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NBCUNIVERSAL MEDIA, LLC - 10-Q - : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Overview We are a global media and technology company with two primary businesses, Comcast Cable and NBCUniversal. We present our operations for Comcast Cable in one reportable business segment, referred to as Cable Communications, and our operations for NBCUniversal in four reportable business segments. Cable Communications Segment Comcast Cable is the nation's largest provider of video, high-speed Internet and voice services ("cable services") to residential customers under the XFINITY brand, and we also provide similar and other services to small and medium-sized businesses. As of June 30, 2014, our cable systems served 22.5 million video customers, 21.3 million high-speed Internet customers and 11.0 million voice customers and passed more than 54 million homes and businesses. Our Cable Communications segment generates revenue primarily from subscriptions to our cable services, which we market individually and in packages, and from the sale of advertising. During the six months ended June 30, 2014, our Cable Communications segment generated 64% of our consolidated revenue and 79% of our operating income before depreciation and amortization. NBCUniversal Segments NBCUniversal is one of the world's leading media and entertainment companies that develops, produces and distributes entertainment, news and information, sports, and other content for global audiences. The Cable Networks, Broadcast Television, Filmed Entertainment and Theme Parks segments comprise the NBCUniversal businesses and are collectively referred to as the "NBCUniversal segments." Cable Networks Our Cable Networks segment consists primarily of a diversified portfolio of cable television networks. Our cable networks are comprised of our national cable networks, which provide a variety of entertainment, news and information, and sports content, our regional sports networks, various international cable networks, and our cable television production operations. Our Cable Networks segment generates revenue primarily from the distribution of our cable network programming to multichannel video providers, from the sale of advertising on our cable networks and related digital media properties, and from the licensing of our owned programming. Broadcast Television Our Broadcast Television segment consists primarily of the NBC and Telemundo broadcast networks, our NBC and Telemundo owned local broadcast television stations, and our broadcast television production operations. Our Broadcast Television segment generates revenue primarily from the sale of advertising on our broadcast networks, owned local broadcast television stations and related digital media properties, from the licensing of our owned programming, and from fees received under retransmission consent agreements. Filmed Entertainment Our Filmed Entertainment segment primarily produces, acquires, markets and distributes filmed entertainment worldwide. We also develop, produce and license live stage plays. Our Filmed Entertainment segment generates revenue primarily from the worldwide distribution of our owned and acquired films for exhibition in movie theaters, from the licensing of our owned and acquired films through various distribution platforms, and from the sale of our owned and acquired films on standard-definition video discs and Blu-ray discs (together, "DVDs") and through digital distributors. Our Filmed Entertainment segment also generates revenue from producing and licensing live stage plays, from distributing filmed entertainment produced by third parties, and from various digital media properties. Theme Parks Our Theme Parks segment consists primarily of our Universal theme parks in Orlando and Hollywood. Our Theme Parks segment generates revenue primarily from theme park attendance and per capita spending. Per 27-------------------------------------------------------------------------------- Table of Contents capita spending includes ticket price and in-park spending on food, beverages and merchandise. We also receive fees from third parties that own and operate Universal Studios Japan and Universal Studios Singapore for intellectual property licenses and other services. Other Our other business interests primarily include Comcast-Spectacor, which owns the Philadelphia Flyers and the Wells Fargo Center arena in Philadelphia and operates arena management-related businesses. Significant Developments The following are the more significant developments in our businesses during the six months ended June 30, 2014: • the entry into an agreement with Time Warner Cable Inc. ("Time Warner Cable") to acquire 100% of Time Warner Cable's outstanding shares; see "Time Warner Cable Merger" below for additional information • the entry into a transactions agreement with Charter Communications, Inc. ("Charter") to divest cable systems that would result in a net disposition of approximately 3.9 million video customers; see "Divestiture Transactions" below for additional information • the agreement of the International Olympic Committee to extend NBCUniversal's broadcast rights of the Olympic Games from 2022 through 2032 for $7.75 billion Time Warner Cable Merger On February 12, 2014, we entered into an agreement and plan of merger (the "merger agreement") with Time Warner Cable. As a result of the merger agreement, we will acquire 100% of Time Warner Cable's outstanding shares of common stock in exchange for shares of our Class A common stock (the "Time Warner Cable merger"). Time Warner Cable stockholders will receive, in exchange for each share of Time Warner Cable common stock owned immediately prior to the Time Warner Cable merger, 2.875 shares of our Class A common stock. Time Warner Cable stockholders will then own approximately 23% of our common stock, an estimate based on the number of shares outstanding as of the date of the merger agreement. Because the exchange ratio was fixed at the time of the merger agreement and the market value of our Class A common stock will continue to fluctuate, the number of shares of Class A common stock to be issued and the total value of the consideration exchanged will not be determinable until the closing date. Following the close of the Time Warner Cable merger, Time Warner Cable will be our wholly owned subsidiary. The Time Warner Cable merger remains subject to shareholder approval at both companies, regulatory review and other customary conditions. It is reasonably possible that the Time Warner Cable merger will close by the end of 2014. Divestiture Transactions The terms of the merger agreement contemplate that we are prepared to divest systems serving up to approximately 3 million video customers of the combined company to reduce competitive concerns. As a result of this commitment, on April 25, 2014, we entered into a transactions agreement with Charter Communications, Inc. ("Charter") that, if consummated, would satisfy our divestiture undertaking. Under the transactions agreement, following the close of the Time Warner Cable merger and subject to various conditions, we would divest cable systems resulting in a net disposition of approximately 3.9 million video customers