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TWX > SEC Filings for TWX > Form 10-Q on 2-Nov-2011All Recent SEC Filings

Show all filings for TIME WARNER INC.

Form 10-Q for TIME WARNER INC.


2-Nov-2011

Quarterly Report


MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

INTRODUCTION

Management's discussion and analysis of results of operations and financial condition ("MD&A") is a supplement to the accompanying consolidated financial statements and provides additional information on Time Warner Inc.'s ("Time Warner" or the "Company") businesses, current developments, financial condition, cash flows and results of operations. MD&A is organized as follows:

• Overview. This section provides a general description of Time Warner's business segments, as well as recent developments the Company believes are important in understanding the results of operations and financial condition or in understanding anticipated future trends.

• Results of operations. This section provides an analysis of the Company's results of operations for the three and nine months ended September 30, 2011. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description of transactions and events that affect the comparability of the results being analyzed is included.

• Financial condition and liquidity. This section provides an analysis of the Company's financial condition as of September 30, 2011 and cash flows for the nine months ended September 30, 2011.

• Caution concerning forward-looking statements. This section provides a description of the use of forward-looking information appearing in this report, including in MD&A and the consolidated financial statements.


Table of Contents

TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

OVERVIEW

Time Warner is a leading media and entertainment company whose major businesses encompass an array of the most respected and successful media brands. Among the Company's brands are TNT, TBS, CNN, HBO, Cinemax, Warner Bros., New Line Cinema, People, Sports Illustrated and Time. During the nine months ended September 30, 2011, the Company generated Revenues of $20.781 billion (up 9% from $19.076 billion in 2010), Operating Income of $4.132 billion (up 3% from $4.004 billion in 2010), Net Income attributable to Time Warner shareholders of $2.113 billion (up 17% from $1.809 billion in 2010) and Cash Provided by Operations from Continuing Operations of $2.146 billion (down 7% from $2.319 billion in 2010).

Time Warner Businesses

Time Warner classifies its operations into three reportable segments: Networks, Filmed Entertainment and Publishing. For additional information regarding Time Warner's business segments, refer to Note 11, "Segment Information," in the accompanying consolidated financial statements.

Networks. Time Warner's Networks segment consists of Turner Broadcasting System, Inc. ("Turner") and Home Box Office, Inc. ("Home Box Office"). During the nine months ended September 30, 2011, the Networks segment generated Revenues of $10.155 billion (49% of the Company's overall Revenues) and $3.278 billion in Operating Income.

Turner operates domestic and international networks, including such recognized brands as TNT, TBS, truTV, CNN and Cartoon Network, which are among the leaders in advertising-supported cable television networks. The Turner networks generate revenues principally from providing programming to affiliates that have contracted to receive and distribute this programming and from the sale of advertising. Turner also operates various websites, including CartoonNetwork.com, CNN.com, Golf.com, NASCAR.com, NCAA.com and SI.com that generate revenues principally from the sale of advertising. In 2011, Turner continued to expand its online and mobile offerings for its networks by rolling out applications and websites for on demand viewing of programs on its TNT, TBS, Cartoon Network, Adult Swim and truTV networks and live streaming of its CNN and HLN networks to authenticated subscribers.

Turner has a multi-year arrangement with the National Basketball Association (the "NBA") to televise NBA games on Turner's TNT network. On June 30, 2011, the collective bargaining agreement between the NBA and the National Basketball Players Association expired, and on July 1, 2011 the NBA announced a lockout of the players (the "NBA Lockout"), which has resulted in the cancellation of NBA 2011-2012 season games through the end of November. For the three months ended September 30, 2011, the NBA Lockout did not have a material impact on the Networks segment's operating results, and the Company does not expect it to have a material impact on the segment's operating results for the remainder of the year. However, the longer-term impact of the NBA Lockout will be influenced by many factors including viewer ratings on TNT and advertising demand after the NBA Lockout ends. Because of the inherent uncertainties surrounding the NBA Lockout, the Company is unable to quantify the adverse impact that a prolonged NBA Lockout would have on the Networks segment's operating results.

