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LIBERTY GLOBAL, INC. - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion and analysis is intended to assist in providing an
understanding of our financial condition, changes in financial condition and
results of operations and should be read in conjunction with our consolidated
financial statements. This discussion is organized as follows:
• Overview. This section provides a general description of our business and
recent events.
• Results of Operations. This section provides an analysis of our results of
operations for the years ended December 31, 2012, 2011 and 2010.
• Liquidity and Capital Resources. This section provides an analysis of our
corporate and subsidiary liquidity, consolidated cash flow statements and
contractual commitments.
• Critical Accounting Policies, Judgments and Estimates. This section
discusses those material accounting policies that contain uncertainties
and require significant judgment in their application.
• Quantitative and Qualitative Disclosures about Market Risk. This section
provides discussion and analysis of the foreign currency, interest rate
and other market risk that our company faces.
Unless otherwise indicated, convenience translations into U.S. dollars are
calculated, and operational data (including subscriber statistics) are
presented, as of December 31, 2012.
Overview
We are an international provider of video, broadband internet and telephony
services with consolidated operations at December 31, 2012 in 13 countries,
primarily in Europe and Chile. Our European and Chilean operations are conducted
through Liberty Global Europe. Through UPC Holding, we provide video, broadband
internet and telephony services in nine European countries and in Chile. The
European broadband communications and DTH operations of UPC Holding and the
broadband communications operations of Unitymedia KabelBW in Germany are
collectively referred to herein as the "UPC/Unity Division." UPC Holding's
broadband communications operations in Chile are provided through VTR. In May
2012, through VTR Wireless, we began offering mobile services in Chile through a
combination of our own wireless network and certain third-party wireless access
arrangements. The operations of VTR and VTR Wireless are collectively referred
to as the "VTR Group." Through Telenet, we provide video, broadband internet and
telephony services in Belgium. Our operations also include (i) consolidated
broadband communications operations in Puerto Rico and (ii) consolidated
interests in certain programming businesses in Europe and Latin America. Our
consolidated programming interests in Europe and Latin America are primarily
held through Chellomedia, which also owns or manages investments in various
other businesses, primarily in Europe. Certain of Chellomedia's subsidiaries and
affiliates provide programming services to certain of our broadband
communications operations, primarily in Europe.
On February 5, 2013 we entered into the Virgin Media Merger Agreement, pursuant
to which we agreed, subject to various conditions, including the approval of the
stockholders of LGI and Virgin Media, to complete the Virgin Media Acquisition.
If completed, the Virgin Media Acquisition will have a significant impact on
our liquidity, financial position and results of operations, as further
described in note 19 to our consolidated financial statements. Unless otherwise
noted, the following discussion and analysis of our results of operations and
liquidity and capital resources focuses on our existing operations exclusive of
the impact of the Virgin Media Acquisition and any forward looking statements
contained herein do not take into account the impact of the Virgin Media
Acquisition.
Our analog cable service offerings include basic programming and, in some
markets, expanded basic programming. We tailor both our basic channel line-up
and our additional channel offerings to each system according to culture,
demographics, programming preferences and local regulation. Our digital cable
service offerings include basic and premium programming and incremental product
and service offerings such as enhanced pay-per-view programming (including
video-on-demand), digital video recorders and high definition programming.
In September 2012 and January 2013, we launched Horizon TV in the Netherlands
and Switzerland, respectively. Horizon TV is a family of media products that
allows customers to view and share content across the television, computer,
tablet and smartphone. Horizon TV is powered by a user interface that provides
customers a seamless intuitive way to access linear, time-shifted, on-demand and
web-based content on the television. It also features an advanced set-top box
that delivers not only video, but also internet and voice connections along with
a wireless network for the home. For our Horizon TV customers, we also offer
applications for various services. We intend to expand the availability of
Horizon TV to other markets within our footprint, with launches planned in
Ireland and Germany during 2013 and in certain additional markets during 2014
and 2015.
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Although our digital television signals are encrypted in many of the countries
in which we operate, the basic digital television channels in our entire
footprints in Germany, Switzerland, Austria, Romania and the Czech Republic are
unencrypted as of February 1, 2013. It is possible that we will decide to
unencrypt the digital versions of our basic analog tier in additional markets in
2013 and future periods. Where our basic digital television channels are
unencrypted, subscribers who have the necessary equipment and who pay the
monthly subscription fee for our analog package are able to watch our basic
digital television channels. Regardless of whether basic digital television
channels are offered on an unencrypted basis, expanded channel packages and
premium channels and services continue to be available for an incremental
monthly fee in all of our markets.
We offer broadband internet services in all of our broadband communications
markets. Our residential subscribers generally access the internet via cable
modems connected to their personal computers at various download speeds ranging
up to 150 Mbps, depending on the market and the tier of service selected. We
determine pricing for each different tier of broadband internet service through
analysis of speed, data limits, market conditions and other factors.
We offer telephony services in all of our broadband communications markets,
primarily using voice-over-internet-protocol or "VoIP" technology. In addition
to VTR Wireless' mobile services, we also offer mobile services using
third-party networks in Belgium and, to a lesser extent, Germany, Poland, the
Netherlands and Hungary.
We have completed a number of transactions that impact the comparability of our
2012, 2011 and 2010 results of operations. The most significant of these
transactions were the KBW Acquisition on December 15, 2011, the Aster
Acquisition on September 16, 2011 and the Unitymedia Acquisition on January 28,
2010. We also completed a number of less significant acquisitions during 2012,
2011 and 2010.
In May 2012, we completed the sale of Austar. Effective September 30, 2010, we
closed down the DTH operations of Unitymedia KabelBW's arena segment. On
February 18, 2010, we sold the J:COM Disposal Group. Our consolidated balance
sheet as of December 31, 2011 has been reclassified to present Austar as a
discontinued operation and our consolidated statements of operations and cash
flows have been reclassified to present Austar, Unitymedia KabelBW's arena
segment and the J:COM Disposal Group as discontinued operations for all
applicable periods presented. In the following discussion and analysis, the
operating statistics, results of operations, cash flows and financial condition
that we present and discuss are those of our continuing operations unless
otherwise indicated.
For further information regarding our completed acquisitions and dispositions,
see notes 3 and 4 to our consolidated financial statements.
From a strategic perspective, we are seeking to build broadband communications,
DTH and programming businesses that have strong prospects for future growth in
revenue, operating cash flow (as defined in note 17 to our consolidated
financial statements) and free cash flow (as defined below under Liquidity and
Capital Resources - Consolidated Cash Flow Statements). As discussed further
under Liquidity and Capital Resources - Capitalization below, we also seek to
maintain our debt at levels that provide for attractive equity returns without
assuming undue risk.
We focus on achieving organic revenue and customer growth in our broadband
communications operations by developing and marketing bundled entertainment and
information and communications services, and extending and upgrading the quality
of our networks where appropriate. As we use the term, organic growth excludes
foreign currency translation effects (FX) and the estimated impact of
acquisitions. While we seek to obtain new customers, we also seek to maximize
the average revenue we receive from each household by increasing the penetration
of our digital cable, broadband internet and telephony services with existing
customers through product bundling and upselling, or by migrating analog cable
customers to digital cable services. We plan to continue to employ this strategy
to achieve organic revenue and customer growth.
Through our subsidiaries and affiliates, we are the largest international
broadband communications operator in terms of subscribers. At December 31, 2012,
we owned and operated networks that passed 34,193,500 homes and served
34,834,500 revenue generating units (RGUs), consisting of 18,308,500 video
subscribers, 9,244,300 broadband internet subscribers and 7,281,700 telephony
subscribers. Effective January 1, 2012, we began including certain SOHO RGUs in
our externally-reported subscriber statistics. As a result of this change, we
recorded a non-organic adjustment to increase the number of our RGUs at January
1, 2012 by 136,300.
Including the effects of acquisitions, our continuing operations added a total
of 1,934,400 RGUs during 2012. Excluding the effects of acquisitions (RGUs added
on the acquisition date), but including post-acquisition date RGU additions, our
continuing operations added 1,594,000 RGUs (including 89,200 SOHO RGUs) on an
organic basis during 2012. The organic RGU growth during 2012 is attributable to
the growth of our (i) telephony services, which added 971,400 RGUs, (ii) digital
cable services, which added 920,000 RGUs, (iii) broadband internet services,
which added 909,100 RGUs, and (iv) DTH video services, which
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--------------------------------------------------------------------------------added 87,900 RGUs. The growth of our digital cable, broadband internet,
telephony and DTH video services was partially offset by a decline in our analog
cable RGUs of 1,284,900 and a less significant decline in our multi-channel
multi-point (microwave) distribution system (MMDS) video RGUs.
We are experiencing significant competition from incumbent telecommunications
operators, DTH operators and/or other providers in all of our broadband
communications markets. This significant competition, together with the
maturation of certain of our markets, has contributed to organic declines in
certain of our markets in revenue, RGUs and/or average monthly subscription
revenue per average RGU (ARPU), the more notable of which include:
(i) organic declines in (a) subscription revenue in the Czech Republic and
(b) overall revenue in Poland during the fourth quarter of 2012, as
compared to the fourth quarter of 2011;
(ii) organic declines in subscription revenue from (a) video services in
Poland, Ireland, the Czech Republic and Hungary and (b) telephony
services in Chile during the fourth quarter of 2012, as compared to the
fourth quarter of 2011;
(iii) organic declines in subscription revenue from video services in Poland
during the fourth quarter of 2012, as compared to the third quarter of
2012;
(iv) organic declines in (a) video RGUs in many of our markets during the fourth quarter of 2012, as net declines in our analog cable RGUs exceeded
net additions to our digital cable RGUs (including migrations from analog
cable) in these markets and (b) telephony RGUs in the Czech Republic and
Chile during the fourth quarter of 2012;
(v) organic declines in ARPU from broadband internet and telephony services
in most of our broadband communications markets during the fourth quarter
of 2012, as compared to the fourth quarter of 2011; and
(vi) organic declines in overall ARPU in Ireland, Hungary, Slovakia, Austria,
Poland, the Czech Republic and Romania during the fourth quarter of 2012,
as compared to the fourth quarter of 2011.
In addition to competition, our operations are subject to macroeconomic
and political risks that are outside of our control. For example, high levels
of sovereign debt in the U.S. and certain European countries (including Ireland
and Hungary), combined with weak growth and high unemployment, could lead to
fiscal reforms (including austerity measures), sovereign debt restructurings,
currency instability, increased counterparty credit risk, high levels of
volatility and, potentially, disruptions in the credit and equity markets, as
well as other outcomes that might adversely impact our company. With regard to
currency instability issues, concerns exist in the eurozone with respect to
individual macro-fundamentals on a country-by-country basis, as well as with
respect to the overall stability of the European monetary union and the
suitability of a single currency to appropriately deal with specific fiscal
management and sovereign debt issues in individual eurozone countries. The
realization of these concerns could lead to the exit of one or more countries
from the European monetary union and the re-introduction of individual
currencies in these countries, or, in more extreme circumstances, the possible
dissolution of the European monetary union entirely, which could result in the
redenomination of a portion, or in the extreme case, all of our euro-denominated
assets, liabilities and cash flows to the new currency of the country in which
they originated. This could result in a mismatch in the currencies of our
assets, liabilities and cash flows. Any such mismatch, together with the capital
market disruption that would likely accompany any such redenomination event,
could have a material adverse impact on our liquidity and financial condition.
Furthermore, any redenomination event would likely be accompanied by significant
economic dislocation, particularly within the eurozone countries, which in turn
could have an adverse impact on demand for our products, and accordingly, on our
revenue and cash flows. Moreover, any changes from euro to non-euro currencies
within the countries in which we operate would require us to modify our billing
and other financial systems. No assurance can be given that any required
modifications could be made within a timeframe that would allow us to timely
bill our customers or prepare and file required financial reports. In light of
the significant exposure that we have to the euro through our euro-denominated
borrowings, derivative instruments, cash balances and cash flows, a
redenomination event could have a material adverse impact on our company.
Over the next few years, we expect to continue to generate organic growth in our
consolidated revenue and operating cash flow. We expect this growth to come
primarily from organic increases in our digital cable, broadband internet and
telephony RGUs, as we expect that our analog cable RGUs will decline and that
our overall ARPU will remain relatively unchanged during this timeframe,
primarily driven by growth in our operations in Germany, Switzerland, Belgium
and the Netherlands. In addition, we currently expect that the continued
expansion of our mobile service offerings will (i) positively impact our revenue
and, towards the end of this timeframe, our OCF growth and (ii) positively
impact our subscriber retention rates. Additionally, we plan to continue
improving our competitive position, with (i) further planned launches of our
Horizon TV platform, as discussed above, and (ii) upgrades to our network
capacity in Germany and other markets. While we expect that these and other
initiatives will require significant additions to our property and equipment, we
currently expect that our total additions to property and equipment as a
percentage of our revenue will continue to decline over the next few years. For
additional information concerning our property and equipment additions,
including our 2013 expectations for the UPC/Unity Division, Telenet and the VTR
Group, see Liquidity
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and Capital Resources - Consolidated Cash Flow Statements below. Our
expectations with respect to the items discussed in this paragraph are subject
to competitive, economic, technological, political and regulatory developments
and other factors outside of our control. Accordingly, no assurance can be given
that actual results in future periods will not differ materially from our
expectations.
The video, broadband internet and telephony businesses in which we operate are
capital intensive. Significant additions to our property and equipment are
required to add customers to our networks and to upgrade our broadband
communications networks and customer premises equipment to enhance our service
offerings and improve the customer experience, including expenditures for
equipment and labor costs. Significant competition, the introduction of new
technologies, the expansion of existing technologies such as fiber-to-the-home,
or adverse regulatory developments could cause us to decide to undertake
previously unplanned upgrades of our networks and customer premises equipment in
the impacted markets. In addition, no assurance can be given that any future
upgrades will generate a positive return or that we will have adequate capital
available to finance such future upgrades. If we are unable to, or elect not to,
pay for costs associated with adding new customers, expanding or upgrading our
networks or making our other planned or unplanned additions to our property and
equipment, our growth could be limited and our competitive position could be
harmed. For information regarding our property and equipment additions, see
Liquidity and Capital Resources - Consolidated Cash Flow Statements below.
Results of Operations
As noted under Overview above, the comparability of our operating results during
2012, 2011 and 2010 is affected by acquisitions. In the following discussion, we
quantify the estimated impact of acquisitions on our operating results. The
acquisition impact represents our estimate of the difference between the
operating results of the periods under comparison that is attributable to an
acquisition. In general, we base our estimate of the acquisition impact on an
acquired entity's operating results during the first three months following the
acquisition date such that changes from those operating results in subsequent
periods are considered
to be organic changes. Accordingly, in the following discussion, variances
attributed to an acquired entity during the first twelve months following the
acquisition date represent differences between the estimated acquisition impact
and the actual results.
Changes in foreign currency exchange rates have a significant impact on our
reported operating results as all of our operating segments, except for Puerto
Rico, have functional currencies other than the U.S. dollar. Our primary
exposure to FX risk during the year ended December 31, 2012 was to the euro as
64.0% of our U.S. dollar revenue during that period was derived from
subsidiaries whose functional currency is the euro. In addition, our reported
operating results are impacted by changes in the exchange rates for the Swiss
franc, the Chilean peso and other local currencies in Europe. The portions of
the changes in the various components of our results of operations that are
attributable to changes in FX are highlighted under Discussion and Analysis of
our Reportable Segments and Discussion and Analysis of our Consolidated
Operating Results below. For information concerning our foreign currency risks
and the applicable foreign currency exchange rates in effect for the periods
covered by this Annual Report, see Quantitative and Qualitative Disclosures
about Market Risk - Foreign Currency Risk below.
The amounts presented and discussed below represent 100% of each operating
segment's revenue and operating cash flow. As we have the ability to control
Telenet, the VTR Group and Liberty Puerto Rico, we consolidate 100% of the
revenue and expenses of these entities in our consolidated statements of
operations despite the fact that third parties own significant interests in
these entities. The noncontrolling owners' interests in the operating results of
Telenet, the VTR Group, Liberty Puerto Rico and other less significant
majority-owned subsidiaries are reflected in net earnings or loss attributable
to noncontrolling interests in our consolidated statements of operations.
Discussion and Analysis of our Reportable Segments
General
All of the reportable segments set forth below derive their revenue primarily
from broadband communications services, including video, broadband internet and
telephony services. Most reportable segments also provide B2B services. At
December 31, 2012, our operating segments in the UPC/Unity Division provided
broadband communications services in 10 European countries and DTH services to
customers in the Czech Republic, Hungary, Romania and Slovakia through UPC DTH.
Our Other Western Europe segment includes our broadband communications operating
segments in Austria and Ireland. Our Central and Eastern Europe segment includes
our broadband communications operating segments in the Czech Republic, Hungary,
Poland, Romania and Slovakia. The UPC/Unity Division's central and other
category includes (i) the UPC DTH operating segment, (ii) costs associated with
certain centralized functions, including billing systems, network operations,
technology, marketing, facilities, finance and other administrative functions
and (iii) intersegment eliminations within the UPC/Unity Division. Telenet
provides
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video, broadband internet and telephony services in Belgium. In Chile, the VTR
Group includes VTR, which provides video, broadband internet and telephony
services, and VTR Wireless, which provides mobile services through a combination
of its own wireless network and certain third-party wireless access
arrangements. Our corporate and other category includes (i) less significant
operating segments that provide (a) broadband communications services in Puerto
Rico and (b) programming and other services primarily in Europe and Latin
America and (ii) our corporate category. Intersegment eliminations primarily
represent the elimination of intercompany transactions between our broadband
communications and programming operations, primarily in Europe.
The tables presented below in this section provide a separate analysis of each
of the line items that comprise operating cash flow (revenue, operating expenses
and SG&A expenses, excluding allocable stock-based compensation expense, as
further discussed in note 17 to our consolidated financial statements) as well
as an analysis of operating cash flow by reportable segment for (i) 2012, as
compared to 2011, and (ii) 2011, as compared to 2010. These tables present (i)
the amounts reported by each of our reportable segments for the comparative
periods, (ii) the U.S. dollar change and percentage change from period to period
and (iii) the organic percentage change from period to period (percentage change
after removing FX and the estimated impacts of acquisitions). The comparisons
that exclude FX assume that exchange rates remained constant at the prior year
rate during the comparative periods that are included in each table. As
discussed under Quantitative and Qualitative Disclosures about Market Risk -
Foreign Currency Risk below, we have significant exposure to movements in
foreign currency exchange rates. We also provide a table showing the operating
cash flow margins of our reportable segments for 2012, 2011 and 2010 at the end
of this section.
The revenue of our reportable segments includes revenue earned from subscribers
for ongoing services, revenue earned from B2B services, interconnect fees,
channel carriage fees, installation fees, mobile services revenue, late fees and
advertising revenue. Consistent with the presentation of our revenue categories
in note 17 to our consolidated financial statements, we use the term
"subscription revenue" in the following discussion to refer to amounts received
from subscribers for ongoing services, excluding installation fees, late fees
and mobile services revenue.
The rates charged for certain video services offered by our broadband
communications operations in some European countries and in Chile are subject to
oversight and control, either before or after the fact, based on competition law
or general pricing regulations. Additionally, in Chile, our ability to bundle
or discount our services is subject to certain limitations, and in Europe, our
ability to bundle or discount our services may be constrained if we are held to
be dominant with respect to any product we offer. The amounts we charge and
incur with respect to telephony interconnection fees are also subject to
regulatory oversight in many of our markets. Adverse outcomes from rate
regulation or other regulatory initiatives could have a significant negative
impact on our ability to maintain or increase our revenue. For information
concerning the potential impact of adverse regulatory developments in Belgium
and the Netherlands, see note 16 to our consolidated financial statements.
Most of our revenue is derived from jurisdictions that administer value-added or
similar revenue-based taxes. Any increases in these taxes could have an adverse
impact on our ability to maintain or increase our revenue to the extent that we
are unable to pass such tax increases on to our customers. In the case of
revenue-based taxes for which we are the ultimate taxpayer, we will also
experience increases in our operating expenses and corresponding declines in our
operating cash flow and operating cash flow margins to the extent of any such
tax increases. In this regard, value-added tax rates increased (i) effective
January 1, 2012 in Ireland, Hungary and, with respect to certain digital cable
services, Belgium, (ii) effective October 1, 2012 in the Netherlands and (iii)
effective January 1, 2013, in the Czech Republic. In addition, during the fourth
quarter of 2010, the Hungarian government imposed a revenue-based tax on
telecommunications operators (the 2010 Hungarian Telecom Tax) that, prior to its
expiration at the end of 2012, was applicable to our broadband communications
operations in Hungary, with retroactive effect to the beginning of 2010. In
September 2011, the European Commission requested that Hungary abolish the 2010
Hungarian Telecom Tax on the grounds that it was illegal under EU rules. In
March 2012, the European Commission announced its decision to refer the matter
to the European Court of Justice, as Hungary continued to impose the 2010
Hungarian Telecom Tax in violation of EU rules. The ultimate resolution of this
matter may take several years, and no assurance can be given as to the outcome.
Through December 31, 2012, we have incurred total inception-to-date operating
expenses of HUF 9.5 billion ($43.0 million) as a result of the 2010 Hungarian
Telecom Tax. This amount includes a HUF 650.0 million ($2.9 million) reduction
recorded during the second quarter of 2012 that reflects the cumulative effect
of credits taken during the quarter with respect to prior period payments. The
credits taken resulted from a change in our approach to determining the 2010
Hungarian Telecom Tax that was implemented on a retroactive basis during the
second quarter of 2012.
During the second quarter of 2012, Hungary imposed an act that provides for a
new usage-based telecommunication tax (the 2012 Hungarian Telecom Tax) on
telecommunications service providers for fixed and mobile voice and mobile
texting services, effective from July 1, 2012 for an indefinite period of time.
As a result of the 2012 Hungarian Telecom Tax, we incurred additional operating
expenses of HUF 349.0 million ($1.6 million) during the last half of 2012. On
June 21, 2012, the European Commission sent a letter of formal notice to Hungary
with respect to the 2012 Hungarian Telecom Tax, setting out concerns regarding
the
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compatibility of the tax with EU rules. Hungary has responded to the European
Commission and indicated that it believes the 2012 Hungarian Telecom Tax is in
compliance with EU rules. On January 24, 2013, the European Commission commenced
formal infringement proceedings against Hungary and, depending on Hungary's
response, this matter could ultimately be referred to the European Court of
Justice. The ultimate resolution of this matter may take several years.
On November 20, 2012, the Parliament of Hungary adopted an act imposing tax on
utility networks, effective from January 1, 2013 for an indefinite period of
time. The act provides that a tax will be levied on the owners of ducts
providing for electricity, telecommunication, natural gas, heating, water and
wastewater services. For telecommunication networks, the level of tax levied
will depend on the length of ducts. Based on the current text of the new law, we
currently estimate that our Hungarian operations will incur additional operating
expenses in 2013 as a result of the new utility tax of approximately HUF 1.6
billion ($7.2 million).
