CHARTER COMMUNICATIONS, INC. /MO/ 10-Q

Item 1. Financial Statements. CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in millions, except share data) March 31, 2023 December 31, 2022 (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents $ 534 $ 645 Accounts receivable, less allowance for doubtful accounts of $ 211 and $ 219 , respectively 2,851 2,921 Prepaid expenses and other current assets 682 451 Total current assets 4,067 4,017 INVESTMENT IN CABLE PROPERTIES: Property, plant and equipment, net of accumulated depreciation of $ 36,644 and $ 36,164 , respectively 36,602 36,039 Customer relationships, net of accumulated amortization of $ 15,777 and $ 15,478 , respectively 2,479 2,772 Franchises 67,366 67,363 Goodwill 29,563 29,563 Total investment in cable properties, net 136,010 135,737 OTHER NONCURRENT ASSETS 4,793 4,769 Total assets $ 144,870 $ 144,523 LIABILITIES AND SHAREHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable and accrued liabilities $ 10,243 $ 10,555 Current portion of long-term debt 1,999 1,510 Total current liabilities 12,242 12,065 LONG-TERM DEBT 95,973 96,093 DEFERRED INCOME TAXES 19,030 19,058 OTHER LONG-TERM LIABILITIES 4,723 4,758 SHAREHOLDERS’ EQUITY: Class A common stock; $ 0.001 par value; 900 million shares authorized; 153,048,145 and 152,651,396 shares issued, respectively — — Class B common stock; $ 0.001 par value; 1,000 shares authorized; 1 share issued and outstanding — — Preferred stock; $ 0.001 par value; 250 million shares authorized; no shares issued and outstanding — — Additional paid-in capital 24,138 23,940 Accumulated deficit ( 13,800 ) ( 14,821 ) Treasury stock at cost; 2,472,915 and no shares, respectively ( 920 ) — Total Charter shareholders’ equity 9,418 9,119 Noncontrolling interests 3,484 3,430 Total shareholders’ equity 12,902 12,549 Total liabilities and shareholders’ equity $ 144,870 $ 144,523 The accompanying notes are an integral part of these consolidated financial statements. 1 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in millions, except per share data) Unaudited Three Months Ended March 31, 2023 2022 REVENUES $ 13,653 $ 13,200 COSTS AND EXPENSES: Operating costs and expenses (exclusive of items shown separately below) 8,511 8,134 Depreciation and amortization 2,206 2,294 Other operating expenses, net 10 1 10,727 10,429 Income from operations 2,926 2,771 OTHER INCOME (EXPENSES): Interest expense, net ( 1,265 ) ( 1,060 ) Other income (expenses), net ( 104 ) 23 ( 1,369 ) ( 1,037 ) Income before income taxes 1,557 1,734 Income tax expense ( 374 ) ( 345 ) Consolidated net income 1,183 1,389 Less: Net income attributable to noncontrolling interests ( 162 ) ( 186 ) Net income attributable to Charter shareholders $ 1,021 $ 1,203 EARNINGS PER COMMON SHARE ATTRIBUTABLE TO CHARTER SHAREHOLDERS: Basic $ 6.74 $ 7.05 Diluted $ 6.65 $ 6.90 Weighted average common shares outstanding, basic 151,438,371 170,688,127 Weighted average common shares outstanding, diluted 153,538,359 174,500,472 The accompanying notes are an integral part of these consolidated financial statements. 2 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (dollars in millions) Unaudited Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Charter Shareholders’ Equity Non-controlling Interests Total Shareholders’ Equity BALANCE, December 31, 2022 $ — $ — $ 23,940 $ ( 14,821 ) $ — $ 9,119 $ 3,430 $ 12,549 Consolidated net income — — — 1,021 — 1,021 162 1,183 Stock compensation expense — — 208 — — 208 — 208 Exercise of stock options — — 2 — — 2 — 2 Purchases of treasury stock, including excise tax — — — — ( 920 ) ( 920 ) — ( 920 ) Purchase of noncontrolling interest, net of tax — — ( 40 ) — — ( 40 ) ( 68 ) ( 108 ) Change in noncontrolling interest ownership, net of tax — — 28 — — 28 ( 37 ) ( 9 ) Distributions to noncontrolling interest — — — — — — ( 3 ) ( 3 ) BALANCE, March 31, 2023 $ — $ — $ 24,138 $ ( 13,800 ) $ ( 920 ) $ 9,418 $ 3,484 $ 12,902 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Treasury Stock Total Charter Shareholders’ Equity Non-controlling Interests Total Shareholders’ Equity BALANCE, December 31, 2021 $ — $ — $ 26,725 $ ( 12,675 ) $ — $ 14,050 $ 4,106 $ 18,156 Consolidated net income — — — 1,203 — 1,203 186 1,389 Stock compensation expense — — 147 — — 147 — 147 Exercise of stock options — — 1 — — 1 — 1 Purchases of treasury stock — — — — ( 3,333 ) ( 3,333 ) — ( 3,333 ) Purchase of noncontrolling interest, net of tax — — ( 197 ) — — ( 197 ) ( 156 ) ( 353 ) Change in noncontrolling interest ownership, net of tax — — 189 — — 189 ( 250 ) ( 61 ) Distributions to noncontrolling interest — — — — — — ( 2 ) ( 2 ) BALANCE, March 31, 2022 $ — $ — $ 26,865 $ ( 11,472 ) $ ( 3,333 ) $ 12,060 $ 3,884 $ 15,944 The accompanying notes are an integral part of these consolidated financial statements. 