CHARTER COMMUNICATIONS, INC. Reference is made to "Part I. Item 1A. Risk Factors" and "Cautionary Statement Regarding Forward-Looking Statements," which describe important factors that could cause actual results to differ from expectations and non-historical information contained herein. In addition, the following discussion should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto of Charter included in "Part II. Item 8. Financial Statements and Supplementary Data."
Overview
We are 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, sports and high-quality original programming to our customers through Spectrum Networks and Spectrum Originals. See "Part I. Item 1. Business - Products and Services" for further description of these services, including customer statistics for different services. The COVID-19 pandemic significantly impacted how our customers use our products and services, how they interact with us, and how our employees 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 2021 along with lower growth in customer relationships. We cannot predict when trends return to pre-COVID-19 levels as the economy returns to normal activities. 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 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 Internet connectivity 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's mobile network combined with Spectrum WiFi. We continue to explore ways to drive even more mobile traffic to our network. We intend to use CBRS PALs we purchased in 2020, along with unlicensed CBRS spectrum, to build our own 5G mobile data-only 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 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 years endedDecember 31, 2021 and 2020, our mobile product line increased revenues by$2.2 billion and$1.4 billion , respectively, reduced Adjusted EBITDA by approximately$311 million and$401 million , respectively, and reduced free cash flow by approximately$853 million and$1.1 billion , respectively. We expect mobile Adjusted EBITDA will continue to be negative primarily as a result of growth-related sales and marketing and other customer acquisition costs for mobile services, and 28 -------------------------------------------------------------------------------- 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 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).
Years ended December 31,
2021 2020 2021 vs. 2020 Growth
Revenues $ 51,682 $ 48,097 7.5 %
Adjusted EBITDA $ 20,630 $ 18,518 11.4 %
Income from operations $ 10,526 $ 8,405 25.2 %
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 and
income from operations growth was impacted by growth in revenue and increases in
operating costs and expenses, primarily mobile, programming and regulatory,
connectivity and produced content costs.
Approximately 91% of our revenues for each of the years ended December 31, 2021
and 2020 are attributable to monthly subscription fees charged to customers for
our Internet, video, voice, mobile and commercial services as well as regional
sports and news channels. Generally, these customer subscriptions may be
discontinued by the customer at any time subject to a fee for certain commercial
customers. The remaining 9% of revenue is derived primarily from advertising
revenues, franchise and other regulatory fee revenues (which are collected by us
but then paid to local authorities), sales of mobile and video devices,
processing fees or reconnection fees charged to customers to commence or
reinstate service, installation, VOD and pay-per-view programming, and
commissions related to the sale of merchandise by home shopping services.
Critical Accounting Policies and Estimates
Certain of our accounting policies require our management to make difficult, subjective and/or complex judgments. Management has discussed these policies with the Audit Committee of Charter's board of directors, and the Audit Committee has reviewed the following disclosure. We consider the following policies to be the most critical in understanding the estimates, assumptions and judgments that are involved in preparing our financial statements, and the uncertainties that could affect our results of operations, financial condition and cash flows: •Capitalization of labor and overhead costs •Valuation and impairment of franchises and goodwill •Income taxes •Defined benefit pension plans
Capitalization of labor and overhead costs
Costs associated with network construction or upgrades, placement of the
customer drop to the dwelling and the placement of outlets within a dwelling
along with the costs associated with the deployment of new customer premise
equipment necessary to provide Internet, video or voice services, are
capitalized. Costs capitalized include materials, direct labor and certain
indirect costs. These indirect costs consist of compensation and overhead costs
associated with support functions. While our capitalization is based on
specific activities, once capitalized, we track these costs on a composite basis
by fixed asset category at the cable system level, and not on a specific asset
basis. For assets that are sold or retired, we remove the estimated applicable
cost and accumulated depreciation. The costs of disconnecting service and
removing customer premise equipment from a dwelling and the costs to reconnect a
customer drop or to redeploy previously installed customer premise equipment are
charged to operating expense as incurred. Costs for repairs and maintenance are
charged to operating expense as incurred,
29
--------------------------------------------------------------------------------while plant and equipment replacement, including replacement of certain components, betterments, and replacement of cable drops and outlets, are capitalized.
