CHARTER COMMUNICATIONS, INC. General
Charter Communications, Inc. (together with its controlled subsidiaries, "Charter") is a leading broadband connectivity company and cable operator serving more than 31 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, sports and high-quality original programming to our customers through Spectrum Networks and Spectrum Originals. Charter is a holding company whose principal asset is a controlling equity interest inCharter Communications Holdings, LLC ("Charter Holdings "), an indirect owner ofCharter 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 2021 and 2020, the Novel Coronavirus ("COVID-19") pandemic significantly impacted how our customers use our products and services, how they interact with us, and how our employees work and provide services to our customers. Customer activity levels remain below normal which contributed to lower operating expense from reduced service transactions and lower bad debt in the first nine months of 2021, however, we expect trends to return to pre-COVID-19 levels as the economy continues to reopen and normal activities resume. InMay 2021 , theFederal Communications Commission ("FCC ") introduced the Emergency Broadband Benefit ("EBB") program to help households pay for Internet service. The EBB program provides eligible low-income households with up to$50 per month towards Internet service. AlthoughCongress may extend the EBB program funding as currently proposed in an infrastructure bill, we expect theFCC to run out of funding under the current EBB program allocation sometime in early 2022. If funding is not extended byCongress , our customers in the current EBB program will generally roll out of that program, continue to be our customers and be serviced consistent with our business practices regarding collections, disconnect process and bad debt. Many of these customers were serviced prior to the EBB program consistent with our normal business practices. However, we cannot predict how such an expiration of the EBB program would ultimately impact our experience with disconnects and bad debt for our customers currently in the EBB program. Although the ultimate impact of the COVID-19 pandemic cannot be predicted, we remain focused on driving customer relationship growth by deploying superior products and services packaged with attractive pricing. InOctober 2021 , we announced and implemented new Spectrum Mobile multi-line pricing designed to drive more mobile line sales per customer, and in turn, drive more broadband sales and the associated retention benefits. Further, we expect to continue to drive customer relationship growth through sales of bundled services and improving customer retention despite the expectation for continued losses of video and wireline voice customers. Our Spectrum Mobile service is offered to customers subscribing to our Internet service and runs on Verizon Communications Inc.'s ("Verizon") mobile network combined with Spectrum WiFi. We continue to explore ways to drive even more mobile traffic to our network. We intend to use Citizens Broadband Radio Service ("CBRS") Priority Access Licenses ("PALs") we purchased in 2020, along with unlicensed CBRS spectrum, to build our own 5G mobile network on our existing infrastructure in targeted geographies where there is high outdoor cellular traffic volume. This effort, in combination with our expanding WiFi network and continued 5G enhancements within the Verizon mobile virtual network operator ("MVNO") partnership agreement, should position our mobile product for continued customer experience and cost structure improvements. 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. As a result of growth costs associated with our new mobile product line, we cannot be certain that we will be able to grow revenues or maintain our margins at recent historical rates. During the three and nine months endedSeptember 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. During the three and nine months endedSeptember 30, 2020 , our mobile product line increased revenues by$368 million and$936 million , respectively, reduced Adjusted EBITDA by approximately$88 million and$307 million , respectively, and reduced free cash flow by approximately$265 million and 24 --------------------------------------------------------------------------------$758 million , respectively. 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 expect mobile Adjusted EBITDA will continue to be negative. 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 retail store and CBRS build-out.
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):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
Revenues $ 13,146 $ 12,039 9.2 % $ 38,470 $ 35,473 8.4 %
Adjusted EBITDA $ 5,286 $ 4,639 13.9 % $ 15,251 $ 13,524 12.8 %
Income from operations $ 2,927 $ 2,172 34.8 % $ 7,570 $ 5,943 27.4 %
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
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 and
income from operations growth was impacted by growth in revenue and increases in
operating costs and expenses, primarily programming and mobile as well as
regulatory, connectivity and produced content costs.
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The following table summarizes our customer statistics for Internet, video,
voice and mobile as of September 30, 2021 and 2020 (in thousands except per
customer data and footnotes).
