10-Q 1 d802289d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

 

þ

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

    

for the quarterly period ended September 30, 2014 or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

    

for the transition period from ________________________ to _________________________

Commission file number 001-15062

 

 

TIME WARNER INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   13-4099534

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Time Warner Center

New York, NY 10019-8016

(Address of Principal Executive Offices) (Zip Code)

(212) 484-8000

(Registrant’s Telephone Number, Including Area Code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   þ    Accelerated filer   ¨                                               
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨    No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Description of Class

   Shares Outstanding
as of October 28, 2014
 

Common Stock – $.01 par value

     838,486,246       

 

 

 


Table of Contents

TIME WARNER INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER FINANCIAL INFORMATION

 

     Page

PART I. FINANCIAL INFORMATION

  

Management’s Discussion and Analysis of Results of Operations and Financial Condition

   1

Item 4. Controls and Procedures

   23

Consolidated Balance Sheet at September 30, 2014 and December 31, 2013

   24

Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 2014 and 2013

   25

Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended September  30, 2014 and 2013

   26

Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 2014 and 2013

   27

Consolidated Statement of Equity for the Nine Months Ended September 30, 2014 and 2013

   28

Notes to Consolidated Financial Statements

   29

Supplementary Information

   48

PART II. OTHER INFORMATION

  

Item 1. Legal Proceedings

   57

Item 1A. Risk Factors

   57

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   57

Item 5. Other Information

   58

Item 6. Exhibits

   58


Table of Contents

TIME WARNER INC.

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, 2014. 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 September 30, 2014 and cash flows for the nine months ended September 30, 2014.

 

   

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.

Separation of Time Inc.

On June 6, 2014, the Company completed the legal and structural separation of the Company’s Time Inc. segment from the Company (the “Time Separation”). With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in the Company’s consolidated financial statements. Accordingly, the Company has recast its financial information to present the financial condition and results of operations of its former Time Inc. segment as discontinued operations in the accompanying consolidated financial statements for all periods presented. See Note 1, “Description of Business and Basis of Presentation,” to the accompanying consolidated financial statements. In connection with the Time Separation, the Company received $1.4 billion from Time Inc. consisting of proceeds from Time Inc.’s acquisition of the IPC publishing business in the U.K. from a wholly-owned subsidiary of Time Warner and a special dividend.

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. and New Line Cinema. During the nine months ended September 30, 2014, the Company generated Revenues of $19.834 billion (up 5% from $18.857 billion in 2013), Operating Income of $4.586 billion (up 1% from $4.535 billion in 2013), Income from continuing operations of $3.174 billion (up 31% from $2.420 billion in 2013), Net Income attributable to Time Warner shareholders of $3.109 billion (up 15% from $2.708 billion in 2013) and Cash provided by operations from continuing operations of $2.674 billion (up 4% from $2.568 billion in 2013).

Time Warner Businesses

Time Warner classifies its operations into three reportable segments: Turner, Home Box Office and Warner Bros. For additional information regarding Time Warner’s segments, refer to Note 13, “Segment Information,” to the accompanying consolidated financial statements.

Turner.  Time Warner’s Turner segment consists of businesses managed by Turner Broadcasting System, Inc. (“Turner”). During the nine months ended September 30, 2014, the Turner segment recorded Revenues of $7.789 billion (39% of the Company’s total Revenues) and Operating Income of $2.166 billion.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Turner operates domestic and international television networks, including such recognized brands as TNT, TBS, truTV, CNN, Cartoon Network and Adult Swim, 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 websites, including CNN.com, CNNMoney.com, BleacherReport.com, NBA.com, NCAA.com and cartoonnetwork.com, that generate revenues principally from the sale of advertising and sponsorships.

Home Box Office.  Time Warner’s Home Box Office segment consists of businesses managed by Home Box Office, Inc. (“Home Box Office”). During the nine months ended September 30, 2014, the Home Box Office segment recorded Revenues of $4.060 billion (20% of the Company’s total Revenues) and Operating Income of $1.392 billion.

Home Box Office operates the HBO and Cinemax multi-channel premium pay television services, with the HBO service ranking as the most widely distributed multi-channel premium pay television service. HBO- and Cinemax-branded premium pay and basic tier television services are distributed in more than 60 countries across Latin 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 domestic affiliates that have contracted to receive and distribute such programming to their customers who subscribe to the HBO or Cinemax services. Home Box Office’s agreements with domestic affiliates are typically long-term arrangements that provide for annual service fee increases and marketing support. While fees to Home Box Office under affiliate agreements are generally based on the number of subscribers served by the affiliates, the relationship between subscriber totals and the amount of revenues earned depends on the specific terms of the applicable agreement, which may include basic and/or pay television subscriber thresholds, volume discounts and other performance-based discounts. Marketing and promotional activities intended to retain existing subscribers and acquire new subscribers may also impact revenue earned. Home Box Office also derives subscription revenues from the distribution by international affiliates of country-specific HBO and Cinemax premium pay and basic tier television services to their local subscribers. Additional sources of revenues for Home Box Office are the home entertainment sales 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 its original programming primarily to international television networks and the Amazon Prime Instant Video subscription video-on-demand (“SVOD”) service (the “Amazon SVOD Service”).