Home Box Office operates the HBO and Cinemax multi-channel premium pay television services, with the HBO service ranking as the most widely distributed domestic multi-channel premium pay television service. Home Box Office generates revenues principally from providing programming to affiliates that have contracted to receive and distribute such programming to their customers who choose to subscribe to the HBO or Cinemax services. An additional source of revenues for Home Box Office is the sale and licensing of its original programming, including True Blood, The Pacific, Sex and the City and Entourage. In 2010, Home Box Office launched its on demand broadband offerings of HBO and Cinemax by rolling out HBO GO and MAX GO, its authenticated online video services. In the second quarter and third quarter of 2011, Home Box Office made available HBO GO and MAX GO, respectively, on mobile devices, including the iPad, iPhone and Android smart phones. HBO GO was available to approximately 80% of the HBO domestic subscriber base and MAX GO was available to approximately 85% of the Cinemax domestic subscriber base as of November 2, 2011.

The Company's Networks segment has been pursuing international expansion in select areas for the past several years. During the first quarter of 2011, Home Box Office purchased an additional 8% equity interest in HBO Latin America Group, consisting of HBO Brazil, HBO Olé and HBO Latin America Production Services (collectively, "HBO LAG"), for $65 million, resulting in Home Box Office owning 88% of the equity interests in HBO LAG. The investment in HBO LAG


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

is accounted for under the equity method of accounting, because control of the entity is shared with the remaining minority partner. The Company anticipates that international expansion will continue to be an area of focus at the Networks segment for the foreseeable future.

Filmed Entertainment. Time Warner's Filmed Entertainment segment consists of businesses managed by the Warner Bros. Entertainment Group ("Warner Bros.") that principally produce and distribute theatrical motion pictures, including the following recently released films: Harry Potter and the Deathly Hallows: Part 2, The Hangover Part II and Horrible Bosses, as well as television shows and videogames. During the nine months ended September 30, 2011, the Filmed Entertainment segment generated Revenues of $8.748 billion (39% of the Company's overall Revenues) and $836 million in Operating Income.

The Filmed Entertainment segment's theatrical product revenues are generated principally through rentals from theatrical exhibition and subsequently through licensing fees received for the distribution of films on television networks and pay television programming services. Television product revenues are generated principally from the licensing of the Filmed Entertainment segment's programs on television networks and pay television programming services. The Filmed Entertainment segment also generates revenues for both its theatrical and television product through home video distribution on DVD and Blu-ray Discs and in various digital formats. In addition, the Filmed Entertainment segment generates revenues through the distribution of interactive videogames.

Warner Bros. continues to be an industry leader in the television content business. During the 2011-2012 broadcast season, Warner Bros. expects to produce more than 30 scripted primetime series, with at least three series for each of the five broadcast networks (including 2 Broke Girls, The Big Bang Theory, Fringe, Harry's Law, The Mentalist, The Middle, Mike & Molly, Two and a Half Men and Vampire Diaries) and original series for several cable networks (including The Closer, Pretty Little Liars, Rizzoli & Isles and Southland). Internationally, Warner Bros. has begun to form a group of local television production companies in major territories with a focus on non-scripted programs and formats that can be sold internationally and adapted for sale in the U.S. Warner Bros. has also begun to create locally produced versions of programs owned by the studio and to develop original local television programming.

The distribution of DVDs has been one of the largest drivers of the segment's revenues and profits over the last several years. However, in recent years, home video revenues have declined as a result of several factors, including consumers shifting to subscription rental services and discount rental kiosks, which generate significantly less revenue per transaction for the Company than DVD sales, the general economic downturn in the U.S. and many regions around the world, increasing competition for consumer discretionary time and spending, piracy, and the maturation of the standard definition DVD format. Reduced consumer spending on DVDs is being partially offset by growing sales of high definition Blu-ray Discs and increased sales through electronic delivery (particularly video-on-demand), which have higher gross margins than standard definition DVDs. The decline in consumer spending on DVDs is also being partially offset by the sale of theatrical and television content to subscription video-on-demand providers. For example, on October 13, 2011, Warner Bros. and CBS Corporation announced a licensing agreement with Netflix, Inc. ("Netflix") that will allow Netflix's U.S. members to stream previous seasons of scripted series that are currently on The CW network or that premiere on the network through the 2014-2015 broadcast season.