Approximate as of
September 30,
2021 (a) 2020 (a)
Customer Relationships (b)
Residential 29,823 28,912
Small and Medium Business ("SMB") 2,126 2,021
Total Customer Relationships 31,949 30,933
Monthly Residential Revenue per Residential Customer (c) $ 115.15 $ 109.03
Monthly SMB Revenue per SMB Customer (d) $ 167.29 $ 164.77
Internet
Residential 27,965 26,807
SMB 1,934 1,826
Total Internet Customers 29,899 28,633
Video
Residential 15,287 15,705
SMB 604 530
Total Video Customers 15,891 16,235
Voice
Residential 8,784 9,335
SMB 1,273 1,207
Total Voice Customers 10,057 10,542
Mobile Lines (e)
Residential 3,085 2,020
SMB 99 40
Total Mobile Lines 3,184 2,060
Enterprise Primary Service Units ("PSUs") (f) 284 272
(a)We calculate the aging of customer accounts based on the monthly billing
cycle for each account. On that basis, as of September 30, 2021 and 2020,
customers include approximately 160,700 and 181,700 customers, respectively,
whose accounts were over 60 days past due, approximately 42,000 and 52,300
customers, respectively, whose accounts were over 90 days past due and
approximately 32,600 and 26,000 customers, respectively, whose accounts were
over 120 days past due.
(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.
(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.
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--------------------------------------------------------------------------------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 2020 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):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Revenues $ 13,146 $ 12,039 $ 38,470 $ 35,473
Costs and Expenses:
Operating costs and expenses (exclusive of
items shown separately below) 7,958 7,483 23,551 22,212
Depreciation and amortization 2,270 2,370 7,065 7,295
Other operating (income) expenses, net (9) 14 284 23
10,219 9,867 30,900 29,530
Income from operations 2,927 2,172 7,570 5,943
Other Income (Expenses):
Interest expense, net (1,016) (946) (3,003) (2,883)
Other expenses, net (157) (117) (237) (413)
(1,173) (1,063) (3,240) (3,296)
Income before income taxes 1,754 1,109 4,330 2,647
Income tax expense (347) (177) (844) (372)
Consolidated net income 1,407 932 3,486 2,275
Less: Net income attributable to
noncontrolling interests (190) (118) (442) (299)
Net income attributable to Charter
shareholders $ 1,217 $
814 $ 3,044
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: Basic $ 6.69$ 4.01 $ 16.33$ 9.62 Diluted $ 6.50$ 3.90 $ 15.78$ 9.35 Weighted average common shares outstanding, basic 181,925,180 202,826,502 186,380,681 205,468,736 Weighted average common shares outstanding, diluted 187,166,071 208,722,129 197,316,667 211,399,781
Revenues. Total revenues grew
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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):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 % Change 2021 2020 % Change
Internet $ 5,363 $ 4,722 13.6 % $ 15,670 $ 13,659 14.7 %
Video 4,502 4,221 6.7 % 13,224 13,014 1.6 %
Voice 409 449 (8.8) % 1,202 1,357 (11.4) %
Residential revenue 10,274 9,392 9.4 % 30,096 28,030 7.4 %
Small and medium business 1,062 988 7.5 % 3,116 2,967 5.0 %
Enterprise 656 617 6.4 % 1,930 1,845 4.7 %
Commercial revenue 1,718 1,605 7.1 % 5,046 4,812 4.9 %
Advertising sales 391 460 (15.1) % 1,146 1,074 6.6 %
Mobile 535 368 45.4 % 1,546 936 65.2 %
Other 228 214 6.5 % 636 621 2.4 %
$ 13,146 $ 12,039 9.2 % $ 38,470 $ 35,473 8.4 %
The increase in Internet revenues from our residential customers is attributable to the following (dollars in millions):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Increase related to rate, product mix and bundle
allocation changes $ 415 $ 1,139
Increase in average residential Internet customers 226 872
$ 641 $ 2,011
The increase related to rate, product mix and bundle allocation changes was
primarily due to price adjustments, promotional roll-off and higher bundled
revenue allocation as well as $29 million of credits related to prior year's
Keep Americans Connected ("KAC") Pledge which reduced revenue during the nine
months ended September 30, 2020 . Residential Internet customers grew by
1,158,000 customers from September 30, 2020 to September 30, 2021 .