We make judgments regarding the installation and construction activities to be capitalized. We capitalized direct labor and overhead of$1.7 billion and$1.6 billion for the years endedDecember 31, 2021 and 2020, respectively. We capitalize direct labor and overhead using standards developed from actual costs and applicable operational data. We calculate standards annually (or more frequently if circumstances dictate) for items such as the labor rates, overhead rates, and the actual amount of time required to perform a capitalizable activity. For example, the standard amounts of time required to perform capitalizable activities are based on studies of the time required to perform such activities. Overhead rates are established based on an analysis of the nature of costs incurred in support of capitalizable activities, and a determination of the portion of costs that is directly attributable to capitalizable activities. The impact of changes that resulted from these studies were not material in the periods presented.
Labor costs directly associated with capital projects are capitalized. Capitalizable activities performed in connection with installations include such activities as:
•dispatching a "truck roll" to the customer's dwelling or business for service connection or placement of new equipment; •costs to package and ship new equipment to a customer's home for self-installation; •verification of serviceability to the customer's dwelling or business (i.e., determining whether the customer's dwelling is capable of receiving service by our cable network); •customer premise activities performed by in-house field technicians and third-party contractors in connection with the installation, replacement and betterment of equipment and materials to enable Internet, video or voice services; and •verifying the integrity of the customer's network connection by initiating test signals downstream from the headend to the customer premise equipment, as well as testing signal levels at the utility pole or pedestal. Judgment is required to determine the extent to which overhead costs incurred result from specific capital activities, and therefore should be capitalized. The primary costs that are included in the determination of the overhead rate are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, (iii) the cost of support personnel, such as care personnel and dispatchers, who assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities. While we believe our existing capitalization policies are appropriate, a significant change in the nature or extent of our operating practices could affect management's judgment about the extent to which we should capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization policies, and perform updates to our internal studies on an ongoing basis to determine whether facts or circumstances warrant a change to our capitalization policies.
Valuation and impairment of franchises
The net carrying value of franchises as of bothDecember 31, 2021 and 2020 was approximately$67.3 billion (representing 47% of total assets). Franchise assets are aggregated into essentially inseparable units of accounting to conduct valuations. The units of accounting generally represent geographical clustering of our cable systems into groups. For more information and a complete discussion of how we value and test franchise assets for impairment, see Note 5 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data." We perform an impairment assessment of franchise assets annually or more frequently as warranted by events or changes in circumstances. We performed a qualitative assessment in 2021. Our assessment included consideration of a multitude of factors that affect the fair value of our franchise assets. Examples of such factors include environmental and competitive changes within our operating footprint, actual and projected operating performance, the consistency of our operating margins, equity and debt market trends, including changes in our market capitalization, and changes in our regulatory and political landscape, among other factors. Based on our assessment, we concluded that it was more likely than not that the estimated fair values of our franchise assets equals or exceeds their carrying values and that a quantitative impairment test is not required.
Valuation and impairment of goodwill
The net carrying value of goodwill as of bothDecember 31, 2021 and 2020 was approximately$29.6 billion (representing 21% and 20% of total assets, respectively). We have determined that we have one reporting unit for purposes of the assessment of goodwill impairment. For more information and a complete discussion on how we test goodwill for impairment, see Note 5 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary 30 -------------------------------------------------------------------------------- Data." We perform our impairment assessment of goodwill annually as ofNovember 30 . As with our franchise impairment testing, we elected to perform a qualitative assessment of goodwill in 2021. Given the completion of the assessment and absence of significant adverse changes in factors impacting our fair value estimates, we concluded that it is more likely than not that our goodwill is not impaired.