We rely on third-party vendors for the equipment, software and services that we
require in order to provide services to our customers. Our suppliers often
conduct business worldwide and their ability to meet our needs are subject to
various risks, including political and economic instability, natural calamities,
interruptions in transportation systems, terrorism and labor issues. As a
result, we may not be able to obtain the equipment, software and services
required for our businesses on a timely basis or on satisfactory terms. Any
shortfall in customer premises equipment could lead to delays in connecting
customers to our services, and accordingly, could adversely impact our ability
to maintain or increase our RGUs, revenue and cash flows.
Revenue of our Reportable Segments
Revenue - 2012 compared to 2011
Organic
increase
Year ended December 31, Increase (decrease) (decrease)
2012 2011 $ % %
in millions
UPC/Unity Division:
Germany $ 2,311.0 $ 1,450.0 $ 861.0 59.4 13.4
The Netherlands 1,229.1 1,273.4 (44.3 ) (3.5 ) 4.4
Switzerland 1,259.8 1,282.6 (22.8 ) (1.8 ) 3.7
Other Western Europe 848.4 893.3 (44.9 ) (5.0 ) 2.8
Total Western Europe 5,648.3 4,899.3 749.0 15.3 6.6
Central and Eastern Europe 1,115.7 1,122.5 (6.8 ) (0.6 ) (0.3 )
Central and other 115.7 122.7 (7.0 ) (5.7 ) 2.9
Total UPC/Unity Division 6,879.7 6,144.5 735.2 12.0 5.3
Telenet (Belgium) 1,918.0 1,918.5 (0.5 ) - 8.1
VTR (Chile) 940.6 889.0 51.6 5.8 6.4
Corporate and other 655.8 645.2 10.6 1.6 1.5
Intersegment eliminations (83.3 ) (86.4 ) 3.1 3.6 (4.5 )
Total $ 10,310.8 $ 9,510.8 $ 800.0 8.4 5.7
General. While not specifically discussed in the below explanations of the
changes in the revenue of our reportable segments, we are experiencing
significant competition in all of our broadband communications markets. This
competition has an adverse impact on our ability to increase or maintain our
RGUs and/or ARPU. For a description of the more notable recent impacts of this
competition on our broadband communications markets, see Overview above.
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Germany. The increase in Germany's revenue during 2012, as compared to 2011,
includes (i) an organic increase of $194.4 million or 13.4%, (ii) the impact of
the KBW Acquisition and (iii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue (a) revenue (b) Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (c)
$ 118.9 $ - $ 118.9
ARPU (d) 38.9 - 38.9
Increase in non-subscription revenue (e) - 36.6 36.6
Organic increase 157.8 36.6 194.4
Impact of the KBW Acquisition 756.3 96.2 852.5
Impact of FX (162.4 ) (23.5 ) (185.9 )
Total $ 751.7 $ 109.3 $ 861.0
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(a) Germany's subscription revenue includes revenue from multi-year bulk
agreements with landlords, housing associations or with third parties that
operate and administer the in-building networks on behalf of housing
associations. These bulk agreements, which generally allow for the
procurement of the basic video signals at volume-based discounts, provide
access to nearly two-thirds of Germany's video cable subscribers. During
the three months ended December 31, 2012, Germany's 20 largest bulk
agreement accounts generated approximately 6% of its revenue (including
estimated amounts billed directly to the building occupants for premium
cable, broadband internet and telephony services). No assurance can be
given that Germany's bulk agreements will be renewed or extended on
financially equivalent terms or at all, particularly in light of the commitments we made to regulators in connection with the KBW Acquisition.
In this regard, we have, among other items, agreed to grant a special
termination right with respect to Germany's Remedy HA Agreements. The Remedy
HA Agreements that remain subject to the special termination right (which
include agreements that are not among the 20 largest bulk agreements) as of
December 31, 2012 accounted for approximately 1% of Germany's total revenue
during the three months ended December 31, 2012. For additional information,
see note 3 to our consolidated financial statements.
(b) Germany's non-subscription revenue includes fees received for the carriage
of certain channels included in Germany's analog and digital cable
offerings. This carriage fee revenue is subject to contracts that expire or
are otherwise terminable by either party at various dates ranging from 2013
through 2017. The aggregate amount of revenue related to these carriage
contracts represents approximately 6% of Germany's total revenue during the
three months ended December 31, 2012. Public broadcasters representing
approximately 20% of Germany's carriage fee revenue for the three months
ended December 31, 2012 have sent us notices purporting to terminate these
carriage fee arrangements effective December 31, 2012. While we are still
seeking to negotiate with the public broadcasters to reach acceptable
agreements, we have rejected the termination notices and filed law suits for
payment of carriage fees against the public broadcasters. Until such time as
we resolve these disputes or obtain favorable outcomes in our law suits, we
don't believe we will meet the criteria to recognize revenue from the public
broadcasters in 2013 and future periods. In addition, some private
broadcasters are seeking to change the distribution model to eliminate the
payment of carriage fees and instead require that cable operators pay license fees to the broadcasters. In light of the foregoing, no assurance
can be given that any of our carriage fee contracts will be renewed or
extended on financially equivalent terms, or at all. Also, our ability to
increase the aggregate carriage fees that Germany receives for each channel
is limited by certain commitments we made to regulators in connection with
the KBW Acquisition. For additional information, see note 3 to our
consolidated financial statements.
(c) The increase in Germany's subscription revenue related to a change in the
average number of RGUs is attributable to increases in the average numbers
of broadband internet, telephony and digital cable RGUs that were only
partially offset by a decline in the average number of analog cable RGUs.
The decline in Germany's average number of analog cable RGUs led to a
decline in the average number of total video RGUs during 2012, as compared
to 2011.
(d) The increase in Germany's subscription revenue related to a change in ARPU
is due to (i) an improvement in RGU mix, attributable to higher proportions
of telephony, broadband internet and digital cable RGUs, and (ii) a net
increase resulting primarily from the following factors: (a) lower ARPU due
to a decrease in telephony call volume for customers on usage-based calling
plans, (b) higher ARPU from digital cable services, (c) higher ARPU from
broadband internet services, (d) higher ARPU due to a lower negative impact
from free bundled services provided to new subscribers during promotional
periods and (e) lower ARPU due to higher proportions of customers receiving
discounted analog cable services through
II-11--------------------------------------------------------------------------------
bulk agreements. For information concerning our commitment to distribute basic
digital television channels in unencrypted form in Germany commencing January 1,
2013, see note 3 to our consolidated financial statements.
(e) The increase in Germany's non-subscription revenue is primarily attributable
to (i) an increase in installation revenue, due to a higher number of
installations and an increase in the average installation fee, (ii) an
increase in mobile services revenue, (iii) an increase in interconnect
revenue and (iv) an increase in network usage revenue, most of which relates
to the settlement of prior year amounts.
The Netherlands. The decrease in the Netherlands' revenue during 2012, as
compared to 2011, includes (i) an organic increase of $55.8 million or 4.4%,
(ii) the impact of an acquisition and (iii) the impact of FX, as set forth
below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 40.7 $ - $ 40.7
ARPU (b) 7.7 - 7.7
Increase in non-subscription revenue (c) - 7.4 7.4
Organic increase 48.4 7.4 55.8
Impact of an acquisition 0.9 - 0.9
Impact of FX (91.3 ) (9.7 ) (101.0 )
Total $ (42.0 ) $ (2.3 ) $ (44.3 )
_______________
(a) The increase in the Netherlands' subscription revenue related to a change in
the average number of RGUs is attributable to increases in the average
numbers of telephony, digital cable and broadband internet RGUs that were
only partially offset by a decline in the average number of analog cable
RGUs. The decline in the average number of analog cable RGUs in the
Netherlands led to a decline in the average number of total video RGUs
during 2012, as compared to 2011.
(b) The increase in the Netherlands' subscription revenue related to a change in
ARPU is due to the net effect of (i) an improvement in RGU mix, attributable
to higher proportions of digital cable, broadband internet and telephony
RGUs, and (ii) a net decrease resulting primarily from the following
factors: (a) lower ARPU due to a decrease in telephony call volume,
including the impact of higher proportions of customers selecting
usage-based calling plans, (b) lower ARPU due to the impact of bundling and
promotional discounts and (c) higher ARPU due to January 2012 price
increases for certain video services and, to a lesser extent, July 2012
price increases for bundled services.
(c) The increase in the Netherlands' non-subscription revenue is primarily
attributable to the net effect of (i) an increase in B2B revenue, (ii) an
increase in revenue from late charges, (iii) an increase in installation
revenue and (iv) a decrease in interconnect revenue, due primarily to the
impact of an August 1, 2012 reduction in fixed termination rates.
For information concerning certain regulatory developments that could have an
adverse impact on our revenue in the Netherlands, see note 16 to our
consolidated financial statements.
II-12
--------------------------------------------------------------------------------
Switzerland. The decrease in Switzerland's revenue during 2012, as compared to
2011, includes (i) an organic increase of $47.7 million or 3.7%, (ii) the impact
of acquisitions and (iii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 41.0 $ - $ 41.0
ARPU (b) 3.9 - 3.9
Increase in non-subscription revenue (c) - 2.8 2.8
Organic increase 44.9 2.8 47.7
Impact of acquisitions 4.4 - 4.4
Impact of FX (63.4 ) (11.5 ) (74.9 )
Total $ (14.1 ) $ (8.7 ) $ (22.8 )
_______________
(a) The increase in Switzerland's subscription revenue related to a change in
the average number of RGUs is attributable to increases in the average
numbers of digital cable, broadband internet and telephony RGUs that were
only partially offset by a decline in the average number of analog cable
RGUs. The decline in the average number of Switzerland's analog cable RGUs
led to a decline in the average number of total video RGUs during 2012, as
compared to 2011.
(b) The increase in Switzerland's subscription revenue related to a change in ARPU is due to the net effect of (i) an improvement in RGU mix, attributable
to higher proportions of digital cable, broadband internet and telephony
RGUs, and (ii) a net decrease resulting primarily from the following
factors: (a) higher ARPU due to higher proportions of customers selecting
higher-priced tiers of broadband internet services and, to a lesser extent,
digital cable services, (b) lower ARPU due to the impact of bundling
discounts and (c) lower ARPU due to a decrease in telephony call volume for
customers on usage-based calling plans.
(c) The increase in Switzerland's non-subscription revenue is attributable to the net effect of (i) an increase in installation revenue, (ii) a decline in
revenue from usage-based wholesale residential telephony services and (iii)
a net increase resulting from various individually insignificant changes. In
addition, B2B revenue remained relatively unchanged during 2012, as lower
revenue from construction and equipment sales was offset by growth in B2B
broadband internet and telephony services.
In October 2012, we announced an agreement with the Swiss Price Regulator
pursuant to which we will make certain changes to our service offerings in
exchange for progressive increases in the price of our basic cable connection
over the next two years. In this regard, (i) effective November 1, 2012, we
began offering a basic tier of digital television channels on an unencrypted
basis in our Switzerland footprint and (ii) effective January 3, 2013, for video
subscribers who pay the required upfront activation fee, we have
made available, at no additional monthly charge, a 2.0 Mbps internet
connection, which was an increase from the previously-offered 300 Kbps internet
connection. In addition, the price for a cable connection increased by CHF 0.90
($0.98) effective January 1, 2013 and a further increase of CHF 0.60 ($0.66)
will take effect on January 1, 2014. Although the above changes in our service
offerings may negatively impact certain revenue streams, we believe that the
positive impact of the price increases in 2013 and 2014 will offset such
negative impacts and place us in a position where we can continue to increase
our revenue and RGUs in Switzerland. No assurance can be given that our
assessment of the net impact of these changes in our service offerings and
prices will prove to be accurate or that we will be able to continue to grow our
revenue and RGUs in Switzerland.
II-13
--------------------------------------------------------------------------------Other Western Europe. The decrease in Other Western Europe's revenue during
2012, as compared to 2011, includes (i) an organic increase of $24.6 million or
2.8% and (ii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millions
Increase (decrease) in subscription revenue due to
change in:
Average number of RGUs (a) $ 56.9 $ - $ 56.9
ARPU (b) (35.0 ) - (35.0 )
Increase in non-subscription revenue (c) - 2.7 2.7
Organic increase 21.9 2.7 24.6
Impact of FX (61.3 ) (8.2 ) (69.5 )
Total $ (39.4 ) $ (5.5 ) $ (44.9 )
_______________
(a) The increase in Other Western Europe's subscription revenue related to a
change in the average number of RGUs is attributable to increases in the
average numbers of telephony, broadband internet and digital cable RGUs in
each of Ireland and Austria that were only partially offset by a decline in
the average number of analog cable RGUs in each of Austria and Ireland and,
to a lesser extent, MMDS video RGUs in Ireland. The declines in the average
numbers of analog cable and MMDS video RGUs led to a decline in the average
number of total video RGUs in each of Ireland and Austria during 2012, as
compared to 2011.
(b) The decrease in Other Western Europe's subscription revenue related to a change in ARPU is attributable to a decrease in ARPU in each of Ireland and
Austria. The decrease in Ireland's ARPU is mostly due to (i) lower ARPU due
to the impact of bundling discounts, (ii) lower ARPU from digital cable
services and (iii) lower ARPU due to a decrease in telephony call volume for
customers on usage-based calling plans, including the impact of higher
proportions of customers selecting usage-based calling plans. The decrease
in Austria's ARPU is primarily due to (a) lower ARPU due to the impact of
bundling discounts, (b) lower ARPU due to a higher proportion of customers
selecting lower-priced tiers of broadband internet services, (c) higher ARPU
due to the third quarter 2011 implementation of an additional charge for
broadband internet services and (d) lower ARPU due to a decrease in
telephony call volume for customers on usage-based calling plans. In
addition, Other Western Europe's overall ARPU was impacted by adverse changes in RGU mix, primarily attributable to a lower proportion of digital
cable RGUs in Ireland.
(c) The increase in Other Western Europe's non-subscription revenue is due
primarily to the net effect of (i) an increase in installation revenue in each of Austria and Ireland and (ii) a decline in B2B revenue, as a decrease
in revenue from B2B broadband internet and telephony services in Austria was
only partially offset by an increase in revenue from B2B telephony services
in Ireland.
Central and Eastern Europe. The decrease in Central and Eastern Europe's revenue
during 2012, as compared to 2011, includes (i) an organic decrease of $3.2
million or 0.3%, (ii) the impact of acquisitions and (iii) the impact of FX, as
set forth below:
Subscription Non-subscription
revenue revenue Total
in millions
Increase (decrease) in subscription revenue due to
change in:
Average number of RGUs (a) $ 29.1 $ - $ 29.1
ARPU (b) (34.7 ) - (34.7 )
Increase in non-subscription revenue (c) - 2.4 2.4
Organic increase (decrease) (5.6 ) 2.4 (3.2 )
Impact of acquisitions 99.9 15.0 114.9
Impact of FX (108.2 ) (10.3 ) (118.5 )
Total $ (13.9 ) $ 7.1 $ (6.8 )
II-14--------------------------------------------------------------------------------_______________
(a) The increase in Central and Eastern Europe's subscription revenue related to
a change in the average number of RGUs is primarily attributable to
increases in the average numbers of digital cable, telephony and broadband
internet RGUs that were only partially offset by declines in the average
numbers of analog cable and, to a much lesser extent, MMDS video RGUs in
Slovakia. In each country within our Central and Eastern Europe segment, a
decline in the average number of analog cable RGUs led to a decline in the
average number of total video RGUs during 2012, as compared to 2011.
(b) The decrease in Central and Eastern Europe's subscription revenue related to
a change in ARPU is primarily due to (i) lower ARPU due to increases in the
proportions of video, broadband internet and telephony subscribers selecting
lower-priced tiers of services, (ii) lower ARPU due to the impact of higher
bundling discounts and (iii) lower ARPU due to a decrease in telephony call
volume for customers on usage-based calling plans. In addition, Central and
Eastern Europe's overall ARPU was positively impacted by an improvement in
RGU mix, primarily attributable to a higher proportion of digital cable and,
to a lesser extent, broadband internet RGUs.
(c) The increase in Central and Eastern Europe's non-subscription revenue is due
primarily to the net effect of (i) an increase in sales of customer premises
equipment, primarily in the Czech Republic, (ii) a decrease in installation
revenue, primarily in Poland, and (iii) a net increase resulting from
individually insignificant changes in other non-subscription revenue
categories.
Telenet (Belgium). The decrease in Telenet's revenue during 2012, as compared to
2011, includes (i) an organic increase of $155.8 million or 8.1% and (ii) the
impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 29.7 $ - $ 29.7
ARPU (b) 56.2 - 56.2
Increase in non-subscription revenue (c) - 69.9 69.9
Organic increase 85.9 69.9 155.8
Impact of FX (127.2 ) (29.1 ) (156.3 )
Total $ (41.3 ) $ 40.8 $ (0.5 )
_______________
(a) The increase in Telenet's subscription revenue related to a change in the
average number of RGUs is attributable to increases in the average numbers
of digital cable, broadband internet and telephony RGUs that were only
partially offset by a decline in the average number of analog cable RGUs.
The decline in the average number of Telenet's analog cable RGUs led to a
decline in the average number of total video RGUs during 2012, as compared
to 2011.
(b) The increase in Telenet's subscription revenue related to a change in ARPU
is due to the net effect of (i) an improvement in RGU mix, attributable to
higher proportions of digital cable, broadband internet and telephony RGUs,
and (ii) a net decrease resulting primarily from the following factors: (a)
lower ARPU due to an increase in the proportion of customers selecting
lower-priced tiers of broadband internet services, (b) higher ARPU due to
October 2011 price increases for certain analog and digital cable services
and an August 2011 price increase for certain broadband internet services,
(c) lower ARPU due to a decrease in telephony call volume for customers on
usage-based plans and the negative impact of higher proportions of customers
migrating to fixed-rate calling plans and (d) higher ARPU from digital cable
services, due in part to an increase in the number of subscribers to
Telenet's premium sporting channel following the third quarter 2011
acquisition of certain Belgian football (soccer) rights. In addition,
Telenet's subscription revenue and ARPU were positively impacted by a nonrecurring adjustment during the fourth quarter of 2012 to recognize $6.3
million of revenue following the implementation of billing system
improvements. Most of this nonrecurring adjustment relates to revenue earned
in prior years.
(c) The increase in Telenet's non-subscription revenue is due primarily to (i) an increase in mobile services revenue of $38.5 million, (ii) an increase in
interconnect revenue of $21.2 million, primarily associated with growth in
mobile services, and (iii) an increase in mobile handset sales of $10.3
million. The increase in Telenet's mobile handset sales, which sales
typically generate relatively low margins, is primarily due to an increase
in sales to third-party retailers.
II-15--------------------------------------------------------------------------------For information concerning certain regulatory developments that could have an
adverse impact on our revenue in Belgium, see note 16 to our consolidated
financial statements.
VTR (Chile). The increase in the VTR Group's revenue during 2012, as compared to
2011, includes (i) an organic increase of $57.0 million or 6.4% and (ii) the
impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 38.9 $ - $ 38.9
ARPU (b) 2.6 - 2.6
Increase in non-subscription revenue (c) - 15.5 15.5
Organic increase 41.5 15.5 57.0
Impact of FX (5.0 ) (0.4 ) (5.4 )
Total $ 36.5 $ 15.1 $ 51.6
_______________
(a) The increase in the VTR Group's subscription revenue related to a change in
the average number of RGUs is primarily due to increases in the average
numbers of digital cable, broadband internet and telephony RGUs that were
only partially offset by a decline in the average numbers of analog cable
RGUs.
(b) The increase in the VTR Group's subscription revenue related to a change in
ARPU is primarily due to the positive impact of an improvement in RGU mix,
attributable to a higher proportion of digital cable RGUs. Excluding the
positive impact related to RGU mix, ARPU remained relatively unchanged due
to the net effect of the following factors: (i) higher ARPU from digital
cable services, (ii) higher ARPU due to semi-annual inflation and other
price adjustments for video, broadband internet and telephony services,
(iii) lower ARPU due to the impact of promotional and bundling discounts and
(iv) lower ARPU from telephony services, due in part to the net effect of
(a) the negative impact of a lower volume of calls subject to usage-based
charges and (b) the positive impact of a higher proportion of customers on
fixed-rate calling plans.
(c) The increase in the VTR Group's non-subscription revenue is attributable to
the net effect of (i) the May 2012 launch of mobile services by VTR Wireless
and (ii) decreases in installation and interconnect revenue at VTR.
II-16--------------------------------------------------------------------------------Revenue - 2011 compared to 2010
Organic
increase
Year ended December 31, Increase (decrease) (decrease)
2011 2010 $ % %
in millions
UPC/Unity Division:
Germany $ 1,450.0 $ 1,146.6 $ 303.4 26.5 9.0
The Netherlands 1,273.4 1,156.8 116.6 10.1 5.0
Switzerland 1,282.6 1,067.6 215.0 20.1 2.2
Other Western Europe 893.3 829.5 63.8 7.7 2.7
Total Western Europe 4,899.3 4,200.5 698.8 16.6 4.9
Central and Eastern Europe 1,122.5 1,001.5 121.0 12.1 1.5
Central and other 122.7 108.6 14.1 13.0 7.7
Total UPC/Unity Division 6,144.5 5,310.6 833.9 15.7 4.3
Telenet (Belgium) 1,918.5 1,727.2 191.3 11.1 5.7
VTR Group (Chile) 889.0 798.2 90.8 11.4 5.7
Corporate and other 645.2 608.6 36.6 6.0 1.8
Intersegment eliminations (86.4 ) (80.4 ) (6.0 ) (7.5 ) (2.3 )
Total $ 9,510.8 $ 8,364.2 $ 1,146.6 13.7 4.6
Germany. The increase in Germany's revenue during 2011, as compared to 2010,
includes (i) an organic increase of $103.1 million or 9.0% , (ii) the impact of
acquisitions and (iii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millions
Increase in subscription revenue due to change in:
Average number of RGUs (a)
$ 73.7 $ - $ 73.7
ARPU (b) 11.2 - 11.2
Increase in non-subscription revenue (c) - 18.2 18.2
Organic increase 84.9 18.2 103.1
Impact of acquisitions 111.9 14.8 126.7
Impact of FX 64.8 8.8 73.6
Total $ 261.6 $ 41.8 $ 303.4
_______________
(a) The increase in Germany's subscription revenue related to a change in the
average number of RGUs is attributable to increases in the average numbers
of broadband internet, telephony and digital cable RGUs that were only
partially offset by a decline in the average number of analog cable RGUs.
The decline in Germany's average number of analog cable RGUs led to a
decline in the average number of total video RGUs in Germany during 2011, as
compared to 2010.
(b) The increase in Germany's subscription revenue related to a change in ARPU
is due to an improvement in RGU mix, attributable to higher proportions of
telephony, digital cable and broadband internet RGUs, that was only
partially offset by a net decrease resulting primarily from the following
factors: (i) lower ARPU due to the impact of free bundled services provided
to new subscribers during promotional periods, (ii) lower ARPU due to a
higher proportion of customers receiving discounted analog cable services
through bulk agreements and (iii) lower ARPU due to a decrease in telephony
call volume for customers on usage-based calling plans.