Warner Bros.  Time Warner’s Warner Bros. 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 nine months ended September 30, 2014, the Warner Bros. segment recorded Revenues of $8.711 billion (41% of the Company’s total Revenues) and Operating Income of $840 million.

The Warner Bros. segment’s theatrical product revenues are generated principally through rental fees from theatrical exhibition of feature films, including the following recently released films: Annabelle, Edge of Tomorrow, Godzilla, The Judge, The LEGO Movie and Tammy, and subsequently through licensing fees received from the distribution of films on television broadcast and cable networks, premium pay television and SVOD services. Television product revenues are generated principally from the licensing of programs to television broadcast and cable networks and premium pay television and SVOD services. The segment also generates revenues for both its theatrical and television product through home video distribution on DVDs and Blu-ray Discs and in various digital formats (e.g., EST and video-on-demand). 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 2014/2015 season, Warner Bros. is producing over 60 series, including (i) at least two series for each of the five broadcast networks (including 2 Broke Girls, Arrow, The Bachelor, The Big Bang Theory, The Flash, The Following, Forever, Gotham, The Middle, Mike & Molly, Mom, The Mysteries of Laura, Person of Interest, Stalker, Vampire Diaries and The Voice), (ii) original series for cable television networks (including Major Crimes, Pretty Little Liars, Rizzoli & Isles and Sullivan & Son), (iii) series for premium pay television services (The Leftovers and Shameless), (iv) series for first-run syndication (including The Ellen DeGeneres Show, Extra and TMZ) and (v) animated series for cable television networks. Warner Bros.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

also licenses many of these series internationally. In addition, in 16 countries across Europe, South America, Australia and New Zealand, Warner Bros. operates a group of local television production companies 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 for international territories.

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; changing retailer initiatives and strategies (e.g., reduction of floor space devoted to physical discs); retail store closures; 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 Warner Bros. segment, which has helped to offset some of the decline in sales of physical discs. During the three and nine months ended September 30, 2014, consumer spending on physical discs continued to decline and consumer spending on electronic delivery continued to increase.

Recent Developments

Restructuring Activities

For the three months ended September 30, 2014, the Company incurred $303 million of Restructuring and severance costs related to restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The restructuring activities and related costs relate to reductions in the Company’s workforce. The Restructuring and severance costs by operating segment and at Corporate are as follows: $199 million at Turner, $48 million at Home Box Office, $45 million at Warner Bros. and $11 million at Corporate. Headcount reductions associated with these restructuring activities are expected to be approximately 2,400. The Company expects additional headcount reductions and related Restructuring and severance costs ranging from approximately $120 million to $150 million in the fourth quarter of 2014, primarily at the Warner Bros. segment.

In addition to the restructuring activities noted above, during the three months ended September 30, 2014, Turner conducted a strategic evaluation of its programming, and as result of such evaluation decided to no longer air certain (principally licensed) programming. In connection with that decision, the Company incurred $343 million of programming impairments related to programming that will no longer be aired subsequent to September 30, 2014, reflecting $482 million of programming impairments at the Turner segment, partially offset by $139 million of intercompany eliminations primarily related to intercompany profits on programming licensed by the Warner Bros. segment to the Turner segment. The programming impairments have been classified as Costs of revenues in the Company’s Consolidated Statement of Operations.

Tax Matter

During the third quarter of 2014, the Company recognized a tax benefit of $687 million primarily related to the reversal of certain tax reserves, including related interest accruals, in connection with a Federal tax settlement on the examination of the Company’s 2005-2007 tax returns. Certain matters addressed in the examination were not resolved and, accordingly, the Company is pursuing resolution of such matters through the Internal Revenue Service’s administrative appeals process.

NBA Agreement

On October 3, 2014, Turner entered into a nine-year agreement with the National Basketball Association (“NBA”), which extends Turner’s relationship with the NBA through the 2024/2025 season and increases TNT’s regular season coverage from 52 live games annually to 64 live games annually beginning with the 2016/2017 season. The agreement also provides Turner with enhanced digital rights during the extension period. The aggregate cash commitment for the programming rights under the new agreement is approximately $10.5 billion.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

2014 Debt Offering

On May 20, 2014, Time Warner issued $2.0 billion aggregate principal amount of debt securities in a public offering. See “Financial Condition and Liquidity – Outstanding Debt and Other Financing Arrangements” for more information.