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 change in video revenues is attributable to the following (dollars in millions):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Customer credits estimated in 2020 due to COVID-19 $ 218 $ 262
Increase related to rate, product mix and bundle
allocation changes 156 136
Decrease in average residential video customers (92) (137)
Decrease in video on demand and pay-per-view (1) (38)
Decrease in installation - (13)
$ 281 $ 210
28-------------------------------------------------------------------------------- We recorded$218 million of estimated customer credits related to canceled sporting events which reduced revenue during the three and nine months endedSeptember 30, 2020 and$44 million of credits related to prior year's KAC program which reduced revenue during the nine months endedSeptember 30, 2020 . The increase related to rate, product mix and bundle allocation changes 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 and lower bundled revenue allocation. Residential video customers decreased by 418,000 fromSeptember 30, 2020 toSeptember 30, 2021 .
The decrease in voice revenues from our residential customers is attributable to the following (dollars in millions):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Decrease related to rate and bundle allocation changes $ (17) $ (107)
Decrease in average residential voice customers (23) (48)
$ (40) $ (155)
-
The decrease related to rate and bundle allocation changes was impacted by
value-based pricing and changes in bundled revenue allocations. Residential
wireline voice customers decreased by 551,000 customers from
The increase in SMB revenues is attributable to the following (dollars in
millions):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Increase in SMB customers $ 58 $ 162
Increase related to COVID-19 programs which reduced prior year revenue
11 24
Increase (decrease) related to rate and product mix
changes 5 (37)
$ 74 $ 149
SMB customers grew by 105,000 from September 30, 2020 to September 30, 2021 . The
decrease related to rate and product mix changes during the nine months ended
September 30, 2021 compared to the corresponding period in 2020 was primarily
due to value-based pricing related to Spectrum pricing and packaging ("SPP") net
of promotional roll-off and price adjustments.
Enterprise revenues increased $39 million and $85 million during the three and
nine months ended September 30, 2021 , respectively, compared to the
corresponding periods in 2020 primarily due to an increase in Internet PSUs, $18
million of impacts from COVID-19 related programs which reduced revenues in the
nine months ended September 30, 2020 as well as a $16 million one-time benefit
incurred during the three and nine months ended September 30, 2021 offset by
lower wholesale PSUs. Enterprise PSUs increased 12,000 from September 30, 2020
to September 30, 2021 .
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
decreased $69 million during the three months ended September 30, 2021 as
compared to the corresponding period in 2020 primarily due to a decrease in
political revenue partially offset by an increase in advanced advertising
revenue. Advertising sales revenues increased $72 million during the nine months
ended September 30, 2021 as compared to the corresponding period in 2020
primarily due to an increase in advanced advertising revenues and local and
national advertising revenues as well as the impacts of COVID-19 that lowered
revenues in 2020 offset by a decrease in political.
During the three and nine months ended
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respectively. During the three and nine months ended September 30, 2020 , mobile
revenues represented approximately $172 million and $461 million of device
revenues, respectively, and approximately $196 million and $475 million of
service revenues, respectively. The increases in revenues are a result of an
increase of 1,124,000 mobile lines from September 30, 2020 to September 30,
2021 .
Other revenues consist of revenue from regional sports and news channels
(excluding intercompany charges or advertising sales on those channels), home
shopping, late payment fees, video device sales, wire maintenance fees and other
miscellaneous revenues. Other revenues increased $14 million and $15 million
during the three and nine months ended September 30, 2021 , respectively,
compared to the corresponding periods in 2020 primarily due to an increase in
late payment fees and sales of video devices.
