Charter 2011 Annual Report Download - page 137

Use of Non-GAAP Financial Measures
The Company uses certain measures that are not
defined by Generally Accepted Accounting Principles
(“GAAP”) to evaluate various aspects of its business.
Adjusted EBITDA, adjusted EBITDA less capital expen-
ditures and free cash flow are non-GAAP financial
measures and should be considered in addition to, not
as a substitute for, net income (loss) or cash flows
from operating activities reported in accordance with
GAAP. These terms, as defined by Charter, may not
be comparable to similarly titled measures used by
other companies. Adjusted EBITDA is reconciled to
consolidated net income (loss) and free cash flow is
reconciled to net cash flows from operating activities
in this Annual Report.
Adjusted EBITDA is defined as consolidated net income
(loss) plus net interest expense, income taxes, depre-
ciation and amortization, stock compensation expense,
loss on extinguishment of debt, and other expenses,
such as special charges, reorganization items and loss
on sale or retirement of assets. As such, it eliminates
the significant non-cash depreciation and amortization
expense that results from the capital-intensive nature
of the Company’s businesses as well as other non-cash
or special items, and is unaffected by the Company’s
capital structure or investment activities. Adjusted
EBITDA less capital expenditures is defined as adjusted
EBITDA minus purchases of property, plant and equip-
ment. Adjusted EBITDA and adjusted EBITDA less
capital expenditures are used by management and the
Company’s Board to evaluate the performance of the
Company’s business. For this reason, they are signifi-
cant components of Charter’s annual incentive compen-
sation program. However, these measures are limited
in that they do not reflect the periodic costs of certain
capitalized tangible and intangible assets used in
generating revenues and the cash cost of financing.
Management evaluates these costs through other
financial measures.
Free cash flow is defined as net cash flows from oper-
ating activities, less purchases of property, plant and
equipment and changes in accrued expenses related
to capital expenditures.
The Company believes that adjusted EBITDA and free
cash flow provide information useful to investors in
assessing Charter’s performance and its ability to
service its debt, fund operations and make additional
investments with internally generated funds. In addition,
adjusted EBITDA generally correlates to the leverage
ratio calculation under the Company’s credit facilities
or outstanding notes to determine compliance with
the covenants contained in the credit facilities and
notes (all such documents have been previously filed
with the United States Securities and Exchange
Commission). For the purpose of calculating compliance
with leverage covenants, we used adjusted EBITDA,
as presented, excluding certain expenses paid by our
operating subsidiaries to other Charter entities. Our debt
covenants refer to these expenses as management
fees which fees were in the amount of $151 million,
$144 million, and $136 million for the years ended
December 31, 2011, 2010, and 2009, respectively.
Upon our emergence from bankruptcy, we adopted
fresh start accounting. This resulted in a new account-
ing basis and therefore, the consolidated financial
statements on or after December 1, 2009 are not
comparable to the consolidated financial statements
prior to that date. For purposes of this Annual Report,
the eleven months ended November 30, 2009 of
Charter (the “Predecessor”) and the one month ended
December 31, 2009 of Charter (the “Successor”) have
been combined to present the year ended December 31,
2009 results of operations for the Predecessor and
the Successor. This combined presentation is being
made solely to compare the combined results of oper-
ations for the year ended December 31, 2009 with
2010 as we believe this presentation provides a more
meaningful perspective on our ongoing financial and
operational performance and trends.
In addition to the actual results for the twelve months
ended December 31, 2011, 2010, and 2009, we have
provided pro forma results in this Annual Report for
the twelve months ended December 31, 2011, 2010,
and 2009. We believe these pro forma results facilitate
meaningful analysis of the results of operations. Pro
forma results in this Annual Report reflect certain
acquisitions and sales of cable systems in 2009, 2010,
and 2011 as if they occurred as of January 1, 2009.
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