Income taxes
As ofDecember 31, 2021 , Charter had approximately$714 million of federal tax net operating loss carryforwards resulting in a gross deferred tax asset of approximately$150 million . These losses resulted from the operations ofCharter Communications Holding Company, LLC ("Charter Holdco") and its subsidiaries and from loss carryforwards received as a result of the merger with TWC. Federal tax net operating loss carryforwards expire in the years 2034 through 2035. In addition, as ofDecember 31, 2021 , Charter had state tax net operating loss carryforwards, resulting in a gross deferred tax asset (net of federal tax benefit) of approximately$175 million . State tax net operating loss carryforwards generally expire in the years 2022 through 2041. Such tax loss carryforwards can accumulate and be used to offset Charter's future taxable income. AfterDecember 31, 2021 ,$714 million of Charter's federal tax loss carryforwards are subject to Section 382 and other restrictions. Pursuant to these restrictions, Charter estimates that approximately$229 million annually over each of the next three years of federal tax loss carryforwards, should become unrestricted and available for Charter's use. Charter's state tax loss carryforwards are subject to similar but varying restrictions. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. In evaluating the need for a valuation allowance, management takes into account various factors, including the expected level of future taxable income, available tax planning strategies and reversals of existing taxable temporary differences. Approximately$13 million of valuation allowance associated with federal capital loss carryforwards and approximately$23 million of valuation allowance associated with state tax loss carryforwards and other miscellaneous deferred tax assets remains on theDecember 31, 2021 consolidated balance sheet. In determining our tax provision for financial reporting purposes, we establish a reserve for uncertain tax positions unless such positions are determined to be "more likely than not" of being sustained upon examination, based on their technical merits. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to be recognized in our financial statements. The tax position is measured as the largest amount of benefit that has a greater than 50% likelihood of being realized when the position is ultimately resolved. There is considerable judgment involved in determining whether positions taken on the tax return are "more likely than not" of being sustained. We adjust our uncertain tax reserve estimates periodically because of ongoing examinations by, and settlements with, the various taxing authorities, as well as changes in tax laws, regulations and interpretations. Charter is currently under examination by the Internal Revenue Service ("IRS") for income tax purposes for 2019. Charter's 2016, 2018 and 2020 tax years remain open for examination and assessment. Charter's 2017 tax year remains open solely for purposes of loss and credit carryforwards. Charter's short period return datedMay 17, 2016 (prior to the merger with TWC and acquisition of Bright House) and prior years remain open solely for purposes of examination of Charter's loss and credit carryforwards. TheIRS is currently examiningCharter Holdings' income tax return for 2016 and 2019.Charter Holdings' 2018 and 2020 tax years remain open for examination and assessment, while 2017 remains open solely for purposes of credit carryforwards. TheIRS is currently examining TWC's income tax returns for 2011 through 2014. TWC's tax year 2015 remains subject to examination and assessment. Prior to TWC's separation from Time Warner Inc. ("Time Warner") inMarch 2009 , TWC was included in the consolidatedU.S. federal and certain state income tax returns of Time Warner. TheIRS has examined Time Warner's 2008 through 2010 income tax returns and the results are under appeal. We do not anticipate that these examinations will have a material impact on our consolidated financial position or results of operations. In addition, we are also subject to ongoing examinations of our tax returns by state and local tax authorities for various periods. Activity related to these state and local examinations did not have a material impact on our consolidated financial position or results of operations during the year endedDecember 31, 2021 , nor do we anticipate a material impact in the future.