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):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Programming $ 256 $ 457
Regulatory, connectivity and produced content 22 251
Costs to service customers (3) (68)
Marketing - 7
Mobile 151 522
Other 49 170
$ 475 $ 1,339
Programming costs were approximately $3.0 billion and $8.9 billion for the three
and nine months ended September 30, 2021 , respectively, representing 37% and 38%
of total operating costs and expenses, respectively, and $2.7 billion and $8.5
billion for the three and nine months ended September 30, 2020 , respectively,
representing 36% and 38% of total operating costs and expense, respectively.
Programming costs consist primarily of costs paid to programmers for basic,
digital, premium, video on demand, and pay-per-view programming. Programming
costs increased as a result of $163 million of estimated rebates from sports
programming networks as a result of canceled sporting events due to COVID-19
which reduced programming costs during the three and nine months ended
September 30, 2020 , as well as contractual rate adjustments, including renewals
and increases in amounts paid for retransmission consent offset by fewer
customers and a higher mix of lower cost video packages within our video
customer base. 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 increased $22 million and $251
million during the three and nine months ended September 30, 2021 , respectively,
compared to the corresponding periods in 2020. The increase during the nine
months ended September 30, 2021 as compared to the corresponding period in 2020
is primarily due to higher sports rights costs as a result of more National
Basketball Association ("NBA") and Major League Baseball ("MLB") games during
2021 as compared to the corresponding period in 2020 as the prior period had
cancelation of MLB games and the current 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 decreased $3 million and $68 million during the three
and nine months ended September 30, 2021 , respectively, compared to the
corresponding periods in 2020 despite 3.3% customer growth. The decrease during
the nine months ended September 30, 2021 compared to the corresponding period in
2020 was primarily due to fewer transactions and a decrease in bad debt expense
partly driven by government stimulus packages offset by the higher labor costs
associated with our commitment to a minimum $20 per hour wage in 2022.
Mobile costs of $607 million and $1.8 billion for the three and nine months
ended September 30, 2021 , respectively, and $456 million and $1.2 billion for
the three and nine months ended September 30, 2020 , respectively, were comprised
of mobile
30
--------------------------------------------------------------------------------device costs and mobile service, customer acquisition and operating costs. The increase is attributable to an increase in the number of mobile lines.
The increase in other expense is attributable to the following (dollars in
millions):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Corporate costs $ 27 $ 53
Stock compensation expense 15 69
Property tax and insurance 9 5
Enterprise 6 15
Advertising sales expense (17) 17
Other 9 11
$ 49 $ 170
Corporate costs increased during the three and nine months ended September 30,
2021 compared to the corresponding prior periods primarily due to higher labor
costs. Stock compensation expense increased during the nine months ended
September 30, 2021 compared to the corresponding period in 2020 primarily due to
changes in certain equity award provisions that result in additional expense at
the time of grant. Advertising sales expense decreased during the three months
ended September 30, 2021 compared to the corresponding period in 2020 due to
lower cost of sales fees driven by lower political revenue offset by higher
labor costs.
Depreciation and amortization. Depreciation and amortization expense decreased
by $100 million and $230 million during the three and nine months ended
September 30, 2021 , respectively, compared to the corresponding periods in 2020
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):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Special charges, net $ (35) $ 192
(Gain) loss on disposal of assets, net 12 69
$ (23) $ 261
See Note 13 to the accompanying consolidated financial statements contained in "Item 1. Financial Statements" for more information.
