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TWX > SEC Filings for TWX > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for TIME WARNER INC.


7-Aug-2013

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, 2013. 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, 2013 and cash flows for the six months ended June 30, 2013.

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.

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, 2013, the Company generated Revenues of $14.374 billion (up 5% from $13.723 billion in 2012), Operating Income of $2.921 billion (up 26% from $2.310 billion in 2012), Net Income attributable to Time Warner shareholders of $1.525 billion (up 54% from $991 million in 2012) and Cash provided by operations of $1.644 billion (up 119% from $751 million in 2012). On March 6, 2013, Time Warner announced that its Board of Directors has authorized management to proceed with plans for the complete legal and structural separation of the Company's Publishing segment from Time Warner (the "Time Separation").

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 12, "Segment Information," to 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 six months ended June 30, 2013, the Networks segment recorded Revenues of $7.536 billion (52% of the Company's total Revenues) and Operating Income of $2.542 billion.

Turner operates domestic and international television 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 to subscribers and from the sale of advertising. In addition, Turner provides online and mobile offerings for on-demand viewing of programs on its networks and live streaming of its networks to authenticated subscribers. Turner also manages and operates various digital media properties that primarily consist of brand-aligned websites, including CNN.com, NBA.com and related properties, NCAA.com and cartoonnetwork.com, that generate revenues principally from the sale of advertising and sponsorships.

Home Box Office operates the HBO and Cinemax domestic 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-branded premium pay and basic tier television services are distributed in more than 60 countries in Latin


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

America, Asia and Europe. HBO and Cinemax domestic premium pay television subscribers have access to the authenticated HBO GO and MAX GO streaming services, respectively, on various mobile devices and other online platforms, and an authenticated HBO GO streaming service is available to international premium pay television subscribers of HBO in a number of countries. 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. Additional sources of revenues for Home Box Office are the sale of its original programming, including Game of Thrones, True Blood and Boardwalk Empire, via DVDs, Blu-ray Discs and electronic sell-through ("EST") and the licensing of original programming primarily to international television networks.

The Company expects that over the next several years domestic subscription revenues generated by basic cable networks and premium pay television services in the industry will grow, in connection with affiliate contract renewals, as a result of investments in high quality programming.

Film and TV Entertainment. Time Warner's Film and TV Entertainment segment consists of businesses managed by Warner Bros. Entertainment Inc. ("Warner Bros.") that principally produce and distribute feature films, television shows and videogames. During the six months ended June 30, 2013, the Film and TV Entertainment segment recorded Revenues of $5.622 billion (37% of the Company's total Revenues) and Operating Income of $444 million.

The Film and TV Entertainment segment's theatrical product revenues are generated principally through rental fees from theatrical exhibition of feature films, including the following recently released films: The Great Gatsby, The Hangover Part III and Man of Steel, and subsequently through licensing fees received from the distribution of films on television networks and premium pay television services. Television product revenues are generated principally from the licensing of programs to television networks and premium pay television 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., EST and video-on-demand) as well as through licensing of feature films and television programming to subscription video on demand ("SVOD") services. In addition, the segment generates revenues through the development and distribution of videogames.

Warner Bros. continues to be an industry leader in the television content business. Domestically, for the 2013-2014 season, Warner Bros. expects to produce more than 50 series, with at least three series for each of the five broadcast networks (including 2 Broke Girls, Arrow, The Bachelor, The Big Bang Theory, The Following, The Middle, Mike & Molly, Person of Interest, Revolution, Two and a Half Men, Vampire Diaries and The Voice), several original series for cable television networks (including Dallas, Longmire, Major Crimes, Pretty Little Liars and Rizzoli & Isles) and several series for first-run syndication (including The Ellen DeGeneres Show, Extra and TMZ). Warner Bros. also licenses many of these series internationally. In addition, 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. also creates locally produced versions of programs owned by the studio as well as original local television programming.

The distribution and sale of physical discs (both standard definition DVDs and high definition Blu-ray Discs) is one of the largest contributors to the segment's revenues and profits. 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 physical disc sales; the general economic downturn in the U.S. and many regions around the world; increasing competition for consumer discretionary time and spending; and piracy. The electronic delivery of film and television content is growing and becoming more important to the Film and TV Entertainment segment, which has helped to offset some of the decline in sales of physical discs. In 2012 and through the first half of 2013, the decline in consumer spending on physical discs moderated compared to prior years and the growth in consumer spending on electronic delivery increased.

Publishing. Time Warner's Publishing segment consists principally of Time Inc.'s magazine publishing business and related websites as well as book publishing and marketing businesses. During the six months ended June 30, 2013, the Publishing segment recorded Revenues of $1.570 billion (11% of the Company's total Revenues) and Operating Income of $115 million.