Defined benefit pension plans
We sponsor qualified and unqualified defined benefit pension plans that provide pension benefits to a majority of employees who were employed by TWC before the merger with TWC. As ofDecember 31, 2021 , the accumulated benefit obligation and fair value of plan assets was$3.4 billion and$3.5 billion , respectively, and the net funded asset was recorded as a$114 million noncurrent asset,$4 million current liability and$27 million long-term liability. As ofDecember 31, 2020 , the accumulated 31 --------------------------------------------------------------------------------
benefit obligation and fair value of plan assets was
Pension benefits are based on formulas that reflect the employees' years of service and compensation during their employment period. Actuarial gains or losses are changes in the amount of either the benefit obligation or the fair value of plan assets resulting from experience different from that assumed or from changes in assumptions. We have elected to follow a mark-to-market pension accounting policy for recording the actuarial gains or losses annually during the fourth quarter, or earlier if a remeasurement event occurs during an interim period. We use aDecember 31 measurement date for our pension plans. We recognized net periodic pension benefit of$305 million and net periodic pension cost of$66 million in 2021 and 2020, respectively. Net periodic pension benefit or expense is determined using certain assumptions, including the expected long-term rate of return on plan assets, discount rate and mortality assumptions. We determined the discount rate used to compute pension expense based on the yield of a large population of high-quality corporate bonds with cash flows sufficient in timing and amount to settle projected future defined benefit payments. In developing the expected long-term rate of return on assets, we considered the current pension portfolio's composition, past average rate of earnings, and our asset allocation targets. We used a discount rate of 3.01% to determine theDecember 31, 2021 pension plan benefit obligation. A decrease in the discount rate of 25 basis points would result in a$155 million increase in our pension plan benefit obligation as ofDecember 31, 2021 and net periodic pension expense recognized in 2021 under our mark-to-market accounting policy. The expected long-term rate of return on plan assets used to determine net periodic pension benefit for the year endedDecember 31, 2022 is expected to be 5.00%. A decrease in the expected long-term rate of return of 25 basis points to 4.75%, while holding all other assumptions constant, would result in an increase in our 2022 net periodic pension expense of approximately$8 million . See Note 23 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" for additional discussion on these assumptions. 32
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Results of Operations
A discussion of changes in our results of operations during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 has been omitted from this Annual Report on Form 10-K, but may be found in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onJanuary 29, 2021 , which is available free of charge on the SECs website at www.sec.gov and on our investor relations website at ir.charter.com.
The following table sets forth the consolidated statements of operations for the periods presented (dollars in millions, except per share data):
Year Ended December 31,
2021 2020
Revenues $ 51,682 $ 48,097 Costs and Expenses: Operating costs and expenses (exclusive of items shown separately below)
31,482 29,930
Depreciation and amortization 9,345 9,704
Other operating expenses, net 329 58
41,156 39,692
Income from operations 10,526 8,405
Other Income (Expenses):
Interest expense, net (4,037) (3,848)
Other expenses, net (101) (255)
(4,138) (4,103)
Income before income taxes 6,388 4,302
Income tax expense (1,068) (626)
Consolidated net income 5,320 3,676
Less: Net income attributable to noncontrolling interests (666) (454)
Net income attributable to Charter shareholders $
4,654
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: Basic$ 25.34 $ 15.85 Diluted$ 24.47 $ 15.40 Weighted average common shares outstanding, basic 183,669,369 203,316,483 Weighted average common shares outstanding, diluted 193,042,948 209,273,247
Revenues. Total revenues grew
33
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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):
Years ended December 31,
2021 2020 % Growth
Internet $ 21,094 $ 18,521 13.9 %
Video 17,630 17,432 1.1 %
Voice 1,598 1,806 (11.5) %
Residential revenue 40,322 37,759 6.8 %
Small and medium business 4,170 3,964 5.2 %
Enterprise 2,573 2,468 4.3 %
Commercial revenue 6,743 6,432 4.9 %
Advertising sales 1,594 1,699 (6.2) %
Mobile 2,178 1,364 59.6 %
Other 845 843 0.2 %
$ 51,682 $ 48,097 7.5 %
The increase in Internet revenues from our residential customers was attributable to the following (dollars in millions):
2021 compared to
2020
Increase related to rate, product mix and bundle allocation changes
$ 1,490 Increase in average residential Internet customers 1,083$ 2,573
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
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 increase in video revenues was attributable to the following (dollars in millions):
2021 compared to
2020
Customer credits due to COVID-19 $ 223
Increase related to rate, product mix and bundle allocation changes
283
Decrease in average residential video customers (250)
Decrease in video on demand and pay-per-view (44)
Decrease in installation (14)
$ 198
We recorded $39 million and $218 million of estimated customer credits related
to canceled sporting events during the years ended December 31, 2021 and 2020,
respectively, and $44 million of credits related to prior year's KAC program
which reduced revenue during the year ended December 31, 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 423,000 in 2021
compared to 2020.
34
--------------------------------------------------------------------------------The decrease in voice revenues from our residential customers was attributable to the following (dollars in millions):
2021 compared to 2020
Decrease related to rate and bundle allocation changes $
(132)
Decrease in average residential voice customers (76)
$ (208)
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 594,000 in 2021 compared to 2020.