Venezuela Currency

Certain of the Company’s divisions conduct business in Venezuela. As of September 30, 2014, the Company has $163 million of net Venezuelan Bolivares Fuertes (“VEF”) denominated consolidated monetary assets, primarily consisting of cash and accounts receivable, which have been remeasured at the official exchange rate as published by the Central Bank of Venezuela of 6.3 VEF to each U.S. Dollar. However, because of Venezuelan government-imposed restrictions on the exchange of foreign currency in Venezuela, the Company has not been able to convert VEF earned in Venezuela into U.S. Dollars at the official government rate.

In March 2013, the Venezuelan government announced the creation of a new foreign currency exchange system called the Complimentary System of Foreign Currency Acquirement (“SICAD”), a complementary currency auction system it created for purchases of U.S. Dollars by certain eligible importers and tourists. In December 2013, the Venezuelan government published the SICAD rate for the first time and issued Exchange Agreement No. 24, which clarified that SICAD could be used only by companies operating in the oil and gas industry for certain transactions and for gold purchases conducted by the Central Bank of Venezuela. In January 2014, the government expanded the use of SICAD and announced that it would increase the amount of U.S. Dollars available to buyers to $220 million per week from $100 million. In addition, through Exchange Agreement No. 25, the government noted that it would expand the use of the SICAD auction rate for certain other types of transactions that were previously limited to the official rate. For the period that includes September 30, 2014, the published SICAD exchange rate was 12 VEF for each U.S. Dollar. Based on the published SICAD requirements, the Company does not believe it is eligible to access the SICAD exchange. If the Company had used the published SICAD exchange rate as of September 30, 2014 to remeasure its VEF-denominated consolidated monetary assets, the Company would have recognized foreign exchange losses of approximately $78 million, on a pretax basis, in its Consolidated Statement of Operations.

On March 24, 2014, the Venezuelan government introduced a new currency exchange system referred to as SICAD 2, which is regulated by the Central Bank of Venezuela. The Company does not believe it is eligible to access the SICAD 2 exchange due to the requirement that an entity be domiciled in Venezuela to participate in the exchange. During the three months ended September 30, 2014, the published average daily rate was approximately 50.0 VEF for each U.S. Dollar. Given the status of its eligibility to access the SICAD and SICAD 2 exchanges, the Company continues to use the official exchange rate for its remeasurement rate as of September 30, 2014. If the Company is able to utilize the SICAD 2 exchange system to regularly access U.S. Dollars in future periods, the SICAD 2 rate may be used as its remeasurement rate. If the Company had used the published SICAD 2 exchange rate as of September 30, 2014 to remeasure its VEF-denominated consolidated monetary assets, the Company would have recognized foreign exchange losses of approximately $143 million, on a pretax basis, in its Consolidated Statement of Operations.

Central European Media Enterprises Ltd.

During the second quarter of 2014, Time Warner and Central European Media Enterprises Ltd. (“CME”) completed a series of related financing transactions.

On May 2, 2014, pursuant to a rights offering by CME, Time Warner acquired approximately 2.8 million units, each consisting of $100 principal amount of 15% senior secured notes due 2017 and 21 unit warrants, with each unit warrant entitling the Company to purchase one share of CME Class A common stock. In addition, Time Warner acquired 581,533 units in a private offering, and CME issued warrants to Time Warner to purchase an additional 30 million shares of Class A common stock. The warrants issued to Time Warner, including the unit warrants in connection with the rights offering and the private offering, have a four-year term and an exercise price of $1.00 per share, do not contain any voting rights and are not exercisable until the second anniversary of their issuance. The warrants are subject to a limited right whereby the Company can exercise any of its warrants earlier solely to own up to 49.9% of CME’s Class A common stock.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Additionally, Time Warner provided CME with a $115 million revolving credit facility and a $30 million term loan that mature on December 1, 2017. Amounts outstanding under the revolving credit facility will bear interest at a rate per annum based on LIBOR (subject to a minimum rate of 1.00%) plus 14%. CME can pay accrued interest for an applicable quarterly interest period either fully in cash or by adding such amount to the outstanding principal amount of the revolving credit facility. The revolving credit facility also contains a commitment fee on the average daily unused amount under the facility of 0.50% per annum. As of September 30, 2014, no amounts have been drawn under the revolving credit facility. The $30 million term loan bears interest at a rate of 15.0% per annum, paid semi-annually either fully in cash or by adding such amount to the principal amount of the loan.