3 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in millions) Unaudited Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Consolidated net income $ 1,183 $ 1,389 Adjustments to reconcile consolidated net income to net cash flows from operating activities: Depreciation and amortization 2,206 2,294 Stock compensation expense 208 147 Noncash interest income, net ( 3 ) ( 3 ) Deferred income taxes ( 23 ) 38 Other, net 104 ( 21 ) Changes in operating assets and liabilities, net of effects from acquisitions and dispositions: Accounts receivable 70 49 Prepaid expenses and other assets ( 336 ) ( 185 ) Accounts payable, accrued liabilities and other ( 86 ) ( 61 ) Net cash flows from operating activities 3,323 3,647 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment ( 2,464 ) ( 1,857 ) Change in accrued expenses related to capital expenditures ( 195 ) 10 Other, net ( 80 ) 60 Net cash flows from investing activities ( 2,739 ) ( 1,787 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings of long-term debt 7,104 6,713 Repayments of long-term debt ( 6,740 ) ( 2,954 ) Payments for debt issuance costs ( 18 ) ( 37 ) Purchase of treasury stock ( 912 ) ( 3,333 ) Proceeds from exercise of stock options 2 1 Purchase of noncontrolling interest ( 122 ) ( 416 ) Distributions to noncontrolling interest ( 3 ) ( 2 ) Other, net ( 6 ) ( 2 ) Net cash flows from financing activities ( 695 ) ( 30 ) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ( 111 ) 1,830 CASH AND CASH EQUIVALENTS, beginning of period 645 601 CASH AND CASH EQUIVALENTS, end of period $ 534 $ 2,431 CASH PAID FOR INTEREST $ 1,189 $ 982 CASH PAID FOR TAXES $ 61 $ 29 The accompanying notes are an integral part of these consolidated financial statements. 4 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) 1. Organization and Basis of Presentation Organization Charter Communications, Inc. (together with its controlled subsidiaries, “Charter,” or the “Company”) is a leading broadband connectivity company and cable operator. Over an advanced communications network, the Company offers a full range of state-of-the-art residential and business services including Spectrum Internet ® , TV, Mobile and Voice. For small and medium-sized companies, Spectrum Business ® delivers the same suite of broadband products and services coupled with special features and applications to enhance productivity, while for larger businesses and government entities, Spectrum Enterprise™ provides highly customized, fiber-based solutions. Spectrum Reach ® delivers tailored advertising and production for the modern media landscape. The Company also distributes award-winning news coverage and sports programming to its customers through Spectrum Networks. Charter is a holding company whose principal asset is a controlling equity interest in Charter Communications Holdings, LLC (“Charter Holdings”), an indirect owner of Charter Communications Operating, LLC (“Charter Operating”) under which substantially all of the operations reside. All significant intercompany accounts and transactions among consolidated entities have been eliminated. The Company’s operations are managed and reported to its Chief Executive Officer (“CEO”), the Company’s chief operating decision maker, on a consolidated basis. The CEO assesses performance and allocates resources based on the consolidated results of operations. Under this organizational and reporting structure, the Company has one reportable segment. Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures typically included in the Company's Annual Report on Form 10-K have been condensed or omitted for this quarterly report. The accompanying consolidated financial statements are unaudited and are subject to review by regulatory authorities. However, in the opinion of management, such financial statements include all adjustments, which consist of only normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. Interim results are not necessarily indicative of results for a full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Areas involving significant judgments and estimates include capitalization of labor and overhead costs, pension benefits and income taxes. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform with the 2023 presentation. Comprehensive income equaled net income attributable to Charter shareholders for the three months ended March 31, 2023 and 2022. 