The increase in SMB commercial revenues was attributable to the following
(dollars in millions):
2021 compared to
2020
Increase in SMB customers $ 209Increase related to COVID-19 programs which reduced prior year revenue
36
Decrease related to rate and product mix changes (39)
$ 206
SMB customers increased by 92,000 in 2021 compared to 2020. The decrease related
to rate and product mix changes during the year ended December 31, 2021 as
compared to 2020 was primarily due to value-based pricing related to SPP net of
promotional roll-off and price adjustments.
Enterprise revenues increased $105 million during the year ended December 31,
2021 as compared to the corresponding period in 2020 primarily due to an
increase in Internet PSUs, $18 million of impacts from COVID-19 related programs
which reduced revenues in the year ended December 31, 2020 as well as a $16
million one-time benefit incurred during the year ended December 31, 2021 offset
by lower wholesale PSUs. Enterprise PSUs increased by 13,000 in 2021 compared to
2020.
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 $105 million during the year ended December 31, 2021 as compared to
the corresponding period in 2020 primarily due to a decrease in political offset
by 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.
During the years ended December 31, 2021 and 2020, mobile revenues included
approximately $909 million and $658 million of device revenues, respectively,
and approximately $1.3 billion and $706 million of service revenues,
respectively. The increases in revenues are a result of an increase of 1,189,000
lines from December 31, 2020 to December 31, 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 remained relatively consistent during the
year ended December 31, 2021 as compared to the corresponding period in 2020.
35
--------------------------------------------------------------------------------Operating costs and expenses. The increase in our operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, was attributable to the following (dollars in millions):
2021 compared to 2020
Programming $ 443
Regulatory, connectivity and produced content 311
Costs to service customers (79)
Marketing 40
Mobile 724
Other 113
$ 1,552
Programming costs were approximately $11.8 billion and $11.4 billion for the
years ended December 31, 2021 and 2020, respectively, representing 38% of
operating costs and expenses. 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 $124 million of more
rebates in 2020 than 2021 from sports programming networks as a result of
canceled sporting events due to COVID-19, 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 $311 million during the
year ended December 31, 2021 compared to the corresponding period in 2020
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 $79 million during the year ended
December 31, 2021 compared to the corresponding period in 2020 despite 3.0%
customer growth 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 $2.5 billion and $1.8 billion for the years ended December 31,
2021 and 2020, 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.
The increase in other expense was attributable to the following (dollars in
millions):
2021 compared to 2020
Stock compensation expense $ 79
Enterprise 21
Corporate costs 20
Property tax and insurance 17
Advertising sales expense (21)
Other (3)
$ 113
36--------------------------------------------------------------------------------
Stock compensation expense increased primarily due to changes in certain equity award provisions that result in additional expense at the time of grant.
Depreciation and amortization. Depreciation and amortization expense decreased by$359 million during the year endedDecember 31, 2021 compared to the corresponding period 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 expenses, net. The increase in other operating expenses, net was attributable to the following (dollars in millions):
2021 compared to 2020
Special charges, net $ 159
(Gain) loss on sale of assets, net 112
$ 271
For more information, see Note 15 to the accompanying consolidated financial
statements contained in "Part II. Item 8. Financial Statements and Supplementary
Data."
Interest expense, net. Net interest expense increased by $189 million in 2021
from 2020 primarily due to an increase in weighted average debt outstanding of
approximately $7.1 billion primarily as a result of the issuance of notes in
2020 and 2021 for general corporate purposes including stock buybacks and debt
repayments offset by a decrease in weighted average interest rates.
Other expenses, net. The decrease in other expenses, net is attributable to the following (dollars in millions):
2021 compared to 2020
Loss on extinguishment of debt (see Note 9) $ (1)
Loss on financial instruments, net (see Note 12) (71)
Net periodic pension benefit (cost) (see Note 23) 371
Loss on equity investments, net (see Note 6) (145)
$ 154
See Note 16 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$1.1 billion and$626 million for the years endedDecember 31, 2021 and 2020, respectively. Income tax expense increased during the year endedDecember 31, 2021 compared to the corresponding period in 2020 primarily as a result of higher pretax income. For more information, see Note 18 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data." 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 and$150 million for the years endedDecember 31, 2021 and 2020, respectively. For more information, see Note 11 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data."
