amendment, the “Amended Agreement”). Pursuant to the Amended Agreement, Mr. Ellen has
agreed to remain employed by Charter through November 30, 2023 as Senior Executive Vice President. Mr. Ellen and Charter may mutually agree to terminate the Amended Agreement before such date in addition to the other termination events provided for in the Amended Agreement. Mr. Ellen’s compensation will remain the same as provided for under the Employment Agreement. Pursuant to the Amendment, Mr. Ellen will be entitled to certain additional compensation upon the expiration of the extended term or upon termination earlier upon mutual agreement between Mr. Ellen and Charter.
A copy of the Amendment is filed herewith as Exhibit 10.6. The foregoing description of the Amended Employment Agreement does not purport
to be complete and is qualified in its entirety by reference to the full text of the Amendment that is filed as Exhibit 10.6 and the previously filed Employment Agreement that is incorporated by reference herein as Exhibit 10.5.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, Charter Communications, Inc. has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
The following financial information from Charter Communications, Inc.’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2022, filed with the Securities
and Exchange Commission on October 28, 2022, formatted in iXBRL (inline eXtensible Business Reporting Language) includes: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Changes in Shareholders' Equity; (iv) the Consolidated Statements of Cash Flows; and (vi) the Notes to the Consolidated Financial Statements.
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Cover Page, formatted in iXBRL and contained in Exhibit 101.
E-1
Dates Referenced Herein and Documents Incorporated by Reference