II-17--------------------------------------------------------------------------------(c) The increase in Germany's non-subscription revenue is primarily attributable
to increases in (i) installation revenue, primarily due to a higher number
of RGU additions, (ii) interconnect revenue, primarily due to growth in
Germany's telephony services and (iii) channel carriage fees.
The Netherlands. The increase in the Netherlands' revenue during 2011, as
compared to 2010, includes (i) an organic increase of $57.5 million or 5.0% and
(ii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 41.1 $ - $ 41.1
ARPU (b) 17.8 - 17.8
Decrease in non-subscription revenue (c) - (1.4 ) (1.4 )
Organic increase (decrease) 58.9 (1.4 ) 57.5
Impact of FX 53.7 5.4 59.1
Total $ 112.6 $ 4.0 $ 116.6
_______________
(a) The increase in the Netherlands' subscription revenue related to a change in
the average number of RGUs is attributable to increases in the average
numbers of digital cable, telephony and broadband internet RGUs that were
only partially offset by a decline in the average number of analog cable
RGUs. The decline in the Netherlands' average number of analog cable RGUs
led to a decline in the average number of total video RGUs in the
Netherlands during 2011, as compared to 2010.
(b) The increase in the Netherlands' subscription revenue related to a change in
ARPU is due to an improvement in RGU mix, attributable to higher proportions
of digital cable, broadband internet and telephony RGUs, that was only
partially offset by a net decrease resulting primarily from the following
factors: (i) lower ARPU due to a decrease in telephony call volume,
including the impact of customers moving from usage-based to fixed-rate
calling plans, (ii) lower ARPU due to an increase in the proportion of
customers selecting lower-priced tiers of broadband internet services and
(iii) higher ARPU due to January 2011 price increases for certain video,
broadband internet and telephony services.
(c) The decrease in the Netherlands' non-subscription revenue is attributable to
the net impact of (i) an increase in B2B revenue, due primarily to growth in
B2B telephony and broadband internet services, and (ii) a net decrease
resulting from individually insignificant changes in other non-subscription
revenue categories.
Switzerland. The increase in Switzerland's revenue during 2011, as compared to
2010, includes (i) an organic increase of $23.2 million or 2.2% and (ii) the
impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 11.3 $ - $ 11.3
ARPU (b) 11.4 - 11.4
Increase in non-subscription revenue (c) - 0.5 0.5
Organic increase 22.7 0.5 23.2
Impact of FX 162.0 29.8 191.8
Total $ 184.7 $ 30.3 $ 215.0
_______________
(a) The increase in Switzerland's subscription revenue related to a change in
Switzerland's average number of RGUs is attributable to increases in the
average numbers of digital cable, broadband internet and telephony RGUs that
were only partially offset by a decrease in the average number of analog
cable RGUs. The decline in the average numbers of Switzerland's analog cable
RGUs led to a decline in the average number of total video RGUs in
Switzerland during 2011, as compared to 2010.
II-18--------------------------------------------------------------------------------(b) The increase in Switzerland's subscription revenue related to a change in
ARPU is due to an improvement in RGU mix, attributable to higher proportions
of digital cable, broadband internet and telephony RGUs, that was only
partially offset by a net decrease resulting primarily from the following
factors: (i) lower ARPU due to a decrease in telephony call volume for
customers on usage-based calling plans, (ii) lower ARPU from broadband
internet services, (iii) higher ARPU due to price increases implemented in January 2011 and the second half of 2010 for certain analog and digital cable
services and (iv) higher ARPU from digital cable services.
(c) The increase in Switzerland's non-subscription revenue is primarily
attributable to the net impact of (i) an increase in installation revenue,
(ii) a decline in B2B revenue and (iii) higher revenue from the sale of
customer premises equipment. The higher revenue from customer premises
equipment sales is due largely to the second quarter 2010 introduction of common interface plus (CI+) modules, which enable authorized customers with
CI+ enabled televisions to view our digital cable service without a set-top
box. The decline in B2B revenue is due primarily to lower revenue of $8.0
million or 34.9% from construction and equipment sales that was only
partially offset by modest growth in B2B telephony and broadband internet
services.
Other Western Europe. The increase in Other Western Europe's revenue during
2011, as compared to 2010, includes (i) an organic increase of $22.5 million or
2.7% and (ii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millions
Increase (decrease) in subscription revenue due to
change in:
Average number of RGUs (a) $ 46.6 $ - $ 46.6
ARPU (b) (20.5 ) - (20.5 )
Decrease in non-subscription revenue (c) - (3.6 ) (3.6 )
Organic increase (decrease) 26.1 (3.6 ) 22.5
Impact of FX 35.8 5.5 41.3
Total $ 61.9 $ 1.9 $ 63.8
_______________
(a) The increase in Other Western Europe's subscription revenue related to a
change in the average number of RGUs is attributable to increases in the
average numbers of telephony, broadband internet and digital cable RGUs in
each of Ireland and Austria that were only partially offset by decreases in
the average numbers of analog cable RGUs in each of Ireland and Austria and,
to a lesser extent, MMDS video RGUs in Ireland. The declines in the average
numbers of analog cable and MMDS video RGUs led to declines in the average
numbers of total video RGUs in both Ireland and Austria during 2011, as
compared to 2010.
(b) The decrease in Other Western Europe's subscription revenue related to a change in ARPU is primarily attributable to a decrease in ARPU in Austria,
as ARPU in Ireland declined only slightly during 2011, as compared to 2010.
The decrease in Austria's overall ARPU is primarily due to the net effect of
(i) lower ARPU due to a higher proportion of customers selecting
lower-priced tiers of broadband internet services, (ii) lower ARPU due to a
decrease in telephony call volume for customers on usage-based calling plans
and a higher proportion of customers selecting such usage-based calling
plans and (iii) higher ARPU due to the third quarter 2011 implementation of
an additional charge for broadband internet services. Ireland's overall ARPU
declined slightly during 2011, as compared to 2010, primarily due to the net
impact of the following factors: (a) higher ARPU due to January 2011 price
increases for certain digital and broadband internet services and (b) lower
ARPU due to a decrease in telephony call volume for customers on usage-based
calling plans and a higher proportion of customers selecting such
usage-based calling plans. In addition, Other Western Europe's overall ARPU
was slightly impacted by adverse changes in RGU mix in both Austria and
Ireland.
(c) The decrease in Other Western Europe's non-subscription revenue is due
primarily to (i) a decrease in B2B revenue and (ii) a net decrease resulting
from individually insignificant changes in other non-subscription revenue
categories. The decrease in B2B revenue is primarily attributable to the net
effect of (a) growth in Ireland's B2B broadband internet services, (b) a
decrease in Austria's B2B broadband internet and telephony services and
(iii) a decrease resulting from the impact of a first quarter 2010 favorable
settlement with the incumbent telecommunications operator in Austria.
II-19--------------------------------------------------------------------------------
Central and Eastern Europe. The increase in Central and Eastern Europe's revenue
during 2011, as compared to 2010, includes (i) an organic increase of $15.2
million or 1.5%, (ii) the impact of acquisitions and (iii) the impact of FX, as
set forth below:
Subscription Non-subscription
revenue revenue Total
in millions
Increase (decrease) in subscription revenue due to
change in:
Average number of RGUs (a) $ 23.7 $ - $ 23.7
ARPU (b) (13.9 ) - (13.9 )
Increase in non-subscription revenue (c) - 5.4 5.4
Organic increase 9.8 5.4 15.2
Impact of acquisitions 47.6 17.9 65.5
Impact of FX 36.8 3.5 40.3
Total $ 94.2 $ 26.8 $ 121.0
_______________
(a) The increase in Central and Eastern Europe's subscription revenue related to
a change in the average number of RGUs is primarily attributable to
increases in the average numbers of digital cable (mostly in Poland, Hungary
and Romania), broadband internet (mostly in Poland, Hungary and the Czech
Republic) and telephony RGUs (mainly in Poland and Hungary) that were only
partially offset by declines in the average numbers of analog cable and, to
a much lesser extent, MMDS video RGUs. The declines in the average numbers
of analog cable RGUs led to declines in the average numbers of total video
RGUs in each country within our Central and Eastern Europe segment during
2011, as compared to 2010.
(b) The decrease in Central and Eastern Europe's subscription revenue related to
a change in ARPU is primarily due to the following factors: (i) lower ARPU
due to increases in the proportions of video, broadband internet and
telephony subscribers selecting lower-priced tiers of services and (ii)
lower ARPU due to a decrease in telephony call volume for customers on
usage-based calling plans. The impacts of these negative factors were
partially offset by an improvement in Central and Eastern Europe's RGU mix,
primarily attributable to higher proportions of digital cable and broadband
internet RGUs.
(c) The increase in Central and Eastern Europe's non-subscription revenue is
primarily attributable to an increase in B2B revenue, largely driven by
growth in B2B broadband internet and telephony services in the Czech
Republic and Poland.
Telenet (Belgium). The increase in Telenet's revenue during 2011, as compared to
2010, includes (i) an organic increase of $98.5 million or 5.7%, (ii) the impact
of an acquisition and (iii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue (a) revenue (a) Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (b)
$ 31.8 $ - $ 31.8
ARPU (c) 34.9 - 34.9
Increase in non-subscription revenue (d) - 31.8 31.8
Organic increase 66.7 31.8 98.5
Impact of an acquisition - 4.1 4.1
Impact of FX 74.1 14.6 88.7
Total $ 140.8 $ 50.5 $ 191.3
_______________
(a) The organic increase in Telenet's subscription and non-subscription revenue
is net of decreases of $7.6 million and $3.7 million, respectively, that
resulted from a change from gross to net presentation of revenue and
expenses related to certain premium text messaging and calling services due
to a legislative action that became effective in January 2011. As a result
of this legislative action, Telenet now acts as an agent, as opposed to a
principal, in these transactions.
II-20--------------------------------------------------------------------------------(b) The increase in Telenet's subscription revenue related to a change in the
average number of RGUs is attributable to increases in the average numbers
of digital cable, broadband internet and telephony RGUs that were only
partially offset by a decline in the average number of analog cable RGUs.
The decline in the average number of analog cable RGUs led to a decline in
the average number of total video RGUs during 2011, as compared to 2010.
(c) The increase in Telenet's subscription revenue related to a change in ARPU
is due to an improvement in RGU mix, attributable to higher proportions of
digital cable, broadband internet and telephony RGUs, that was only
partially offset by a net decrease resulting primarily from the following
factors: (i) higher ARPU due to February 2010 price increases for certain
analog and digital cable services and an August 2011 price increase for
certain broadband internet services, (ii) lower ARPU due to an increase in
the proportions of customers selecting lower-priced tiers of broadband
internet services, (iii) lower ARPU due to a decrease in telephony call
volume for customers on usage-based plans and (iv) higher ARPU from digital
cable services.
(d) The increase in Telenet's non-subscription revenue is due primarily to (i) an increase in mobile services revenue of $22.5 million, (ii) an increase in
interconnect revenue, as higher interconnect revenue associated with growth
in mobile and fixed telephony services more than offset lower revenue
associated with a decline in mobile termination rates, and (iii) an increase
in revenue from B2B services. These increases were partially offset by a
decrease in installation revenue, primarily attributable to a lower number
of RGU additions and increased promotional discounts.
VTR Group (Chile). The increase in the VTR Group's revenue during 2011, as
compared to 2010, includes (i) an organic increase of $45.5 million or 5.7% and
(ii) the impact of FX, as set forth below:
Subscription Non-subscription
revenue revenue Total
in millionsIncrease in subscription revenue due to change in:
Average number of RGUs (a)
$ 30.2 $ - $ 30.2
ARPU (b) 14.5 - 14.5
Increase in non-subscription revenue (c) - 0.8 0.8
Organic increase 44.7 0.8 45.5
Impact of FX 41.3 4.0 45.3
Total $ 86.0 $ 4.8 $ 90.8
_______________
(a) The increase in the VTR Group's subscription revenue related to a change in
the average number of RGUs is primarily due to increases in the average
numbers of digital cable, broadband internet and telephony RGUs that were
only partially offset by a decline in the average number of analog cable
RGUs.
(b) The increase in the VTR Group's subscription revenue related to a change in
ARPU is due to (i) an improvement in RGU mix, primarily attributable to a
higher proportion of digital cable RGUs, and (ii) a net increase resulting
primarily from the following factors: (a) higher ARPU due to inflation and
other price adjustments, (b) lower ARPU from broadband internet services,
(c) higher ARPU resulting from the estimated $4.3 million of revenue that
was lost during the first quarter of 2010 as a result of an earthquake and
tsunami in Chile and (d) higher ARPU from digital cable services.
(c) The increase in the VTR Group's non-subscription revenue is primarily
attributable to higher advertising revenue that was only partially offset by
lower interconnect and installation revenue.
II-21--------------------------------------------------------------------------------Operating Expenses of our Reportable Segments
Operating expenses - 2012 compared to 2011
Organic
increase
Year ended December 31, Increase (decrease) (decrease)
2012 2011 $ % %
in millions
UPC/Unity Division:
Germany $ 548.3 $ 320.5 $ 227.8 71.1 12.4
The Netherlands 354.5 375.4 (20.9 ) (5.6 ) 2.1
Switzerland 359.8 372.0 (12.2 ) (3.3 ) 2.2
Other Western Europe 323.6 348.7 (25.1 ) (7.2 ) 0.4
Total Western Europe 1,586.2 1,416.6 169.6 12.0 4.0
Central and Eastern Europe 418.4 435.2 (16.8 ) (3.9 ) (3.0 )
Central and other 108.4 103.7 4.7 4.5 14.1
Total UPC/Unity Division 2,113.0 1,955.5 157.5 8.1 3.0
Telenet (Belgium) 734.5 704.9 29.6 4.2 12.5
VTR Group (Chile) 442.4 381.2 61.2 16.1 16.7
Corporate and other 398.6 407.0 (8.4 ) (2.1 ) (0.1 )
Intersegment eliminations (79.6 ) (84.5 ) 4.9 5.8 (2.1 )
Total operating expenses
excluding stock-based
compensation expense 3,608.9 3,364.1 244.8 7.3 6.2
Stock-based compensation expense 8.6 15.3 (6.7 ) (43.8 )
Total $ 3,617.5 $ 3,379.4 $ 238.1 7.0
General. Operating expenses include programming, network operations,
interconnect, customer operations, customer care, stock-based compensation
expense and other direct costs. We do not include stock-based compensation in
the following discussion and analysis of the operating expenses of our
reportable segments as stock-based compensation expense is not included in the
performance measures of our reportable segments. Stock-based compensation
expense is discussed under Discussion and Analysis of Our Consolidated Operating
Results below. Programming costs, which represent a significant portion of our
operating costs, are expected to rise in future periods as a result of (i)
growth in digital cable services, in combination with the introduction of
Horizon TV, and (ii) price increases. In addition, we are subject to
inflationary pressures with respect to our labor and other costs and foreign
currency exchange risk with respect to costs and expenses that are denominated
in currencies other than the respective functional currencies of our operating
segments (non-functional currency expenses). Any cost increases that we are not
able to pass on to our subscribers through service rate increases would result
in increased pressure on our operating margins. For additional information
concerning our foreign currency exchange risks see Quantitative and Qualitative
Disclosures about Market Risk - Foreign Currency Risk below.
II-22
--------------------------------------------------------------------------------
UPC/Unity Division. The UPC/Unity Division's operating expenses (exclusive of
stock-based compensation expense) increased $157.5 million or 8.1% during 2012,
as compared to 2011. This increase includes $274.8 million attributable to the
impact of acquisitions. Excluding the effects of acquisitions and FX, the
UPC/Unity Division's operating expenses increased $58.9 million or 3.0%. This
increase includes the following factors:
• An increase in programming and related costs of $51.1 million or 8.7%,
primarily due to growth in digital video services, predominantly in
Germany, Switzerland, Austria and the Netherlands. The increase in programming and related costs also reflects a decrease of $7.3 million due
to the net impact of accrual releases in Germany and the Netherlands
during 2012 and 2011, and Poland in the fourth quarter of 2012. These
accrual releases primarily relate to the settlement or reassessment of
operational contingencies;
• An increase in network-related expenses of $24.5 million or 9.3%,
primarily due to (i) increased network maintenance costs, primarily in Germany and Poland, (ii) higher costs associated with the refurbishment of
customer premises equipment, primarily in Germany, (iii) higher duct and
pole rental costs, primarily in Germany and Romania, with the higher costs
in Germany primarily attributable to the negative impact of a fourth
quarter 2011 settlement of an operational contingency, (iv) higher energy
costs in Germany due in part to the release of accruals in connection with
the settlement of operational contingencies during the second and fourth
quarters of 2011, (v) increased encryption costs, due largely to increased
numbers of installed digital set-top boxes, primarily in Switzerland and
Germany, and (vi) higher costs of $1.4 million due to the net impact of settlements in 2012 and 2011 of claims for costs incurred in connection
with faulty customer premises equipment, primarily in the Netherlands,
Switzerland and Poland. In addition, in the UPC/Unity Division's central
operations, the impact of a fourth quarter 2011 settlement of a dispute
with a third party contributed $2.8 million to the overall increase in
network-related expenses;
• An increase in outsourced labor and professional fees of $11.7 million or
6.3%, primarily due to the net effect of (i) higher call center costs in
Germany, primarily attributable to an increase in call volumes, (ii)
higher outsourced labor costs associated with customer-facing activities
in Germany, Ireland and Switzerland and (iii) lower call center costs in
Switzerland;
• A decrease in bad debt and collection expenses of $8.1 million or 11.5%,
primarily in Poland, the Czech Republic, Ireland and Austria. The decrease
in bad debt and collection expenses is largely attributable to (i)
improved collection experience and (ii) the $2.6 million impact of a
nonrecurring increase to bad debt expense that was recorded in the
Netherlands during the first quarter of 2011;
• An increase in personnel costs of $5.8 million or 1.5%, primarily due to
(i) annual wage increases, with the largest impacts occurring in the
Netherlands, Germany, Switzerland and Austria, and (ii) increased staffing
levels in the UPC/Unity Division's central operations and the Netherlands.
The increased staffing levels in the UPC/Unity Division's central
operations are due in part to increased numbers of strategic initiatives;
• A decrease in information technology-related expenses of $3.4 million or
39%, due in part to costs incurred in 2011 associated with a billing
system implementation in the Czech Republic;
• A decrease of $1.9 million associated with lower taxes in Hungary. This
decrease represents the net effect of (i) a decrease attributable to a
change in our approach to determining the 2010 Hungarian Telecom Tax that
was implemented on a retroactive basis during the second quarter of 2012 and (ii) an increase attributable to the initiation of the 2012 Hungarian
Telecom Tax in July 2012. For additional information regarding the 2012
Hungarian Telecom Tax and the 2010 Hungarian Telecom Tax, see Discussion
and Analysis of our Reportable Segments - General; and
• A net decrease resulting from individually insignificant changes in other
operating expense categories.
Telenet (Belgium). Telenet's operating expenses (exclusive of stock-based
compensation expense) increased $29.6 million or 4.2% during 2012, as compared
to 2011. Excluding the effects of FX, Telenet's operating expenses increased
$88.1 million or 12.5%. This increase includes the following factors:
• An increase in mobile costs of $36.6 million, due primarily to (i) higher
costs associated with subscriber promotions involving free or
heavily-discounted handsets and (ii) increased mobile handset sales to
third-party retailers;
II-23--------------------------------------------------------------------------------• An increase in programming and related costs of $32.3 million or 15.1%,
due primarily to (i) a $25.3 million increase resulting from Telenet's
acquisition of the rights to broadcast certain Belgian football (soccer)
matches for the three years that began in the third quarter of 2011 and
(ii) an increase due to growth in other digital video services. The
increase in programming and related costs also reflects a $2.3 million
decrease due to the impact of an accrual release during the fourth quarter
of 2012 related to the settlement of an operational contingency;
• An increase in interconnect costs of $18.3 million or 22.2%, due primarily
to the net effect of (i) subscriber growth, (ii) increased mobile voice
and data volumes and (iii) lower mobile termination rates;
• An increase in costs of $10.0 million associated with a campaign to retain
customers following the move of certain channels from the analog to the
basic digital channel package. This campaign involved the sale and rental
of used digital set-top boxes at relatively low prices. In connection with
this campaign, Telenet experienced (i) increases in the costs of set-top
boxes that were sold and (ii) higher outsourced labor and professional
fees due primarily to increased customer-facing activities;
• An increase in outsourced labor and professional fees of $8.0 million or
11.7%, due primarily to increased call center costs, mainly associated
with (i) a higher number of calls and (ii) efforts to improve service
levels;
• A decrease in network-related expenses of $7.0 million or 6.1%, due primarily to lower costs associated with the refurbishment of customer
premises equipment due primarily to the benefit of claims taken related to
faulty set-top boxes;
• A decrease in personnel costs of $5.6 million or 4.9%, due primarily to
the net effect of (i) increased staffing levels and annual wage increases,
(ii) lower costs of $4.1 million due to the impact of reimbursements
received from the Belgian government during the third and fourth quarters
of 2012 with respect to the employment of certain individuals with
advanced degrees and (iii) lower costs of $3.4 million due to
reassessments of certain post-employment benefit obligations during the
third and fourth quarters of 2012;
• Lower costs of $5.0 million associated with the impact of nonrecurring
adjustments recorded during the third and fourth quarters of 2012
resulting from the reassessment of a social tariff obligation; and
• A decrease in bad debt expense of $1.7 million that includes a $3.3 million decrease associated with a nonrecurring adjustment recorded during
the second quarter of 2012 related to the settlement of an operational
contingency.
VTR Group (Chile). The VTR Group's operating expenses (exclusive of stock-based
compensation expense) increased $61.2 million or 16.1% during 2012, as compared
to 2011. Excluding the effects of FX, the VTR Group's operating expenses
increased $63.6 million or 16.7%. This increase includes the following factors:
• An increase in VTR Wireless' mobile handset costs of $21.1 million;
• An increase in programming and related costs of $14.5 million or 10.9%,
primarily associated with growth in digital cable services. Although a
significant portion of the VTR Group's programming contracts are
denominated in U.S. dollars, the impact of foreign currency exchange rate fluctuations did not materially impact the increase in the VTR Group's
programming costs during 2012;
• An increase in interconnect and access costs of $12.7 million or 21.1%,
due primarily to (i) higher costs associated with VTR Wireless, primarily
attributable to (a) the impact of the May 2012 launch of mobile services
and (b) the initiation of minimum payments under a roaming agreement
during the first quarter of 2012, and (ii) higher costs associated with
VTR's broadband internet services, as the impact of higher traffic was
only partially offset by lower average rates;
• An increase in facilities expenses of $10.5 million, due primarily to higher site and tower rental costs incurred by VTR Wireless, including
$1.9 million of fees incurred in connection with the termination of
certain leases;
• A decrease in personnel costs of $5.7 million or 10.4%, primarily related
to lower bonus costs at VTR; and
• An increase in outsourced labor and professional fees of $5.5 million or
19.1%, resulting from the net effect of (i) increased costs associated
with VTR Wireless' network operating center and (ii) a decrease in VTR's
customer-facing activities.