Net income attributable to Charter shareholders. Net income attributable to
Charter shareholders was
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 37 --------------------------------------------------------------------------------
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 theSEC ). 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 fees were in the amount of$1.3 billion for each of the years endedDecember 31, 2021 and 2020.
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).
Years
ended
2021 2020
Net income attributable to Charter shareholders $ 4,654 $ 3,222
Plus: Net income attributable to noncontrolling interest 666 454
Interest expense, net 4,037 3,848
Income tax expense 1,068 626
Depreciation and amortization 9,345 9,704
Stock compensation expense 430 351
Other expenses, net 430 313
Adjusted EBITDA $ 20,630 $ 18,518
Net cash flows from operating activities $ 16,239 $ 14,562
Less: Purchases of property, plant and equipment (7,635) (7,415)
Change in accrued expenses related to capital expenditures 80 (77)
Free cash flow $ 8,684 $ 7,070 Liquidity and Capital Resources
Overview
We have significant amounts of debt. The principal amount of our debt as ofDecember 31, 2021 was$91.2 billion , consisting of$10.7 billion of credit facility debt,$56.5 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$8.7 billion and$7.1 billion for the years endedDecember 31, 2021 and 2020, respectively. See table below for factors impacting free cash flow during the year endedDecember 31, 2021 compared to 2020. As ofDecember 31, 2021 , the amount available under our credit facilities was 38 -------------------------------------------------------------------------------- approximately$3.9 billion and cash on hand was approximately$601 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 expanding the capacity of our network, the expansion of our network through our rural broadband construction project, 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 consolidated first lien level. Our leverage ratio was 4.4 times Adjusted EBITDA as ofDecember 31, 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 discussed below, during the years endedDecember 31, 2021 and 2020, Charter purchased in the public market approximately 15.9 million and 18.4 million shares, respectively, of Charter Class A common stock for approximately$10.9 billion and$10.6 billion , respectively. Since the beginning of its buyback program inSeptember 2016 through the year endedDecember 31, 2021 , Charter has purchased in the public market approximately 125.6 million shares of Class A common stock andCharter Holdings common units for approximately$56.8 billion , including purchases from Liberty Broadband discussed below. 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 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 6.1 million shares of Charter Class A common stock for approximately$4.2 billion during the year endedDecember 31, 2021 . InJanuary 2022 , Charter purchased from Liberty Broadband an additional 0.5 million shares of Charter Class A common stock for approximately$341 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 years endedDecember 31, 2021 and 2020,Charter Holdings purchased from A/N 3.3 million and 2.6 millionCharter Holdings common units, respectively, for approximately$2.2 billion and$1.5 billion , respectively. As ofDecember 31, 2021 , Charter had remaining board authority to purchase an additional$1.9 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. 39 --------------------------------------------------------------------------------
Recent Events
InJanuary 2022 ,CCO Holdings, LLC ("CCO Holdings ") andCCO Holdings Capital Corp. jointly issued$1.2 billion of 4.750% senior unsecured notes dueFebruary 2032 at par. The net proceeds were used for general corporate purposes, including to fund buybacks of Charter Class A common stock andCharter Holdings common units, to repay certain indebtedness and to pay related fees and expenses. In addition to the debt issued inJanuary 2022 as described above,CCO Holdings andCCO Holdings Capital Corp. jointly issued$3.75 billion aggregate principal amount of senior unsecured notes in 2021 at varying rates, prices and maturity dates, andCharter Operating and Charter Communications Operating Capital Corp. jointly issued$9.8 billion aggregate principal amount of senior secured notes in 2021 at varying rates, prices and maturity dates. 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.
Free Cash Flow
Free cash flow increased$1.6 billion during the year endedDecember 31, 2021 compared to the corresponding prior period due to the following (dollars in millions). 2021 compared to 2020 Increase in Adjusted EBITDA$ 2,112 Increase in capital expenditures
(220)
Increase in cash paid for interest, net
(193)
Change in working capital, excluding change in accrued interest (109)
Other, net 24
$ 1,614 Free cash flow was reduced by
Historical Operating, Investing, and Financing Activities
Cash and Cash Equivalents. We held
Operating Activities. Net cash provided by operating activities increased$1.7 billion during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to an increase in Adjusted EBITDA of$2.1 billion offset by changes in working capital, excluding the change in accrued interest and accrued expenses related to capital expenditures, that used$266 million more cash and$193 million higher cash paid for interest. Investing Activities. Net cash used in investing activities for the years endedDecember 31, 2021 and 2020 was$7.8 billion and$8.2 billion , respectively. The decrease in cash used was primarily due the purchase of spectrum wireless licenses in 2020 offset by an increase in capital expenditures in 2021. Financing Activities. Net cash used in financing activities decreased$68 million during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 primarily 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 and a decrease in equity exercises.