These transactions did not change the Company’s approximate 49% voting interest, but resulted in the Company holding an approximate 75% economic interest in CME on a diluted basis.

Eyeworks

On June 2, 2014, Warner Bros. acquired the operations outside the U.S. of Eyeworks Group, a television production and distribution company, which are located in 15 countries across Europe, South America, Australia and New Zealand, for approximately $267 million, net of cash acquired (the “Eyeworks Acquisition”).

Sale and Leaseback of Time Warner Center

On January 16, 2014, Time Warner sold the space it owned in Time Warner Center for approximately $1.3 billion and agreed to lease space in Time Warner Center from the buyer until early 2019. In connection with these transactions, the Company recognized a pretax gain of $441 million and a tax benefit of $58 million in the first quarter of 2014. Additionally, a pretax gain of approximately $325 million has been deferred and is being recognized ratably over the lease period. The Company also reached a preliminary agreement relating to the move of its Corporate headquarters and its New York City-based employees to the Hudson Yards development on the west side of Manhattan, which remains subject to further negotiation and execution of final agreements. Assuming final agreements are reached, the Company expects to invest approximately $1.3 billion in the Hudson Yards development project over the next several years.

RESULTS OF OPERATIONS

Changes in Basis of Presentation

As discussed more fully in Note 1, “Description of Business and Basis of Presentation,” to the accompanying consolidated financial statements, the 2013 financial information has been recast so that the basis of presentation is consistent with that of the 2014 financial information. This recast reflects the financial condition and results of operations of the Company’s former Time Inc. segment as discontinued operations for all periods presented.

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.

 

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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 from continuing operations has been affected by transactions and certain other items in each period as follows (millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Asset impairments

   $ (5)       $ (5)       $ (31)       $ (35)   

Gain (loss) on operating assets, net

     (5)         113         451         130   

Other

     (12)         32         (71)         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impact on Operating Income

     (22)         140         349         109   

Investment gains (losses), net

     (78)         12         (57)         67   

Amounts related to the separation of Time Warner Cable Inc.

                    (1)          

Amounts related to the disposition of Warner Music Group

                              

Amounts related to the Time Separation

                             

Items affecting comparability relating to equity method investments

     (5)                 (25)         (12)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pretax impact

     (102)         155         268         173   

Income tax impact of above items

            (52)         84         (69)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Impact of items affecting comparability on income from continuing operations attributable to Time Warner Inc. shareholders

   $ (95)       $ 103       $ 352       $ 104   
  

 

 

    

 

 

    

 

 

    

 

 

 

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $303 million and $346 million for the three and nine months ended September 30, 2014, respectively, and $56 million and $132 million for the three and nine months ended September 30, 2013, respectively. For the three months ended September 30, 2014, the Company also incurred $343 million of programming impairments, reflecting $482 million of programming impairments at the Turner segment, partially offset by $139 million of intercompany eliminations. For further discussion of Restructuring and severance costs and the programming impairments, see “Overview,” “Consolidated Results” and “Business Segment Results.”

Asset Impairments

During the three months ended September 30, 2014, the Company recognized asset impairments of $5 million, consisting of $4 million at the Turner segment related to miscellaneous assets and $1 million at Corporate related to certain internally developed software. For the nine months ended September 30, 2014, the Company recognized asset impairments of $15 million at the Turner segment related to miscellaneous assets, $4 million at the Home Box Office segment related to the noncash impairment of an international tradename and $5 million and $7 million at the Warner Bros. segment and Corporate, respectively, related to certain internally developed software.

During the three months ended September 30, 2013, the Company recognized an international intangible asset impairment of $5 million at the Turner segment. During the nine months ended September 30, 2013, the Company recognized asset impairments of $35 million, consisting of $17 million related to certain of Turner’s international intangible assets, $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 Warner Bros. segment related to miscellaneous assets and $7 million at Corporate related to certain internally developed software.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Gain (Loss) on Operating Assets, Net

For the three and nine months ended September 30, 2014, the Company recognized a $5 million loss on operating assets at the Turner segment related to the shutdown of a business. For the nine months ended September 30, 2014, the Company also recognized $15 million of gains at the Turner segment, reflecting a $2 million gain primarily related to the sale of a building in South America and a $13 million gain related to the sale of Zite, Inc. (“Zite”), a news content aggregation and recommendation platform, and a $441 million gain at Corporate in connection with the sale and leaseback of the Company’s space in Time Warner Center.

