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Form 10-Q for TIME WARNER INC.


1-Aug-2012

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 six months ended June 30, 2012. This analysis is presented on both a consolidated and a business segment basis. In addition, a brief description of transactions and other items 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 June 30, 2012 and cash flows for the six months ended June 30, 2012.

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 six months ended June 30, 2012, the Company generated Revenues of $13.723 billion (essentially flat from $13.713 billion in 2011), Operating Income of $2.310 billion (down 9% from $2.536 billion in 2011), Net Income attributable to Time Warner shareholders of $1.013 billion (down 22% from $1.291 billion in 2011) and Cash provided by operations from continuing operations of $759 million (down 13% from $868 million in 2011).

Time Warner Businesses

Time Warner classifies its operations into three reportable segments: Networks, Film and TV Entertainment and Publishing. For additional information regarding Time Warner's segments, refer to Note 13, "Segment Information," in the accompanying consolidated financial statements. Effective for the first quarter of 2012, the Company changed the name of its Filmed Entertainment reportable segment to Film and TV Entertainment. This change did not affect the composition of the segment; accordingly, all prior period financial information related to this reportable segment was unaffected.

Networks. Time Warner's Networks segment consists of Turner Broadcasting System, Inc. ("Turner") and Home Box Office, Inc. ("Home Box Office"). During the six months ended June 30, 2012, the Networks segment recorded Revenues of $7.200 billion (52% of the Company's total Revenues) and $2.117 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 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 provides online and mobile offerings for on demand viewing of programs on its networks and live streaming of its CNN and HLN networks to authenticated subscribers. Turner also operates various websites, including CNN.com, NCAA.com, NASCAR.com and CartoonNetwork.com, that generate revenues principally from the sale of advertising and sponsorships.

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. HBO and Cinemax pay television subscribers also have access to the authenticated HBO GO and MAX GO streaming services, respectively, on various online and mobile platforms. Home Box Office generates revenues principally from providing programming to affiliates that have contracted to receive and distribute such programming to their customers who 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 Game of Thrones, True Blood and Boardwalk Empire.

During the six months ended June 30, 2012, Turner completed the shutdown of its general entertainment network, Imagine, in India, and made the decision to close its TNT television operations in Turkey as a result of the failure to meet performance and growth objectives and after a strategic review completed during the second quarter of 2012 (collectively, the "Imagine and TNT Turkey Shutdowns"). For the three and six months ended June 30, 2012, the Company recognized $163 million and $221 million, respectively, of charges related to the Imagine and TNT Turkey Shutdowns. These shutdowns will allow the Company to redirect its resources toward opportunities with stronger growth prospects. See "Transactions and Other Items Affecting Comparability" as well as Note 2, "Asset Dispositions," to the accompanying consolidated financial statements for further information.

The Company still anticipates that international expansion will continue to be an area of focus at the Networks segment for the foreseeable future.

Film and TV Entertainment. Time Warner's Film and TV Entertainment segment consists of businesses managed by the Warner Bros. Entertainment Group ("Warner Bros.") that principally produce and distribute theatrical motion pictures, television shows and videogames. During the six months ended June 30, 2012, the Film and TV Entertainment segment recorded Revenues of $5.398 billion (36% of the Company's total Revenues) and $348 million in Operating Income.


Table of Contents

TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

The Film and TV Entertainment segment's theatrical product revenues are generated principally through rentals from theatrical exhibition of films, including the following recently released films: The Dark Knight Rises, Journey 2: The Mysterious Island, Sherlock Holmes: A Game of Shadows, Wrath of the Titans, Magic Mike and Project X, and subsequently through licensing fees received from the distribution of films on television networks and pay television programming services. Television product revenues are generated principally from the licensing of programs to television networks and pay television programming services. The 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 (e.g., electronic sell-through and video-on-demand). In addition, the segment generates revenues through the distribution of videogames.