5 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) 2. Accounts Payable and Accrued Liabilities Accounts payable and accrued liabilities consist of the following as of March 31, 2023 and December 31, 2022: March 31, 2023 December 31, 2022 Accounts payable – trade $ 746 $ 952 Deferred revenue 523 511 Accrued liabilities: Programming costs 1,882 1,914 Labor 959 1,314 Capital expenditures 1,592 1,792 Interest 1,248 1,165 Taxes and regulatory fees 970 667 Property and casualty 502 505 Operating lease liabilities 292 295 Other 1,529 1,440 $ 10,243 $ 10,555 3. Long-Term Debt A summary of our debt as of March 31, 2023 and December 31, 2022 is as follows: March 31, 2023 December 31, 2022 Principal Amount Carrying Value Fair Value Principal Amount Carrying Value Fair Value Senior unsecured notes $ 27,250 $ 27,159 $ 23,638 $ 26,650 $ 26,567 $ 22,426 Senior secured notes and debentures (a) 55,873 56,230 47,636 56,841 57,213 46,905 Credit facilities (b) 14,640 14,583 14,267 13,877 13,823 13,467 $ 97,763 $ 97,972 $ 85,541 $ 97,368 $ 97,603 $ 82,798 (a) Includes the Company's £ 625 million fixed-rate British pound sterling denominated notes (the “Sterling Notes”) (remeasured at $ 771 million and $ 755 million as of March 31, 2023 and December 31, 2022, respectively, using the exchange rate at the respective dates) and the Company's £ 650 million aggregate principal amount of Sterling Notes (remeasured at $ 802 million and $ 786 million as of March 31, 2023 and December 31, 2022, respectively, using the exchange rate at the respective dates). (b) The Company has availability under the Charter Operating credit facilities of approximately $ 3.3 billion as of March 31, 2023. The estimated fair value of the Company’s senior unsecured and secured notes and debentures as of March 31, 2023 and December 31, 2022 is based on quoted market prices in active markets and is classified within Level 1 of the valuation hierarchy, while the estimated fair value of the Company’s credit facilities is based on quoted market prices in inactive markets and is classified within Level 2. In February 2023, CCO Holdings, LLC ("CCO Holdings") and CCO Holdings Capital Corp. jointly issued $ 1.1 billion of 7.375 % senior unsecured notes due March 2031 at par. The net proceeds were used for general corporate purposes, including repaying certain indebtedness, funding buybacks of Charter Class A common stock and Charter Holdings common units and to pay related fees and expenses. In February 2023, Charter Operating entered into an amendment to its credit agreement to replace London Interbank Offering Rate ("LIBOR") as the benchmark rate applicable to the Term B loans with Secured Overnight Financing Rate ("SOFR") and in 6 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) March 2023, Charter Operating entered into another amendment to its credit agreement to incur a new Term B-3 loan with an aggregate principal amount of $ 750 million maturing in 2030 concurrently with the cancelation of certain of Charter Operating's existing Term B-1 and B-2 loans, among other amendments. Pricing on the new Term B-3 loan is SOFR plus 2.25 %. After giving effect to the amendments, the aggregate principal amount of Term B-1 loans is $ 2.3 billion with pricing unchanged at SOFR plus 1.75 % and the aggregate principal amount of Term B-2 loans is $ 3.1 billion with pricing unchanged at SOFR plus 1.75 %. 4. Common Stock The following represents the Company's purchase of Charter Class A common stock and the effect on the consolidated statements of cash flows during the three months ended March 31, 2023 and 2022. Three Months Ended March 31, 2023 2022 Shares $ Shares $ Share buybacks 2,304,419 $ 863 5,325,594 $ 3,172 Income tax withholding 127,815 49 264,845 161 Exercise cost 40,681 148,657 2,472,915 $ 912 5,739,096 $ 3,333 Share buybacks above include shares of Charter Class A common stock purchased from Liberty Broadband Corporation (“Liberty Broadband”) as follows. Three Months Ended March 31, 2023 2022 Number of shares purchased 120,149 970,241 Amount of shares purchased $ 42 $ 602 As of March 31, 2023, Charter had remaining board authority to purchase an additional $ 305 million of Charter’s Class A common stock and/or Charter Holdings common units, excluding purchases from Liberty Broadband. The Company also withholds shares of its Class A common stock in payment of income tax withholding owed by employees upon vesting of equity awards as well as exercise costs owed by employees upon exercise of stock options. In 2022, Charter’s board of directors approved the retirement of the then currently held treasury stock and those shares were retired as of December 31, 2022. The Company accounts for treasury stock using the cost method and includes treasury stock as a component of total shareholders’ equity. 