through three transactions: (1) a spin-off of cable systems serving approximately 2.5 million of our video customers (the "spin-off transaction") into a newly formed public entity ("SpinCo"), (2) an exchange of cable systems serving approximately 1.5 million Time Warner Cable video customers for cable systems serving approximately 1.7 million Charter video customers, and (3) a sale to Charter of cable systems serving approximately 1.5 million Time Warner Cable video customers for cash (collectively, the "divestiture transactions"). In connection with the spin-off transaction and prior to the spin-off, it is expected that SpinCo will incur new debt to fund a distribution to us in the form of cash and notes, which will enable us to retire a portion of our debt. In the spin-off transaction, we will distribute common stock of SpinCo pro rata to the holders of all of our outstanding common stock, including the former Time Warner Cable stockholders who continue to hold shares 28-------------------------------------------------------------------------------- Table of Contents through the record date of the spin-off transaction. After the spin-off transaction, a newly formed, wholly owned indirect subsidiary of Charter will merge with and into Charter with the effect that all shares of Charter will be converted into shares of a new holding company, which will survive as the publicly traded parent company of Charter ("New Charter"). New Charter will then acquire an interest in SpinCo by issuing New Charter stock in exchange for a portion of the outstanding SpinCo stock, following which Comcast shareholders, including the former Time Warner Cable stockholders, are expected to own approximately 67% of SpinCo and New Charter is expected to own approximately 33% of SpinCo. The close of the divestiture transactions is subject to the completion of the Time Warner Cable merger, Charter stockholder approval, completion of the SpinCo financing transactions, regulatory approvals and other customary conditions. The Time Warner Cable merger and the divestiture transactions are subject to separate conditions, and the Time Warner Cable merger can be completed regardless of whether the divestiture transactions are ultimately completed. Competition The results of operations of our reportable business segments are affected by competition, as all of our businesses operate in competitive, consumer-driven and rapidly changing environments and compete with a growing number of companies that provide a broad range of communications products and services and entertainment, news and information content to consumers. Additionally, there continue to be new companies with significant financial resources that potentially may compete on a larger scale with our cable services, as well as with our cable and broadcast networks and filmed entertainment businesses. Competition for the cable services we offer consists primarily of direct broadcast satellite ("DBS") providers, which have a national footprint and compete in all our service areas, and phone companies, which overlap almost 50% of our service areas and are continuing to expand their fiber-based networks. We also compete with other providers of traditional cable services. All of these companies typically offer features, pricing and packaging for services comparable to our cable services. Each of NBCUniversal's businesses also faces substantial and increasing competition from providers of similar types of content, as well as from other forms of entertainment and recreational activities. NBCUniversal also must compete to obtain talent, programming and other resources required in operating these businesses. Technological changes are further intensifying and complicating the competitive landscape for all of our businesses by challenging existing business models and affecting consumer behavior. Newer services and devices that enable online digital distribution of movies, television shows, and other cable and broadcast video programming continue to gain consumer acceptance and evolve, including some services that charge a nominal or no fee for such programming. These services and devices may potentially negatively affect demand for our video services, as well as demand for our cable network, broadcast television and filmed entertainment content, as the number of entertainment choices available to consumers increases and as video programming is more reliably delivered over the Internet and more easily viewed via the Internet on televisions. Wireless services and devices also continue to evolve that allow consumers to access information, entertainment and communication services, which could negatively impact demand for our cable services, including for our voice services as people substitute mobile phones for landline phones. In addition, delayed viewing and advertising skipping have become more common as the penetration of digital video recorders ("DVRs") and similar products has increased and as content has become increasingly available via video-on-demand services and Internet sources, which may have a negative impact on our advertising revenue. In our Cable Communications segment, we believe that adding more content and delivering it on an increasing variety of platforms will assist in attracting and retaining customers for our cable services. We are also launching new technology initiatives, such as our X1 platform, Cloud DVR and deploying new wireless gateway devices, to further enhance our video and high-speed Internet services. In our NBCUniversal segments, to compete for consumers of our content and for customers at our theme parks, we have invested, and will continue to invest, substantial amounts in acquiring content and producing original content for our cable networks and broadcast television networks, including the acquisition of sports rights, and will continue to invest in our film productions and in the development of new theme park attractions. 29-------------------------------------------------------------------------------- Table of Contents Seasonality and Cyclicality Each of our businesses is subject to seasonal and cyclical variations. In our Cable Communications segment, our results are impacted by the seasonal nature of customers receiving our cable services in college and vacation markets. This generally results in a reduction in net customer additions in the second calendar quarter and an increase in net customer additions in the third and fourth quarters of each year. Revenue in our Cable Communications, Cable Networks and Broadcast Television segments is subject to cyclicality, with a benefit in even-numbered years from advertising related to candidates running for political office and issue-oriented advertising. Our Cable Networks and Broadcast Television segments revenue and operating costs and expenses are also cyclical as a result of our periodic broadcasts of the Olympic Games and the Super Bowl. Our advertising revenue generally increases in the period of these broadcasts from increased demand for advertising time, and our operating costs and expenses also increase as a result of our production costs and the amortization of the related rights fees. Revenue in our Filmed Entertainment segment fluctuates due to the timing of