Warner Bros. continues to be an industry leader in the television content business. For the 2012-2013 broadcast season, Warner Bros. expects to produce more than 30 scripted primetime series, with at least one series for each of the five broadcast networks (including 2 Broke Girls, The Big Bang Theory, Fringe, The Mentalist, The Middle,Mike & Molly, Person of Interest, Two and a Half Men and Vampire Diaries) and original series for cable television networks (including Major Crimes, Pretty Little Liars, Rizzoli & Isles, Dallas and Southland). Internationally, Warner Bros. operates a group of local television production companies in the U.K. and the Netherlands that focus on developing 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 contributors to the segment's revenues and profits over the last decade. 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 incremental gross margins than standard definition DVDs. The decline in consumer spending on DVDs is also being partially offset by the licensing of theatrical and television content to subscription video-on-demand providers.

Publishing. Time Warner's Publishing segment consists principally of Time Inc.'s magazine publishing and related websites, book publishing businesses and marketing services businesses. During the six months ended June 30, 2012, the Publishing segment recorded Revenues of $1.631 billion (12% of the Company's total Revenues) and $93 million in Operating Income.

As of June 30, 2012, Time Inc. published 21 magazines in the U.S., including People, Sports Illustrated and Time, and over 70 magazines outside the U.S. All 21 of Time Inc.'s U.S. magazines are available as tablet editions. The Publishing segment generates revenues primarily from the sale of advertising, magazine subscriptions and newsstand sales. During the first half of 2012, the publishing industry continued to experience both secular and economic challenges, which negatively impacted print advertising and newsstand sales.

From the fourth quarter of 2010 through the first quarter of 2012, Turner managed the SI.comand Golf.com websites, including selling the advertising for the websites, and in exchange Time Inc. received a license fee from Turner. In the second quarter of 2012, Time Inc. assumed management of these websites from Turner and, with the transfer, Time Inc. now sells the advertising for these websites and no longer receives a license fee from Turner. This change did not affect the Company's consolidated results of operations for the three and six months ended June 30, 2012.

Recent Developments

2012 Debt Offering

On June 13, 2012, Time Warner issued $1.0 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.


Table of Contents

TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

CME

During the quarter ended June 30, 2012, the Company purchased additional shares of Class A common stock of Central European Media Enterprises Ltd. ("CME"), a publicly traded media and entertainment company that operates leading television networks in six Central and Eastern European countries. On July 3, 2012, the Company purchased additional shares of Class A common stock and one share of preferred stock convertible into Class A common stock. As a result of these purchases, the Company increased its economic interest in CME from 34% to 49.9%. For additional information regarding the transactions with CME, refer to Note 3, "Investments," in the accompanying consolidated financial statements.

RESULTS OF OPERATIONS

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                 Six Months Ended
                                              6/30/12          6/30/11          6/30/12          6/30/11
Asset impairments                           $      (127)     $       (11)     $      (179)     $       (11)
Gain (loss) on operating assets                       -                2              (42)               5
Other                                               (23)              (4)             (33)             (12)

Impact on Operating Income                         (150)             (13)            (254)             (18)

Investment losses, net                              (15)              (7)             (24)              (3)
Amounts related to the separation of Time
Warner Cable Inc.                                     1                1                -                5
Amounts related to the disposition of the
Warner Music Group                                   (6)               -               (6)               -

Pretax impact                                      (170)             (19)            (284)             (16)
Income tax impact of above items                     24               11               60               14

Impact of items on net income
attributable to Time Warner Inc.
shareholders                                $      (146)     $        (8)     $      (224)     $        (2)

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $23 million and $49 million for the three and six months ended June 30, 2012, respectively, and $24 million and $54 million for the three and six months ended June 30, 2011, respectively. For further discussion of Restructuring and severance costs, refer to "Consolidated Results" and "Business Segment Results."

Asset Impairments

For the three and six months ended June 30, 2012, the Company recognized $127 million and $179 million, respectively, of charges at the Networks segment in connection with the Imagine and TNT Turkey Shutdowns primarily related to certain receivables, including value added tax receivables, inventories and long-lived assets, including Goodwill.