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

As of June 30, 2013, Time Inc. published 21 magazines in print in the U.S., including People, Sports Illustrated, InStyle and Time, and over 70 magazines outside the U.S. All of Time Inc.'s U.S. and U.K. magazines are available as digital editions on multiple digital devices and platforms. The Publishing segment generates revenues primarily from the sale of advertising, magazine subscriptions and newsstand sales. The Publishing segment is experiencing declines in its print advertising and newsstand sales as a result of market conditions in the magazine publishing industry. The Publishing segment is pursuing a number of initiatives (the "Publishing Segment Initiatives") to help mitigate these declines, including conducting additional brand marketing; developing innovative ways to sell branded magazine content outside of traditional channels, including through websites, tablets and other mobile devices; developing integrated advertising solutions that will provide greater data insight and value to advertisers; developing a new cross-platform content management system; and improving its operating efficiency through management of its cost structure. In July 2013, a new chief executive officer of Time Inc. was announced. Management of Time Inc. is conducting a strategic review of its business and, as a result of the review and the input of the new chief executive officer, may make changes to the Publishing Segment Initiatives.

Recent Developments

Time Inc. Separation from Time Warner

On March 6, 2013, Time Warner announced that its Board of Directors has authorized management to proceed with plans for the Time Separation. The Time Separation is currently expected to be effected as a spin-off of Time Inc., a wholly owned subsidiary. In the Time Separation, Time Warner will distribute all of its Time Inc. common stock to Time Warner stockholders, and Time Inc. will become an independent publicly-traded company. The Time Separation is contingent on the satisfaction of a number of conditions, including the effectiveness of a registration statement on Form 10 that Time Inc. will file with the Securities and Exchange Commission. Time Warner expects to complete the Time Separation in early 2014.

Central European Media Enterprises Ltd.

During the second quarter of 2013, Central European Media Enterprises Ltd. ("CME") conducted a public offering of shares of its Class A common stock in which the Company purchased approximately 28.5 million shares for approximately $78 million in cash in order to maintain a 49.9% voting interest in CME's Class A common stock. In addition, on June 25, 2013, the Company purchased $200 million of CME's newly-issued, non-voting Series B convertible redeemable preferred shares. The Company incurred costs of $9 million in connection with these transactions.

Prior to the second quarter of 2013, the Company accounted for its investment in CME under the cost method of accounting because CME founder and Non-Executive Chairman, Ronald S. Lauder, controlled the voting rights associated with the Company's shares in CME pursuant to a voting agreement between the parties. During the second quarter of 2013, the voting agreement ended and the Company assumed control of the voting rights associated with its shares of Class A common stock and Series A convertible preferred stock (which is convertible into shares of Class A common stock and votes with the Class A common stock on an as-converted basis). As a result of the end of the voting agreement with Mr. Lauder, the Company began accounting for its investment in the Class A common stock and Series A convertible preferred stock of CME under the equity method of accounting. The Company accounts for its investment in the Series B convertible redeemable preferred shares of CME under the cost method of accounting. In accordance with applicable accounting guidance, the Company has recast its historical financial results to reflect the presentation of its investment in the Class A common stock and Series A convertible preferred stock of CME under the equity method of accounting for all prior periods from the date of the Company's initial investment in CME in May 2009.

See Note 3, "Investments," to the accompanying consolidated financial statements for more information.

RESULTS OF OPERATIONS

Recent Accounting Guidance

See Note 1, "Description of Business and Basis of Presentation," to the accompanying consolidated financial statements for a discussion of recent accounting guidance adopted.


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

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

                                                   6/30/13          6/30/12          6/30/13          6/30/12

Asset impairments                                $        (3)     $      (127)     $       (30)     $      (179)
Gain (loss) on operating assets, net                       9                -               17              (42)
Other                                                     (7)             (23)             (18)             (33)

Impact on Operating Income                                (1)            (150)             (31)            (254)

Investment gains (losses), net                           (16)             (15)              55              (24)
Amounts related to the separation of
Time Warner Cable Inc.                                     1                1                6                -
Amounts related to the disposition of Warner
Music Group                                                1               (6)               -               (6)
Items affecting comparability relating to
equity method investments                                (12)               -              (12)               -

Pretax impact                                            (27)            (170)              18             (284)
Income tax impact of above items                           5               24              (17)              60

Impact of items on net income attributable to
Time Warner Inc. shareholders                    $       (22)     $      (146)     $         1      $      (224)

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $50 million and $130 million for the three and six months ended June 30, 2013, respectively, and $23 million and $49 million for the three and six months ended June 30, 2012, respectively. For further discussion of Restructuring and severance costs, see "Consolidated Results" and "Business Segment Results."

Asset Impairments

During the three months ended June 30, 2013, the Company recognized miscellaneous asset impairments of $3 million at the Film and TV Entertainment segment. During the six months ended June 30, 2013, the Company recognized asset impairments of $18 million at the Networks segment consisting of $12 million related to certain Turner international intangible assets and $6 million related to programming assets resulting from Turner's decision in the first quarter of 2013 to shut down certain of its entertainment networks in Spain, $5 million at the Film and TV Entertainment segment related to miscellaneous assets and $7 million at the Corporate segment related to certain internally developed software.

