Time Warner Cable 2011 Annual Report Download - page 57

TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Operating Income. Operating Income increased primarily due to the increase in OIBDA and the decrease in
amortization expense, as discussed above.
Interest expense, net. Interest expense, net, increased primarily due to higher average debt outstanding during 2011 as
compared to 2010 as a result of the public debt issuances in November 2010 and the 2011 Bond Offerings, partially offset by
a $46 million increase in benefits received from interest rate swaps.
Other expense, net. Other expense, net, detail is shown in the table below (in millions):
Year Ended December 31,
2011 2010
Loss from equity investments, net(a) .............................................. $ (88) $ (110)
Gain (loss) on equity award reimbursement obligation to Time Warner(b) ................ (5) 5
Other ...................................................................... 4 6
Other expense, net ........................................................... $ (89) $ (99)
(a) Loss from equity investments, net, primarily consists of losses incurred by Clearwire Communications. During the third quarter of 2011, the balance of
the Company’s investment in Clearwire Communications included in the accompanying consolidated balance sheet was reduced to $0.
(b) See Note 11 to the accompanying consolidated financial statements for a discussion of the Company’s accounting for its equity award reimbursement
obligation to Time Warner.
Income tax provision. In 2011 and 2010, the Company recorded income tax provisions of $795 million and $883
million, respectively. The effective tax rates were 32.3% and 40.2% for 2011 and 2010, respectively.
During the fourth quarter of 2011, TWC completed its income tax returns for the 2010 taxable year, its first full-year
income tax returns subsequent to the Separation from Time Warner, reflecting the income tax positions and state income tax
apportionments of TWC as a standalone taxpayer. Based on these returns, the Company concluded that an approximate 65
basis point change in the estimate of the effective tax rate applied to calculate its net deferred income tax liability was
required. As a result, TWC recorded a noncash income tax benefit of $178 million during the fourth quarter of 2011. The
income tax provision and the effective tax rate for 2011 also included a benefit of $14 million (which includes $9 million that
related to 2010) from the domestic production activities deduction under Section 199 of the Internal Revenue Code of 1986,
as amended.
The income tax provision and the effective tax rate for 2010 benefited from an adjustment of $29 million to the
Company’s valuation allowance for deferred income tax assets associated with its investment in Clearwire Communications.
The income tax provision and the effective tax rate for 2010 were also impacted by legislation enacted in California in
October 2010 that reversed the changes in methodology of California income tax apportionment included in the 2009
California state budget, which resulted in a decrease in the Company’s state deferred income tax liabilities and a
corresponding noncash tax benefit of $40 million, which was recorded in the fourth quarter of 2010.
Additionally, the income tax provisions and the effective tax rates for 2011 and 2010 were impacted by the reversal of
deferred income tax assets associated with Time Warner stock option awards held by TWC employees, net of excess tax
benefits realized upon the exercise of TWC stock options or vesting of TWC RSUs, as follows (in millions):
Year Ended December 31,
2011 2010
Time Warner stock option activity ............................................... $ (58) $ (80)
TWC equity award activity ..................................................... 44 12
Net income tax expense ....................................................... $ (14) $ (68)
As a result of the Separation, on March 12, 2009, TWC employees who held stock option awards under Time Warner
equity plans were treated as if their employment with Time Warner had been terminated without cause. In most cases, this
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