For the three and six months ended June 30, 2011, the Company recorded an $11 million impairment of capitalized software costs at the Film and TV Entertainment segment.


Table of Contents

TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

Gain (Loss) on Operating Assets

For the six months ended June 30, 2012, the Company recognized a loss on operating assets of $42 million at the Publishing segment in connection with the sale in the first quarter of 2012 of Time Inc.'s school fundraising business, QSP (the "QSP Business").

For the three and six months ended June 30, 2011, the Company recognized gains on operating assets of $2 million and $5 million, respectively.

Other

Other reflects legal and other professional fees related to the defense of securities litigation matters for former employees totaling $2 million for the six months ended June 30, 2012, and $2 million and $4 million for the three and six months ended June 30, 2011, respectively.

Other also reflects external costs related to mergers, acquisitions or dispositions of $23 million and $31 million for the three and six months ended June 30, 2012, respectively, and $2 million and $8 million for the three and six months ended June 30, 2011, respectively. The external costs related to mergers, acquisitions or dispositions for the three and six months ended June 30, 2012 include charges of $20 million and $26 million, respectively, related to the Imagine and TNT Turkey Shutdowns.

Amounts related to securities litigation and government investigations and external costs related to mergers, acquisitions or dispositions are included in Selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

Investment Losses, Net

For the three and six months ended June 30, 2012, the Company recognized $15 million and $24 million, respectively, of net miscellaneous investment losses, including a $16 million loss on an investment in a network in Turkey recognized as part of the Imagine and TNT Turkey Shutdowns. For the three and six months ended June 30, 2011, the Company recognized $7 million and $3 million, respectively, of net miscellaneous investment losses. Investment losses, net are included in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Separation of Time Warner Cable Inc.

The Company recognized $1 million for the three months ended June 30, 2012 and $1 million and $5 million for the three and six months ended June 30, 2011, respectively, of other income 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, which has been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Disposition of the Warner Music Group

For both the three and six months ended June 30, 2012, the Company recognized a $6 million loss primarily related to a tax indemnification associated with the disposition of the Warner Music Group ("WMG") in 2004. This amount has been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

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.


Table of Contents

TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

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                              Six Months Ended
                                    6/30/12          6/30/11         % Change      6/30/12          6/30/11         % Change
Subscription                      $     2,488      $     2,391          4%       $     4,959      $     4,759          4%
Advertising                             1,604            1,626         (1%)            3,076            3,057          1%
Content                                 2,433            2,846        (15%)            5,294            5,579         (5%)
Other                                     219              167         31%               394              318         24%

Total revenues                    $     6,744      $     7,030         (4%)      $    13,723      $    13,713          0%

The increase in Subscription revenues for the three and six months ended June 30, 2012 was primarily related to an increase at the Networks segment. Advertising revenues for the three and six months ended June 30, 2012 were essentially flat as an increase at the Networks segment was offset by a decrease at the Publishing segment. The decrease in Content revenues for the three and six months ended June 30, 2012 was due primarily to a decrease at the Film and TV Entertainment segment. The increase in Other revenues for the three and six months ended June 30, 2012 was primarily related to an increase at the Film and TV Entertainment segment.

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

Costs of Revenues. For the three months ended June 30, 2012 and 2011, Costs of revenues totaled $3.865 billion and $4.044 billion, respectively, and for the six months ended June 30, 2012 and 2011, Costs of revenues totaled $7.841 billion and $7.771 billion, respectively. For the three and six months ended June 30, 2012, Costs of revenues increased at the Networks segment and decreased at the Film and TV Entertainment and Publishing segments. The segment variations are discussed in "Business Segment Results."