During 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 shutdown of Turner's general entertainment network, Imagine, in India and its TNT television operations in Turkey in the first half of 2012 (the "Imagine and TNT Turkey Shutdowns") primarily related to certain receivables, including value added tax receivables, programming assets and long-lived assets, including Goodwill.

Gain (Loss) on Operating Assets, Net

For the three and six months ended June 30, 2013, the Company recognized a $9 million gain upon the Company's acquisition of the controlling interest in HBO Nordic. For the six months ended June 30, 2013, the Company also recognized an $8 million gain at the Corporate segment on the disposal of certain corporate assets.

For the six months ended June 30, 2012, the Company recognized a $42 million loss 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").


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

Other

Other reflects external costs related to mergers, acquisitions or dispositions of $7 million and $18 million for the three and six months ended June 30, 2013, respectively, and $23 million and $31 million for the three and six months ended June 30, 2012, respectively. External costs related to mergers, acquisitions or dispositions for the three and six months ended June 30, 2013 consisted of $7 million and $16 million, respectively, related to the separation of Time Inc. from Time Warner and, for the six months ended June 30, 2013, $2 million related to the shutdown of certain of Turner's entertainment networks in Spain. External costs related to mergers, acquisitions or dispositions for the three and six months ended June 30, 2012 included $20 million and $26 million, respectively, related to the Imagine and TNT Turkey Shutdowns.

Other also 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.

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

Investment Gains (Losses), Net

For the three months ended June 30, 2013, the Company recognized $16 million of net miscellaneous investment losses. For the six months ended June 30, 2013, the Company recognized $55 million of net miscellaneous investment gains consisting of a $65 million gain on the sale of the Company's investment in a theater venture in Japan, which included a $10 million gain related to a foreign currency contract, and $10 million of net miscellaneous investment losses.

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.

Amounts Related to the Separation of Time Warner Cable Inc.

The Company recognized other income of $1 million and $6 million for the three and six months ended June 30, 2013, respectively, and other income of $1 million and $0 for the three and six months ended June 30, 2012, respectively, 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 Warner Music Group

The Company recognized gains of $1 million and $0 for the three and six months ended June 30, 2013, respectively, and losses of $6 million for both the three and six months ended June 30, 2012 associated with the disposition of Warner Music Group ("WMG") in 2004. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Items Affecting Comparability Relating to Equity Method Investments

For the three and six months ended June 30, 2013, the Company recognized $12 million as its share of a noncash loss on the extinguishment of debt recorded by an equity method investee. This amount has been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.


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TIME WARNER INC.

MANAGEMENT'S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - (Continued)

Income Tax Impact

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

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

                                               6/30/13          6/30/12         % Change      6/30/13          6/30/12         % Change
Subscription                                 $     2,569      $     2,488          3%       $     5,129      $     4,959          3%
Advertising                                        1,710            1,604          7%             3,174            3,076          3%
Content                                            2,921            2,433         20%             5,651            5,294          7%
Other                                                235              219          7%               420              394          7%

Total revenues                               $     7,435      $     6,744         10%       $    14,374      $    13,723          5%

The increase in Subscription and Advertising revenues for the three and six months ended June 30, 2013 mainly reflected an increase at the Networks segment, partially offset by a decrease at the Publishing segment. The increase in Content revenues for the three and six months ended June 30, 2013 was due primarily 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, 2013, Costs of revenues increased to $4.221 billion from $3.865 billion for the three months ended June 30, 2012, respectively, reflecting increases at the Film and TV Entertainment and Networks segments, partially offset by a decline at the Publishing segment. For the six months ended June 30, 2013, Costs of revenues increased to $7.971 billion from $7.841 billion for the six months ended June 30, 2012, respectively, reflecting increases at the Film and TV Entertainment and Networks segments, partially offset by a decline at the Publishing segment. The segment variations are discussed in "Business Segment Results."

Selling, General and Administrative Expenses. For the three months ended June 30, 2013, Selling, general and administrative expenses decreased slightly to $1.598 billion from $1.606 billion for the three months ended June 30, 2012 primarily related to decreases at the Networks and Publishing segments, partially offset by increases at the Film and TV Entertainment and Corporate segments. For the six months ended June 30, 2013, Selling, general and administrative expenses increased 1% to $3.218 billion from $3.181 billion for the three months ended June 30, 2012 primarily related to increases at the Film and TV Entertainment and Corporate segments, partly offset by a decline at the Publishing 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 $157 million and $314 million for the three and six months ended June 30, 2013, respectively, and $161 million and $315 million for the three and six months ended June 30, 2012, respectively.

Amortization Expense. Amortization expense was $61 million and $121 million for the three and six months ended June 30, 2013, respectively, and $60 million and $121 million for the three and six months ended June 30, 2012, respectively.


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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, 2013 and 2012, 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):

. . .

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