Interest expense, net. Net interest expense increased by$70 million and$120 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the corresponding periods in 2020. The increase in net interest expense is the result of an increase in weighted average debt outstanding of approximately$7.8 billion and$6.3 billion during the three and nine months endedSeptember 30, 2021 , respectively, compared to the corresponding periods in 2020 offset by reductions in weighted average interest rates. The increase in weighted average debt outstanding is primarily due to the issuance of notes throughout 2020 and 2021 for general corporate purposes including stock buybacks and debt repayments. 31
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Other expenses, net. The change in other expenses, net is attributable to the following (dollars in millions):
Three months ended Nine months ended
September 30, 2021 September 30, 2021
compared to compared to
three months ended nine months ended
September 30, 2020 September 30, 2020
Increase / (Decrease) Increase / (Decrease)
Loss on extinguishment of debt (see Note 6) $ (11) $ (23)
Gain (loss) on financial instruments, net (see Note 9) (133) 78
Net periodic pension benefits (see Note 21) 100 270
Loss on equity investments, net (see Note 3) 4 (149)
$ (40) $ 176
See Note 14 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$347 million and$844 million for the three and nine months endedSeptember 30, 2021 , respectively, and$177 million and$372 million for the three and nine months endedSeptember 30, 2020 , respectively. The increase is primarily a result of higher pretax income. For more information, see Note 16 to the accompanying consolidated financial statements contained in "Item 1. Financial Statements." Net income attributable to noncontrolling interest. Net income attributable to noncontrolling interest for financial reporting purposes represents A/N's portion ofCharter Holdings' net income based on its effective common unit ownership interest and the preferred dividend of$70 million for the nine months endedSeptember 30, 2021 , and$37 million and$112 million for the three and nine months endedSeptember 30, 2020 , respectively. For more information, see Note 8 to the accompanying consolidated financial statements contained in "Item 1. Financial Statements." Net income attributable to Charter shareholders. Net income attributable to Charter shareholders increased from$814 million and$2.0 billion for the three and nine months endedSeptember 30, 2020 , respectively, to$1.2 billion and$3.0 billion for the three and nine months endedSeptember 30, 2021 , respectively, primarily as a result of the factors described above.
Use of Adjusted EBITDA and Free Cash Flow
We use certain measures that are not defined byU.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 theSecurities 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$337 million and$979 million for 32 --------------------------------------------------------------------------------
the three and nine months ended
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).
Three Months Ended September
30, Nine Months Ended
2021 2020 2021 2020
Net income attributable to Charter
shareholders $ 1,217 $ 814 $ 3,044 $ 1,976
Plus: Net income attributable to
noncontrolling interest 190 118 442 299
Interest expense, net 1,016 946 3,003 2,883
Income tax expense 347 177 844 372
Depreciation and amortization 2,270 2,370 7,065 7,295
Stock compensation expense 98 83 332 263
Other expenses, net 148 131 521 436
Adjusted EBITDA $ 5,286 $ 4,639 $ 15,251 $ 13,524 Net cash flows from operating activities
$ 12,013 $ 10,413 Less: Purchases of property, plant and equipment (1,861) (2,014) (5,563) (5,352) Change in accrued expenses related to capital expenditures 74 104 (51) (70) Free cash flow$ 2,476 $ 1,754 $ 6,399 $ 4,991
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
InMarch 2021 ,Charter Operating and Charter Communications Operating Capital Corp. jointly issued$1.5 billion aggregate principal amount of 3.500% senior secured notes dueJune 2041 at a price of 99.544% of the aggregate principal amount,$1.0 billion aggregate principal amount of 3.900% senior secured notes dueJune 2052 at a price of 99.951% of the aggregate principal amount and an additional$500 million aggregate principal amount of 3.850% senior secured notes dueApril 2061 at a price of 94.668% of the aggregate principal amount. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock andCharter Holdings common units as well as repaying certain indebtedness, including$750 million ofCCO Holdings, LLC's ("CCO Holdings ") 5.750% notes dueFebruary 2026 . InApril 2021 ,CCO Holdings andCCO Holdings Capital Corp. jointly issued$1.0 billion of 4.500% senior unsecured notes dueJune 2033 at par, and inJune 2021 , an additional$750 million of the same series of notes was issued at a price of 99.250% of the aggregate principal amount. The net proceeds were used for general corporate purposes, including to fund potential buybacks of Charter Class A common stock andCharter Holdings common units, to repay certain indebtedness and to pay related fees and expenses. InJune 2021 ,Charter Operating and Charter Communications Operating Capital Corp. issued an additional$1.4 billion of 3.900% senior secured notes dueJune 2052 priced at 95.578% of the aggregate principal amount and$1.4 billion aggregate principal amount of 4.400% senior secured notes dueDecember 2061 at a price of 99.906% of the aggregate principal amount. Net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock andCharter Holdings common units as well as repaying certain indebtedness, including 33 --------------------------------------------------------------------------------