Selling, General and Administrative Expenses. For the three months ended June 30, 2012, Selling, general and administrative expenses decreased 1% to $1.606 billion from $1.621 billion for the three months ended June 30, 2011. For the six months ended June 30, 2012, Selling, general and administrative expenses decreased 1% to $3.181 billion from $3.212 billion for the six months ended June 30, 2011. For the three and six months ended June 30, 2012, the decrease in Selling, general and administrative expenses was primarily related to declines at the Film and TV Entertainment and Publishing segments, offset in part by an increase at the Networks segment. The segment variations are discussed in "Business Segment Results."

Included in Costs of revenues and Selling, general and administrative expenses is depreciation expense of $161 million and $315 million for the three and six months ended June 30, 2012, respectively, and $164 million and $327 million for the three and six months ended June 30, 2011, respectively.

Amortization Expense. Amortization expense decreased to $60 million for the three months ended June 30, 2012 from $66 million for the three months ended June 30, 2011 and decreased to $121 million for the six months ended June 30, 2012 from $134 million for the six months ended June 30, 2011.


Table of Contents

TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

Restructuring and Severance Costs. For the three and six months ended June 30, 2012 and 2011, the Company incurred Restructuring and severance costs primarily related to employee terminations and other exit activities. Restructuring and severance costs by segment are as follows (millions):

                                                  Three Months Ended                     Six Months Ended
                                              6/30/12            6/30/11            6/30/12            6/30/11
Networks                                    $         8        $         6        $        22        $        18
Film and TV Entertainment                             2                 16                  8                 22
Publishing                                           12                  -                 18                 12
Corporate                                             1                  2                  1                  2

Total restructuring and severance costs     $        23        $        24        $        49        $        54

Operating Income. Operating Income decreased to $1.063 billion for the three months ended June 30, 2012 from $1.266 billion for the three months ended June 30, 2011. Excluding the items noted under "Transactions and Other Items Affecting Comparability" totaling $150 million and $13 million of expense for the three months ended June 30, 2012 and 2011, respectively, Operating Income decreased $66 million, reflecting decreases at the Film and TV Entertainment and Publishing segments and higher intersegment eliminations, offset in part by an increase at the Networks segment.

Operating Income decreased to $2.310 billion for the six months ended June 30, 2012 from $2.536 billion for the six months ended June 30, 2011. Excluding the items noted under "Transactions and Other Items Affecting Comparability" totaling $254 million and $18 million of expense for the six months ended June 30, 2012 and 2011, respectively, Operating Income increased $10 million, reflecting increases at the Film and TV Entertainment and Networks segments, offset in part by a decrease at the Publishing segment and higher intersegment eliminations.

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

Interest Expense, Net. For the three months ended June 30, 2012, Interest expense, net decreased to $308 million from $314 million for the three months ended June 30, 2011. For the six months ended June 30, 2012, Interest expense, net increased to $628 million from $588 million for the six months ended June 30, 2011. The increase for the six months ended June 30, 2012 reflected higher average net debt in 2012, including the issuance of $4 billion aggregate principal amount of debt securities in April 2011, October 2011 and June 2012.

Other Loss, Net. Other loss, net detail is shown in the table below (millions):

                                                    Three Months Ended                   Six Months Ended
                                                6/30/12           6/30/11           6/30/12           6/30/11
Investment losses, net                        $       (15)      $        (7)      $       (24)      $        (3)
Amounts related to the separation of TWC                1                 1                 -                 5
Amounts related to the disposition of WMG              (6)                -                (6)                -
Income (loss) from equity method investees            (22)                8               (30)              (10)
Other                                                  (5)               (4)               13                (8)

Other loss, net                               $       (47)      $        (2)      $       (47)      $       (16)

Investment losses, net and amounts related to the separation of TWC and the disposition of WMG are discussed under "Transactions and Other Items Affecting Comparability." The remaining changes in Other loss, net for the three and six months ended June 30, 2012 were primarily due to higher losses from equity method investees. In addition, the six months ended June 30, 2012 included an adjustment to reduce a liability for deferred compensation.

Income Tax Provision. Income tax provision decreased to $279 million and $625 million for the three and six months ended June 30, 2012, respectively, from . . .

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