the release of films in movie theaters and the release of our films on DVD and through digital distributors. Release dates are determined by several factors, including competition and the timing of vacation and holiday periods. As a result, revenue tends to be seasonal, with increases experienced each year during the summer months and around the holidays. Revenue in our Cable Networks and Broadcast Television segments fluctuates depending on the timing of when our programming is aired on television, which typically results in higher advertising revenue in the second and fourth calendar quarter of each year. Revenue in our Cable Networks, Broadcast Television and Filmed Entertainment segments also fluctuates due to the timing of when our owned content is made available to licensees. Revenue in our Theme Parks segment fluctuates with changes in theme park attendance that result from the seasonal nature of vacation travel, local entertainment offerings and seasonal weather variations. Our theme parks generally experience peak attendance during the summer months when schools are closed and during early winter and spring holiday periods. Consolidated Operating Results Three Months Ended Increase/ Six Months Ended Increase/ June 30 (Decrease) June 30 (Decrease) (in millions) 2014 2013 2014 2013 Revenue $ 16,844 $ 16,270 3.5 % $ 34,252 $ 31,580 8.5 % Costs and Expenses: Programming and production 4,874 4,968 (1.9 ) 10,782 9,631 12.0 Other operating and administrative 4,924 4,570 7.8 9,676 9,036 7.1 Advertising, marketing and promotion 1,242 1,307 (5.0 ) 2,452 2,454 (0.1 ) Depreciation 1,599 1,583 0.9 3,168 3,149 0.6 Amortization 401 407 (1.2 ) 802 808 (0.7 ) Operating income 3,804 3,435 10.7 7,372 6,502 13.4 Other income (expense) items, net (545 ) (643 ) (15.3 ) (1,057 ) (1,140 ) (7.3 ) Income before income taxes 3,259 2,792 16.8 6,315 5,362 17.8 Income tax expense (1,234 ) (1,048 ) 17.8 (2,352 ) (1,973 ) 19.2 Net income 2,025 1,744 16.1 3,963 3,389 17.0 Net (income) loss attributable to noncontrolling interests and redeemable subsidiary preferred stock (33 ) (10 ) 261.0 (100 ) (218 ) (53.9 ) Net income attributable to Comcast Corporation $ 1,992 $ 1,734 14.8 % $ 3,863 $ 3,171 21.8 % All percentages are calculated based on actual amounts. Minor differences may exist due to rounding. Percentage changes that are considered not meaningful are denoted with NM. Consolidated Revenue Our Cable Communications, Cable Networks, Broadcast Television and Theme Parks segments as well as our other businesses accounted for the increase in consolidated revenue for the three and six months ended 30-------------------------------------------------------------------------------- Table of Contents June 30, 2014. Excluding $1.1 billion of revenue associated with the broadcast of the 2014 Sochi Olympics in February 2014, consolidated revenue increased 5.0% for the six months ended June 30, 2014. Revenue for our Cable Communications and NBCUniversal segments is discussed separately below under the heading "Segment Operating Results." Revenue for our other businesses is discussed separately below under the heading "Corporate and Other Results of Operations." Consolidated Costs and Expenses Our Cable Communications, Cable Networks, Broadcast Television and Theme Parks segments accounted for substantially all of the increase in consolidated costs and expenses, excluding depreciation and amortization ("operating costs and expenses") for the three and six months ended June 30, 2014. Operating costs and expenses for our Cable Communications and NBCUniversal segments are discussed separately below under the heading "Segment Operating Results." Our Corporate and Other operating costs and expenses includes transaction-related costs associated with the Time Warner Cable merger and the divestiture transactions of $44 million and $61 million for the three and six months ended June 30, 2014, respectively. Operating costs and expenses for our corporate and other businesses are discussed separately below under the heading "Corporate and Other Results of Operations." Consolidated depreciation and amortization remained flat for the three and six months ended June 30, 2014 compared to the same periods in 2013. Segment Operating Results Our segment operating results are presented based on how we assess operating performance and internally report financial information. We use operating income (loss) before depreciation and amortization, excluding impairment charges related to fixed and intangible assets and gains or losses on the sale of assets, if any, as the measure of profit or loss for our operating segments. This measure eliminates the significant level of noncash depreciation and amortization expense that results from the capital-intensive nature of certain of our businesses and from intangible assets recognized in business combinations. Additionally, it is unaffected by our capital structure or investment activities. We use this measure to evaluate our consolidated operating performance and the operating performance of our operating segments and to allocate resources and capital to our operating segments. It is also a significant performance measure in our annual incentive compensation programs. We believe that this measure is useful to investors because it is one of the bases for comparing our operating performance with that of other companies in our industries, although our measure may not be directly comparable to similar measures used by other companies. Because we use operating income (loss) before depreciation and amortization to measure our segment profit or loss, we reconcile it to operating income, the most directly comparable financial measure calculated and presented in accordance with generally accepted accounting principles in the United States of America ("GAAP"), in the business segment footnote to our condensed consolidated financial statements (see Note 12 to Comcast's condensed consolidated financial statements and Note 10 to NBCUniversal's condensed consolidated financial statements). This measure should not be considered a substitute for operating income (loss), net income (loss) attributable to Comcast Corporation or NBCUniversal, net cash provided by operating activities, or other measures of performance or liquidity we have reported in accordance with GAAP. Beginning in 2014, Fandango, our movie ticketing and entertainment business that was previously presented in our Cable Networks segment, is now presented in the Filmed Entertainment segment to reflect the change in our management reporting presentation. Due to immateriality, prior period amounts have not been adjusted. 