For the three and nine months ended September 30, 2013, the Company recognized a $105 million gain at the Home Box Office segment upon Home Box Office’s acquisition of its former partner’s interests in HBO Asia and HBO South Asia (collectively, “HBO Asia”), a $2 million gain at the Turner segment on the sale of a building and a $6 million gain at the Warner Bros. segment on miscellaneous operating assets. For the nine months ended September 30, 2013, the Company also recognized a $9 million gain at the Home Box Office segment upon Home Box Office’s acquisition of its former partner’s interest in HBO Nordic and an $8 million gain at Corporate on the disposal of certain corporate assets.

Other

Other reflects external costs related to mergers, acquisitions or dispositions of $12 million and $71 million for the three and nine months ended September 30, 2014, respectively, and $6 million and $24 million for the three and nine months ended September 30, 2013, respectively. External costs related to mergers, acquisitions or dispositions for the three and nine months ended September 30, 2014 consisted of $4 million and $14 million, respectively, at the Turner segment primarily related to exit costs in connection with the shutdown of CNN Latino, $4 million and $12 million, respectively, at the Warner Bros. segment primarily related to the Eyeworks Acquisition and $4 million and $45 million, respectively, at Corporate primarily related to the Time Separation. External costs related to mergers, acquisitions or dispositions for the three and nine months ended September 30, 2013 primarily reflected higher costs at Corporate of $4 million and $20 million, respectively, primarily related to the Time Separation. Other also includes a gain of $38 million for the three and nine months ended September 30, 2013 at Corporate related to the curtailment of certain post-retirement benefits (the “Curtailment”).

External costs related to mergers, acquisitions or dispositions and the gain related to the Curtailment are included in Selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

Investment Gains (Losses), Net

For the three and nine months ended September 30, 2014, the Company recognized $78 million and $57 million, respectively, of net miscellaneous investment losses, consisting of $58 million and $59 million, respectively, of losses related to fair value adjustments on CME warrants and $20 million of net miscellaneous investment losses for the three months ended September 30, 2014 and $2 million of net miscellaneous investment gains for the nine months ended September 30, 2014. For the three months ended September 30, 2013, the Company recognized a $12 million gain associated with a fair value adjustment on an option to acquire securities that was terminated during the third quarter of 2013. For the nine months ended September 30, 2013, the Company recognized $67 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 $2 million of net miscellaneous investment gains.

Amounts Related to the Separation of Time Warner Cable Inc.

The Company recognized other expense of $1 million for the nine months ended September 30, 2014 and other income of $4 million and $10 million for the three and nine months ended September 30, 2013, 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. For the three and nine months ended September 30, 2013, the Company also recognized $1 million of other loss related to changes in the value of a TWC tax indemnification receivable, which has also 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)

 

Amounts Related to the Disposition of Warner Music Group

For the three and nine months ended September 30, 2014, the Company recognized other income of $1 million and $0, respectively, primarily related to a tax indemnification obligation 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.

Amounts Related to the Time Separation

For the three and nine months ended September 30, 2014, the Company recognized $2 million of other income related to the expiration, exercise and net change in the estimated fair value of Time Warner equity awards held by certain Time Inc. employees.

Items Affecting Comparability Relating to Equity Method Investments

For the three and nine months ended September 30, 2014, the Company recognized $4 million as its share of costs related to a government investigation of an equity method investee and $1 million and $9 million, respectively, as its share of discontinued operations recorded by an equity method investee. In addition, for the nine months ended September 30, 2014, the Company recognized $12 million as its share of a loss on the extinguishment of debt recorded by an equity method investee. For the nine months ended September 30, 2013, the Company recognized $12 million as its share of a loss on the extinguishment of debt recorded by an equity method investee. These amounts have 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. 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    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change
            (recast)                  (recast)       

Subscription

   $ 2,518       $ 2,297       10%    $ 7,473       $ 6,895       8%

Advertising

     980         1,017       (4%)      3,360         3,360       -  

Content

     2,625         2,614       -        8,578         8,228       4%

Other

     120         114       5%      423         374       13%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total revenues

   $ 6,243       $ 6,042       3%    $ 19,834       $ 18,857       5%
  

 

 

    

 

 

       

 

 

    

 

 

    

 