5. Noncontrolling Interests Noncontrolling interests represents consolidated subsidiaries of which the Company owns less than 100 %. The Company is a holding company whose principal asset is a controlling equity interest in Charter Holdings, the indirect owner of the Company’s cable systems. Noncontrolling interests on the Company’s balance sheet consist primarily of Advance/Newhouse Partnership's (“A/N”) equity interests in Charter Holdings, which is comprised of a common ownership interest. Net income of Charter Holdings attributable to A/N’s common noncontrolling interest for financial reporting purposes is based on the weighted average effective common ownership interest of approximately 11 %, and was $ 162 million and $ 186 million for the three months ended March 31, 2023 and 2022, respectively. 7 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) The following table represents Charter Holdings' purchase of Charter Holdings common units from A/N and the effect on total shareholders' equity during the three months ended March 31, 2023 and 2022. Three Months Ended March 31, 2023 2022 Number of units purchased 324,100 657,268 Amount of units purchased $ 122 $ 416 Decrease in noncontrolling interest based on carrying value $ ( 68 ) $ ( 156 ) Decrease in additional paid-in-capital, net of tax $ ( 40 ) $ ( 197 ) Total shareholders' equity was also adjusted during the three months ended March 31, 2023 and 2022 due to the changes in Charter Holdings' ownership as follows. Three Months Ended March 31, 2023 2022 Decrease in noncontrolling interest $ ( 37 ) $ ( 250 ) Increase in additional paid-in-capital, net of tax $ 28 $ 189 6. Accounting for Derivative Instruments and Hedging Activities Cross-currency derivative instruments are used to manage foreign exchange risk on the Sterling Notes by effectively converting £ 1.275 billion aggregate principal amount of fixed-rate British pound sterling denominated debt, including annual interest payments and the payment of principal at maturity, to fixed-rate U.S. dollar denominated debt. The fair value of the Company's cross-currency derivatives, which are classified within Level 2 of the valuation hierarchy, was $ 565 million and $ 570 million and is included in other long-term liabilities on its consolidated balance sheets as of March 31, 2023 and December 31, 2022, respectively. The effect of financial instruments are recorded in other income (expenses), net in the consolidated statements of operations and consisted of the following. Three Months Ended March 31, 2023 2022 Change in fair value of cross-currency derivative instruments $ 5 $ ( 36 ) Foreign currency remeasurement of Sterling Notes to U.S. dollars ( 32 ) 50 Gain (loss) on financial instruments, net $ ( 27 ) $ 14 8 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) 7. Revenues The Company’s revenues by product line are as follows: Three Months Ended March 31, 2023 2022 Internet $ 5,718 $ 5,452 Video 4,254 4,346 Voice 373 391 Mobile service 497 387 Residential revenue 10,842 10,576 Small and medium business 1,091 1,070 Enterprise 682 661 Commercial revenue 1,773 1,731 Advertising sales 355 383 Other 683 510 $ 13,653 $ 13,200 As of March 31, 2023 and December 31, 2022, accounts receivable, net on the consolidated balance sheets includes approximately $ 632 million and $ 577 million of current equipment installment plan receivables, respectively, and other noncurrent assets includes approximately $ 352 million and $ 261 million of noncurrent equipment installment plan receivables, respectively. 8. Operating Costs and Expenses Operating costs and expenses, exclusive of items shown separately in the consolidated statements of operations, consist of the following for the periods presented: Three Months Ended March 31, 2023 2022 Programming $ 2,799 $ 2,977 Other costs of revenue 1,328 1,108 Costs to service customers 2,095 1,959 Sales and marketing 946 880 Other expense 1,343 1,210 $ 8,511 $ 8,134 Programming costs consist primarily of costs paid to programmers for basic, premium, video on demand and pay-per-view programming. Other costs of revenue include costs directly related to providing Internet, video, voice and mobile services including mobile device costs, payments to franchise and regulatory authorities, payments for sports, local and news content produced by the Company and direct costs associated with selling advertising. Also included in other costs of revenue are content acquisition costs for the Los Angeles Lakers’ basketball games and Los Angeles Dodgers’ baseball games, which are recorded as games are exhibited over the contract period. Costs to service customers include costs related to field operations, network operations and customer operations for the Company’s products, including mobile, sold to non-bulk