II-24--------------------------------------------------------------------------------Operating expenses - 2011 compared to 2010
Organic
increase
Year ended December 31, Increase (decrease) (decrease)
2011 2010 $ % %
in millions
UPC/Unity Division:
Germany $ 320.5 $ 272.9 $ 47.6 17.4 (0.3 )
The Netherlands 375.4 351.1 24.3 6.9 2.0
Switzerland 372.0 322.7 49.3 15.3 (2.0 )
Other Western Europe 348.7 325.1 23.6 7.3 2.3
Total Western Europe 1,416.6 1,271.8 144.8 11.4 0.6
Central and Eastern Europe 435.2 381.4 53.8 14.1 3.3
Central and other 103.7 99.5 4.2 4.2 (0.8 )
Total UPC/Unity Division 1,955.5 1,752.7 202.8 11.6 1.1
Telenet (Belgium) 704.9 614.3 90.6 14.7 9.1
VTR Group (Chile) 381.2 333.6 47.6 14.3 8.4
Corporate and other 407.0 380.0 27.0 7.1 3.1
Intersegment eliminations (84.5 ) (79.5 ) (5.0 ) (6.3 ) (0.8 )
Total operating expenses
excluding stock-based
compensation expense 3,364.1 3,001.1 363.0 12.1 3.8
Stock-based compensation expense 15.3 9.4 5.9 62.8
Total $ 3,379.4 $ 3,010.5 $ 368.9 12.3
UPC/Unity Division. The UPC/Unity Division's operating expenses (exclusive of
stock-based compensation expense) increased $202.8 million or 11.6% during 2011,
as compared to 2010. This increase includes $60.0 million attributable to the
impact of acquisitions. Excluding the effects of acquisitions and FX, the
UPC/Unity Division's operating expenses increased $18.8 million or 1.1%. This
increase includes the following factors:
• An increase in programming and related costs of $28.8 million or 5.6%, due
primarily to growth in digital video services, predominantly in the
Netherlands, Germany, Poland and Ireland. The net impact of favorable
copyright and programming fee settlements, primarily in Germany and the
Netherlands, also contributed to the increase, as the $3.5 million
favorable impact in 2011 was less than the $6.4 million favorable impact
in 2010. These increases were partially offset by the impact of lower
rates for certain copyright fees in Germany;
• An increase in outsourced labor and professional fees of $15.0 million or
9.9%, primarily attributable to increased call center costs due to higher
call volumes in Germany, Switzerland, the Netherlands and the Czech
Republic;
• A decrease in interconnect costs of $12.6 million or 6.8%, primarily
attributable to the net effect of (i) decreased costs due to lower rates,
primarily in Switzerland, Germany, the Netherlands and the Czech Republic,
(ii) increased costs related to subscriber growth, primarily in Germany,
(iii) decreased costs due to lower call volumes, primarily in Switzerland
and Austria and (iv) a $3.0 million increase related to the impact of a
favorable interconnect settlement during the third quarter of 2010 in
Switzerland;
• An increase in personnel costs of $7.2 million or 2.1%, due primarily to
the net effect of (i) a decrease associated with higher levels of labor
costs allocated to certain capital projects, including the development of
our Horizon TV platform, (ii) annual wage increases, (iii) higher employee
benefit related costs primarily in the Netherlands and Germany, (iv) lower
costs related to temporary personnel, primarily in Switzerland and
Germany, (v) increased bonus costs and (vi) increased staffing levels;
• A decrease of $6.9 million or 43.6%, due primarily to lower B2B
construction and equipment sales in Switzerland;
• A decrease in network related expenses of $5.6 million or 2.3%, due primarily to the net effect of (i) lower energy costs in Germany and, to a
lesser extent, the Czech Republic and the Netherlands, with the lower
costs in Germany due in part to the release of accruals in connection with
the settlement of operational contingencies during the second and fourth
II-25
--------------------------------------------------------------------------------
quarters of 2011, (ii) increased encryption costs, due largely to an increased
number of installed digital set-top boxes, (iii) a $6.7 million decrease due to
the 2011 settlement of a claim for costs incurred in connection with faulty
customer premises equipment, primarily in the Netherlands and Switzerland, (iv)
higher costs associated with the refurbishment of customer premises equipment
and (v) higher duct and pole rental costs due primarily to increased rates in
the Czech Republic and Romania. In Germany, duct and pole rental costs remained
relatively constant as the impact of higher rates was offset by the favorable
impact of the fourth quarter 2011 settlement of an operational contingency. In
addition, in UPC/Unity Division's central operations, the favorable impact of a
fourth quarter 2011 settlement of a dispute with a third party regarding
services rendered in 2010 contributed $2.9 million to the overall decrease in
network related expenses; and
• A decrease of $4.5 million at UPC DTH due to lower satellite costs
resulting from (i) lower transponder rates and (ii) the impact of certain
expenses incurred during 2010 related to UPC DTH's migration to a new
satellite.
Telenet (Belgium). Telenet's operating expenses (exclusive of stock-based
compensation expense) increased $90.6 million or 14.7% during 2011, as compared
to 2010. This increase includes $3.1 million attributable to the impact of an
acquisition. Excluding the effects of an acquisition and FX, Telenet's operating
expenses increased $55.9 million or 9.1%. This increase includes the following
factors:
• An increase in programming and related costs of $36.3 million or 21.7%,
due primarily to (i) an increase resulting from Telenet's second quarter
2011 acquisition of the rights to broadcast certain Belgian football
(soccer) matches over the next three years and (ii) growth in digital
cable services;
• An increase in network-related expenses of $18.2 million or 20.2%, due primarily to (i) DTT network costs that Telenet began incurring during the
fourth quarter of 2010 pursuant to an agreement that provides Telenet with
the right to use a specified DTT network through June 2024, (ii) higher
costs associated with the refurbishment of customer premises equipment and
(iii) higher maintenance costs;
• A decrease of $13.8 million in outsourced labor and customer premises
equipment costs incurred in connection with the installation of certain
wireless routers that were sold to customers during 2010. In January
2011, Telenet ceased the practice of selling wireless routers to its
customers and began installing modems with built-in wireless routers, the
ownership of which is retained by Telenet;
• An increase of $8.8 million or 23.9% in mobile costs, primarily due to
increased mobile handset costs from (i) increased handset sales, primarily
to third-party retailers, and (ii) promotions involving free or
heavily-discounted handsets;
• An increase in personnel costs of $8.8 million or 8.9%, due largely to
increased staffing levels and annual wage increases. The increase in
staffing levels is largely due to (i) the insourcing of certain customer
care functions and (ii) increased network operations activities; and
• A decrease in interconnect costs of $7.0 million or 8.2%, due primarily to
decreases associated with (i) the previously-discussed change from gross
to net presentation of revenue and expenses related to certain premium
text messaging and calling services due to a legislative action that
became effective in January 2011 and (ii) the previously-discussed
reduction in mobile termination rates. These decreases were partially
offset by increases associated with (i) subscriber growth and (ii)
increased mobile calling volumes.
II-26--------------------------------------------------------------------------------
VTR Group (Chile). The VTR Group's operating expenses (exclusive of stock-based
compensation expense) increased $47.6 million or 14.3% during 2011, as compared
to 2010. Excluding the effects of FX, the VTR Group's operating expenses
increased $28.0 million or 8.4%. This increase includes the following factors:
• An increase in programming and related costs of $14.6 million or 13.2%, as
an increase associated with growth in digital cable services was only
partially offset by a decrease arising from foreign currency exchange rate
fluctuations with respect to the VTR Group's U.S. dollar denominated
programming contracts;
• An increase in facilities expenses of $6.5 million, due mostly to higher
site and tower rental costs in connection with VTR Wireless;
• An increase in outsourced labor and professional fees of $6.2 million or
29.1%, due largely to (i) increased call center costs due to efforts to
improve service levels, (ii) a higher number of service calls and (iii)
higher site and tower location costs incurred in connection with VTR
Wireless;
• A decrease in bad debt and collection expenses of $5.4 million, as improved economic conditions and customer retention efforts have resulted
in better collection experience; and
• An increase in personnel costs of $2.9 million or 5.8%, due primarily to
higher staffing levels related to VTR Wireless.
II-27--------------------------------------------------------------------------------
SG&A Expenses of our Reportable Segments
SG&A expenses - 2012 compared to 2011
Organic
Year ended December 31, Increase (decrease) increase
2012 2011 $ % %
in millions
UPC/Unity Division:
Germany $ 398.4 $ 265.8 $ 132.6 49.9 21.2
The Netherlands 137.5 142.7 (5.2 ) (3.6 ) 3.9
Switzerland 182.1 188.7 (6.6 ) (3.5 ) 1.5
Other Western Europe 117.1 125.9 (8.8 ) (7.0 ) 0.4
Total Western Europe 835.1 723.1 112.0 15.5 9.0
Central and Eastern Europe 142.2 139.3 2.9 2.1 4.5
Central and other 170.4 159.5 10.9 6.8 15.7
Total UPC/Unity Division 1,147.7 1,021.9 125.8 12.3 9.4
Telenet (Belgium) 242.8 246.6 (3.8 ) (1.5 ) 6.3
VTR Group (Chile) 184.0 166.6 17.4 10.4 11.1
Corporate and other 261.5 231.2 30.3 13.1 12.7
Intersegment eliminations (3.7 ) (1.9 ) (1.8 ) N.M. N.M.
Total SG&A expenses excluding
stock-based compensation expense 1,832.3 1,664.4 167.9 10.1 9.5
Stock-based compensation expense 103.8 116.0 (12.2 ) (10.5 )
Total $ 1,936.1 $ 1,780.4 $ 155.7 8.7
___________
N.M. - Not Meaningful.
General. SG&A expenses include human resources, information technology, general
services, management, finance, legal and sales and marketing costs, stock-based
compensation and other general expenses. We do not include stock-based
compensation in the following discussion and analysis of the SG&A expenses of
our reportable segments as stock-based compensation expense is not included in
the performance measures of our reportable segments. Stock-based compensation
expense is discussed under Discussion and Analysis of Our Consolidated Operating
Results below. As noted under Operating Expenses above, we are subject to
inflationary pressures with respect to our labor and other costs and foreign
currency exchange risk with respect to non-functional currency expenses. For
additional information concerning our foreign currency exchange risks see
Quantitative and Qualitative Disclosures about Market Risk - Foreign Currency
Risk below.
II-28--------------------------------------------------------------------------------
UPC/Unity Division. The UPC/Unity Division's SG&A expenses (exclusive of
stock-based compensation expense) increased $125.8 million or 12.3% during 2012,
as compared to 2011. This increase includes $121.2 million attributable to the
impact of acquisitions. Excluding the effects of acquisitions and FX, the
UPC/Unity Division's SG&A expenses increased $96.5 million or 9.4%. This
increase includes the following factors:
• An increase in personnel costs of $35.1 million or 8.8%, due largely to
(i) increased staffing levels in the UPC/Unity Division's central
operations due largely to increased numbers of strategic initiatives and
(ii) annual wage increases, predominantly in the Netherlands, the
UPC/Unity Division's central operations, Germany and Switzerland. The increases in personnel costs also include the impact of a new employee
wage tax in the Netherlands, which tax is payable in 2013 and is not
applicable to future years. This new employee wage tax, which was
authorized in September 2012, is based on wages for the year ended
December 31, 2012;
• An increase in sales and marketing costs of $30.6 million or 8.2%, largely
due to higher costs in Germany, including higher third-party sales
commissions and, to a lesser extent, increased costs associated with
rebranding and other advertising campaigns. Lower sales and marketing
costs in Austria, the Czech Republic and Switzerland partially offset the
increased costs in Germany;
• An increase in facilities expenses of $8.3 million or 9.7%, due primarily
to increases in costs related to the rental of office space in Germany,
the UPC/Unity Division's central operations and the Netherlands;
• An increase in outsourced labor and professional fees of $4.1 million or
6.0%, due primarily to (i) an increase in consulting costs incurred in
Germany, primarily associated with integration activities related to the KBW Acquisition, and (ii) an increase in consulting costs incurred by the
UPC/Unity Division's central operations in connection with the UPC/Unity
Division's mobile and other strategic initiatives; and
• An increase of $4.1 million in delivery and postage costs, including
higher costs associated with (i) the delivery of customer premises
equipment to retail locations in Germany and (ii) postage for customer
communications in Switzerland.
Telenet (Belgium). Telenet's SG&A expenses (exclusive of stock-based
compensation expense) decreased $3.8 million or 1.5% during 2012, as compared to
2011. Excluding the effects of FX, Telenet's SG&A expenses increased $15.4
million or 6.3%. This increase includes the following factors:
• An increase in sales and marketing costs of $18.0 million or 22.5%, due
primarily to (i) increased third-party sales commissions and sales call
center costs mostly related to (a) increased sales of mobile services and
(b) the aforementioned campaign to retain customers following the move of
channels from the analog to the basic digital channel package and (ii)
higher marketing costs in connection with promotional and operational
initiatives;
• A decrease in outsourced labor and professional fees of $10.5 million or
31.9%, due primarily to a decrease in consulting costs associated with
strategic and regulatory initiatives;
• An increase of $3.5 million in the costs associated with the delivery of
mobile handsets to retail locations; and
• An increase in personnel costs of $2.1 million or 2.1%, due primarily to
the net effect of (i) annual wage increases, (ii) lower costs of $1.6
million due to the reassessment of certain post-employment benefit
obligations during the third quarter of 2012 and (iii) lower bonus costs.
VTR Group (Chile). The VTR Group's SG&A expenses (exclusive of stock-based
compensation expense) increased $17.4 million or 10.4%, during 2012, as compared
to 2011. Excluding the effects of FX, the VTR Group's SG&A expenses increased
$18.4 million or 11.1%. This increase includes the following factors:
• An increase in sales and marketing costs of $9.0 million or 17.4%, due
primarily to the net effect of (i) higher third-party sales commissions,
(ii) increased advertising campaigns at VTR Wireless, primarily associated
with the launch of mobile services in May 2012, and (iii) decreased
advertising campaigns at VTR. The higher sales commissions are primarily
attributable to (a) an increase at VTR, due primarily to a higher
proportion of sales generated by third-party dealers, and (b) an increase
at VTR Wireless, due primarily to higher sales volumes resulting from the
May 2012 launch of mobile services;
• An increase in facilities expenses of $6.4 million, due primarily to
higher rental and related costs associated with (i) an increase in retail
space used by VTR Wireless and (ii) an increase in office and other space
used by VTR; and
II-29--------------------------------------------------------------------------------• An increase in personnel costs of $0.7 million or 1.2%, resulting from the
net effect of (i) higher staffing levels and other personnel costs at VTR
Wireless and (ii) lower bonus costs and, to a lesser degree, lower
staffing levels at VTR.
SG&A expenses - 2011 compared to 2010
Organic
Increase increase
Year ended December 31, (decrease) (decrease)
2011 2010 $ % %
in millions
UPC/Unity Division:
Germany $ 265.8 $ 213.9 $ 51.9 24.3 7.0
The Netherlands 142.7 131.8 10.9 8.3 3.2
Switzerland 188.7 156.7 32.0 20.4 2.6
Other Western Europe 125.9 121.2 4.7 3.9 (1.0 )
Total Western Europe 723.1 623.6 99.5 16.0 3.5
Central and Eastern Europe 139.3 123.3 16.0 13.0 3.8
Central and other 159.5 129.4 30.1 23.3 17.2
Total UPC/Unity Division 1,021.9 876.3 145.6 16.6 5.6
Telenet (Belgium) 246.6 240.1 6.5 2.7 (2.3 )
VTR Group (Chile) 166.6 136.9 29.7 21.7 15.7
Corporate and other 231.2 229.0 2.2 1.0 (2.5 )
Intersegment eliminations (1.9 ) (0.9 ) (1.0 ) N.M. N.M.
Total SG&A expenses excluding
stock-based compensation expense 1,664.4 1,481.4 183.0 12.4 3.9
Stock-based compensation expense 116.0 101.6 14.4 14.2
Total $ 1,780.4 $ 1,583.0 $ 197.4 12.5
____________
N.M. - Not Meaningful.
UPC/Unity Division. The UPC/Unity Division's SG&A expenses (exclusive of
stock-based compensation expense) increased $145.6 million or 16.6% during 2011,
as compared to 2010. This increase includes $30.5 million attributable to the
impact of acquisitions. Excluding the effects of acquisitions and FX, the
UPC/Unity Division's SG&A expenses increased $48.9 million or 5.6%. This
increase includes the following factors:
• An increase in personnel costs of $22.1 million or 6.6%, due primarily to
(i) annual wage increases, (ii) higher marketing staffing levels, mostly
in Switzerland and the Netherlands, (iii) higher bonus costs and (iv)
higher severance costs;
• An increase in outsourced labor and professional fees of $14.0 million or
29.4%, due primarily to higher consulting costs for (i) procurement,
billing system and other initiatives within UPC/Unity Division's central
operations and (ii) strategic marketing projects in Germany;
• An increase in sales and marketing costs of $7.3 million or 2.3% , due
primarily to the net effect of (i) increased marketing activities, primarily in the Netherlands, Ireland and UPC DTH, (ii) higher third-party
sales commissions in Germany and (iii) lower third-party sales commissions
in the Czech Republic. The increase in sales commissions in Germany was
partially offset by the release of an accrual in connection with the
second quarter 2011 settlement of an operational contingency; and
• An increase in information technology related expense of $4.5 million or
14.0%, due primarily to additional support and maintenance requirements.
Telenet (Belgium). Telenet's SG&A expenses (exclusive of stock-based
compensation expense) increased $6.5 million or 2.7% during 2011, as compared to
2010. This increase includes $0.9 million attributable to the impact of an
acquisition. Excluding the effects of an acquisition and FX, Telenet's SG&A
expenses decreased $5.6 million or 2.3%. This decrease includes the following
factors:
II-30
--------------------------------------------------------------------------------
• A decrease in sales and marketing costs of $12.4 million or 13.9%, due
primarily to (i) lower marketing expenses, as increased promotional costs associated with Telenet's launch of Belgian football (soccer) coverage and
advertising expenses during 2011 were more than offset by higher marketing
campaign costs in 2010, (ii) lower sponsorship costs, (iii) lower costs
related to sales call centers and (iv) decreased third-party sales
commissions, primarily related to lower sales;
• An increase in outsourced labor and professional fees of $3.8 million or
13.9%, primarily due to an increase in consulting and legal costs
associated with regulatory, strategic and financial initiatives; and
• An increase in personnel costs of $2.1 million or 2.3%, primarily due to
annual wage increases and increased staffing levels, partially offset by
lower severance costs.
VTR Group (Chile). The VTR Group's SG&A expenses (exclusive of stock-based
compensation expense) increased $29.7 million or 21.7% during 2011, as compared
to 2010. Excluding the effects of FX, the VTR Group's SG&A expenses increased
$21.4 million or 15.7%. This increase includes the following factors:
• An increase in sales and marketing costs of $10.6 million or 27.7%, due
primarily to (i) increased costs associated with rebranding and other
advertising campaigns that are largely attributable to VTR Wireless and
(ii) higher third-party sales commissions;
• An increase in facilities expenses of $4.3 million, due largely to office
rental and other facilities costs associated with VTR Wireless;
• An increase in personnel costs of $2.1 million or 3.8%, primarily due to
higher staffing levels related to VTR Wireless; and
• An increase in outsourced labor and professional fees of $2.1 million, due
primarily to increased consulting costs related to (i) VTR Wireless and
(ii) a subscriber retention project.
II-31--------------------------------------------------------------------------------Operating Cash Flow of our Reportable Segments
Operating cash flow is the primary measure used by our chief operating decision
maker to evaluate segment operating performance. As we use the term, operating
cash flow is defined as revenue less operating and SG&A expenses (excluding
stock-based compensation, depreciation and amortization, provisions for
litigation, and impairment, restructuring and other operating items). For
additional information concerning this performance measure and for a
reconciliation of total segment operating cash flow to our loss from continuing
operations before income taxes, see note 17 to our consolidated financial
statements.
Operating Cash Flow - 2012 compared to 2011
Organic
increase
Year ended December 31, Increase (decrease) (decrease)
2012 2011 $ % %
in millions
UPC/Unity Division:
Germany $ 1,364.3 $ 863.7 $ 500.6 58.0 11.4
The Netherlands 737.1 755.3 (18.2 ) (2.4 ) 5.6
Switzerland 717.9 721.9 (4.0 ) (0.6 ) 5.1
Other Western Europe 407.7 418.7 (11.0 ) (2.6 ) 5.4
Total Western Europe 3,227.0 2,759.6 467.4 16.9 7.3
Central and Eastern Europe 555.1 548.0 7.1 1.3 0.6
Central and other (163.1 ) (140.5 ) (22.6 ) (16.1 ) (25.7 )
Total UPC/Unity Division 3,619.0 3,167.1 451.9 14.3 5.3
Telenet (Belgium) 940.7 967.0 (26.3 ) (2.7 ) 5.4
VTR Group (Chile) 314.2 341.2 (27.0 ) (7.9 ) (7.3 )
Corporate and other (4.3 ) 7.0 (11.3 ) N.M. N.M.
Total $ 4,869.6 $ 4,482.3 $ 387.3 8.6 3.9
Operating Cash Flow - 2011 compared to 2010
Organic
increase
Year ended December 31, Increase (decrease) (decrease)
2011 2010 $ % %
in millions
UPC/Unity Division:
Germany $ 863.7 $ 659.8 $ 203.9 30.9 13.5
The Netherlands 755.3 673.9 81.4 12.1 6.8
Switzerland 721.9 588.2 133.7 22.7 4.4
Other Western Europe 418.7 383.2 35.5 9.3 4.2
Total Western Europe 2,759.6 2,305.1 454.5 19.7 7.7
Central and Eastern Europe 548.0 496.8 51.2 10.3 (0.4 )
Central and other (140.5 ) (120.3 ) (20.2 ) (16.8 ) (10.2 )
Total UPC/Unity Division 3,167.1 2,681.6 485.5 18.1 6.1
Telenet (Belgium) 967.0 872.8 94.2 10.8 5.5
VTR Group (Chile) 341.2 327.7 13.5 4.1 (1.2 )
Corporate and other 7.0 (0.4 ) 7.4 N.M. N.M
Total $ 4,482.3 $ 3,881.7 $ 600.6 15.5 5.4
_______________
N.M. - Not Meaningful.