8


Table of Contents

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, 2014, the increase in Subscription revenues was primarily related to increases at the Turner and Home Box Office segments. Advertising revenues for the three months ended September 30, 2014 decreased primarily due to a decrease at the Turner segment. Advertising revenues for the nine months ended September 30, 2014 were flat as higher revenues at the Turner segment were offset by higher intercompany eliminations. Content revenues for the three months ended September 30, 2014 were essentially flat as an increase at Warner Bros. was offset by higher intercompany eliminations. The increase in Content revenues for the nine months ended September 30, 2014 was primarily due to increases at the Warner Bros. and Home Box Office segments, partially offset by higher intercompany eliminations. The increase in Other revenues for the three and nine months ended September 30, 2014 was primarily related to an increase at the Warner Bros. 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 September 30, 2014, Costs of revenues increased to $3.681 billion from $3.158 billion for the three months ended September 30, 2013 reflecting increases at the Turner and Home Box Office segments, partially offset by higher intercompany eliminations. For the nine months ended September 30, 2014, Costs of revenues increased to $11.457 billion from $10.508 billion for the nine months ended September 30, 2013 reflecting increases at the Turner, Warner Bros. and Home Box Office segments, partially offset by higher intercompany eliminations. Included in Costs of Revenues for the three and nine months ended September 30, 2014 was $343 million of programming impairments related to programming that will no longer be aired subsequent to September 30, 2014, reflecting $482 million of programming impairments at the Turner segment, partially offset by $139 million of intercompany eliminations primarily related to intercompany profits on programming licensed by the Warner Bros. segment to the Turner segment. The segment variations are discussed in “Business Segment Results.”

Selling, General and Administrative Expenses.  For the three months ended September 30, 2014, Selling, general and administrative expenses increased 6% to $1.226 billion from $1.157 billion for the three months ended September 30, 2013, primarily reflecting an increase at Corporate and the Warner Bros. and Turner segments, partially offset by a decline at the Home Box Office segment. For the nine months ended September 30, 2014, Selling, general and administrative expenses increased 2% to $3.713 billion from $3.626 billion for the nine months ended September 30, 2013 primarily related to increases at Corporate and the Home Box Office segment, partially offset by decreases at the Turner and Warner Bros. 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 $131 million and $399 million for the three and nine months ended September 30, 2014, respectively, and $136 million and $408 million for the three and nine months ended September 30, 2013, respectively.

Amortization Expense.  Amortization expense was $52 million and $152 million for the three and nine months ended September 30, 2014, respectively, and $50 million and $151 million for the three and nine months ended September 30, 2013, respectively.

Restructuring and Severance Costs.  For the three and nine months ended September 30, 2014 and 2013, the Company incurred Restructuring and severance costs primarily related to employee terminations and other exit activities. Restructuring and severance costs are as follows (millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Turner

   $ 199       $ 30       $ 223       $ 64   

Home Box Office

     48         24         57         36   

Warner Bros.

     45                50         33   

Corporate

     11                 16         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and severance costs

   $ 303       $ 56       $ 346       $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating Income.  Operating Income decreased to $971 million for the three months ended September 30, 2014 from $1.729 billion for the three months ended September 30, 2013. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $22 million of expense and $140 million of income for the three months ended September 30, 2014 and 2013, respectively, Operating Income decreased $596 million, primarily reflecting a decrease at the Turner segment.

 

9


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Operating Income increased to $4.586 billion for the nine months ended September 30, 2014 from $4.535 billion for the nine months ended September 30, 2013. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $349 million and $109 million of income for the nine months ended September 30, 2014 and 2013, respectively, Operating Income decreased $189 million, reflecting a decrease at the Turner segment, partially offset by increases at the Home Box Office and Warner Bros. segments.

The segment variations are discussed under “Business Segment Results.”

Interest Expense, Net.  For the three months ended September 30, 2014, Interest expense, net increased to $307 million from $300 million for the three months ended September 30, 2013 reflecting higher average debt balances, partially offset by higher interest income of $18 million mainly due to noncash interest income related to the CME transactions in the second quarter of 2014 and lower average interest rates. For the nine months ended September 30, 2014, Interest expense, net decreased to $868 million from $889 million for the nine months ended September 30, 2013 reflecting higher interest income of $67 million mainly due to the recognition of interest income on a note receivable that was collected in March 2014 and noncash interest income related to the CME transactions in the second quarter of 2014 as well as lower average interest rates, partially offset by higher average debt balances.

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

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Investment gains (losses), net

   $ (78)       $ 12       $ (57)       $ 67   

Amounts related to the separation of TWC

                    (1)          

Amounts related to the disposition of WMG

                               

Amounts related to the Time Separation

                              

Loss from equity method investees

     (63)         (26)         (83)         (117)   

Other

             (9)         (1)         (19)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other loss, net

   $ (135)       $ (20)       $ (140)       $ (60)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Investment gains (losses), net and amounts related to the separation of TWC, the disposition of WMG and the Time Separation are discussed under “Transactions and Other Items Affecting Comparability.” The remaining change in Other loss, net for the three months ended September 30, 2014 was primarily related to higher net losses from equity method investees and for the nine months ended September 30, 2014 was primarily related to lower net losses from equity method investees.