InAugust 2021 ,CCO Holdings andCCO Holdings Capital Corp. jointly issued$2.0 billion of 4.250% senior unsecured notes dueJanuary 2034 at par. The net proceeds were used to pay related fees and expenses and for general corporate purposes, including repaying$1.25 billion ofCCO Holdings' 5.750% notes dueFebruary 2026 and$750 million ofCCO Holdings' 5.500% notes dueMay 2026 as well as funding buybacks of Charter Class A common stock andCharter Holdings common units. InOctober 2021 ,Charter Operating and Charter Communications Operating Capital Corp. issued an$1.25 billion aggregate principal amount of 2.250% senior secured notes dueJanuary 2029 priced at 99.835% of the aggregate principal amount,$1.35 billion aggregate principal amount of 3.500% senior secured notes dueMarch 2042 at a price of 99.253% of the aggregate principal amount and$1.4 billion aggregate principal amount of 3.950% senior secured notes dueJune 2062 at a price of 99.186% of the aggregate principal amount. Net proceeds were used to pay related fees and expenses and for general corporate purposes, including funding buybacks of Charter Class A common stock andCharter Holdings common units as well as repaying certain indebtedness.
Overview of Our Contractual Obligations and Liquidity
We have significant amounts of debt. The principal amount of our debt as ofSeptember 30, 2021 was$87.9 billion , consisting of$11.5 billion of credit facility debt,$52.5 billion of investment grade senior secured notes and$24.0 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 mobile services, we expect an initial funding period to grow a new product as well as 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 expects to become a meaningful federal cash tax payer as the majority of net operating losses will have been utilized. Free cash flow was$2.5 billion and$6.4 billion for the three and nine months endedSeptember 30, 2021 , respectively, and$1.8 billion and$5.0 billion for the three and nine months endedSeptember 30, 2020 , respectively. See table below for factors impacting free cash flow during the three and nine months endedSeptember 30, 2021 compared to the corresponding prior periods. As ofSeptember 30, 2021 , the amount available under our credit facilities was approximately$3.2 billion and cash on hand was approximately$466 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 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 the expansion of our network such as through ourRural Digital Opportunity Fund ("RDOF") project and participation in other federal, state and municipal programs, 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 4.3 times Adjusted EBITDA as ofSeptember 30, 2021 . 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 endedSeptember 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, and during the three and nine months endedSeptember 30, 2020 , Charter purchased approximately 5.5 million and 11.9 million shares of Charter Class A common stock, respectively, for approximately$3.3 billion and$6.5 billion , respectively. Since the beginning of its buyback program inSeptember 2016 throughSeptember 30, 2021 , Charter has purchased in the public market approximately 99.2 million shares of Class A common stock for approximately$42.4 billion . InFebruary 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 with Charter, Liberty Broadband andAdvance/Newhouse Partnership ("A/N"), dated as ofMay 23, 2015 (as amended, the 34 -------------------------------------------------------------------------------- "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 1.2 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 endedSeptember 30, 2021 , respectively. InOctober 2021 , Charter purchased from Liberty Broadband an additional 0.7 million shares of Charter Class A common stock for approximately$561 million . InDecember 2016 , Charter and A/N entered into a letter agreement, as amended inDecember 2017 (the "A/N Letter Agreement"), that requires A/N to sell to Charter or toCharter Holdings , on a monthly basis, a number of shares of Charter Class A common stock orCharter 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 endedSeptember 30, 2021 ,Charter Holdings purchased from A/N 0.6 million and 2.3 millionCharter Holdings common units, respectively, for approximately$410 million and$1.5 billion , respectively, and during the three and nine months endedSeptember 30, 2020 ,Charter Holdings purchased from A/N 0.6 million and 1.7 millionCharter Holdings common units, respectively, for approximately$366 million and$884 million , respectively. As ofSeptember 30, 2021 , Charter had remaining board authority to purchase an additional$1.5 billion of Charter's Class A common stock and/orCharter 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. 