II-32--------------------------------------------------------------------------------Operating Cash Flow Margin - 2012, 2011 and 2010
The following table sets forth the operating cash flow margins (operating cash
flow divided by revenue) of each of our reportable segments:
Year ended December 31,
2012 2011 2010
%
UPC/Unity Division:
Germany 59.0 59.6 57.5
The Netherlands 60.0 59.3 58.3
Switzerland 57.0 56.3 55.1
Other Western Europe 48.1 46.9 46.2
Total Western Europe 57.1 56.3 54.9
Central and Eastern Europe 49.8 48.8 49.6Total UPC/Unity Division, including central and other 52.6 51.5
50.5
Telenet (Belgium) 49.0 50.4 50.5
VTR Group (Chile) 33.4 38.4 41.1
The operating cash flow margin of the UPC/Unity Division improved during 2012,
as compared to 2011, as most of the cash flow margins of the UPC/Unity
Division's operating segments improved or remained relatively unchanged. The
operating cash flow margin of the UPC/Unity Division was negatively impacted by
an increase in the operating cash flow deficit of the UPC/Unity Division's
central and other category, which increase is primarily attributable to higher
personnel and consulting costs, due in part to increased levels of strategic
initiatives. The decrease in Germany's operating cash flow margin is
attributable to the net effect of (i) the positive impact of the inclusion of
KBW during 2012, (ii) higher customer care, sales and marketing and programming
costs and (iii) integration costs associated with the KBW Acquisition. The
increases in the operating cash flow margins for the remaining segments of the
UPC/Unity Division generally represent the net impact of improved operational
leverage, resulting from revenue growth that more than offset the accompanying
increases in operating and SG&A expenses, and competitive and economic factors.
In Belgium, the decline in Telenet's operating cash flow margin is primarily due
to the net effect of (i) the expansion of lower margin mobile services, (ii) the
net positive impact of certain nonrecurring items, as described under the
Telenet sections of our Discussion and Analysis of our Reportable Segments
above, and (iii) higher programming costs. The increase in programming costs is
largely attributable to Telenet's third quarter 2011 acquisition of the rights
to broadcast certain Belgian football (soccer) matches, as further described
under Operating Expenses of our Reportable Segments above. In the case of Chile,
the decrease in the operating cash flow margin is attributable to an increase in
the incremental operating cash flow deficit of VTR Wireless during 2012 that was
only partially offset by an improvement in the operating cash flow margin of
VTR. During 2012 and 2011, the incremental operating cash flow deficit of VTR
Wireless was $83.0 million and $31.0 million, respectively.
The operating cash flow margin of the UPC/Unity Division increased during 2011,
as compared to 2010, as increases in the margins of its reportable segments in
western Europe were only partially offset by a decrease in the margin of its
reportable segment in Central and Eastern Europe. The improvements in the
operating cash flow margins of the UPC/Unity Division's western European
segments are primarily attributable to improved operational leverage. In the
UPC/Unity Division's Central and Eastern Europe segment, competitive, economic
and other factors contributed to the decline in operating cash flow margin. In
Belgium, Telenet's operating cash flow margin remained relatively unchanged
during 2011, as compared to 2010, as an increase due to improved operational
leverage was offset by decreases attributable to increased programming costs and
other less significant factors. The increase in programming costs is largely
attributable to Telenet's third quarter 2011 acquisition of the rights to
broadcast certain Belgian football (soccer) matches. In the case of Chile, the
incremental operating cash flow deficit of VTR Wireless during 2011 adversely
impacted the VTR Group's 2011 operating cash flow margin and more than offset
the margin improvement during 2011 that resulted in part from the adverse
impacts of the February 2010 earthquake on the VTR Group's margin during 2010.
For additional discussion of the factors contributing to the changes in the
operating cash flow margins of our reportable segments, see the above analyses
of the revenue, operating expenses and SG&A expenses of our reportable segments.
We expect that the 2013 operating cash flow margin of (i) the UPC/Unity Division
will remain relatively unchanged, (ii) Telenet will decline slightly and (iii)
the VTR Group will increase somewhat, each as compared to 2012. With regard to
Telenet, the expected slight margin decline is due largely to the expected
impact of the increasing mobile business. As discussed under Overview and
Discussion and Analysis of our Reportable Segments - General above, most of our
broadband communications
II-33
--------------------------------------------------------------------------------operations are experiencing significant competition. Sustained or increased
competition, particularly in combination with unfavorable regulatory, economic
or political developments, could adversely impact the operating cash flow
margins of our reportable segments.
Discussion and Analysis of our Consolidated Operating Results
General
For more detailed explanations of the changes in our revenue, operating expenses
and SG&A expenses, see the Discussion and Analysis of our Reportable Segments
above. For information concerning our foreign currency exchange risks, see
Quantitative and Qualitative Disclosures about Market Risk - Foreign Currency
Risk below.
2012 compared to 2011
Revenue
Our revenue by major category is set forth below:
Organic
Year ended December 31, Increase increase
2012 2011 (a) $ % %
in millions
Subscription revenue (b):
Video $ 4,647.6 $ 4,407.0 $ 240.6 5.5 2.1
Broadband internet 2,438.3 2,243.2 195.1 8.7 8.7
Telephony 1,523.1 1,303.6 219.5 16.8 8.3
Total subscription revenue 8,609.0 7,953.8 655.2 8.2 5.0
Other revenue (c) 1,701.8 1,557.0 144.8 9.3 9.2
Total $ 10,310.8 $ 9,510.8 $ 800.0 8.4 5.7
_______________
(a) Effective January 1, 2012, we began classifying the monthly revenue derived
from certain SOHO subscribers as subscription revenue. SOHO subscribers pay
a premium price to receive enhanced service levels along with video
programming, internet or telephony services that are the same or similar to
the mass marketed products offered to our residential subscribers. Amounts
have been conformed to the current period presentation by reclassifying the
corresponding SOHO revenue from other revenue to subscription revenue.
(b) Subscription revenue includes amounts received from subscribers for ongoing
services, excluding installation fees, late fees and mobile services
revenue. Subscription revenue from subscribers who purchase bundled services
at a discounted rate is generally allocated proportionally to each service
based on the standalone price for each individual service.
(c) Other revenue includes non-subscription revenue (including B2B,
interconnect, carriage fee, mobile services and installation revenue) and
programming revenue.
II-34--------------------------------------------------------------------------------
Total revenue. Our consolidated revenue increased $800.0 million during 2012, as
compared to 2011. This increase includes $1,013.4 million attributable to the
impact of acquisitions. Excluding the effects of acquisitions and FX, total
consolidated revenue increased $541.7 million or 5.7%.
Subscription revenue. The details of the increase in our consolidated
subscription revenue for 2012, as compared to 2011, are as follows (in
millions):
Increase due to change in:
Average number of RGUs $ 375.3
ARPU 23.8
Organic increase 399.1
Impact of acquisitions 884.0
Impact of FX (627.9 )Total increase in subscription revenue $ 655.2
Excluding the effects of acquisitions and FX, our consolidated subscription
revenue increased $399.1 million or 5.0% during 2012, as compared to 2011. This
increase is attributable to (i) an increase in subscription revenue from
broadband internet services of $196.2 million or 8.7%, as the impact of an
increase in the average number of broadband internet RGUs was only partially
offset by lower ARPU from broadband internet services, (ii) an increase in
subscription revenue from telephony services of $108.4 million or 8.3%, as the
impact of an increase in the average number of telephony RGUs was only partially
offset by lower ARPU from telephony services, and (iii) an increase in
subscription revenue from video services of $94.5 million or 2.1%, as the impact
of higher ARPU from video services was only partially offset by a decline in the
average number of video RGUs.
Other revenue. Excluding the effects of acquisitions and FX, our consolidated
other revenue increased $142.6 million or 9.2% during 2012, as compared to 2011.
This increase is primarily attributable to (i) higher revenue from mobile
services and mobile handset sales in Belgium and Chile and mobile services in
Germany, (ii) an increase in interconnect revenue, (iii) an increase in
installation revenue and (iv) an increase in programming revenue.
For additional information concerning the changes in our subscription and other
revenue, see Discussion and Analysis of our Reportable Segments - Revenue - 2012
compared to 2011 above. For information regarding the competitive environment in
certain of our markets, see Overview above.
Operating expenses
Our operating expenses increased $238.1 million during 2012, as compared to
2011. This increase includes $293.3 million attributable to the impact of
acquisitions. Our operating expenses include stock-based compensation expense,
which decreased $6.7 million during 2012. For additional information, see the
discussion following SG&A expenses below. Excluding the effects of acquisitions,
FX and stock-based compensation expense, our operating expenses increased $208.2
million or 6.2% during 2012, as compared to 2011. This increase primarily is
attributable to increases in (i) programming and other direct costs, (ii) mobile
costs, primarily in Belgium and Chile, (iii) interconnect and access costs and
(iv) outsourced labor and professional fees. For additional information
regarding the changes in our operating expenses, see Discussion and Analysis of
our Reportable Segments - Operating Expenses - 2012 compared to 2011 above.
SG&A expenses
Our SG&A expenses increased $155.7 million during 2012, as compared to 2011.
This increase includes $132.9 million attributable to the impact of
acquisitions. Our SG&A expenses include stock-based compensation expense, which
decreased $12.2 million during 2012. For additional information, see the
discussion in the following paragraph. Excluding the effects of acquisitions, FX
and stock-based compensation expense, our SG&A expenses increased $157.6 million
or 9.5% during 2012, as compared to 2011. This increase primarily reflects net
increases in (i) sales and marketing costs, (ii) personnel costs, (iii)
facilities expenses in the UPC/Unity Division and the VTR Group and (iv)
outsourced labor and professional fees. For additional information regarding the
changes in our SG&A expenses, see Discussion and Analysis of our Reportable
Segments - SG&A Expenses - 2012 compared to 2011 above.
II-35
--------------------------------------------------------------------------------Stock-based compensation expense (included in operating and SG&A expenses)
We record stock-based compensation that is associated with LGI shares and the
shares of certain of our subsidiaries. A summary of the aggregate stock-based
compensation expense that is included in our operating and SG&A expenses is set
forth below:
Year ended December 31,
2012 2011
in millions
LGI common stock:
LGI performance-based incentive awards (a) $ 33.0 $ 46.8
Other LGI stock-based incentive awards 46.0 43.4
Total LGI common stock 79.0 90.2
Telenet stock-based incentive awards (b) 31.2 40.0
Austar Performance Plan - 3.6
Other (c) 2.2 1.1
Total $ 112.4 $ 134.9
Included in:
Continuing operations:
Operating expense $ 8.6 $ 15.3
SG&A expense 103.8 116.0
Total - continuing operations 112.4 131.3
Discontinued operation - 3.6
Total $ 112.4 $ 134.9
_______________
(a) Includes stock-based compensation expense related to the LGI PSUs and,
during 2011, the LGI Performance Plans.
(b) During the second quarters of 2012 and 2011, Telenet modified the terms of
certain of its stock option plans to provide for anti-dilution adjustments
in connection with certain capital distributions, as further described in
note 11 to our consolidated financial statements. These anti-dilution
adjustments provided for increases in the number of options outstanding and
proportionate reductions to the option exercise prices such that the fair
value of the options outstanding before and after the capital distribution
remained the same for all option holders. In connection with these
anti-dilution adjustments, Telenet recognized stock-based compensation
expense of $12.6 million and $15.8 million, respectively, and continues to
recognize additional stock-based compensation expense as the underlying
options vest.
(c) The 2012 amount includes stock-based compensation expense related to
performance-based awards granted pursuant to a liability-based plan of the
VTR Group. These awards were granted during the first quarter of 2012 and,
based on the level of the specified performance criteria achieved during
2012, these awards will vest on December 31, 2013.
For additional information concerning our stock-based compensation, see note 12
to our consolidated financial statements.
Depreciation and amortization expense
Our depreciation and amortization expense increased $234.1 million during 2012
as compared to 2011. Excluding the effects of FX, depreciation and amortization
expense increased $432.5 million or 17.6%. This increase is due primarily to the
net effect of (i) an increase associated with acquisitions, primarily in
Germany, (ii) an increase associated with property and equipment additions
related to the installation of customer premises equipment, the expansion and
upgrade of our networks and other capital initiatives and (iii) a decrease
associated with certain assets becoming fully depreciated, largely in Belgium,
Switzerland, Chile and the Netherlands.
II-36
--------------------------------------------------------------------------------Impairment, restructuring and other operating items, net
We recognized impairment, restructuring and other operating items, net, of $83.0
million during 2012, as compared to $75.6 million during 2011. The 2012 amount
includes (i) aggregate restructuring charges of $52.0 million associated with
employee severance and termination costs related to certain reorganization
activities, primarily in Germany, (ii) $22.7 million of direct acquisition
costs, largely related to the Puerto Rico Transaction, and (iii) a loss of $8.6
million related to the settlement of a pre-existing relationship in connection
with the MGM Acquisition. The 2011 amount includes (i) $32.1 million of direct
acquisition costs, including $22.3 million and $6.3 million attributable to the
KBW Acquisition and the Aster Acquisition, respectively, (ii) restructuring
charges of $18.5 million, primarily related to reorganization and integration
activities in Europe and Chile, and (iii) an impairment charge of $15.9 million
to reduce the carrying amount of the goodwill associated with Chellomedia's
programming operations in central and eastern Europe.
For additional information regarding our restructuring charges, see note 14 to
our consolidated financial statements.
If, among other factors, (i) our equity values were to decline significantly or
(ii) the adverse impacts of economic, competitive, regulatory or other factors
were to cause our results of operations or cash flows to be worse than
anticipated, we could conclude in future periods that impairment charges are
required in order to reduce the carrying values of our goodwill, and to a lesser
extent, other long-lived assets. Any such impairment charges could be
significant. For additional information, see Critical Accounting Policies,
Judgments and Estimates - Impairment of Property and Equipment and Intangible
Assets, below.
Telenet's intangible assets that are subject to amortization include spectrum
rights with a carrying value of $80.1 million at December 31, 2012. Telenet is
continuing its efforts to use this asset as initially intended by management.
Depending on the outcome of these efforts and Telenet's evaluation of
alternative means to use or monetize this asset, a triggering event might occur
that could lead to the impairment of all or part of the carrying value of this
asset during 2013.
Interest expense
Our interest expense increased $222.2 million during 2012, as compared to 2011.
Excluding the effects of FX, interest expense increased $350.1 million or 24.1%.
This increase is primarily attributable to higher average outstanding debt
balances. In addition, interest expense was impacted by a slightly lower
weighted average interest rate. The slight decrease in our weighted average
interest rate is primarily related to the net effect of (i) decreases in certain
of the base rates for our variable rate indebtedness and (ii) the completion of
certain financing transactions that resulted in extended maturities, certain of
which resulted in an increase to our weighted average interest rates. For
additional information regarding our outstanding indebtedness, see note 9 to our
consolidated financial statements.
It is possible that (i) the interest rates on any new borrowings could be higher
than the current interest rates on our existing indebtedness and (ii) the
interest rates incurred on our variable-rate indebtedness could increase in
future periods. As further discussed under Qualitative and Quantitative
Disclosures about Market Risk below, we use derivative instruments to manage our
interest rate risks.
Interest and dividend income
Our interest and dividend income decreased $30.9 million during 2012, as
compared to 2011. This decrease is primarily attributable to the net effect of
(i) a decrease in interest income due to (a) a lower weighted average interest
rate earned on our cash and cash equivalent and restricted cash balances and (b)
lower average cash and cash equivalent and restricted cash balances and (ii) an
increase in dividend income attributable to our investment in Sumitomo common
stock.
The terms of the Sumitomo Collar effectively fix the dividends that we will
receive on the Sumitomo common stock during the term of the Sumitomo Collar. We
report the full amount of dividends received from Sumitomo as dividend income
and the dividend adjustment that is payable to, or receivable from, the
counterparty to the Sumitomo Collar is reported as a component of realized and
unrealized losses on derivative instruments, net, in our consolidated statements
of operations.
II-37--------------------------------------------------------------------------------Realized and unrealized losses on derivative instruments, net
Our realized and unrealized gains or losses on derivative instruments include
(i) unrealized changes in the fair values of our derivative instruments that are
non-cash in nature until such time as the derivative contracts are fully or
partially settled and (ii) realized gains or losses upon the full or partial
settlement of the derivative contracts. The details of our realized and
unrealized losses on derivative instruments, net, are as follows:
Year ended December 31,
2012 2011
in millions
Cross-currency and interest rate derivative contracts (a) $ (958.3 ) $ (110.6 )
Equity-related derivative contracts (b)
(109.0 ) 87.2
Foreign currency forward contracts (6.0 ) (36.1 )
Other 3.4 (0.9 )
Total $ (1,069.9 ) $ (60.4 )
_______________
(a) The loss during 2012 is primarily attributable to the net effect of (i)
losses associated with decreases in market interest rates in the euro,
Hungarian forint, Polish zloty, Swiss franc, and Czech koruna markets, (ii)
losses associated with increases in the values of the Polish zloty,
Hungarian forint, Chilean peso, Swiss franc, and Czech koruna relative to
the euro, (iii) gains associated with decreases in market interest rates in
the U.S. dollar market, (iv) losses associated with increases in the values
of the Chilean peso and Swiss franc relative to the U.S. dollar and (v)
losses associated with a decrease in the value of the U.S. dollar relative
to the euro. In addition, the loss during 2012 includes a net loss of $57.3
million resulting from changes in our credit risk valuation adjustments. The
loss during 2011 is primarily attributable to the net effect of (i) losses
associated with decreases in market interest rates in the euro, Swiss franc,
Chilean peso, Polish zloty and Czech koruna markets, (ii) gains associated
with decreases in the values of the Polish zloty, Hungarian forint and
Chilean peso relative to the euro, (iii) gains associated with an increase
in the value of the U.S. dollar relative to the euro and (iv) gains
associated with a decrease in the value of the Chilean peso relative to the
U.S. dollar. In addition, the loss during 2011 includes a net gain of $42.9
million resulting from changes in our credit risk valuation adjustments.
(b) Includes gains (losses) related to the Sumitomo Collar with respect to the
Sumitomo shares held by our company. The 2012 losses are primarily attributable to (i) a decrease in the value of the Japanese yen relative to
the U.S. dollar and (ii) an increase in the market price of Sumitomo common
stock. The 2011 gains are primarily attributable to (i) a decrease in the
market price of Sumitomo common stock and (ii) an increase in the value of
the Japanese yen relative to the U.S. dollar.
For additional information concerning our derivative instruments, see note 6 and
7 to our consolidated financial statements and Quantitative and Qualitative
Disclosures about Market Risk below.
II-38
--------------------------------------------------------------------------------Foreign currency transaction gains (losses), net
Our foreign currency transaction gains or losses primarily result from the
remeasurement of monetary assets and liabilities that are denominated in
currencies other than the underlying functional currency of the applicable
entity. Unrealized foreign currency transaction gains or losses are computed
based on period-end exchange rates and are non-cash in nature until such time as
the amounts are settled. The details of our foreign currency transaction gains
(losses), net, are as follows:
Year ended December 31,
2012 2011
in millions
Intercompany payables and receivables denominated in a
currency other than the entity's functional currency (a) $ 230.6
$ (358.7 )
Yen denominated debt issued by a U.S. subsidiary 135.7 (63.0 )
U.S. dollar denominated debt issued by European subsidiaries 74.2 (102.0 )
Cash and restricted cash denominated in a currency other than
the entity's functional currency
0.2 (40.5 )
Other (4.4 ) (8.4 )
Total $ 436.3 $ (572.6 )
_______________
(a) Amounts primarily relate to (i) loans between our non-operating and
operating subsidiaries in Europe, which generally are denominated in the
currency of the applicable operating subsidiary, (ii) U.S. dollar
denominated loans between certain of our non-operating subsidiaries in the U.S. and Europe and (iii) a U.S. dollar denominated loan between a Chilean
subsidiary and a non-operating subsidiary in Europe. Accordingly, these
amounts are a function of movements of (i) the euro against (a) the U.S.
dollar and (b) other local currencies in Europe and (ii) the U.S. dollar
against the Chilean peso.
For information regarding how we manage our exposure to foreign currency risk,
see Quantitative and Qualitative Disclosures about Market Risk - Foreign
Currency Risk below.
Realized and unrealized losses due to changes in fair values of certain
investments and debt, net
Our realized and unrealized losses due to changes in fair values of certain
investments and debt include unrealized losses associated with changes in fair
values that are non-cash in nature until such time as these losses are realized
through cash transactions. The details of our realized and unrealized losses due
to changes in fair values of certain investments and debt, net, are as follows:
Year ended December 31,
2012 2011
in millions
Investments (a):
Sumitomo $ (38.2 ) $ (28.2 )
Other, net (b) 8.3 (19.9 )
Debt - UGC Convertible Notes (c) - (107.0 )
Total $ (29.9 ) $ (155.1 )
_______________
(a) For additional information regarding our investments and fair value
measurements, see notes 5 and 7 to our consolidated financial statements.
(b) The 2012 amount includes an increase in the fair value of Chellomedia's
investment in Cyfra+ that was largely offset by a decrease in the fair
values of certain other investments. The 2011 amount includes decreases in
the fair values of (i) our investment in a broadband communications operator
in Switzerland and (ii) Cyfra+.
(c) Represents the change in the fair value of the UGC Convertible Notes prior
to their conversion into LGI common stock in April 2011. The change in fair
value includes amounts attributable to the remeasurement of the UGC
Convertible Notes into U.S. dollars.
II-39--------------------------------------------------------------------------------Losses on debt modification, extinguishment and conversion, net
We recognized losses on debt modification, extinguishment and conversion, net,
of $215.8 million and $218.4 million during 2012 and 2011, respectively. The
loss during 2012 includes (i) a loss of $175.8 million during the fourth quarter
associated with the redemption and repurchase of all of the 2009 UM Dollar
Senior Secured Notes and a portion of the 2009 UM Euro Senior Secured Notes,
including a loss of (a) $125.9 million representing the difference between the
carrying value and redemption price of the debt redeemed and (b) $49.4 million
associated with the write-off of deferred financing costs and an unamortized
discount, (ii) a loss of $12.4 million associated with the write-off of deferred
financing costs and an unamortized discount during the fourth quarter in
connection with the prepayment of Facility AB under the UPC Broadband Holding
Bank Facility, (iii) a loss of $10.2 million during the third quarter
representing the difference between the carrying value and redemption price of
the UM Senior Secured Floating Rate Exchange Notes and (iv) a loss of $7.0
million associated with the Unitymedia KabelBW Exchange and the Special Optional
Redemptions, including $5.6 million of third-party costs and a loss of $1.4
million representing the difference between the carrying value and redemption
price of the debt redeemed pursuant to the Special Optional Redemptions.
The loss during 2011 includes (i) a debt conversion loss of $187.2 million
recognized primarily during the second quarter of 2011 related to the exchange
of substantially all of the LGI Convertible Notes for LGI common stock and cash,
(ii) the write-off of $15.7 million of deferred financing costs and an
unamortized discount during the first quarter in connection with the prepayment
of amounts outstanding under Facilities M, P, T and U of the UPC Broadband
Holding Bank Facility and (iii) the write-off of $9.5 million of deferred
financing costs and the incurrence of $5.3 million of third-party costs in
connection with the prepayment of amounts outstanding under Telenet Facilities
K, L1, G and J of the Telenet Credit Facility.
For additional information concerning our losses on debt modification,
extinguishment and conversion, net, see note 9 to our consolidated financial
statements.
Income tax expense
We recognized income tax expense of $89.0 million and $231.7 million during 2012
and 2011, respectively.