31 -------------------------------------------------------------------------------- Table of Contents Cable Communications Segment Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Residential: Video $ 5,239 $ 5,175 $ 64 1.2 % High-speed Internet 2,819 2,569 250 9.7 Voice 922 910 12 1.3 Business services 965 788 177 22.4 Advertising 599 558 41 7.5 Other 485 467 18 3.9 Total revenue 11,029 10,467 562 5.4 Operating costs and expenses Programming 2,433 2,280 153 6.7 Technical and product support 1,365 1,330 35 2.7 Customer service 544 517 27 5.2 Franchise and other regulatory fees 325 311 14 4.7 Advertising, marketing and promotion 781 724 57 8.0 Other 1,017 970 47 4.7 Total operating costs and expenses 6,465 6,132 333 5.4 Operating income before depreciation and amortization $ 4,564 $ 4,335 $ 229 5.3 % Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Residential: Video $ 10,417 $ 10,288 $ 129 1.3 % High-speed Internet 5,569 5,092 477 9.4 Voice 1,842 1,810 32 1.7 Business services 1,882 1,529 353 23.1 Advertising 1,118 1,046 72 6.9 Other 958 919 39 4.4 Total revenue 21,786 20,684 1,102 5.3 Operating costs and expenses Programming 4,885 4,533 352 7.8 Technical and product support 2,742 2,650 92 3.5 Customer service 1,092 1,038 54 5.2 Franchise and other regulatory fees 646 619 27 4.4 Advertising, marketing and promotion 1,485 1,393 92 6.7 Other 1,972 1,897 75 3.9 Total operating costs and expenses 12,822 12,130 692 5.7 Operating income before depreciation and amortization $ 8,964 $ 8,554 $ 410 4.8 % Beginning in 2014, our Cable Communications segment revised its methodology for counting customers related to how we count and report customers who reside in multiple dwelling units ("MDUs") that are billed under bulk contracts (the "billable customers method"). For MDUs whose residents have the ability to receive additional cable services, such as additional programming choices or our high-definition ("HD") or DVR services, we now count and report customers based on the number of potential billable relationships within each MDU. For MDUs whose residents are not able to receive additional cable services, the MDU is now counted as a single customer. Previously, we had counted and reported these customers on an equivalent billing unit basis by dividing monthly revenue received under an MDU's bulk contract by the standard monthly residential rate where the MDU was 32 -------------------------------------------------------------------------------- Table of Contents located (the "EBU method"). We believe the billable customers method is consistent with the methodology used by other companies in our industry, including Time Warner Cable, to count and report customers. The tables below present customer metrics using the billable customers method. Because the differences in the number of customers using the billable customers method and the EBU method for high-speed Internet and voice customers were not material, high-speed Internet and voice customers metrics as of and for the three and six months ended June 30, 2013 are presented using the EBU method. Customer Metrics-Billable Customers Method Total Customers Net Additional Customers Three Months Ended Six Months Ended June 30 June 30 June 30 June 30 (in thousands) 2014 2013 2014 2013 2014 2013 Video customers 22,457 22,658 (144 ) (162 ) (120 ) (187 ) High-speed Internet customers 21,271 19,986 203 187 587 620 Voice customers 11,003 10,327 137 161 279 372 Total customer relationships 26,775 26,529 (25 ) 99 Single product customers 8,510 9,044 (95 ) (242 ) Double product customers 8,574 8,505 (82 ) 34 Triple product customers 9,691 8,980 152 307 Customer data includes residential and business customers. Customer relationships represent the number of residential and business customers that subscribe to at least one of our cable services and are presented based on actual amounts. Single product, double product and triple product customers represent customers that subscribe to one, two or three of our cable services, respectively. Cable Communications Segment-Revenue Our Cable Communications segment leverages our existing cable distribution system to grow revenue by, among other things, adding new customers, encouraging existing customers to add additional or higher-tier services, and growing other services such as our business services offerings and our home security and automation services. We offer our cable services in bundles and often provide promotional incentives. We seek to balance promotional offers and rate increases with their expected effects on the number of customers and overall revenue. Video Video revenue increased 1.2% and 1.3% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. An increase in the number of customers receiving additional and higher levels of video service and rate adjustments accounted for increases in revenue of 2.6% and 2.8% for the three and six months ended June 30, 2014, respectively. As of June 30, 2014, the number of customers who subscribed to our advanced services, which are HD and DVR services, increased 5.0% to 12.7 million customers compared to the same period in 2013. The increases in revenue in both periods were partially offset by fewer residential video customers compared to the prior year periods. These decreases in the number of residential video customers were primarily due to competitive pressures in our service areas from phone and direct broadcast satellite competitors and the impact of rate adjustments. We may experience further declines in the number of residential video customers. High-Speed Internet High-speed Internet revenue increased 9.7% and 9.4% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. An increase in the number of residential customers receiving our high-speed Internet service accounted for increases in revenue of 5.8% and 6.0% for the three and six months ended June 30, 2014, respectively. The remaining increases in revenue for the three and six months ended June 30, 2014 were primarily due to higher rates from customers receiving higher levels of service and rate adjustments. Our customer base continues to grow as consumers choose our high-speed Internet service and seek higher-speed offerings. 33-------------------------------------------------------------------------------- Table of Contents Voice Voice revenue increased 1.3% and 1.7% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. An increase in the number of residential customers receiving our voice service through our discounted bundled offerings accounted for increases in revenue of 5.8% and 6.2% for the three and six months ended June 30, 2014, respectively. These increases in both periods were partially offset by the impact of the allocation of voice revenue for our bundled customers because revenue attributable to voice services represents a lower proportion of the bundled rate. The amounts allocated to voice revenue in the bundled rate have decreased because video and high-speed Internet rates have increased, while voice rates have remained relatively flat. Business Services Business services revenue increased 22.4% and 23.1% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. The increases were primarily due to a higher number of small business customers receiving our cable services. The remaining increases in both periods were primarily due to continued growth in the number of medium-sized business customers receiving our other services, such as Ethernet network and cellular backhaul services. During the three and six months ended June 30, 2014, revenue from our medium-sized business customers represented 22% and 21%, respectively, of total business services revenue. We believe the increase in business customers is primarily the result of our efforts to gain market share from competitors by offering competitive services and pricing. Advertising Advertising revenue increased 7.5% and 