Capital Expenditures
We have significant ongoing capital expenditure requirements. Capital expenditures were$7.6 billion and$7.4 billion for the years endedDecember 31, 2021 and 2020, respectively. The increase 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. 40 -------------------------------------------------------------------------------- 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 and growth rates of both our residential and commercial businesses as well as 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$80 million and decreased$77 million for the years endedDecember 31, 2021 and 2020, respectively.
The following tables present our major capital expenditures categories in
accordance with
Year ended December 31,
2021 2020
Customer premise equipment (a)$ 1,967 $ 2,002 Scalable infrastructure (b) 1,677 1,478 Line extensions (c) 1,642 1,641 Upgrade/rebuild (d) 706 615 Support capital (e) 1,643 1,679 Total capital expenditures$ 7,635 $ 7,415 Capital expenditures included in total related to: Commercial services$ 1,445 $ 1,325 Mobile$ 482 $ 508 (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).
Debt
As of
December 31, 2021
Principal Accreted Value
Amount (a) Interest Payment Dates Maturity Date (b)
CCO Holdings, LLC :
4.000% senior notes due 2023 $ 500 $ 499 3/1 & 9/1 3/1/2023
5.500% senior notes due 2026 750 747 5/1 & 11/1 5/1/2026
5.125% senior notes due 2027 3,250 3,228 5/1 & 11/1 5/1/2027
5.000% senior notes due 2028 2,500 2,475 2/1 & 8/1 2/1/2028
5.375% senior notes due 2029 1,500 1,500 6/1 & 12/1 6/1/2029
4.750% senior notes due 2030 3,050 3,043 3/1 & 9/1 3/1/2030
4.500% senior notes due 2030 2,750 2,750 2/15 & 8/15 8/15/2030
4.250% senior notes due 2031 3,000 3,002 2/1 & 8/1 2/1/2031
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4.500% senior notes due 2032 2,900 2,927 5/1 & 11/1 5/1/2032 4.500% senior notes due 2033 1,750 1,729 6/1 & 12/1 6/1/2033 4.250% senior notes due 2034 2,000 1,982 1/15 & 7/15 1/15/2034Charter Communications Operating, LLC : 4.464% senior notes due 2022 3,000 2,997 1/23 & 7/23 7/23/2022 Senior floating rate notes due 2024 900 901 2/1, 5/1, 8/1 & 11/1 2/1/2024 4.500% senior notes due 2024 1,100 1,096 2/1 & 8/1 2/1/2024 4.908% senior notes due 2025 4,500 4,480 1/23 & 7/23 7/23/2025 3.750% senior notes due 2028 1,000 990 2/15 & 8/15 2/15/2028 4.200% senior notes due 2028 1,250 1,242 3/15 & 9/15 3/15/2028 2.250% senior notes due 2029 1,250 1,240 1/15 & 7/15 1/15/2029 5.050% senior notes due 2029 1,250 1,242 3/30 & 9/30 3/30/2029 2.800% senior notes due 2031 1,600 1,585 4/1 & 10/1 4/1/2031 2.300% senior notes due 2032 1,000 992 2/1 & 8/1 2/1/2032 6.384% senior notes due 2035 2,000 1,984 4/23 & 10/23 10/23/2035 5.375% senior notes due 2038 800 787 4/1 & 10/1 4/1/2038 3.500% senior notes due 2041 1,500 1,483 6/1 & 12/1 6/1/2041 3.500% senior notes due 2042 1,350 1,331 3/1 & 9/1 3/1/2042 6.484% senior notes due 2045 3,500 3,468 4/23 & 10/23 10/23/2045 5.375% senior notes due 2047 2,500 2,506 5/1 & 11/1 5/1/2047 5.750% senior notes due 2048 2,450 2,393 4/1 & 10/1 4/1/2048 5.125% senior notes due 2049 1,250 1,240 1/1 & 7/1 7/1/2049 4.800% senior notes due 2050 2,800 2,797 3/1 & 9/1 3/1/2050 3.700% senior notes due 2051 2,050 2,031 4/1 & 10/1 4/1/2051 3.900% senior notes due 2052 2,400 2,322 6/1 & 12/1 6/1/2052 6.834% senior notes due 2055 500 495 4/23 & 10/23 10/23/2055 3.850% senior notes due 2061 1,850 1,809 4/1 & 10/1 4/1/2061 4.400% senior notes due 2061 1,400 1,389 6/1 & 12/1 12/1/2061 3.950% senior notes due 2062 1,400 1,379 6/30 & 12/30 6/30/2062 Credit