Income Tax (Provision) Benefit.  Income tax benefit was $437 million for the three months ended September 30, 2014 as compared to an Income tax provision of $451 million for the three months ended September 30, 2013. Income tax provision decreased to $404 million for the nine months ended September 30, 2014 from $1.166 billion for the nine months ended September 30, 2013. The Company’s effective tax rate was (83)% and 11% for the three and nine months ended September 30, 2014, respectively, compared to 32% and 33% for the three and nine months ended September 30, 2013, respectively. The decrease in the effective tax rate for the three and nine months ended September 30, 2014 was primarily due to the recognition of a tax benefit attributable to the reversal of tax reserves in connection with a Federal tax settlement, which decreased the effective tax rate by 130% and 19% for the three and nine months ended September 30, 2014, respectively. For more information, refer to Note 14, “Commitments and Contingencies,” to the accompanying consolidated financial statements.

Income from Continuing Operations.  Income from continuing operations was $966 million and $958 million for the three months ended September 30, 2014 and 2013, respectively. Excluding the items noted under “Transactions and Other

 

10


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Items Affecting Comparability” totaling $95 million of expense and $103 million of income for the three months ended September 30, 2014 and 2013, respectively, income from continuing operations increased $206 million, primarily reflecting an income tax benefit, partly offset by lower Operating Income. Basic and Diluted income from continuing operations per common share attributable to Time Warner Inc. common shareholders were $1.13 and $1.11, respectively, for the three months ended September 30, 2014 and were $1.04 and $1.02, respectively, for the three months ended September 30, 2013.

Income from continuing operations was $3.174 billion and $2.420 billion for the nine months ended September 30, 2014 and 2013, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $352 million and $104 million of income for the nine months ended September 30, 2014 and 2013, respectively, Income from continuing operations increased $506 million, primarily reflecting a decrease in Income tax provision. Basic and Diluted income from continuing operations per common share attributable to Time Warner Inc. common shareholders were $3.63 and $3.56, respectively, for the nine months ended September 30, 2014 and were $2.60 and $2.55, respectively, for the nine months ended September 30, 2013.

Discontinued Operations, Net of Tax.  For the three and nine months ended September 30, 2014, Discontinued operations, net of tax was income of $1 million and a loss of $65 million, respectively, compared to income of $225 million and $288 million for the three and nine months ended September 30, 2013, respectively.

For the three months ended September 30, 2014, Basic and Diluted income from discontinued operations per common share attributable to Time Warner Inc. common shareholders were both $0.00. For the nine months ended September 30, 2014, Basic and Diluted loss from discontinued operations per common share attributable to Time Warner Inc. common shareholders were $0.08 and $0.07, respectively. For the three months ended September 30, 2013, Basic and Diluted income from discontinued operations per common share attributable to Time Warner Inc. common shareholders were $0.25 and $0.24, respectively. For the nine months ended September 30, 2013, Basic and Diluted income from discontinued operations per common share attributable to Time Warner Inc. common shareholders were $0.31 and $0.30, respectively.

Net Income Attributable to Time Warner Inc. Shareholders.  Net income attributable to Time Warner Inc. shareholders was $967 million and $1.183 billion for the three months ended September 30, 2014 and 2013, respectively, and $3.109 billion and $2.708 billion for the nine months ended September 30, 2014 and 2013, respectively. Basic and Diluted net income per common share attributable to Time Warner Inc. common shareholders were $1.13 and $1.11, respectively, for the three months ended September 30, 2014 and were $1.29 and $1.26, respectively, for the three months ended September 30, 2013. Basic and Diluted net income per common share attributable to Time Warner Inc. common shareholders were $3.55 and $3.49, respectively, for the nine months ended September 30, 2014 and were $2.91 and $2.85, respectively, for the nine months ended September 30, 2013.

 

11


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Business Segment Results

Turner.  Revenues and Operating Income of the Turner segment for the three and nine months ended September 30, 2014 and 2013 are as follows (millions):

 

                                                                                                                                         
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Revenues:

                 

Subscription

   $ 1,334       $ 1,217       10%    $ 3,966       $ 3,665       8%

Advertising

     993         1,011       (2%)      3,414         3,368       1%

Content

     83         71       17%      268         265       1%

Other

     36         39       (8%)      141         137       3%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total revenues

     2,446         2,338       5%      7,789         7,435       5%

Costs of revenues(a)

     (1,416)         (858)       65%      (3,962)         (3,241)       22%

Selling, general and administrative(a)

     (430)         (417)       3%      (1,264)         (1,287)       (2%)

Gain (loss) on operating assets

     (5)              NM      10              NM

Asset impairments

     (4)         (5)       (20%)      (15)         (23)       (35%)

Restructuring and severance costs

     (199)         (30)       NM      (223)         (64)       248%

Depreciation

     (51)         (58)       (12%)      (157)         (174)       (10%)

Amortization

     (4)         (5)       (20%)      (12)         (15)       (20%)
  

 

 

    

 

 

       

 

 

    

 

 

    

Operating Income

   $ 337       $ 967       (65%)    $ 2,166       $ 2,633       (18%)
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

The increase in Subscription revenues for the three and nine months ended September 30, 2014 reflected higher domestic revenues of $92 million and $249 million, respectively, primarily due to higher domestic rates and higher international revenues of $25 million and $52 million, respectively, mainly driven by growth in Latin America.