Publishing. Time Warner's Publishing segment consists principally of magazine publishing and related websites as well as marketing services and direct-marketing businesses that are all primarily conducted by Time Inc. During the nine months ended September 30, 2011, the Publishing segment generated Revenues of $2.633 billion (12% of the Company's overall Revenues) and $356 million in Operating Income.

As of September 30, 2011, Time Inc. published 21 magazines in the U.S., including People, Sports Illustrated and Time, and over 70 magazines outside the U.S. The Publishing segment generates revenues primarily from the sale of print advertising, magazine subscriptions and newsstand sales. Digital Advertising revenues were 12% and 13% of Time Inc.'s total Advertising revenues for the three and nine months ended September 30, 2011, respectively, compared to 13% and 14% for the three and nine months ended September 30, 2010, respectively.


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

Recent Developments

2011 Debt Offerings

On October 17, 2011, Time Warner issued $1.0 billion aggregate principal amount of debt securities from its shelf registration statement. On April 1, 2011, Time Warner issued $2.0 billion aggregate principal amount of debt securities from its shelf registration statement. See "Financial Condition and Liquidity - Outstanding Debt and Other Financing Arrangements" for more information.

Revolving Bank Credit Facilities

On September 27, 2011, Time Warner amended its $5.0 billion senior unsecured credit facilities, which had consisted of a $2.5 billion three-year revolving credit facility and a $2.5 billion five-year revolving credit facility. The amendment changed the $2.5 billion three-year revolving credit facility to a $2.5 billion four-year revolving credit facility with a maturity date of September 27, 2015 (the "Four Year Revolving Credit Facility") and extended the maturity date of the $2.5 billion five-year revolving credit facility from January 19, 2016 to September 27, 2016 (the "Five Year Revolving Credit Facility" and together with the Four Year Revolving Credit Facility, the "Revolving Credit Facilities"). The amendment also reduced interest rates and facility fees and eliminated the reference to the percentage of commitments used under the Revolving Credit Facilities for the purpose of calculating the interest rate on borrowings under the Revolving Credit Facilities. See "Financial Condition and Liquidity - Outstanding Debt and Other Financing Arrangements" for more information.

RESULTS OF OPERATIONS

Recent Accounting Guidance Not Yet Adopted

See Note 1 to the accompanying consolidated financial statements for a discussion of recent accounting guidance not yet adopted.

Transactions and Other Items Affecting Comparability

As more fully described herein and in the related notes to the accompanying
consolidated financial statements, the comparability of Time Warner's results
has been affected by transactions and certain other items in each period as
follows (millions):



                                                          Three Months Ended                            Nine Months Ended
                                                    9/30/11                 9/30/10               9/30/11                9/30/10

Asset impairments                              $             (4)       $             (9)     $            (15)      $             (9)
Gain on operating assets                                      1                       -                     6                     59
Other                                                        (6)                     (2)                  (18)                   (21)

Impact on Operating Income                                   (9)                    (11)                  (27)                    29

Investment gains (losses), net                                2                       2                    (1)                     2
Amounts related to the separation of Time
Warner Cable Inc.                                           (15)                      2                   (10)                    (5)
Premiums paid and transaction costs incurred
in connection with debt redemptions                           -                    (295)                    -                   (364)

Pretax impact(a)                                            (22)                   (302)                  (38)                  (338)
Income tax impact of above items                              8                     116                    22                    144

Impact of items on net income attributable
to Time Warner Inc. shareholders               $            (14)       $           (186)     $            (16)      $           (194)

(a) For the three and nine months ended September 30, 2010, pretax impact amount does not include $4 million and $15 million, respectively, of external costs related to mergers, acquisitions or dispositions.