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 increased$722 million and$1.4 billion during the three and nine months endedSeptember 30, 2021 , respectively, compared to the corresponding prior periods in 2020 due to the following (dollars in millions). Three months ended Nine months ended September 30, 2021 September 30, 2021 compared to compared to three months ended nine months ended September 30, 2020 September 30, 2020 Increase / (Decrease) Increase / (Decrease) Increase in Adjusted EBITDA $ 647 $ 1,727 Decrease (increase) in capital expenditures 153 (211) Changes in working capital, excluding change in accrued interest (110) (90) Increase in cash paid for interest, net (7) (31) Other, net 39 13 $ 722 $ 1,408 Free cash flow was reduced by$145 million and$606 million during the three and nine months endedSeptember 30, 2021 , respectively, and$265 million and$758 million during the three and nine months endedSeptember 30, 2020 , respectively, due to mobile with impacts negatively affecting working capital, capital expenditures and Adjusted EBITDA. 35 --------------------------------------------------------------------------------
Limitations on Distributions
Distributions by our subsidiaries to a parent company for payment of principal on parent company notes are restricted underCCO Holdings indentures and Charter Operating credit facilities governing our indebtedness, unless there is no default under the applicable indenture and credit facilities, and unless each applicable entity's leverage ratio test is met at the time of such distribution. As ofSeptember 30, 2021 , there was no default under any of these indentures or credit facilities, and each applicable entity met its applicable leverage ratio tests based onSeptember 30, 2021 financial results. There can be no assurance that they will satisfy these tests at the time of the contemplated distribution. Distributions by Charter Operating for payment of principal on parent company (CCO Holdings ) notes are further restricted by the covenants in its credit facilities. However, without regard to leverage, during any calendar year or any portion thereof during which the borrower is a flow-through entity for tax purposes, and so long as no event of default exists, the borrower may make distributions to the equity interests of the borrower in an amount sufficient to make permitted tax payments. 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
Operating Activities. Net cash provided by operating activities increased$1.6 billion during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 , primarily due to an increase in Adjusted EBITDA of$1.7 billion .
Investing Activities. Net cash used in investing activities was
Financing Activities. Net cash used in financing activities decreased$303 million during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 due to an increase in the amount by which borrowings of long-term debt exceeded repayments offset by an increase in the purchase of treasury stock and noncontrolling interest.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were$1.9 billion and$5.6 billion for the three and nine months endedSeptember 30, 2021 , respectively, and$2.0 billion and$5.4 billion for the three and nine months endedSeptember 30, 2020 , respectively. The increase during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 was primarily due to an increase in scalable infrastructure driven by augmentation of network capacity for customer growth and usage, with incremental spending to reclaim network headroom maintained prior to COVID-19. See the table below for more details. We currently expect 2021 cable capital expenditures to be relatively consistent as a percentage of cable revenue versus 2020. The actual amount of our capital expenditures in 2021 will depend on a number of factors including further spend related to product development and growth rates of both our residential and commercial businesses. 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 decreased by$51 million and$70 million for the nine months endedSeptember 30, 2021 and 2020, respectively.
The following tables present our major capital expenditures categories in
accordance with
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2020. These disclosure guidelines are not required disclosures under GAAP, nor
do they impact our accounting for capital expenditures under GAAP (dollars in
millions):
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Customer premise equipment (a) $ 513 $ 520 $ 1,496 $ 1,501
Scalable infrastructure (b) 375 424 1,223 979
Line extensions (c) 392 439 1,191 1,204
Upgrade/rebuild (d) 178 175 484 459
Support capital (e) 403 456 1,169 1,209
Total capital expenditures $ 1,861 $ 2,014 $ 5,563 $ 5,352
Capital expenditures included in total
related to:
Commercial services $ 353 $ 358 $ 1,083 $ 942
Mobile $ 119 $ 139 $ 355 $ 351
(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).
(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).
Recently Issued Accounting Standards
See Note 22 to the accompanying consolidated financial statements contained in "Item 1. Financial Statements" for a discussion of recently issued accounting standards.
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