6.9% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013 primarily due to increases in political advertising revenue, as well as increases in revenue in our core national and local advertising markets. Other Other revenue increased 3.9% and 4.4% for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013 primarily due to increases in franchise and other regulatory fees and in revenue from other services, including our home security and automation services. Cable Communications Segment-Operating Costs and Expenses Our most significant operating cost is the programming expense we incur to provide content to our video customers. We anticipate that our programming expenses will continue to increase. We have and will continue to attempt to offset increases in programming expenses through rate increases and the sale of additional video and other services, as well as by achieving operating efficiencies. Programming costs increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in programming license fees, including retransmission consent fees and sports programming costs, and fees to secure rights for additional programming for our customers across an increasing number of platforms. Technical and product support expenses increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to expenses related to customer fulfillment activities, expenses related to the development, delivery and support of our products and services and the continued growth in our products, including our X1 platform, Cloud DVR technology and wireless gateways. Technical and product support expenses also increased for the six months ended June 30, 2014 due to weather-related expenses. Customer service expenses increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in total labor costs associated with increases in customer service activity. The increases in customer service activity were primarily due to sales and related support activity associated with the continued deployment of enhanced services and devices, primarily our X1 platform, Cloud DVR technology, wireless gateways, home security and automation services, and continued growth in business services. Franchise and other regulatory fees increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in residential and business services revenue. 34-------------------------------------------------------------------------------- Table of Contents Advertising, marketing and promotion expenses increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in spending associated with attracting new residential and business services customers and encouraging existing customers to add additional or higher-tier services. Other costs and expenses increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in costs to support the advertising sales business as well as increases in other administrative costs. NBCUniversal Segments Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Cable Networks $ 2,476 $ 2,413 $ 63 2.6 % Broadcast Television 1,816 1,732 84 4.9 Filmed Entertainment 1,176 1,388 (212 ) (15.3 ) Theme Parks 615 546 69 12.8 Headquarters, other and eliminations (67 ) (84 ) 17 NM Total revenue $ 6,016 $ 5,995 $ 21 0.3 % Operating Income Before Depreciation and Amortization Cable Networks $ 914 $ 860 $ 54 6.3 % Broadcast Television 240 206 34 16.2 Filmed Entertainment 195 33 162 482.7 Theme Parks 244 231 13 5.6 Headquarters, other and eliminations (159 ) (139 ) (20 ) 13.8 Total operating income before depreciation and amortization $ 1,434 $ 1,191 $ 243 20.4 % Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Cable Networks $ 4,981 $ 4,638 $ 343 7.4 % Broadcast Television 4,437 3,249 1,188 36.6 Filmed Entertainment 2,527 2,604 (77 ) (3.0 ) Theme Parks 1,102 1,008 94 9.4 Headquarters, other and eliminations (155 ) (164 ) 9 NM Total revenue $ 12,892 $ 11,335 $ 1,557 13.7 % Operating Income Before Depreciation and Amortization Cable Networks $ 1,809 $ 1,719 $ 90 5.3 % Broadcast Television 362 171 191 111.4 Filmed Entertainment 483 102 381 372.6 Theme Parks 414 404 10 2.5 Headquarters, other and eliminations (323 ) (252 ) (71 ) (28.2 ) Total operating income before depreciation and amortization $ 2,745 $ 2,144 $ 601 28.0 % 35 -------------------------------------------------------------------------------- Table of Contents Cable Networks Segment Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Distribution $ 1,270 $ 1,219 $ 51 4.2 % Advertising 945 966 (21 ) (2.2 ) Content licensing and other 261 228 33 14.3 Total revenue 2,476 2,413 63 2.6 Operating costs and expenses Programming and production 1,124 1,084 40 3.8 Other operating and administrative 309 334 (25 ) (7.7 ) Advertising, marketing and promotion 129 135 (6 ) (4.9 ) Total operating costs and expenses 1,562 1,553 9 0.5 Operating income before depreciation and amortization $ 914 $ 860 $ 54 6.3 % Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Distribution $ 2,743 $ 2,460 $ 283 11.5 % Advertising 1,841 1,794 47 2.6 Content licensing and other 397 384 13 3.5 Total revenue 4,981 4,638 343 7.4 Operating costs and expenses Programming and production 2,311 1,992 319 16.0 Other operating and administrative 612 672 (60 ) (9.0 ) Advertising, marketing and promotion 249 255 (6 ) (2.5 ) Total operating costs and expenses 3,172 2,919 253 8.6 Operating income before depreciation and amortization $ 1,809 $ 1,719 $ 90 5.3 % Cable Networks Segment-Revenue Cable Networks revenue increased for the three months ended June 30, 2014 compared to the same period in 2013 primarily due to increases in distribution and content licensing and other revenue, which were partially offset by a decrease in advertising revenue. The increase in distribution revenue was primarily due to increases in the contractual rates charged under distribution agreements. The increase in content licensing and other revenue was primarily due to the timing of content provided under our licensing agreements. The decrease in advertising revenue was primarily due to a continuing decline in the audience ratings at some of our networks, which were offset by higher prices and an increase in the volume of advertising units sold. Cable Networks revenue for the three months ended June 30, 2014 was also impacted by the absence of Fandango and the Style network in the current year period. Cable Networks revenue increased for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to increases in distribution, advertising, and content licensing and other revenue. The increase in distribution revenue was primarily due to our broadcast of the 2014 Sochi Olympics in February 2014 and increases in contractual rates charged under distribution agreements. The increase in advertising revenue was primarily due to higher advertising revenue associated with the 2014 Sochi Olympics. Advertising revenue was also affected by higher prices and an increase in the volume of advertising units sold, which were offset by continuing declines in audience ratings at some of our networks. The increase in content licensing and other revenue was primarily due to the timing of content provided under our licensing agreements. Cable Networks revenue for the six months ended June 30, 2014 was also impacted by the absence of Fandango and the Style network in the current year period. Excluding $257 million of revenue associated with the 2014 Sochi Olympics, Cable Networks segment revenue increased 1.9% for the six months ended June 30, 2014 compared to the same period in 2013. 