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $30 million and $84 million for the three and nine months ended September 30, 2011, respectively, and $29 million and $44 million for the three and nine months ended September 30, 2010, respectively. For further discussion of Restructuring and severance costs, refer to "Consolidated Results" and "Business Segment Results."

Asset Impairments

During the three and nine months ended September 30, 2011, the Company recorded $1 million and $12 million, respectively, of noncash impairments of capitalized software costs at the Filmed Entertainment segment as well as $3 million of other miscellaneous noncash asset impairments at the Filmed Entertainment segment for both the three and nine months ended September 30, 2011.

During the three and nine months ended September 30, 2010, the Company recorded a $9 million noncash impairment of intangible assets related to the termination of a videogames licensing relationship at the Filmed Entertainment segment.

Gain on Operating Assets

For the three and nine months ended September 30, 2011, the Company recognized Gains on operating assets of $1 million and $6 million, respectively.

For the nine months ended September 30, 2010, the Company recognized a $59 million gain at the Networks segment upon the acquisition of the controlling interest in HBO Central Europe ("HBO CE"), reflecting the recognition of the excess of the fair value over the Company's carrying costs of its original investment in HBO CE.

Other

Other reflects legal and other professional fees related to the defense of securities litigation matters for former employees totaling $2 million and $6 million for the three and nine months ended September 30, 2011, respectively, and $2 million and $21 million for the three and nine months ended September 30, 2010, respectively. Other also reflects external costs related to mergers, acquisitions or dispositions of $4 million and $12 million for the three and nine months ended September 30, 2011, respectively.

Investment Gains (Losses), Net

For the three and nine months ended September 30, 2011, the Company recognized $2 million of net miscellaneous investment gains and $1 million of net miscellaneous investment losses, respectively.

For both the three and nine months ended September 30, 2010, the Company recognized $2 million of net miscellaneous investment gains.

Amounts Related to the Separation of Time Warner Cable Inc.

For the three and nine months ended September 30, 2011, the Company recognized $10 million and $5 million, respectively, of other loss related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by Time Warner Cable Inc. ("TWC") employees and $5 million of other loss for both the three and nine months ended September 30, 2011 related to changes in the value of a TWC tax indemnification receivable.

For the three and nine months ended September 30, 2010, the Company recognized $2 million of other income and $5 million of other loss, respectively, related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by TWC employees.


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

Premiums Paid and Transaction Costs Incurred in Connection with Debt Redemptions

For the three and nine months ended September 30, 2010, the Company recognized $295 million and $364 million, respectively, of premiums paid and transaction costs incurred in connection with debt redemptions. During the three months ended September 30, 2010, the Company repurchased and redeemed all $1.0 billion aggregate principal amount of the 5.50% Notes due 2011 of Time Warner, $1.362 billion aggregate principal amount of outstanding 6.875% Notes due 2012 of Time Warner and $568 million aggregate principal amount of outstanding 9.125% Debentures due 2013 of Historic TW Inc. (as successor by merger to Time Warner Companies, Inc.). In addition, during the nine months ended September 30, 2010, the Company repurchased and redeemed all $1.0 billion aggregate principal amount of the 6.75% Notes due 2011 of Time Warner.

Income Tax Impact

The income tax impact reflects the estimated tax provision or tax benefit associated with each item affecting comparability. Such estimated tax provisions or tax benefits vary based on certain factors, including the taxability or deductibility of the items and foreign tax on certain transactions.

Consolidated Results

The following discussion provides an analysis of the Company's results of
operations and should be read in conjunction with the accompanying consolidated
statement of operations.