The income tax expense during 2012 differs from the expected income tax benefit
of $169.2 million (based on the U.S. federal 35% income tax rate) due primarily
to the negative impacts of (i) a net increase in valuation allowances, (ii)
certain permanent differences between the financial and tax accounting treatment
of interest and other items, (iii) certain permanent differences between the
financial and tax accounting treatment of items associated with investments in
subsidiaries, (iv) statutory tax rates in certain jurisdictions in which we
operate that are lower than the U.S. federal income tax rate, (v) a change in
the effective tax rate due to the change in filing status of our Puerto Rican
subsidiaries and (vi) certain permanent differences in the realization of
foreign currency gains and losses between financial and tax accounting. The
negative impacts of these items were partially offset by the positive impact of
an increase in certain net deferred tax assets due to an enacted increase in
Chilean tax law.
The income tax expense during 2011 differs from the expected income tax benefit
of $201.5 million (based on the U.S. federal 35% income tax rate) due primarily
to the negative impacts of (i) a net increase in valuation allowances, including
$222.7 million of valuation allowances that were recorded in France during the
fourth quarter of 2011 due to a modification of our intercompany financing
structure in that jurisdiction that resulted largely from a change in local tax
law, (ii) certain permanent differences between the financial and tax accounting
treatment of interest and other items, (iii) statutory tax rates in certain
jurisdictions in which we operate that are lower than the U.S. federal income
tax rate and (iv) certain permanent differences in the realization of foreign
currency gains and losses between financial and tax accounting.
For additional information concerning our income taxes, see note 10 to our
consolidated financial statements.
Loss from continuing operations
During 2012 and 2011, we reported losses from continuing operations of $572.3
million and $807.5 million, respectively, including (i) operating income of
$1,983.1 million and $1,818.4 million, respectively, (ii) net non-operating
expenses of $2,466.4 million and $2,394.2 million, respectively, and (iii)
income tax expense of $89.0 million and $231.7 million, respectively.
Gains or losses associated with (i) changes in the fair values of derivative
instruments, (ii) movements in foreign currency exchange rates and (iii) the
disposition of assets and changes in ownership are subject to a high degree of
volatility, and as such, any gains from these sources do not represent a
reliable source of income. In the absence of significant gains in the future
from these sources or from other non-operating items, our ability to achieve
earnings from continuing operations is largely dependent on our ability to
increase our aggregate operating cash flow to a level that more than offsets the
aggregate amount of our (a) stock-
II-40
--------------------------------------------------------------------------------
based compensation expense, (b) depreciation and amortization, (c) impairment,
restructuring and other operating items, net, (d) interest expense, (e) other
net non-operating expenses and (f) income tax expenses.
Due largely to the fact that we seek to maintain our debt at levels that provide
for attractive equity returns, as discussed under Liquidity and Capital
Resources - Capitalization below, we expect that we will continue to report
significant levels of interest expense for the foreseeable future. For
information concerning our expectations with respect to trends that may affect
certain aspects of our operating results in future periods, see the discussion
under Overview above. For information concerning the reasons for changes in
specific line items in our consolidated statements of operations, see the
discussion under Discussion and Analysis of our Reportable Segments and
Discussion and Analysis of our Consolidated Operating Results above.
Discontinued operations
Our results from our discontinued operations include (i) earnings from Austar of
$35.5 million and $136.5 million during 2012 and 2011, respectively, and (ii) a
$924.1 million after-tax gain recognized upon the May 23, 2012 completion of the
Austar Transaction. The decline in Austar's earnings during 2012 is due largely
to (a) the $80.7 million after-tax impact of the gain on the sale of Austar's
spectrum licenses that was included in Austar's results of operations during the
first quarter of 2011 and (b) the sale of Austar during the second quarter of
2012. The above factors were partially offset by the impact of not recording
depreciation and amortization on Austar's long-lived assets during 2012 as a
result of our determination that Austar was held-for-sale effective December 31,
2011. For additional information, see note 4 to our consolidated financial
statements.
Net earnings attributable to noncontrolling interests
Net earnings or loss attributable to noncontrolling interests include the
noncontrolling interests' share of the results of our continuing and
discontinued operations. Net earnings attributable to noncontrolling interests
decreased $37.2 million during 2012, as compared to 2011, due primarily to the
net impact of (i) a decrease associated with a decline in the results of
operations of Austar, as discussed in the preceding paragraph, (ii) a decrease
associated with a decline in the results of operations of Telenet and (iii) an
increase associated with an improvement in the results of operations of the VTR
Group.
2011 compared to 2010
Revenue
Our revenue by major category is set forth below:
Organic
Year ended December 31, Increase increase
2011 (a) 2010 (a) $ % %
in millions
Subscription revenue (b):
Video $ 4,407.0 $ 3,916.0 $ 491.0 12.5 3.9
Broadband internet 2,243.2 1,942.9 300.3 15.5 7.3
Telephony 1,303.6 1,137.1 166.5 14.6 5.8
Total subscription revenue 7,953.8 6,996.0 957.8 13.7 5.2
Other revenue (c) 1,557.0 1,368.2 188.8 13.8 1.5
Total $ 9,510.8 $ 8,364.2 $ 1,146.6 13.7 4.6
_________________
(a) Effective January 1, 2012, we began classifying the monthly revenue derived
from certain SOHO subscribers as subscription revenue. SOHO subscribers pay
a premium price to receive enhanced service levels along with video
programming, internet or telephony services that are the same or similar to
the mass marketed products offered to our residential subscribers. Amounts
have been conformed to the 2012 presentation by reclassifying the
corresponding SOHO revenue from other revenue to subscription revenue.
(b) Subscription revenue includes amounts received from subscribers for ongoing
services, excluding installation fees, late fees and mobile services
revenue. Subscription revenue from subscribers who purchase bundled services
at a discounted rate is generally allocated proportionally to each service
based on the standalone price for each individual service.
II-41--------------------------------------------------------------------------------
(c) Other revenue includes non-subscription revenue (including B2B,
interconnect, installation, carriage fee and mobile services revenue) and
programming revenue.
Total revenue. Our consolidated revenue increased $1,146.6 million during 2011,
as compared to 2010. This increase includes $203.0 million attributable to the
impact of acquisitions. Excluding the effects of acquisitions and FX, total
consolidated revenue increased $382.2 million or 4.6%.
Subscription revenue. The details of the increase in our consolidated
subscription revenue for 2011, as compared to 2010, are as follows (in
millions):
Increase due to change in:
Average number of RGUs $ 277.2
ARPU 84.7
Organic increase 361.9
Impact of acquisitions 159.5
Impact of FX 436.4Total increase in subscription revenue $ 957.8
Excluding the effects of acquisitions and FX, our consolidated subscription
revenue increased $361.9 million or 5.2% during 2011, as compared to 2010. This
increase is attributable to (i) an increase in subscription revenue from video
services of $154.7 million or 3.9%, as the impact of higher ARPU from video
services was only partially offset by a decline in the average number of video
RGUs, (ii) an increase in subscription revenue from broadband internet services
of $141.5 million or 7.3%, as the impact of an increase in the average number of
broadband internet RGUs was only partially offset by lower ARPU from broadband
internet services and (iii) an increase in subscription revenue from telephony
services of $65.7 million or 5.8%, as the impact of an increase in the average
number of telephony RGUs was only partially offset by lower ARPU from telephony
services.
Other revenue. Excluding the effects of acquisitions and FX, our consolidated
other revenue increased $20.3 million or 1.5% during 2011, as compared to 2010.
This increase is primarily attributable to (i) an increase in Telenet's mobile
services revenue, (ii) an increase in B2B revenue, (iii) an increase in
interconnect revenue and (iv) an increase in programming revenue.
For additional information concerning the changes in our subscription and other
revenue, see Discussion and Analysis of our Reportable Segments - Revenue - 2011
compared to 2010 above.
Operating expenses
Our operating expenses increased $368.9 million during 2011, as compared to
2010. This increase includes $66.7 million attributable to the impact of
acquisitions. Our operating expenses include stock-based compensation expense,
which increased $5.9 million during 2011. For additional information, see the
discussion following SG&A expenses below. Excluding the effects of acquisitions,
FX and stock-based compensation expense, our operating expenses increased $113.6
million or 3.8% during 2011, as compared to 2010. This increase primarily is
attributable to a net increase in programming and other direct costs, which
includes a $7.5 million increase resulting from the impact of a favorable
settlement of a Chellomedia programming contract during the third quarter of
2010. In addition, the net impact of (i) a net decrease in interconnect charges,
(ii) a net increase in outsourced labor and professional fees, (iii) a net
increase in personnel costs and (iv) a net increase in network-related expenses
contributed to the overall increase in our operating expenses. For additional
information regarding the changes in our operating expenses, see Discussion and
Analysis of our Reportable Segments - Operating Expenses - 2011 compared to 2010
above.
SG&A expenses
Our SG&A expenses increased $197.4 million during 2011, as compared to 2010.
This increase includes $33.3 million attributable to the impact of acquisitions.
Our SG&A expenses include stock-based compensation expense, which increased
$14.4 million during 2011. For additional information, see the discussion in the
following paragraph. Excluding the effects of acquisitions, FX and stock-based
compensation expense, our SG&A expenses increased $57.4 million or 3.9% during
2011, as compared to 2010. This increase generally reflects (i) a net increase
in outsourced labor and professional fees and (ii) a net increase in personnel
costs. For additional information regarding the changes in our SG&A expenses,
see Discussion and Analysis of our Reportable Segments - SG&A Expenses - 2011
compared to 2010 above.
II-42--------------------------------------------------------------------------------Stock-based compensation expense (included in operating and SG&A expenses)
We record stock-based compensation that is associated with LGI shares and the
shares of certain of our subsidiaries. A summary of the aggregate stock-based
compensation expense that is included in our operating and SG&A expenses is set
forth below:
Year ended December 31,
2011 2010
in millions
LGI Series A, Series B and Series C common stock:
LGI performance-based incentive awards (a) $ 46.8 $ 51.3
Other LGI stock-based incentive plans 43.4 42.8
Total LGI common stock 90.2 94.1
Telenet stock-based incentive awards (b) 40.0 13.1
Austar Performance Plan 3.6 11.8
Other 1.1 3.8
Total $ 134.9 $ 122.8
Included in:
Continuing operations:
Operating expense $ 15.3 $ 9.4
SG&A expense 116.0 101.6
Total - continuing operations 131.3 111.0
Discontinued operation 3.6 11.8
Total $ 134.9 $ 122.8
________________
(a) Includes stock-based compensation expense related to the LGI Performance
Plans and the LGI PSUs.
(b) During the second quarter of 2011, Telenet modified the terms of certain of
its stock option plans to provide for anti-dilution adjustments in
connection with a capital distribution, as further described in note 11 to
our consolidated financial statements. These anti-dilution adjustments
provided for increases in the number of options outstanding and
proportionate reductions to the option exercise prices such that the fair
value of the options outstanding before and after the capital distribution
remained the same for all option holders. In connection with these
anti-dilution adjustments, Telenet recognized stock-based compensation
expense of $15.8 million during the second quarter of 2011, and continues to
recognize additional stock-based compensation as the underlying options
vest.
For additional information concerning our stock-based compensation, see note 12
to our consolidated financial statements.
Depreciation and amortization expense
Our depreciation and amortization expense increased $205.5 million during 2011,
as compared to 2010. Excluding the effects of FX, depreciation and amortization
expense increased $59.4 million or 2.6%. This increase is due primarily to the
net effect of (i) increases associated with property and equipment additions
related to the installation of customer premises equipment, the expansion and
upgrade of our networks and other capital initiatives, (ii) decreases associated
with certain assets becoming fully depreciated, primarily in Belgium, the
Netherlands, Switzerland, Chile and Austria, (iii) decreases associated with
changes in the useful lives of certain assets, primarily in Germany, the
Netherlands and Romania, and (iv) increases associated with acquisitions.
Impairment, restructuring and other operating items, net
We recognized impairment, restructuring and other operating items, net, of $75.6
million during 2011, as compared to $125.6 million during 2010. The 2011 amount
includes (i) $32.1 million of direct acquisition costs, including $22.3 million
and $6.3 million attributable to the KBW Acquisition and the Aster Acquisition,
respectively, (ii) restructuring charges of $18.5 million, primarily related to
reorganization and integration activities in Europe and Chile, and (iii) an
impairment charge of $15.9 million to reduce the carrying amount of the goodwill
associated with Chellomedia's programming operations in central and eastern
Europe. The 2010 amount includes (i) aggregate restructuring charges of $48.4
million associated with (a) the estimated additional
II-43
--------------------------------------------------------------------------------
amounts to be paid in connection with Chellomedia's contractual obligations with
respect to satellite capacity that is no longer used by Chellomedia, (b)
dish-turning and duplicate satellite costs incurred in connection with the
migration of UPC DTH's operations in the Czech Republic, Hungary and Slovakia to
a new satellite and (c) employee severance and termination costs related to
reorganization and integration activities, primarily in Europe, (ii) direct
acquisition costs of $45.3 million related to the Unitymedia Acquisition and
(iii) a goodwill impairment charge of $26.3 million related to Chellomedia's
programming operations in central and eastern Europe.
For additional information regarding our restructuring charges, see note 14 to
our consolidated financial statements.
Interest expense
Our interest expense increased $171.6 million during 2011, as compared to 2010.
Excluding the effects of FX, interest expense increased $102.6 million or 8.0%.
This increase is primarily attributable to (i) higher average outstanding debt
balances and (ii) higher weighted average interest rates. The increase in our
weighted average interest rate is primarily related to (i) the completion of
refinancing transactions that generally resulted in extended maturities and
higher interest rates and (ii) increases in the base borrowing rates for certain
of our variable-rate indebtedness. The increase is net of a decrease related to
interest expense incurred from January 28, 2010 through March 2, 2010 on Old
Unitymedia's then-existing indebtedness. For additional information regarding
our outstanding indebtedness, see note 9 to our consolidated financial
statements.
Interest and dividend income
Our interest and dividend income increased $37.0 million during 2011, as
compared to 2010. This increase primarily is attributable to (i) higher average
cash and cash equivalent and restricted cash balances, (ii) an increase in
dividend income attributable to our investment in Sumitomo common stock and
(iii) higher weighted average interest rates earned on our cash and cash
equivalent and restricted cash balances. The higher average cash and cash
equivalent and restricted cash balances are due in part to the KBW Escrow
Account that was funded in connection with the KBW Purchase Agreement. For
additional information, see note 3 to our consolidated financial statements.
Realized and unrealized losses on derivative instruments, net
Our realized and unrealized gains or losses on derivative instruments include
(i) unrealized changes in the fair values of our derivative instruments that are
non-cash in nature until such time as the derivative contracts are fully or
partially settled and (ii) realized gains or losses upon the full or partial
settlement of the derivative contracts. The details of our realized and
unrealized losses on derivative instruments, net, are as follows:
Year ended December 31,
2011 2010
in millions
Cross-currency and interest rate derivative contracts (a) $ (110.6 )
$ (1,120.2 )
Equity-related derivative contracts (b) 87.2 (0.1 )
Foreign currency forward contracts (36.1 ) (34.6 )
Other (0.9 ) 2.6
Total $ (60.4 ) $ (1,152.3 )
_______________
(a) The 2011 loss is primarily attributable to the net effect of (i) losses
associated with decreases in market interest rates in the euro, Swiss franc,
Chilean peso, Polish zloty and Czech koruna markets, (ii) gains associated
with decreases in the values of the Polish zloty, Hungarian forint and
Chilean peso relative to the euro, (iii) gains associated with an increase
in the value of the U.S. dollar relative to the euro and (iv) gains
associated with a decrease in the value of the Chilean peso relative to the
U.S. dollar. In addition, the 2011 loss includes a net gain of $42.9 million
resulting from changes in our credit risk valuation adjustments. The 2010
loss is primarily attributable to the net effect of (i) losses associated
with increases in the values of the Swiss franc, Chilean peso, Czech koruna
and Polish zloty relative to the euro, (ii) losses associated with decreases
in market interest rates in the euro, Romanian lei, Swiss franc, Hungarian
forint, Czech koruna and Polish zloty markets, (iii) losses associated with
increases in the values of the Swiss franc and Chilean peso relative to the
U.S. dollar and (iv) gains associated with an increase in the value of the
U.S. dollar relative to the euro. In addition, the 2010 loss includes a net
gain of $88.4 million resulting from changes in our credit risk valuation
adjustments.
II-44--------------------------------------------------------------------------------
(b) Includes gains (losses) related to the Sumitomo Collar with respect to the Sumitomo shares held by our company. These gains (losses) are primarily
attributable to (i) decreases (increases) in the market price of Sumitomo
common stock and (ii) increases in the value of the Japanese yen relative to
the U.S. dollar.
For additional information concerning our derivative instruments, see note 6 and
7 to our consolidated financial statements and Quantitative and Qualitative
Disclosures about Market Risk below.
Foreign currency transaction losses, net
Our foreign currency transaction gains or losses primarily result from the
remeasurement of monetary assets and liabilities that are denominated in
currencies other than the underlying functional currency of the applicable
entity. Unrealized foreign currency transaction gains or losses are computed
based on period-end exchange rates and are non-cash in nature until such time as
the amounts are settled. The details of our foreign currency transaction losses,
net, are as follows:
Year ended December 31,
2011 2010
in millions
Intercompany payables and receivables denominated in a
currency other than the entity's functional currency (a) $ (358.7 ) $ 140.8
U.S. dollar denominated debt issued by European subsidiaries (102.0 ) (279.0 )
Yen denominated debt issued by a U.S. subsidiary (63.0 ) (148.1 )
Cash and restricted cash denominated in a currency other than
the entity's functional currency
(40.5 ) 66.9
U.S. dollar denominated debt issued by a Chilean subsidiary - (18.1 )
Other (8.4 ) 0.4
Total $ (572.6 ) $ (237.1 )
______________
(a) Amounts primarily relate to (i) loans between our non-operating and
operating subsidiaries in Europe, which generally are denominated in the
currency of the applicable operating subsidiary, (ii) U.S. dollar
denominated loans between certain of our non-operating subsidiaries in the U.S. and Europe and (iii) a U.S. dollar denominated loan between a Chilean
subsidiary and a non-operating subsidiary in Europe. Accordingly, these
amounts are a function of movements of (i) the euro against (a) the U.S.
dollar and (b) other local currencies in Europe and (ii) the U.S. dollar
against the Chilean peso.
For information regarding how we manage our exposure to foreign currency risk,
see Quantitative and Qualitative Disclosures about Market Risk - Foreign
Currency Risk below.
Realized and unrealized gains (losses) due to changes in fair values of certain
investments and debt, net
Our realized and unrealized gains (losses) due to changes in fair values of
certain investments and debt include unrealized gains (losses) associated with
changes in fair values that are non-cash in nature until such time as these
gains (losses) are realized through cash transactions. The details of our
realized and unrealized gains (losses) due to changes in fair values of certain
investments and debt, net, are as follows:
Year ended December 31,
2011 2010
in millions
Investments (a):
Sumitomo $ (28.2 ) $ 183.9
Other, net (b) (19.9 ) (16.1 )
Debt - UGC Convertible Notes (c) (107.0 ) (40.0 )
Total $ (155.1 ) $ 127.8
II-45--------------------------------------------------------------------------------_______________
(a) For additional information concerning our investments and fair value
measurements, see notes 5 and 7 to our consolidated financial statements.
(b) The 2011 amount includes decreases in the fair value of (i) our investment
in a broadband communications operator in Switzerland and (ii) Cyfra+. The
2010 amount includes a decrease in the fair value of Cyfra+ that was only
partially offset by an increase in the fair values of certain other
investments.
(c) Represents the change in the fair value of the UGC Convertible Notes prior
to their conversion into LGI common stock in April 2011. The change in fair
value includes amounts attributable to the remeasurement of the UGC
Convertible Notes into U.S. dollars.
Losses on debt modification, extinguishment and conversion, net
We recognized losses on debt modification, extinguishment and conversion, net,
of $218.4 million and $29.8 million during 2011 and 2010, respectively. The
losses during 2011 include (i) a debt conversion loss of $187.2 million
recognized primarily during the second quarter of 2011 related to the exchange
of substantially all of the LGI Convertible Notes for LGI common stock and cash,
(ii) the write-off of $15.7 million of deferred financing costs and an
unamortized discount during the first quarter of 2011 in connection with the
prepayment of amounts outstanding under Facilities M, P, T and U of the UPC
Broadband Holding Bank Facility and (iii) the write-off of $9.5 million of
deferred financing costs and the incurrence of $5.3 million of third-party costs
in connection with the prepayment of amounts outstanding under Telenet
Facilities K, L1, G and J of the Telenet Credit Facility during 2011. The losses
during 2010 include the payment of $16.1 million of debt redemption premiums and
the write-off of $8.8 million of deferred financing costs in connection with the
third quarter 2010 repurchase and redemption of certain of UPC Holding's senior
notes. For additional information, see note 9 to our consolidated financial
statements.
Income tax benefit (expense)
We recognized income tax expense of $231.7 million and income tax benefit of
$196.9 million during 2011 and 2010, respectively.
The income tax expense during 2011 differs from the expected income tax benefit
of $201.5 million (based on the U.S. federal 35% income tax rate) due primarily
to the negative impacts of (i) a net increase in valuation allowances, including
$222.7 million of valuation allowances that were recorded in France during the
fourth quarter of 2011 due to a modification of our intercompany financing
structure in that jurisdiction that resulted largely from a change in local tax
law, (ii) certain permanent differences between the financial and tax accounting
treatment of interest and other items, (iii) statutory tax rates in certain
jurisdictions in which we operate that are lower than the U.S. federal income
tax rate and (iv) certain permanent differences in the realization of foreign
currency gains and losses between financial and tax accounting.
The income tax benefit during 2010 differs from the expected income tax benefit
of $402.7 million (based on the U.S. federal 35% income tax rate) due primarily
to the negative impacts of (i) statutory tax rates in certain jurisdictions in
which we operate that are lower than the U.S. federal income tax rate,
(ii) certain permanent differences between the financial and tax accounting
treatment of interest and other items, (iii) certain permanent differences
between the financial and tax accounting treatment of items associated with
investments in subsidiaries and (iv) a net increase in valuation allowances,
which included tax benefits of $223.6 million recognized in France upon the
release of valuation allowances during the fourth quarter of 2010 in connection
with an internal financial restructuring. The negative impacts of these items
were partially offset by the positive impact of the recognition of previously
unrecognized tax benefits that met the GAAP recognition criteria during the
period.
On February 18, 2010, we completed the sale of the J:COM Disposal Group in a
taxable transaction. For information concerning certain of the 2010 income tax
impacts of this transaction, see note 4 to our consolidated financial
statements.
For additional information concerning our income taxes, see note 10 to our
consolidated financial statements.
Loss from continuing operations
During 2011 and 2010, we reported losses from continuing operations of $807.5
million and $953.7 million, respectively, including (i) operating income of
$1,818.4 million and $1,393.6 million, respectively, (ii) net non-operating
expenses of $2,394.2 million and $2,544.2 million, respectively, and (iii)
income tax benefit (expense) of ($231.7 million) and $196.9 million,
respectively.