36-------------------------------------------------------------------------------- Table of Contents For both the three and six months ended June 30, 2014, 12% of our Cable Networks segment revenue was generated from our Cable Communications segment. For the three and six months ended June 30, 2013, 12% and 13%, respectively, of our Cable Networks segment revenue was generated from our Cable Communications segment. These amounts are eliminated in our condensed consolidated financial statements but are included in the amounts presented above. Cable Networks Segment-Operating Costs and Expenses Operating costs and expenses increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to an increase in programming and production costs, partially offset by a decrease in other operating and administrative expenses. The increases in programming and production costs in both periods were primarily due to our continued investment in programming, including sports programming rights costs. The increase in programming and production costs for the six months ended June 30, 2014 was also due to higher programming and production costs associated with the 2014 Sochi Olympics. The decreases in other operating and administrative costs for both periods were primarily due to lower employee-related costs and the absence of Fandango and the Style network in the current year periods. Broadcast Television Segment Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Advertising $ 1,245 $ 1,267 $ (22 ) (1.7 )% Content licensing 344 296 48 16.6 Other 227 169 58 33.4 Total revenue 1,816 1,732 84 4.9 Operating costs and expenses Programming and production 1,183 1,154 29 2.5 Other operating and administrative 288 292 (4 ) (1.1 ) Advertising, marketing and promotion 105 80 25 32.1 Total operating costs and expenses 1,576 1,526 50 3.3 Operating income before depreciation and amortization $ 240 $ 206 $ 34 16.2 % Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Advertising $ 3,078 $ 2,219 $ 859 38.7 % Content licensing 840 693 147 21.2 Other 519 337 182 53.8 Total revenue 4,437 3,249 1,188 36.6 Operating costs and expenses Programming and production 3,211 2,314 897 38.8 Other operating and administrative 611 584 27 4.6 Advertising, marketing and promotion 253 180 73 40.6 Total operating costs and expenses 4,075 3,078 997 32.4 Operating income before depreciation and amortization $ 362 $ 171 $ 191 111.4 % Broadcast Television Segment-Revenue Broadcast Television revenue increased for the three months ended June 30, 2014 compared to the same period in 2013 primarily due to increases in other revenue and content licensing revenue, which were partially offset by a decrease in advertising revenue. The increase in other revenue was primarily due to fees recognized under our retransmission consent agreements. The increase in content licensing revenue was primarily due to a new content 37-------------------------------------------------------------------------------- Table of Contents licensing agreement. The decrease in advertising revenue was primarily due to the timing of when certain shows in our primetime schedule were aired, including The Voice, which aired significantly fewer hours in the current year period compared to the prior year period. Broadcast Television revenue increased for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to an increase in advertising revenue associated with our broadcast of the 2014 Sochi Olympics in February 2014, as well as increases in other revenue and content licensing revenue. The increase in other revenue was primarily due to fees recognized under our retransmission consent agreements and other revenue associated with the 2014 Sochi Olympics. The increase in content licensing revenue was primarily due to new content licensing agreements. Excluding $846 million of revenue associated with the 2014 Sochi Olympics, Broadcast Television revenue increased 10.5% for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to higher advertising revenue related to an increase in audience ratings and higher prices of advertising units sold. Broadcast Television Segment-Operating Costs and Expenses Operating costs and expenses increased for the three months ended June 30, 2014 compared to the same period in 2013 primarily due to increases in advertising, marketing and promotion expenses, and in programming and production costs. The increase in advertising, marketing and promotion expenses is primarily due to increased spending associated with our primetime schedule. The increase in programming and production costs is associated with the timing of when certain shows in our primetime schedule were aired, as well as our continued investment in original programming. Operating costs and expenses increased for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to an increase in programming and production costs associated with our broadcast of the 2014 Sochi Olympics, as well as our continued investment in original programming. Filmed Entertainment Segment Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Theatrical $ 195 $ 553 $ (358 ) (64.8 )% Content licensing 462 406 56 13.8 Home entertainment 364 339 25 7.5 Other 155 90 65 71.0 Total revenue 1,176 1,388 (212 ) (15.3 ) Operating costs and expenses Programming and production 547 817 (270 ) (33.1 ) Other operating and administrative 209 163 46 27.3 Advertising, marketing and promotion 225 375 (150 ) (39.8 ) Total operating costs and expenses 981 1,355 (374 ) (27.6 ) Operating income before depreciation and amortization $ 195 $ 33 $ 162 482.7 % 38 -------------------------------------------------------------------------------- Table of Contents Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue Theatrical $ 571 $ 866 $ (295 ) (34.1 )% Content licensing 927 844 83 9.8 Home entertainment 715 710 5 0.7 Other 314 184 130 70.6 Total revenue 2,527 2,604 (77 ) (3.0 ) Operating costs and expenses Programming and production 1,151 1,515 (364 ) (24.0 ) Other operating and administrative 397 331 66 19.5 Advertising, marketing and promotion 496 656 (160 ) (24.3 ) Total operating costs and expenses 2,044 2,502 (458 ) (18.3 ) Operating income before depreciation and amortization $ 483 $ 102 $ 381 372.6 % Filmed Entertainment Segment-Revenue Filmed Entertainment revenue decreased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to decreases in theatrical revenue which were partially offset by increases in other revenue and content licensing revenue. The decrease in theatrical revenue for the three months ended June 30, 2014 was primarily due to the performance of our prior year period releases, including Fast and Furious 6 and Oblivion, which were partially offset by the performance of our current period releases, including Neighbors. The six months ended June 30, 2014 was also impacted by the performance of our first quarter 2014 releases, including Ride Along and Lone Survivor, and the international performance of The Wolf of Wall Street. The increase in other revenue was primarily due to the inclusion in 2014 of Fandango, which was previously presented in our Cable Networks