facilities 10,723 10,668 VariesTime Warner Cable, LLC : 5.750% sterling senior notes due 2031 (c) 846 897 6/2 6/2/2031 6.550% senior debentures due 2037 1,500 1,662 5/1 & 11/1 5/1/2037 7.300% senior debentures due 2038 1,500 1,754 1/1 & 7/1 7/1/2038 6.750% senior debentures due 2039 1,500 1,700 6/15 & 12/15 6/15/2039 5.875% senior debentures due 2040 1,200 1,252 5/15 & 11/15 11/15/2040 5.500% senior debentures due 2041 1,250 1,257 3/1 & 9/1 9/1/2041 5.250% sterling senior notes due 2042 (d) 879 850 7/15 7/15/2042 4.500% senior debentures due 2042 1,250 1,148 3/15 & 9/15 9/15/2042Time Warner Cable Enterprises LLC : 8.375% senior debentures due 2023 1,000 1,058 3/15 & 9/15 3/15/2023 8.375% senior debentures due 2033 1,000 1,254 7/15 & 1/15 7/15/2033$ 91,198 $ 91,561 (a)The accreted values presented in the table above represent the principal amount of the debt adjusted for original issue discount or premium at the time of sale, deferred financing costs, and, in regards to debt assumed in acquisitions, fair value premium adjustments as a result of applying acquisition accounting plus the accretion of those amounts to the balance sheet date. However, the amount that is currently payable if the debt becomes immediately due is equal to the principal amount of the debt. In regards to the Sterling Notes, the principal amount of the debt and any premium or discount is remeasured into US dollars as of each balance sheet date. We have availability under our credit facilities of approximately$3.9 billion as ofDecember 31, 2021 . (b)In general, the obligors have the right to redeem all of the notes set forth in the above table in whole or in part at their option, beginning at various times prior to their stated maturity dates, subject to certain conditions, upon the payment of the outstanding principal amount (plus a specified redemption premium) and all accrued and unpaid interest. 42 --------------------------------------------------------------------------------
(c)Principal amount includes £625 million valued at
See Note 9 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" for further details regarding our outstanding debt and other financing arrangements, including certain information about maturities, covenants and restrictions related to such debt and financing arrangements. The agreements and instruments governing our debt and financing arrangements are complicated and you should consult such agreements and instruments which are filed with theSEC for more detailed information. AtDecember 31, 2021 , Charter Operating had a consolidated leverage ratio of approximately 3.0 to 1.0 and a consolidated first lien leverage ratio of 2.9 to 1.0. Both ratios are in compliance with the ratios required by the Charter Operating credit facilities of 5.0 to 1.0 consolidated leverage ratio and 4.0 to 1.0 consolidated first lien leverage ratio. A failure by Charter Operating to maintain the financial covenants would result in an event of default under the Charter Operating credit facilities and the debt ofCCO Holdings . See "Part I. Item 1A. Risk Factors - The agreements and instruments governing our debt contain restrictions and limitations that could significantly affect our ability to operate our business, as well as significantly affect our liquidity."
Recently Issued Accounting Standards
See Note 24 to the accompanying consolidated financial statements contained in "Part II. Item 8. Financial Statements and Supplementary Data" for a discussion of recently issued accounting standards.
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