Revenues.The components of Revenues are as follows (millions):



                                                                 Three Months Ended                                        Nine Months Ended
                                                   9/30/11             9/30/10            % Change           9/30/11             9/30/10            % Change
Subscription                                   $        2,376      $        2,263            5%          $        7,135      $        6,725            6%
Advertising                                             1,395               1,330            5%                   4,452               4,027           11%
Content                                                 3,130               2,636           19%                   8,709               7,914           10%
Other                                                     167                 148           13%                     485                 410           18%

Total revenues                                 $        7,068      $        6,377           11%          $       20,781      $       19,076            9%

The increase in Subscription and Advertising revenues for the three and nine months ended September 30, 2011 was primarily related to an increase at the Networks segment. The increase in Content revenues for the three months ended September 30, 2011 was due primarily to an increase at the Filmed Entertainment segment and for the nine months ended September 30, 2011 was primarily due to increases at the Filmed Entertainment and Networks segments.

Each of the revenue categories is discussed in greater detail by segment in "Business Segment Results."

Costs of Revenues. For the three months ended September 30, 2011 and 2010, Costs of revenues totaled $3.808 billion and $3.529 billion, respectively, and, for the nine months ended September 30, 2011 and 2010, Costs of revenues totaled $11.579 billion and $10.481 billion, respectively. The increases in Costs of revenues for the three and nine months ended September 30, 2011 were driven primarily by increases at the Networks and Filmed Entertainment segments. The segment variations are discussed in "Business Segment Results."

Selling, General and Administrative Expenses. For the three months ended September 30, 2011, Selling, general and administrative expenses increased 11% to $1.563 billion from $1.409 billion for the three months ended September 30, 2010. For the nine months ended September 30, 2011, Selling, general and administrative expenses increased 8% to $4.775 billion from $4.409 billion for the nine months ended September 30, 2010. The increases in Selling, general and administrative expenses for the three and nine months ended September 30, 2011 primarily related to increases at the Networks and Filmed Entertainment segments. The segment variations are discussed in "Business Segment Results."

Included in Costs of revenues and Selling, general and administrative expenses is depreciation expense of $160 million and $487 million for the three and nine months ended September 30, 2011, respectively, and $168 million and $502 million


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

for the three and nine months ended September 30, 2010, respectively.

Amortization Expense. Amortization expense increased to $68 million and $202 million for the three and nine months ended September 30, 2011, respectively, from $54 million and $188 million for the three and nine months ended September 30, 2010, respectively.

Restructuring and Severance Costs. For the three and nine months ended September 30, 2011, the Company incurred Restructuring and severance costs of $30 million and $84 million, respectively, primarily related to employee terminations and other exit activities, consisting of $16 million and $34 million, respectively, at the Networks segment, $11 million and $33 million, respectively, at the Filmed Entertainment segment and $3 million and $15 million, respectively, at the Publishing segment and, for the nine months ended September 30, 2011, $2 million at the Corporate segment.

For the three and nine months ended September 30, 2010, the Company incurred Restructuring and severance costs of $29 million and $44 million, respectively, primarily related to employee terminations and other exit activities, consisting of $5 million for both periods at the Networks segment, $10 million and $17 million, respectively, at the Filmed Entertainment segment and $14 million and $22 million, respectively, at the Publishing segment.

Operating Income. Operating Income increased to $1.596 billion for the three months ended September 30, 2011 from $1.347 billion for the three months ended September 30, 2010. Excluding the items noted under "Transactions and Other Items Affecting Comparability" totaling $9 million and $11 million of expense for the three months ended September 30, 2011 and 2010, respectively, Operating Income increased $247 million, primarily reflecting an increase at the Filmed Entertainment segment, partially offset by declines at the Networks and Publishing segments.

Operating Income increased to $4.132 billion for the nine months ended September 30, 2011 from $4.004 billion for the nine months ended September 30, 2010. Excluding the items noted under "Transactions and Other Items Affecting Comparability" totaling $27 million of expense and $29 million of income for the nine months ended September 30, 2011 and 2010, respectively, Operating Income increased $184 million, primarily reflecting increases at the Filmed Entertainment, Networks and Publishing segments.

The segment variations are discussed under "Business Segment Results."

Interest Expense, Net. For the three and nine months ended September 30, 2011, Interest expense, net, increased to $310 million and $898 million, respectively, . . .

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