II-46
--------------------------------------------------------------------------------Discontinued operations
Our earnings from discontinued operations, net of taxes, of $136.5 million
during 2011 relates to the operations of Austar. Our earnings from discontinued
operations, net of taxes, of $126.9 million during 2010 relates to the
operations of Austar, Unitymedia KabelBW's arena segment and the J:COM Disposal
Group. We recognized a gain on disposal of discontinued operations, net of
taxes, of $1,390.8 million during 2010 related to the February 18, 2010 sale of
the J:COM Disposal Group. For additional information, see note 4 to our
consolidated financial statements.
Net earnings attributable to noncontrolling interests
Net earnings or loss attributable to noncontrolling interests include the
noncontrolling interests' share of the results of our continuing and
discontinued operations. Net earnings attributable to noncontrolling interests
decreased $74.1 million during 2011, as compared to 2010, due primarily to the
net impact of (i) a decrease resulting from the February 18, 2010 sale of the
J:COM Disposal Group, (ii) a decline in the results of operations of Telenet and
(iii) improvements in the results of operations of Austar and VTR.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Sources and Uses of Cash
Although our consolidated operating subsidiaries have generated cash from
operating activities, the terms of the instruments governing the indebtedness of
certain of these subsidiaries, including Telenet, UPC Holding, UPC Broadband
Holding, Unitymedia KabelBW, Liberty Puerto Rico and VTR Wireless, may restrict
our ability to access the assets of these subsidiaries. As set forth in the
table below, these subsidiaries accounted for a significant portion of our
consolidated cash and cash equivalents at December 31, 2012. In addition, our
ability to access the liquidity of these and other subsidiaries may be limited
by tax considerations, the presence of noncontrolling interests and other
factors.
Cash and cash equivalents
The details of the U.S. dollar equivalent balances of our consolidated cash and
cash equivalents at December 31, 2012 are set forth in the following table. With
the exception of LGI, which is reported on a standalone basis, the amounts
presented below include the cash and cash equivalents of the named entity and
its subsidiaries unless otherwise noted (in millions):
Cash and cash equivalents held by:
LGI and non-operating subsidiaries:
LGI $ 69.4
Non-operating subsidiaries 631.9
Total LGI and non-operating subsidiaries 701.3
Operating subsidiaries:
Telenet
1,196.0
VTR Group (a) 44.3
UPC Holding (excluding VTR Group) 41.6
Unitymedia KabelBW 26.7
Chellomedia 26.6
Liberty Puerto Rico 2.4
Total operating subsidiaries 1,337.6
Total cash and cash equivalents (b) $ 2,038.9
_______________
(a) Includes $9.0 million of cash and cash equivalents held by VTR Wireless.
(b) As of December 31, 2012, our total cash and cash equivalents balance
excludes €1,142.5 million ($1,507.9 million) that we were required to place
into a restricted account to secure a portion of the aggregate offer
consideration for the LGI Telenet Tender, as further described in note 11 to
our consolidated financial statements. On February 1, 2013, we used €332.5
million ($454.6 million at the transaction date) of this restricted cash
account to fund the LGI Telenet Tender and the remaining €810.0 million
($1,107.4 million at the transaction date) was released from restrictions.
Liquidity of LGI and its Non-operating Subsidiaries
The $69.4 million of cash and cash equivalents held by LGI and, subject to
certain tax considerations, the $631.9 million of cash and cash equivalents held
by LGI's non-operating subsidiaries, represented available liquidity at the
corporate level at December 31, 2012. Our remaining cash and cash equivalents of
$1,337.6 million at December 31, 2012 were held by our operating subsidiaries as
set forth in the table above. As noted above, various factors may limit our
ability to access the cash of our operating subsidiaries.
As described in greater detail below, our current sources of corporate liquidity
include (i) cash and cash equivalents held by LGI and, subject to certain tax
considerations, LGI's non-operating subsidiaries, and (ii) interest and dividend
income received on our and, subject to certain tax considerations, our
non-operating subsidiaries' cash and cash equivalents and investments.
From time to time, LGI and its non-operating subsidiaries may also receive (i)
proceeds in the form of distributions or loan repayments from LGI's operating
subsidiaries or affiliates upon (a) the completion of recapitalizations,
refinancings, asset sales
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or similar transactions by these entities or (b) the accumulation of excess cash
from operations or other means, (ii) proceeds received upon the disposition of
investments and other assets of LGI and its non-operating subsidiaries, (iii)
proceeds received in connection with the incurrence of debt by LGI or its
non-operating subsidiaries or the issuance of equity securities by LGI, (iv)
proceeds received upon the exercise of stock options or (v) income tax refunds.
No assurance can be given that any external funding would be available to LGI or
its non-operating subsidiaries on favorable terms, or at all. See note 4 to our
consolidated financial statements for information concerning the disposition of
Austar and notes 11 and 19 to our consolidated financial statements for
information concerning recent and pending capital distributions of Telenet and
VTR.
At December 31, 2012, our consolidated cash and cash equivalents balance
includes $1,971.6 million that is held outside of the U.S. Based on our
assessment of our ability to access the liquidity of our subsidiaries on a tax
efficient basis and our expectations with respect to our corporate liquidity
requirements, we do not anticipate that tax considerations will adversely impact
our corporate liquidity over the next 12 months. Our ability to access the
liquidity of our subsidiaries on a tax efficient basis is a consideration in
assessing the extent of our stock repurchase programs.
The ongoing cash needs of LGI and its non-operating subsidiaries include (i)
corporate general and administrative expenses and (ii) interest payments on the
Sumitomo Collar Loan. In addition, LGI and its non-operating subsidiaries may
require cash in connection with (i) the repayment of outstanding debt, (ii) the
satisfaction of contingent liabilities, (iii) acquisitions, (iv) the repurchase
of equity and debt securities, (v) other investment opportunities or (vi) income
tax payments. For information regarding the LGI Telenet Tender, see note 11 to
our consolidated financial statements. For information concerning the pending
Virgin Media Acquisition, see note 19 to our consolidated financial statements.
During 2012, we repurchased a total of 5,611,380 shares of our LGI Series A
common stock at a weighted average price of $53.46 per share and 13,585,729
shares of our LGI Series C common stock at a weighted average price of $50.11
per share, for an aggregate purchase price of $980.7 million, including direct
acquisition costs and the effects of derivative instruments. At December 31,
2012, the remaining amount authorized for stock repurchases was $1,030.7
million.
Liquidity of Operating Subsidiaries
The cash and cash equivalents of our operating subsidiaries are detailed in the
table above. In addition to cash and cash equivalents, the primary sources of
liquidity of our operating subsidiaries are cash provided by operations and, in
the case of Liberty Puerto Rico, Telenet, Unitymedia KabelBW, UPC Broadband
Holding and VTR Wireless, borrowing availability under their respective debt
instruments. For the details of the borrowing availability of such entities at
December 31, 2012, see note 9 to our consolidated financial statements. The
aforementioned sources of liquidity may be supplemented in certain cases by
contributions and/or loans from LGI and its non-operating subsidiaries. Our
operating subsidiaries' liquidity generally is used to fund capital expenditures
and debt service requirements. From time to time, our operating subsidiaries may
also require funding in connection with (i) acquisitions and other investment
opportunities, (ii) loans to LGI or (iii) capital distributions to LGI and other
equity owners. No assurance can be given that any external funding would be
available to our operating subsidiaries on favorable terms, or at all. For
information concerning the acquisitions of our subsidiaries, see note 3 to our
consolidated financial statements.
For additional information concerning our consolidated capital expenditures and
cash provided by operating activities, see the discussion under Consolidated
Cash Flow Statements below.
Capitalization
We seek to maintain our debt at levels that provide for attractive equity
returns without assuming undue risk. In this regard, we generally seek to cause
our operating subsidiaries to maintain their debt at levels that result in a
consolidated debt balance that is between four and five times our consolidated
operating cash flow. However, the timing of our acquisitions and financing
transactions may temporarily cause this ratio to exceed our targeted range. The
ratio of our December 31, 2012 consolidated debt to our annualized consolidated
operating cash flow for the quarter ended December 31, 2012 was 5.5x. In
addition, the ratio of our December 31, 2012 consolidated net debt (debt less
cash and cash equivalents) to our annualized consolidated operating cash flow
for the quarter ended December 31, 2012 was 5.1x.
When it is cost effective, we generally seek to match the denomination of the
borrowings of our subsidiaries with the functional currency of the operations
that are supporting the respective borrowings. As further discussed under
Quantitative and Qualitative Disclosures about Market Risk below and in note 6
to our consolidated financial statements, we also use derivative instruments to
mitigate foreign currency and interest rate risk associated with our debt
instruments.
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Our ability to service or refinance our debt and to maintain compliance with the
leverage covenants in the credit agreements and indentures of certain of our
subsidiaries is dependent primarily on our ability to maintain or increase the
operating cash flow of our operating subsidiaries and to achieve adequate
returns on our capital expenditures and acquisitions. In addition, our ability
to obtain additional debt financing is limited by the leverage covenants
contained in the various debt instruments of our subsidiaries. For example, if
the operating cash flow of UPC Broadband Holding were to decline, we could be
required to partially repay or limit our borrowings under the UPC Broadband
Holding Bank Facility in order to maintain compliance with applicable covenants.
No assurance can be given that we would have sufficient sources of liquidity, or
that any external funding would be available on favorable terms, or at all, to
fund any such required repayment. The ability to access available borrowings
under the UPC Broadband Holding Bank Facility and/or UPC Holding's ability to
complete additional financing transactions can also be impacted by the interplay
of average and spot foreign currency rates with respect to leverage calculations
under the indentures for UPC Holding's senior notes. At December 31, 2012, each
of our borrowing subsidiaries was in compliance with its debt covenants. In
addition, we do not anticipate any instances of non-compliance with respect to
our subsidiaries' debt covenants that would have a material adverse impact on
our liquidity during the next 12 months.
At December 31, 2012, our outstanding consolidated debt and capital lease
obligations aggregated $27.5 billion, including $363.5 million that is
classified as current in our consolidated balance sheet and $23.6 billion that
is due in 2017 or thereafter.
We believe that we have sufficient resources to repay or refinance the current
portion of our debt and capital lease obligations and to fund our foreseeable
liquidity requirements during the next 12 months. However, as our maturing debt
grows in later years, we anticipate that we will seek to refinance or otherwise
extend our debt maturities. No assurance can be given that we will be able to
complete these refinancing transactions or otherwise extend our debt
maturities. In this regard, it is difficult to predict how political and
economic conditions, sovereign debt concerns or any adverse regulatory
developments will impact the credit and equity markets we access and our future
financial position. However, (i) the financial failure of any of our
counterparties could (a) reduce amounts available under committed credit
facilities and (b) adversely impact our ability to access cash deposited with
any failed financial institution and (ii) tightening of the credit markets could
adversely impact our ability to access debt financing on favorable terms, or at
all. In addition, any weakness in the equity markets could make it less
attractive to use our shares to satisfy contingent or other obligations, and
sustained or increased competition, particularly in combination with adverse
economic or regulatory developments, could have an unfavorable impact on our
cash flows and liquidity.
All of our consolidated debt and capital lease obligations had been borrowed or
incurred by our subsidiaries at December 31, 2012.
For additional information concerning our debt and capital lease obligations,
see note 9 to our consolidated financial statements.
Consolidated Cash Flow Statements
General. Our cash flows are subject to significant variations due to FX. See
related discussion under Quantitative and Qualitative Disclosures about Market
Risk - Foreign Currency Risk below. All of the cash flows discussed below are
those of our continuing operations.
Consolidated Cash Flow Statement - 2012 compared to 2011
Summary. The 2012 and 2011 consolidated cash flow statements of our continuing
operations are summarized as follows:
Year ended December 31,
2012 2011 Change
in millions
Net cash provided by operating activities $ 2,858.5 $ 2,562.7 $ 295.8
Net cash used by investing activities (1,029.2 ) (4,028.7 ) 2,999.5
Net cash used by financing activities (1,469.8 ) (645.2 ) (824.6 )
Effect of exchange rate changes on cash 28.2 30.0 (1.8 )
Net increase (decrease) in cash and cash equivalents $ 387.7 $ (2,081.2 ) $ 2,468.9
Operating Activities. The increase in net cash provided by our operating
activities is primarily attributable to the net effect of (i) an increase in the
cash provided by our operating cash flow and related working capital items,
including the impact of the KBW Acquisition, (ii) a decrease in cash provided
due to higher cash payments for interest, largely attributable to the KBW
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Acquisition, (iii) a decrease in the reported net cash provided by operating
activities due to FX, (iv) an increase in cash provided due to lower net cash
payments for taxes and (v) an increase in cash provided due to lower cash
payments related to derivative instruments.
Investing Activities. The decrease in net cash used by our investing activities
is primarily attributable to (i) a decrease in cash used of $1,764.8 million due
to lower cash paid in connection with acquisitions, net of cash acquired, (ii) a
decrease in cash used of $1,055.4 million associated with cash proceeds received
in connection with the Austar Transaction, (iii) a decrease in cash used of
$127.5 million related to an escrow account that was established in connection
with the March 2011 execution of the KBW Purchase Agreement and (iv) a decrease
in cash used of $43.4 million associated with lower capital expenditures.
Capital expenditures decreased from $1,927.0 million during 2011 to $1,883.6
million during 2012, as an increase in the local currency capital expenditures
of our subsidiaries, including an increase due to acquisitions, was more than
offset by a decrease due to FX.
The capital expenditures that we report in our consolidated cash flow statements
do not include amounts that are financed under vendor financing or capital lease
arrangements. Instead, these amounts are reflected as non-cash additions to our
property and equipment when the underlying assets are delivered, and as
repayments of debt when the principal is repaid. In the following discussion, we
present (i) our capital expenditures as reported in our consolidated cash flow
statements, which exclude amounts financed under vendor financing or capital
lease arrangements, and (ii) our total property and equipment additions, which
include changes in current liabilities associated with capital expenditures and
amounts that are financed under vendor financing or capital lease arrangements.
The UPC/Unity Division accounted for (i) $1,262.9 million and $1,287.0 million
(including $503.6 million and $360.0 million attributable to Germany) of our
consolidated capital expenditures during 2012 and 2011, respectively, and (ii)
$1,541.6 million and $1,410.7 million (including $559.5 million and $371.0
million attributable to Germany) of our consolidated property and equipment
additions during 2012 and 2011, respectively. The increase in the UPC/Unity
Division's property and equipment additions is due primarily to the net effect
of (i) an increase in expenditures for the purchase and installation of customer
premises equipment, (ii) a decrease due to FX, (iii) an increase in expenditures
for support capital, such as information technology upgrades and general support
systems, and (iv) an increase in expenditures for new build and upgrade projects
to expand services. During 2012 and 2011, the UPC/Unity Division's (a) capital
expenditures represented 18.4% and 20.9% (including 21.8% and 24.8% for Germany)
of its revenue, respectively, and (b) property and equipment additions
represented 22.4% and 23.0% (including 24.2% and 25.6% for Germany) of its
revenue, respectively.
Telenet accounted for (i) $360.4 million and $363.8 million of our consolidated
capital expenditures during 2012 and 2011, respectively, and (ii) $440.0 million
and $413.3 million of our consolidated property and equipment additions during
2012 and 2011, respectively. The increase in Telenet's property and equipment
additions is due primarily to the net effect of (i) an increase in expenditures
for the purchase and installation of customer premises equipment, (ii) a
decrease due to FX, (iii) an increase in expenditures for new build and upgrade
projects to expand services and (iv) a decrease in expenditures for support
capital, such as information technology upgrades and general support systems.
During 2012 and 2011, Telenet's (a) capital expenditures represented 18.8% and
19.0% of its revenue, respectively, and (b) property and equipment additions
represented 22.9% and 21.5% of its revenue, respectively.
The VTR Group accounted for (i) $222.6 million and $234.1 million (including
$27.0 million and $68.7 million attributable to VTR Wireless) of our
consolidated capital expenditures during 2012 and 2011, respectively, and (ii)
$243.4 million and $270.8 million (including $36.7 million and $86.9 million
attributable to VTR Wireless) of our consolidated property and equipment
additions during 2012 and 2011, respectively. The decrease in the VTR Group's
property and equipment additions is due primarily to the net effect of (i) a
decrease in expenditures related to the construction of the VTR Wireless mobile
network, (ii) an increase in expenditures for the purchase and installation of
customer premises equipment, (iii) an increase in expenditures for new build and
upgrade projects, (iv) a decrease in expenditures for support capital, such as
information technology upgrades and general support systems, and (v) a decrease
due to FX. During 2012 and 2011, the VTR Group's (a) capital expenditures
represented 23.7% and 26.3% (21.3% and 18.6% excluding VTR Wireless) of its
revenue, respectively, and (b) property and equipment additions represented
25.9% and 30.5% (22.5% and 20.7% excluding VTR Wireless) of its revenue,
respectively.
We expect the percentage of revenue represented by our aggregate 2013
consolidated property and equipment additions to decline slightly as compared to
2012, with the 2013 percentage expected to range from (i) 21% to 23% for the
UPC/Unity Division (including 21% to 23% for Germany), (ii) 21% to 23% for
Telenet and (iii) 20% to 22% for the VTR Group. The 2013 property and equipment
additions range for the VTR Group includes estimated property and equipment
additions ranging from CLP 8.5 billion ($17.8 million) to CLP 12.5 billion
($26.1 million) associated with VTR Wireless. Excluding VTR Wireless' estimated
property and equipment additions and revenue, the percentage of the VTR Group's
2013 revenue represented by property and equipment additions is expected to
range from 18% to 20%. The actual amount of our 2013 consolidated property and
equipment additions and the 2013 property and equipment additions of the
UPC/Unity Division (including Germany), Telenet and the VTR
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Group may vary from expected amounts for a variety of reasons, including (i)
changes in (a) the competitive or regulatory environment, (b) business plans or
(c) our current or expected future operating results and (ii) the availability
of sufficient capital. Accordingly, no assurance can be given that our actual
property and equipment additions will not vary materially from our expectations.
Financing Activities. The increase in net cash used by our financing activities
is primarily attributable to the net effect of (i) an increase in cash used of
$1,464.1 million to fund restricted cash related to the LGI Telenet Tender, (ii)
a decrease in cash used of $503.5 million related to higher net borrowings of
debt, (iii) a decrease in cash used of $124.2 million related to the release of
cash collateral, (iv) a decrease in cash used of $88.4 million due to higher
cash contributions from noncontrolling interest owners to LGI subsidiaries, (v)
a decrease in cash used of $81.2 million due to lower cash distributions from
LGI subsidiaries to noncontrolling interest owners, (vi) a decrease in cash used
of $60.7 million resulting from lower cash payments of net settled employee
withholding taxes on stock incentive awards and (vii) an increase in cash used
of $57.7 million due to higher repurchases of our LGI Series A and Series C
common stock. The increase in our net borrowings of debt was partially offset by
a decrease due to FX.
Consolidated Cash Flow Statement - 2011 compared to 2010
Summary. The 2011 and 2010 consolidated cash flow statements of our continuing
operations are summarized as follows:
Year ended December 31,
2011 2010 Change
in millions
Net cash provided by operating activities $ 2,562.7 $ 2,007.7 $ 555.0
Net cash used by investing activities (4,028.7 ) (389.2 ) (3,639.5 )
Net cash used by financing activities (645.2 ) (187.8 ) (457.4 )
Effect of exchange rate changes on cash 30.0 (135.4 ) 165.4
Net increase (decrease) in cash and cash equivalents $ (2,081.2 ) $ 1,295.3 $ (3,376.5 )
Operating Activities. The increase in net cash provided by our operating
activities is primarily attributable to the net effect of (i) an increase in the
cash provided by our operating cash flow and related working capital items, (ii)
an increase in cash provided due to lower net cash payments for taxes, (iii) a
decrease in cash provided due to higher cash payments for interest, (iv) an
increase in the reported net cash provided by operating activities due to FX and
(v) an increase in cash provided due to lower cash payments related to
derivative instruments.
Investing Activities. The increase in net cash used by our investing activities
is due primarily to the net effect of (i) an increase in cash used of $3,969.9
million associated with cash proceeds received during 2011 in connection with
the disposition of discontinued operations, (ii) a decrease in cash used of
$655.8 million associated with lower cash paid in connection with acquisitions
and (iii) an increase in cash used of $236.5 million associated with higher
capital expenditures. Capital expenditures increased from $1,690.5 million
during 2010 to $1,927.0 million during 2011, due primarily to a net increase in
the local currency capital expenditures of our subsidiaries, including increases
due to acquisitions, and an increase due to FX. In addition, the difference
between the amount funded and the amount released from the KBW Escrow Account,
as further described in note 3 to our consolidated financial statements, is
entirely attributable to FX.
The UPC/Unity Division accounted for (i) $1,287.0 million and $1,151.0 million
(including $360.0 million and $276.5 million attributable to Germany) of our
consolidated capital expenditures during 2011 and 2010, respectively, and (ii)
$1,410.7 million and $1,173.6 million (including $371.0 million and $286.5
million attributable to Germany) of our consolidated property and equipment
additions during 2011 and 2010, respectively. The increase in the UPC/Unity
Division's property and equipment additions is due primarily to (i) an increase
due to FX, (ii) an increase in expenditures for new build and upgrade projects
to expand services, (iii) an increase in expenditures for support capital, such
as information technology upgrades and general support systems, (iv) an increase
due to acquisitions and (v) an increase in expenditures for the purchase and
installation of customer premises equipment. During 2011 and 2010, the UPC/Unity
Division's (a) capital expenditures represented 20.9% and 21.7% (24.8% and 21.0%
excluding Germany) of its revenue, respectively, and (b) property and equipment
additions represented 23.0% and 22.1% (25.6% and 21.3% excluding Germany) of its
revenue, respectively.
Telenet accounted for (i) $363.8 million and $313.6 million of our consolidated
capital expenditures during 2011 and 2010, respectively, and (ii) $413.3 million
and $372.4 million of our consolidated property and equipment additions during
2011 and
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2010, respectively. The increase in Telenet's property and equipment additions
is due primarily to (i) an increase due to FX, (ii) an increase in expenditures
for new build and upgrade projects to expand services, (iii) an increase in
expenditures for the purchase and installation of customer premises equipment
and (iv) an increase in expenditures for support capital such as information
technology upgrades and general support systems. During 2011 and 2010, Telenet's
(a) capital expenditures represented 19.0% and 18.2% of its revenue,
respectively, and (b) property and equipment additions represented 21.5% and
21.6% of its revenue, respectively.
The VTR Group accounted for (i) $234.1 million and $187.5 million (including
$68.7 million and $7.2 million attributable to VTR Wireless) of our consolidated
capital expenditures during 2011 and 2010, respectively, and (ii) $270.8 million
and $177.2 million (including $86.9 million and $3.5 million attributable to VTR
Wireless) of our consolidated property and equipment additions during 2011 and
2010, respectively. The increase in the VTR Group's property and equipment
additions is due primarily to the net effect of (i) an increase in expenditures
related to the construction of VTR Wireless' mobile network, (ii) an increase
due to FX, (iii) an increase in expenditures for new build and upgrade projects,
(iv) a decrease in expenditures for the purchase and installation of customer
premises equipment and (v) an increase in expenditures for support capital, such
as information technology upgrades and general support systems. During 2011 and
2010, the VTR Group's (a) capital expenditures represented 26.3% and 23.5%
(18.6% and 22.6% excluding VTR Wireless) of its revenue, respectively, and (b)
property and equipment additions represented 30.5% and 22.2% (20.7% and 21.8%
excluding VTR Wireless) of its revenue, respectively.
