Time Warner Cable 2011 Annual Report Download - page 63

TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Depreciation. The increase in depreciation expense was primarily associated with continued investments in customer
premise equipment, scalable infrastructure and line extensions occurring during or subsequent to 2009. As discussed above,
depreciation expense in 2010 benefited from a fourth-quarter 2010 reclassification of approximately $20 million.
Amortization. The decrease in amortization expense was primarily due to approximately $880 million of customer
relationships acquired in the Adelphia/Comcast Transactions that were fully amortized as of July 31, 2010. Amortization
expense in 2009 included a benefit of approximately $13 million recorded to reduce excess amortization recorded in prior
years.
Operating Income. Operating Income increased primarily due to the increase in OIBDA and the decrease in
amortization expense, partially offset by the increase in depreciation expense, as discussed above.
Interest expense, net. Interest expense, net, increased primarily due to higher average debt outstanding during 2010 as
compared to 2009. Interest expense, net, for 2009 included $13 million of debt issuance costs primarily related to upfront
loan fees on a 364-day senior unsecured term loan facility entered into in 2008 in connection with the Separation, which were
recognized as expense when the facility was repaid and terminated following the Company’s public debt issuance in March
2009.
Other expense, net. Other expense, net, detail is shown in the table below (in millions):
Year Ended December 31,
2010 2009
Direct transaction costs related to the Separation(a) ................................... $ — $ (28)
Loss from equity investments, net(b) ............................................... (110) (49)
Gain (loss) on equity award reimbursement obligation to Time Warner(c) ................. 5 (21)
Other ...................................................................... 6 12
Other expense, net ............................................................ $ (99) $ (86)
(a) Amount primarily consists of legal and professional fees.
(b) The increase in loss from equity investments, net, was primarily due to an increase in losses incurred by Clearwire Communications.
(c) 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 2010 and 2009, the Company recorded income tax provisions of $883 million and $820
million, respectively. The effective tax rates were 40.2% and 42.9% for 2010 and 2009, respectively.
The income tax provision and the effective tax rate for 2009 were impacted by the passage of the California state budget
during the first quarter of 2009 that, in part, changed the methodology of income tax apportionment in California. This tax
law change resulted in an increase in state deferred tax liabilities and a corresponding noncash tax provision of $38 million,
which was recorded in the first quarter of 2009. On October 19, 2010, legislation was enacted in California 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 tax liabilities and a corresponding noncash tax benefit of $40 million, which
was recorded in the fourth quarter of 2010.
The income tax provision and the effective tax rates for 2010 also benefited from an adjustment of $29 million to the
Company’s valuation allowance for deferred tax assets associated with its investment in Clearwire Communications.
Additionally, the income tax provision and the effective tax rate for 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):
Time Warner stock option activity ............................................................ $ (80)
TWC equity award activity .................................................................. 12
Net income tax expense ..................................................................... $ (68)
55