segment. The increases in content licensing revenue in both periods were primarily due to the timing of licensing agreements related to our film library. Filmed Entertainment Segment-Operating Costs and Expenses Operating costs and expenses decreased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to lower amortization of film cost and a decrease in advertising, marketing and promotion expenses, which was primarily due to a smaller film slate in the current year periods compared to the same periods in 2013. Operating costs and expenses for both the three and six months ended June 30, 2014 included $18 million of expense associated with fair value adjustments to capitalized film production costs. Operating costs and expenses for the three and six months ended June 30, 2013 included $47 million and $113 million, respectively, of expense associated with fair value adjustments to capitalized film production costs. Theme Parks Segment Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue $ 615 $ 546 $ 69 12.8 % Operating costs and expenses 371 315 56 18.1 Operating income before depreciation and amortization $ 244 $ 231 $ 13 5.6 % Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue $ 1,102 $ 1,008 $ 94 9.4 % Operating costs and expenses 688 604 84 14.0 Operating income before depreciation and amortization $ 414 $ 404 $ 10 2.5 % 39 -------------------------------------------------------------------------------- Table of Contents Theme Parks Segment-Revenue Theme Parks revenue increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to higher guest attendance and increases in per capita spending. The three months ended June 30, 2014 included the benefit of a shift in the timing of holidays to the second quarter in 2014 from the first quarter in 2013. Theme Parks Segment-Operating Costs and Expenses Operating costs and expenses increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to costs associated with additional attractions, such as Orlando's The Wizarding World of Harry Potter TM-Diagon Alley TM, and an increase in per capita spending. NBCUniversal Headquarters, Other and Eliminations The change in operating income (loss) before depreciation and amortization for headquarters, other and eliminations for the three and six months ended June 30, 2014 compared to the same periods in 2013 was primarily due to higher employee-related costs, including severance costs. Corporate and Other Results of Operations Three Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue $ 172 $ 136 $ 36 26.1 % Operating costs and expenses 354 255 99 39.0 Operating loss before depreciation and amortization $ (182 ) $ (119 ) $ (63 ) (53.9 )% Six Months Ended Increase/ June 30 (Decrease) (in millions) 2014 2013 $ % Revenue $ 346 $ 298 $ 48 16.0 % Operating costs and expenses 681 500 181 36.1 Operating loss before depreciation and amortization $ (335 ) $ (202 ) $ (133 ) (65.8 )% Corporate and Other-Revenue Other revenue primarily relates to Comcast-Spectacor, which owns the Philadelphia Flyers and the Wells Fargo Center arena in Philadelphia and operates arena management-related businesses. Other revenue increased for the three and six months ended June 30, 2014 compared to the same periods in 2013 primarily due to increases in revenue from food services for sporting events associated with a new contract entered into by our Comcast-Spectacor business, as well as increases in revenue associated with newly acquired businesses. Corporate and Other-Operating Costs and Expenses Corporate and Other operating costs and expenses primarily include overhead, personnel costs, the costs of corporate initiatives and branding, and operating costs and expenses associated with Comcast-Spectacor. Corporate and Other operating costs and expenses increased for the three months ended June 30, 2014 compared to the same period in 2013 primarily due to $44 million of transaction-related costs associated with the Time Warner Cable merger and divestiture transactions, and an increase in labor costs in our Comcast-Spectacor business. Corporate and Other operating costs and expenses increased for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to company-wide branding initiatives, including initiatives associated with the 2014 Sochi Olympics, $61 million of transaction-related costs associated with the Time Warner Cable merger and divestiture transactions, and an increase in labor costs in our Comcast-Spectacor business. 40-------------------------------------------------------------------------------- Table of Contents Consolidated Other Income (Expense) Items, Net Three Months Ended Six Months Ended June 30 June 30 (in millions) 2014 2013 2014 2013 Interest expense $ (648 ) $ (636 ) $ (1,290 ) $ (1,289 ) Investment income (loss), net 120 13 233 85 Equity in net income (losses) of investees, net 22 23 54 34 Other income (expense), net (39 ) (43 ) (54 ) 30 Total $ (545 ) $ (643 ) $ (1,057 ) $ (1,140 ) Investment Income (Loss), Net The components of investment income (loss), net for the three and six months ended June 30, 2014 and 2013 are presented in a table in Note 6 to Comcast's condensed consolidated financial statements. Other Income (Expense), Net Other income (expense), net remained relatively flat for the three months ended June 30, 2014 compared to the same period in 2013. The change in other income (expense), net for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to a $108 million gain recognized in the prior year period related to our sale of wireless communications spectrum licenses and a $27 million favorable settlement of a contingency recognized in the current year period related to the AT&T Broadband transaction. Consolidated Income Tax Expense Income tax expense for the three and six months ended June 30, 2014 and 2013 reflects an effective income tax rate that differs from the federal statutory rate primarily due to state income taxes, adjustments associated with uncertain tax positions and foreign income taxes. We expect our 2014 annual effective tax rate to be in the range of 37% to 39%, absent changes in tax laws or significant changes in uncertain tax positions. It is reasonably possible that certain statutes of limitations for the years 2000 through 2006 will expire and/or judicial decisions related to litigation could be issued within the current calendar year that may result in a decrease in our effective tax rate. Consolidated Net (Income) Loss Attributable to Noncontrolling Interests and Redeemable Subsidiary Preferred Stock The decrease in net (income) loss attributable to noncontrolling interests and redeemable subsidiary preferred stock for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to our acquisition of GE's remaining 49% common equity interest in NBCUniversal Holdings in March 2013. Liquidity and Capital Resources Our businesses generate significant cash flows from operating activities. We believe that we will be able to continue to meet our current and long-term liquidity and capital requirements, including fixed charges, through our cash flows from operating activities, existing cash, cash equivalents and investments, available borrowings under our existing credit facilities, and our ability to obtain future external financing. We anticipate that we will continue to use a substantial portion of our cash flows to meet our debt repayment obligations, to fund our capital expenditures, to invest in business opportunities and to return capital to shareholders. 