residential and SMB customers including internal and third-party labor for the non-capitalizable portion of installations, service and repairs, maintenance, bad debt expense, billing and collection, occupancy and vehicle costs. Sales and marketing costs represent the costs of selling and marketing our Internet, video, voice and mobile services to current and potential non-bulk residential and 9 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) SMB customers, including labor cost. Other expense includes indirect costs associated with the Company’s Spectrum Enterprise, Spectrum Reach and Spectrum Networks businesses, including sales and marketing and bad debt expenses as well as costs associated with selling to and servicing bulk properties. Other expense also includes corporate overhead and stock compensation expense, among others. 9. Other Operating Expenses, Net Other operating expenses, net consist of the following for the periods presented: Three Months Ended March 31, 2023 2022 Special charges, net $ 10 $ ( 1 ) Loss on disposal of assets, net — 2 $ 10 $ 1 Special charges, net primarily includes net amounts of litigation settlements and employee termination costs. 10. Other Income (Expenses), Net Other income (expenses), net consist of the following for the periods presented: Three Months Ended March 31, 2023 2022 Gain (loss) on financial instruments, net (see Note 6) $ ( 27 ) $ 14 Net periodic pension benefits 2 17 Loss on equity investments, net ( 79 ) ( 8 ) $ ( 104 ) $ 23 11. Stock Compensation Plans Charter’s stock incentive plans provide for grants of nonqualified stock options, incentive stock options, stock appreciation rights, dividend equivalent rights, performance units and performance shares, share awards, phantom stock, restricted stock units and restricted stock. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting services for the Company, are eligible for grants under the stock incentive plans. Charter granted the following equity awards for the periods presented. Three Months Ended March 31, 2023 2022 Stock options 4,235,700 1,372,400 Restricted stock units 1,514,400 423,600 Stock options and restricted stock units generally cliff vest three years from the date of grant. Certain stock options and restricted stock units vest based on achievement of stock price hurdles. Stock options generally expire ten years from the grant date and restricted stock units have no voting rights. Restricted stock generally vests one year from the date of grant. As of March 31, 2023, total unrecognized compensation remaining to be recognized in future periods totaled $ 643 million for stock options, $ 0.2 million for restricted stock and $ 701 million for restricted stock units and the weighted average period over which they are expected to be recognized is two years for stock options, one month for restricted stock and two years for restricted stock units. 10 CHARTER COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (dollars in millions, except per share amounts and where indicated) The Company recorded stock compensation expense of $ 208 million and $ 147 million for the three months ended March 31, 2023 and 2022, respectively, which is included in operating costs and expenses. 12. Earnings Per Share Basic earnings per common share is computed by dividing net income attributable to Charter shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share considers the impact of potentially dilutive securities using the treasury stock and if-converted methods and is based on the weighted average number of shares used for the basic earnings per share calculation, adjusted for the dilutive effect of stock options, restricted stock, restricted stock units, equity awards with market conditions and Charter Holdings common units. Charter Holdings common units of 18 million and 21 million for the three months ended March 31, 2023 and 2022, respectively, were not included in the computation of diluted earnings per share as their effect would have been antidilutive. The following is the computation of diluted earnings per common share for the three months ended March 31, 2023 and 2022. Three Months Ended March 31, 2023 2022 Numerator: Net income attributable to Charter shareholders $ 1,021 $ 1,203 Denominator: Weighted average common shares outstanding, basic 151,438,371 170,688,127 Effect of dilutive securities: Assumed exercise or issuance of shares relating to stock plans 2,099,988 3,812,345 Weighted average common shares outstanding, diluted 153,538,359 174,500,472 Basic earnings per common share attributable to Charter shareholders $ 6.74 $ 7.05 Diluted earnings per common share attributable to Charter shareholders $ 6.65 $ 6.90 11