Financing Activities. The increase in net cash used by our financing activities
is due primarily to the net effect of (i) a decrease in cash used of $3,639.1
million related to higher net borrowings of debt, (ii) an increase in cash used
of $3,622.4 million related to changes in cash collateral, (iii) an increase in
cash used of $220.2 million related to higher distributions by subsidiaries to
noncontrolling interest owners, (iv) an increase in cash used of $160.2 million
due to an increase in payments of financing costs, mainly due to $186.7 million
of exchange offer consideration paid during 2011 in connection with the LGI
Notes Exchange, and (v) an increase in cash used of $68.5 million due to higher
cash payments for net settled employee withholding taxes on stock incentive
awards. The increase in our net borrowings of debt is due in part to FX.
Free cash flow
We define free cash flow as net cash provided by our operating activities, plus
(i) excess tax benefits related to the exercise of stock incentive awards and
(ii) cash payments for direct acquisition costs, less (a) capital expenditures,
as reported in our consolidated cash flow statements, (b) principal payments on
vendor financing obligations and (c) principal payments on capital leases
(exclusive of the portions of the network lease in Belgium and the duct leases
in Germany that we assumed in connection with certain acquisitions), with each
item excluding any cash provided or used by our discontinued operations. We
believe that our presentation of free cash flow provides useful information to
our investors because this measure can be used to gauge our ability to service
debt and fund new investment opportunities. Free cash flow should not be
understood to represent our ability to fund discretionary amounts, as we have
various mandatory and contractual obligations, including debt repayments, which
are not deducted to arrive at this amount. Investors should view free cash flow
as a supplement to, and not a substitute for, GAAP measures of liquidity
included in our consolidated cash flow statements. The following table provides
the details of our free cash flow:
Year ended December 31,
2012 2011 2010
in millions
Net cash provided by operating activities of our
continuing operations $ 2,858.5 $ 2,562.7 $ 2,007.7
Excess tax benefits from stock-based compensation 7.2 37.7 44.7
Cash payments for direct acquisition costs 33.8 19.6 54.3
Capital expenditures (1,883.6 ) (1,927.0 ) (1,690.5 )
Principal payments on vendor financing obligations (104.7 ) (10.0 )
-
Principal payments on certain capital leases (17.5 ) (11.4 ) (8.9 )
Free cash flow $ 893.7 $ 671.6 $ 407.3
Off Balance Sheet Arrangements
In the ordinary course of business, we have provided indemnifications to
purchasers of certain of our assets, our lenders, our vendors and certain other
parties. We have also provided performance and/or financial guarantees to local
municipalities, our
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customers and vendors. Historically, these arrangements have not resulted in our
company making any material payments and we do not believe that they will result
in material payments in the future.
We are a party to various stockholder and similar agreements pursuant to which
we could be required to make capital contributions to the entity in which we
have invested or purchase another investor's interest. We do not expect any
payments made under these provisions to be material in relation to our financial
position or results of operations.
Contractual Commitments
As of December 31, 2012, the U.S. dollar equivalents (based on December 31, 2012
exchange rates) of the consolidated contractual commitments are as follows:
Payments due during:
2013 2014 2015 2016 2017 Thereafter Total
in millions
Debt (excluding
interest) $ 293.6 $ 16.2 $ 400.0 $ 2,922.7 $ 4,736.0 $ 17,849.3 $ 26,217.8
Capital leases
(excluding interest) 69.9 75.4 74.1 75.2 77.0 1,018.0 1,389.6
Operating leases 183.7 138.4 126.2 104.8 91.5 365.9 1,010.5
Programming obligations 310.0 161.3 81.9 50.0
42.3 0.5 646.0
Other commitments 764.1 248.8 201.5 160.6 118.2 1,317.4 2,810.6
Total (a) $ 1,621.3 $ 640.1 $ 883.7 $ 3,313.3 $ 5,065.0 $ 20,551.1 $ 32,074.5
Projected cash interest
payments on debt and
capital lease
obligations (b) $ 1,549.4 $ 1,665.6 $ 1,664.4 $ 1,663.1 $ 1,510.3 $ 4,193.9 $ 12,246.7
_______________
(a) The commitments reflected in this table do not reflect any liabilities
that are included in our December 31, 2012 balance sheet other than debt
and capital lease obligations. Our liability for uncertain tax positions
in the various jurisdictions in which we operate ($327.5 million at
December 31, 2012) has been excluded from the table as the amount and
timing of any related payments are not subject to reasonable estimation.
(b) Amounts are based on interest rates, interest rate payment dates and
contractual maturities in effect as of December 31, 2012. These amounts
are presented for illustrative purposes only and will likely differ from
the actual cash payments required in future periods. In addition, the
amounts presented do not include the impact of our interest rate derivative agreements, deferred financing costs, discounts or commitment
fees, all of which affect our overall cost of borrowing.
Programming commitments consist of obligations associated with certain of our
programming, studio output and sports rights contracts that are enforceable and
legally binding on us in that we have agreed to pay minimum fees without regard
to (i) the actual number of subscribers to the programming services, (ii)
whether we terminate service to a portion of our subscribers or dispose of a
portion of our distribution systems or (iii) whether we discontinue our premium
film or sports services. The amounts reflected in the table with respect to
these contracts are significantly less than the amounts we expect to pay in
these periods under these contracts. Payments to programming vendors have in the
past represented, and are expected to continue to represent in the future, a
significant portion of our operating costs. In this regard, during 2012, 2011
and 2010, (a) the programming and copyright costs incurred by our broadband
communications and DTH operations aggregated $1,055.7 million, $965.3 million
and $824.3 million, respectively (including intercompany charges that eliminate
in consolidation of $77.2 million, $78.9 million and $73.3 million,
respectively), and (b) the third-party programming costs incurred by our
programming distribution operations aggregated $111.5 million, $115.9 million
and $102.0 million, respectively. The ultimate amount payable in excess of the
contractual minimums of our studio output contracts, which expire at various
dates through 2017, is dependent upon the number of subscribers to our premium
movie service and the theatrical success of the films that we exhibit.
Other commitments relate primarily to Telenet's commitments for certain
operating costs associated with its leased network. Subsequent to October 1,
2015, these commitments are subject to adjustment based on changes in the
network operating costs incurred by Telenet with respect to its own networks.
These potential adjustments are not subject to reasonable estimation, and
therefore, are not included in the above table. Other commitments also include
(i) unconditional purchase obligations associated with commitments to purchase
customer premises and other equipment and services that are enforceable and
legally binding on us, (ii) certain commitments of Telenet to purchase (a)
broadcasting capacity on a DTT network and (b) certain spectrum licenses, (iii)
certain repair and maintenance, fiber capacity and energy commitments of
Unitymedia KabelBW, (iv) satellite commitments
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associated with satellite carriage services provided to our company and (v)
commitments associated with our MVNO agreements. The amounts reflected in the
table with respect to our MVNO commitments represent fixed minimum amounts
payable under these agreements and therefore may be significantly less than the
actual amounts we ultimately pay in these periods. Commitments arising from
acquisition agreements (including with respect to the Virgin Media Merger
Agreement, as described in note 19 to our consolidated financial statements) or
tender offers (including with respect to the LGI Telenet Tender, as described in
note 11 to our consolidated financial statements) are not reflected in the above
table.
In addition to the commitments set forth in the table above, we have significant
commitments under derivative instruments pursuant to which we expect to make
payments in future periods. For information concerning projected cash flows
associated with these derivative instruments, see Quantitative and Qualitative
Disclosures about Market Risk - Projected Cash Flows Associated with Derivatives
below. For information concerning our derivative instruments, including the net
cash paid or received in connection with these instruments during 2012, 2011 and
2010, see note 6 to our consolidated financial statements.
We also have commitments pursuant to agreements with, and obligations imposed
by, franchise authorities and municipalities, which may include obligations in
certain markets to move aerial cable to underground ducts or to upgrade, rebuild
or extend portions of our broadband communication systems. Such amounts are not
included in the above table because they are not fixed or determinable.
Critical Accounting Policies, Judgments and Estimates
In connection with the preparation of our consolidated financial statements, we
make estimates and assumptions that affect the reported amounts of assets and
liabilities, revenue and expenses and related disclosure of contingent assets
and liabilities. Critical accounting policies are defined as those policies that
are reflective of significant judgments, estimates and uncertainties, which
would potentially result in materially different results under different
assumptions and conditions. We believe the following accounting policies are
critical in the preparation of our consolidated financial statements because of
the judgment necessary to account for these matters and the significant
estimates involved, which are susceptible to change:
• Impairment of property and equipment and intangible assets (including
goodwill);
• Costs associated with construction and installation activities;
• Useful lives of long-lived assets;
• Fair value measurements; and
• Income tax accounting.
We have discussed the selection of the aforementioned critical accounting
policies with the Audit Committee of our Board of Directors. For additional
information concerning our significant accounting policies, see note 2 to our
consolidated financial statements.
Impairment of Property and Equipment and Intangible Assets
Carrying Value. The aggregate carrying value of our property and equipment and
intangible assets (including goodwill) that were held for use comprised 80% of
our total assets at December 31, 2012.
We review, when circumstances warrant, the carrying amounts of our property and
equipment and our intangible assets (other than goodwill and indefinite-lived
intangible assets) to determine whether such carrying amounts continue to be
recoverable. Such changes in circumstance may include, among other items, (i) an
expectation of a sale or disposal of a long-lived asset or asset group,
(ii) adverse changes in market or competitive conditions, (iii) an adverse
change in legal factors or business climate in the markets in which we operate
and (iv) operating or cash flow losses. For purposes of impairment testing,
long-lived assets are grouped at the lowest level for which cash flows are
largely independent of other assets and liabilities, generally at or below the
reporting unit level (see below). If the carrying amount of the asset or asset
group is greater than the expected undiscounted cash flows to be generated by
such asset or asset group, an impairment adjustment is recognized. Such
adjustment is measured by the amount that the carrying value of such asset or
asset group exceeds its fair value. We generally measure fair value by
considering (a) sale prices for similar assets, (b) discounted estimated future
cash flows using an appropriate discount rate and/or (c) estimated replacement
cost. Assets to be disposed of are carried at the lower of their financial
statement carrying amount or fair value less costs to sell.
We evaluate the goodwill, franchise rights and other indefinite-lived intangible
assets for impairment at least annually on October 1 and whenever other facts
and circumstances indicate that the carrying amounts of goodwill and
indefinite-lived intangible
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assets may not be recoverable. For purposes of the goodwill evaluation, we make
a qualitative assessment to determine if goodwill may be impaired. If it is more
likely than not that a reporting unit's fair value is less than its carrying
value, we then compare the fair value of the reporting unit to its respective
carrying amount. A reporting unit is an operating segment or one level below an
operating segment (referred to as a "component"). In most cases, our operating
segments are deemed to be a reporting unit either because the operating segment
is comprised of only a single component, or the components below the operating
segment are aggregated as they have similar economic characteristics. If the
carrying value of a reporting unit were to exceed its fair value, we would then
compare the implied fair value of the reporting unit's goodwill to its carrying
amount, and any excess of the carrying amount over the fair value would be
charged to operations as an impairment loss. Any excess of the carrying value
over the fair value of franchise rights or other indefinite-lived intangible
assets is also charged to operations as an impairment loss.
When required, considerable management judgment is necessary to estimate the
fair value of reporting units and underlying long-lived and indefinite-lived
assets. The equity of one of our reporting units, Telenet, is publicly traded in
an active market. For this reporting unit, our fair value determination is based
on quoted market prices. For other reporting units, we typically determine fair
value using an income-based approach (discounted cash flows) based on
assumptions in our long-range business plans and, in some cases, a combination
of an income-based approach and a market-based approach. With respect to our
discounted cash flow analysis used in the income-based approach, the timing and
amount of future cash flows under these business plans require estimates, among
other items, of subscriber growth and retention rates, rates charged per
product, expected gross margin and operating cash flow margins and expected
capital expenditures. The development of these cash flows, and the discount rate
applied to the cash flows, is subject to inherent uncertainties, and actual
results could vary significantly from such estimates. Our determination of the
discount rate is based on a weighted average cost of capital approach, which
uses a market participant's cost of equity and after-tax cost of debt and
reflects the risks inherent in the cash flows. Based on the results of our 2012
qualitative assessment of our reporting unit carrying values, we determined that
it was more likely than not that fair value exceeded carrying value for all but
one small reporting unit. Upon our determination of the implied fair value of
the goodwill and other long-lived assets of this reporting unit, we concluded
that the goodwill and long-lived assets of this reporting unit were not
impaired.
During 2012, 2011 and 2010, we recorded impairments of our property and
equipment and intangible assets (including goodwill) aggregating nil, $27.6
million and $27.7 million, respectively. The 2011 and 2010 amounts are largely
due to goodwill impairments related to Chellomedia's programming operations in
central and eastern Europe. For additional information, see note 8 to our
consolidated financial statements.
In the case of two of our smaller reporting units (our broadband communications
operations in Puerto Rico and Chellomedia's programming operations in central
and eastern Europe), a hypothetical decline of 20% or more in the fair value of
either of these reporting units could result in the need to record a goodwill
impairment charge based on the results of our October 1, 2012 goodwill
impairment test. At December 31, 2012, the goodwill associated with these
reporting units aggregated $301.0 million. If, among other factors, (i) our
equity values were to decline significantly, or (ii) the adverse impacts of
economic, competitive, regulatory or other factors were to cause our results of
operations or cash flows to be worse than anticipated, we could conclude in
future periods that impairment charges are required in order to reduce the
carrying values of our goodwill, and to a lesser extent, other long-lived
assets. Any such impairment charges could be significant. In addition,
Telenet's intangible assets that are subject to amortization include spectrum
rights with a carrying value of $80.1 million at December 31, 2012. Telenet is
continuing its efforts to use this asset as initially intended by management.
Depending on the outcome of these efforts and Telenet's evaluation of
alternative means to use or monetize this asset, a triggering event might occur
that could lead to the impairment of all or part of the carrying value of this
asset during 2013.
Costs Associated with Construction and Installation Activities
We capitalize costs associated with the construction of new cable transmission
and distribution facilities and the installation of new cable services.
Installation activities that are capitalized include (i) the initial connection
(or drop) from our cable system to a customer location, (ii) the replacement of
a drop and (iii) the installation of equipment for additional services, such as
digital cable, telephone or broadband internet service. The costs of other
customer-facing activities such as reconnecting customer locations where a drop
already exists, disconnecting customer locations and repairing or maintaining
drops, are expensed as incurred.
The nature and amount of labor and other costs to be capitalized with respect to
construction and installation activities involves significant judgment. In
addition to direct external and internal labor and materials, we also capitalize
other costs directly attributable to our construction and installation
activities, including dispatch costs, quality-control costs, vehicle-related
costs and certain warehouse-related costs. The capitalization of these costs is
based on time sheets, time studies, standard costs, call tracking systems and
other verifiable means that directly link the costs incurred with the applicable
capitalizable activity. We continuously monitor the appropriateness of our
capitalization policies and update the policies when necessary to respond to
changes in facts and
II-56
--------------------------------------------------------------------------------circumstances, such as the development of new products and services, and changes
in the manner that installations or construction activities are performed.
Useful Lives of Long-Lived Assets
We depreciate our property and equipment on a straight-line basis over the
estimated economic useful life of the assets. The determination of the economic
useful lives of property and equipment requires significant management judgment,
based on factors such as the estimated physical lives of the assets,
technological changes, changes in anticipated use, legal and economic factors,
rebuild and equipment swap-out plans, and other factors. Our intangible assets
with finite lives primarily consist of customer relationships. Customer
relationship intangible assets are amortized on a straight-line basis over the
estimated weighted average life of the customer relationships. The determination
of the estimated useful life of customer relationship intangible assets requires
significant management judgment and is primarily based on historical and
forecasted churn rates, adjusted when necessary for risk associated with demand,
competition, technological changes and other economic factors. We regularly
review whether changes to estimated useful lives are required in order to
accurately reflect the economic use of our property and equipment and intangible
assets with finite lives. Any changes to estimated useful lives are reflected
prospectively. Depreciation and amortization expense of our continuing
operations during 2012, 2011 and 2010 was $2,691.1 million, $2,457.0 million and
$2,251.5 million, respectively. A 10% increase in the aggregate amount of the
depreciation and amortization expense of our continuing operations during 2012
would have resulted in a $269.1 million or 13.6% decrease in our 2012 operating
income.
Fair Value Measurements
GAAP provides guidance with respect to the recurring and nonrecurring fair value
measurements and for a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value into three broad levels. Level 1
inputs are quoted market prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the
measurement date. Level 2 inputs are inputs other than quoted market prices
included within Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 3 inputs are unobservable inputs for the asset or
liability.
Recurring Valuations. We perform recurring fair value measurements with respect
to our derivative instruments and fair value method investments, each of which
are carried at fair value. We use (i) cash flow valuation models to determine
the fair values of our interest rate and foreign currency derivative instruments
and (ii) a binomial option pricing model to determine the fair values of our
equity-related derivative instruments. We use quoted market prices when
available and, when not available, we use a combination of an income approach
(discounted cash flows) and a market approach (market multiples of similar
businesses) to determine the fair value of our fair value method investments.
For a detailed discussion of the inputs we use to determine the fair value of
our derivative instruments and fair value method investments, see note 7 to our
consolidated financial statements. See also notes 5 and 6 to our consolidated
financial statements for information concerning our fair value method
investments and derivative instruments, respectively.
Changes in the fair values of our derivative instruments and fair value method
investments have had, and we believe will continue to have, a significant and
volatile impact on our results of operations. During 2012, 2011 and 2010, our
continuing operations included net losses of $1,099.8 million, $108.5 million
and $984.5 million, respectively, attributable to changes in the fair values of
these items.
As further described in note 7 to our consolidated financial statements, actual
amounts received or paid upon the settlement of our derivative instruments or
disposal of our fair value method investments may differ materially from the
recorded fair values at December 31, 2012.
For information concerning the sensitivity of the fair value of certain of our
more significant derivative instruments to changes in market conditions, see
Quantitative and Qualitative Disclosures About Market Risk - Derivative
Instruments below.
Nonrecurring Valuations. Our nonrecurring valuations are primarily associated
with (i) the application of acquisition accounting and (ii) impairment
assessments, both of which require that we make fair value determinations as of
the applicable valuation date. In making these determinations, we are required
to make estimates and assumptions that affect the recorded amounts, including,
but not limited to, expected future cash flows, market comparables and discount
rates, remaining useful lives of long-lived assets, replacement or reproduction
costs of property and equipment and the amounts to be recovered in future
periods from acquired net operating losses and other deferred tax assets. To
assist us in making these fair value determinations, we may engage third-party
valuation specialists. Our estimates in this area impact, among other items, the
amount of depreciation and amortization, impairment charges and income tax
expense or benefit that we report. Our estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain. A
significant portion of our long-lived assets were
II-57
--------------------------------------------------------------------------------initially recorded through the application of acquisition accounting and all of
our long-lived assets are subject to impairment assessments. For additional
information, see notes 3, 7 and 8 to our consolidated financial statements.
Income Tax Accounting
We are required to estimate the amount of tax payable or refundable for the
current year and the deferred tax assets and liabilities for the future tax
consequences attributable to differences between the financial statement
carrying amounts and income tax basis of assets and liabilities and the expected
benefits of utilizing net operating loss and tax credit carryforwards, using
enacted tax rates in effect for each taxing jurisdiction in which we operate for
the year in which those temporary differences are expected to be recovered or
settled. This process requires our management to make assessments regarding the
timing and probability of the ultimate tax impact of such items.
Net deferred tax assets are reduced by a valuation allowance if we believe it
more-likely-than-not such net deferred tax assets will not be realized.
Establishing or reducing a tax valuation allowance requires us to make
assessments about the timing of future events, including the probability of
expected future taxable income and available tax planning strategies. At
December 31, 2012, the aggregate valuation allowance provided against deferred
tax assets was $2,184.4 million. The actual amount of deferred income tax
benefits realized in future periods will likely differ from the net deferred tax
assets reflected in our December 31, 2012 balance sheet due to, among other
factors, possible future changes in income tax law or interpretations thereof in
the jurisdictions in which we operate and differences between estimated and
actual future taxable income. Any of such factors could have a material effect
on our current and deferred tax position as reported in our consolidated
financial statements. A high degree of judgment is required to assess the impact
of possible future outcomes on our current and deferred tax positions.
Tax laws in jurisdictions in which we operate are subject to varied
interpretation, and many tax positions we take are subject to significant
uncertainty regarding whether the position will be ultimately sustained after
review by the relevant tax authority. We recognize the financial statement
effects of a tax position when it is more-likely-than-not, based on technical
merits, that the position will be sustained upon examination. The determination
of whether the tax position meets the more-likely-than-not threshold requires a
facts-based judgment using all information available. In a number of cases, we
have concluded that the more-likely-than-not threshold is not met, and
accordingly, the amount of tax benefit recognized in the financial statements is
different than the amount taken or expected to be taken in our tax returns. As
of December 31, 2012, the amount of unrecognized tax benefits for financial
reporting purposes, but taken or expected to be taken on tax returns, was $359.7
million, of which $227.3 million would have a favorable impact on our effective
income tax rate if ultimately recognized, after considering amounts that we
would expect to be offset by valuation allowances.
We are required to continually assess our tax positions, and the results of tax
examinations or changes in judgment can result in substantial changes to our
unrecognized tax benefits.
We have taxable outside basis differences on certain investments in foreign
subsidiaries. We do not recognize the deferred tax liabilities associated with
these outside basis differences when the difference is considered essentially
permanent in duration. In order to be considered essentially permanent in
duration, sufficient evidence must indicate that the foreign subsidiary has
invested or will invest its undistributed earnings indefinitely, or that
earnings will be remitted in a tax-free liquidation. If circumstances change and
it becomes apparent that some or all of the undistributed earnings will be
remitted on a taxable basis in the foreseeable future, a net deferred tax
liability must be recorded for some or all of the outside basis difference. The
assessment of whether these outside basis differences are considered permanent
in nature requires significant judgment and is based on management intentions to
reinvest the earnings of a foreign subsidiary indefinitely in light of
anticipated liquidity requirements and other relevant factors. As of
December 31, 2012, we had approximately $667.0 million of net differences in our
taxable outside bases related to our investments in foreign subsidiaries for
which a net deferred tax liability might otherwise be required. If our plans or
intentions change in the future due to liquidity or other relevant
considerations, we could decide that it would be prudent to repatriate
significant funds or other assets from one or more of our subsidiaries, even
though we would incur a tax liability in connection with any such repatriation.
If our plans or intentions were to change in this manner, the recognition of all
or a part of these outside basis differences could have an adverse impact on our
consolidated net earnings (loss).
For additional information concerning our income taxes, see note 10 to our
consolidated financial statements.
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