41-------------------------------------------------------------------------------- Table of Contents Operating Activities Components of Net Cash Provided by Operating Activities Six Months Ended June 30 (in millions) 2014 2013 Operating income $ 7,372 $ 6,502 Depreciation and amortization 3,970 3,957 Operating income before depreciation and amortization 11,342 10,459 Noncash share-based compensation 266 213 Changes in operating assets and liabilities (905 ) 418 Cash basis operating income 10,703 11,090 Payments of interest (1,164 ) (1,132 ) Payments of income taxes (1,904 ) (2,222 ) Excess tax benefits under share-based compensation (206 ) (147 ) Other 118 96 Net cash provided by operating activities $ 7,547 $ 7,685 The variance between changes in operating assets and liabilities for the six months ended June 30, 2014 compared to the same period in 2013 was $1.3 billion, of which approximately $800 million was related to the timing of film and television production and related costs. The remaining variance was primarily related to the recognition of deferred revenue associated with the broadcast of the 2014 Sochi Olympics in February 2014 and the timing of payments, including participations, residuals and program obligations. The decrease in income tax payments for the six months ended June 30, 2014 compared to the same period in 2013 was primarily due to lower tax payments in the first quarter of 2014 that related to 2013 compared to the prior year period. The decrease was also due to the settlement of tax disputes recorded in 2013 and a decrease in taxes on nonrecurring gains. The decreases were partially offset by higher taxable income from operations and the expiration of the economic stimulus legislation in 2014. Investing Activities Net cash used in investing activities for the six months ended June 30, 2014 consisted primarily of cash paid for capital expenditures, cash paid for intangible assets and acquisitions, which were partially offset by proceeds from the sales of businesses and investments. Capital expenditures increased for the six months ended June 30, 2014 compared to the same period in 2013 primarily due to increased spending in our Cable Communications segment on customer premise equipment related to the deployment of our X1 platform and Cloud DVR technology, and our continued investment in network infrastructure to increase network capacity. Financing Activities Net cash used in financing activities for the six months ended June 30, 2014 consisted primarily of repayments of debt, repurchases of our common stock and dividend payments, which were partially offset by proceeds from new borrowings. In January 2014, we repaid at maturity $1 billion aggregate principal amount of 5.30% senior notes due 2014. In February 2014, we repaid $1.25 billion of borrowings outstanding under NBCUniversal Enterprise Inc.'s ("NBCUniversal Enterprise") revolving credit facility with the proceeds from $990 million of borrowings under its new commercial paper program and cash on hand. In February 2014, we issued $1.2 billion aggregate principal amount of 3.60% senior notes due 2024 and $1 billion aggregate principal amount of 4.75% senior notes due 2044. The proceeds from this offering were used for working capital and general corporate purposes, including the repayment of a portion of our outstanding commercial paper and our $900 million aggregate principal amount of 2.10% senior notes due April 2014 at maturity. 42-------------------------------------------------------------------------------- Table of Contents We have made, and may from time to time in the future make, optional repayments on our debt obligations, which may include repurchases of our outstanding public notes and debentures, depending on various factors, such as market conditions. Available Borrowings Under Credit Facilities We also maintain significant availability under our lines of credit and our commercial paper programs to meet our short-term liquidity requirements. In February 2014, NBCUniversal Enterprise established a commercial paper program. The maximum borrowing capacity under this commercial paper program is $1.35 billion, and it is supported by NBCUniversal Enterprise's existing $1.35 billion revolving credit facility due March 2018. The commercial paper program is fully and unconditionally guaranteed by us and the cable guarantors. As of June 30, 2014, NBCUniversal Enterprise had $1 billion face amount of commercial paper outstanding. The proceeds from NBCUniversal Enterprise's issuance of commercial paper were used to repay the $1.25 billion borrowings outstanding under its revolving credit facility. As of June 30, 2014, amounts available under our consolidated revolving credit facilities, net of amounts outstanding under our commercial paper programs and undrawn letters of credit, totaled $6.3 billion, which included $340 million available under NBCUniversal Enterprise's credit facility. Share Repurchases and Dividends In January 2014, our Board of Directors increased our share repurchase authorization to $7.5 billion, which does not have an expiration date. Under this authorization, we may repurchase shares in the open market or in private transactions. During the six months ended June 30, 2014, we repurchased 30 million shares of our Class A Special common stock for $1.5 billion. We intend to repurchase a total of $3 billion of shares in 2014, subject to market conditions. In addition, after shareholder approval of the Time Warner Cable merger has been obtained by both Comcast and Time Warner Cable, we intend to repurchase an additional $2.5 billion of shares during 2014, subject to market conditions and the timing of the shareholder approvals. In January 2014, our Board of Directors approved a 15% increase in our dividend to $0.90 per share on an annualized basis. In each of January and May 2014, our Board of Directors approved a quarterly dividend of $0.225 per share as part of our planned annual dividend. We expect to continue to pay quarterly dividends, although each dividend is subject to approval by our Board of Directors. Quarterly Dividends Declared (in millions) Amount Month of Payment Three months ended March 31, 2014 $ 585 April Three months ended June 30, 2014 $ 583 July Critical Accounting Judgments and Estimates The preparation of our condensed consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and contingent liabilities. We base our judgments on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. For a more complete discussion of the accounting judgments and estimates that we have identified as critical in the preparation of our condensed consolidated financial statements, please refer to our Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2013 Annual Report on Form 10-K. Recent Accounting Pronouncements See Note 2 to each of Comcast's and NBCUniversal's condensed consolidated financial statements for additional information related to recent accounting pronouncements. 43 -------------------------------------------------------------------------------- Table of Contents |