Time Warner Cable 2012 Annual Report Download - page 63

TIME WARNER CABLE INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION—(Continued)
Employee costs increased primarily as a result of higher headcount (which increased by approximately 650 employees,
including NaviSite employees) and higher compensation costs per employee.
Voice costs declined primarily due to a decrease in delivery costs per subscriber as a result of the ongoing replacement
of Sprint as the provider of voice transport, switching and interconnection services, partially offset by growth in voice
subscribers. This replacement process began in the fourth quarter of 2010 and, as of December 31, 2011, TWC had replaced
Sprint with respect to nearly half of TWC’s voice lines.
Other direct operating costs increased as a result of increases in a number of categories, including costs associated with
ad rep agreements, fuel expense and NaviSite-related costs. Additionally, in the fourth quarter of 2010, the Company began
classifying certain costs as other direct operating costs that were previously recorded as depreciation expense. As a result,
$15 million of costs related to the nine months ended September 30, 2010 were reclassified in the fourth quarter of 2010.
Management does not believe this reclassification is material to the 2011 or 2010 fourth-quarter results.
Selling, general and administrative expenses. The components of selling, general and administrative expenses were as
follows (in millions):
Year Ended December 31,
2011 2010 % Change
Employee ......................................................$ 1,472 $ 1,330 10.7%
Marketing ...................................................... 635 629 1.0%
Bad debt(a) ..................................................... 118 114 3.5%
Separation-related “make-up” equity award costs(b) ..................... — 5 (100.0%)
Other ......................................................... 1,086 1,047 3.7%
Total ..........................................................$ 3,311 $ 3,125 6.0%
(a) Bad debt expense includes amounts charged to expense associated with the Company’s allowance for doubtful accounts and collection expenses, net of
late fees billed to subscribers. Late fees billed to subscribers were $140 million in both 2011 and 2010.
(b) As a result of the Separation, pursuant to their terms, Time Warner equity awards held by TWC employees were forfeited and/or experienced a
reduction in value as of the date of the Separation. Amounts represent the costs associated with TWC stock options and RSUs granted to TWC
employees during the second quarter of 2009 to offset these forfeitures and/or reduced values (“Separation-related ‘make-up’ equity award costs”).
Selling, general and administrative expenses increased primarily as a result of increases in employee costs and higher
consulting and professional fees. The increase in employee costs was primarily due to higher headcount (which increased by
approximately 830 employees, including NaviSite employees) and higher compensation costs per employee. Employee costs
in 2010 included $12 million of executive severance costs that were recorded in the fourth quarter.
Merger-related and restructuring costs. During 2011, the Company incurred merger-related costs of $10 million in
connection with the acquisitions of NaviSite, the NewWave cable systems and Insight. No such costs were incurred during
2010.
The Company incurred restructuring costs of $60 million and $52 million during 2011 and 2010, respectively. These
restructuring costs were primarily related to approximately 775 and 900 employee terminations in 2011 and 2010,
respectively, and other exit costs, including the termination of a facility lease during the second quarter of 2010.
Asset impairments. In early 2012, TWC ceased making its existing wireless service available to new wireless
customers. As a result, during the fourth quarter of 2011, the Company impaired $60 million of assets related to the provision
of wireless service that would no longer be utilized. Of the $60 million noncash impairment, $44 million related to fixed
assets and wireless devices and $16 million related to the remaining value of wireless wholesale agreements with Sprint and
Clearwire that were recorded upon TWC’s initial investment in Clearwire Communications in 2008.
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