The decrease in Advertising revenues for the three months ended September 30, 2014 primarily reflected a decrease in international revenues mainly in Latin America. The increase in Advertising revenues for the nine months ended September 30, 2014 reflected domestic growth of $50 million, driven by the 2014 National Collegiate Athletic Association Division I Men’s Basketball Championship tournament (the “NCAA Tournament”), including the airing of additional games and higher pricing, partially offset by lower audience delivery and demand.

The components of Costs of revenues for the Turner segment are as follows (millions):

 

                                                                                                                                         
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Programming costs:

                 

Originals and sports

   $ 674       $         451       49%    $ 2,356       $ 2,006       17%

Acquired films and syndicated series

     545         211       158%      1,002         654       53%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total programming costs

              1,219         662       84%          3,358         2,660       26%

Other direct operating costs

     197         196       1%      604         581       4%
  

 

 

    

 

 

       

 

 

    

 

 

    

Costs of revenues(a)

   $ 1,416       $ 858       65%    $ 3,962       $ 3,241       22%
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

(a) 

Costs of revenues exclude depreciation.

 

12


Table of Contents

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, 2014, Costs of revenues increased primarily due to programming impairments of $482 million as a result of the Turner segment’s decision following its strategic evaluation of its programming to no longer air certain programming. Excluding these programming impairments, programming costs increased for the three and nine months ended September 30, 2014 primarily due to higher originals and sports programming costs, which for the three months ended September 30, 2014 was primarily due to an increased volume of original series and higher costs related to the first year of a new agreement with Major League Baseball and for the nine months ended September 30, 2014 was primarily due to higher costs related to the NCAA Tournament and original series.

For the three months ended September 30, 2014, Selling, general and administrative expenses increased mainly due to higher marketing expenses in conjunction with the launch of new original programming. For the nine months ended September 30, 2014, Selling, general and administrative expenses decreased primarily due to the reversal of a $20 million accrued contingency.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2014 and 2013, which affected the comparability of the Turner segment’s results.

The results for the three months ended September 30, 2014 included $199 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. For the three and nine months ended September 30, 2013, Turner incurred Restructuring and severance costs primarily related to employee severance actions.

The decrease in Operating Income for the three and nine months ended September 30, 2014, was primarily due to higher Costs of revenues and higher Restructuring and severance costs, partially offset by higher Revenues.

Home Box Office.  Revenues and Operating Income of the Home Box Office segment for the three and nine months ended September 30, 2014 and 2013 are as follows (millions):

 

                                                                                                                                                     
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Revenues:

                 

Subscription

   $ 1,156       $ 1,050       10%    $ 3,427       $ 3,135       9%

Content

     146         136       7%      627         495       27%

Other

                  NM                   NM
  

 

 

    

 

 

       

 

 

    

 

 

    

Total revenues

     1,304         1,186       10%      4,060         3,630       12%

Costs of revenues(a)

     (678)         (558)       22%      (1,992)         (1,743)       14%

Selling, general and administrative(a)

     (176)         (181)       (3%)      (546)         (516)       6%

Gain on operating assets

             105       (100%)              114       (100%)

Asset impairments

                   NM      (4)               NM

Restructuring and severance costs

     (48)         (24)       100%      (57)         (36)       58%

Depreciation

     (18)         (24)       (25%)      (58)         (65)       (11%)

Amortization

     (4)         (2)       100%      (11)         (6)       83%
  

 

 

    

 

 

       

 

 

    

 

 

    

Operating Income

   $ 380       $ 502       (24%)    $ 1,392       $ 1,378       1%
  

 

 

    

 

 

       

 

 

    

 

 

    

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

The increase in Subscription revenues for the three and nine months ended September 30, 2014 was primarily due to higher domestic subscription revenues of $57 million and $151 million, respectively, driven primarily by higher contractual rates and an increase in the number of subscribers, as well as the consolidation of HBO Asia in September 2013, which contributed revenues of $40 million and $120 million for the three and nine months ended September 30, 2014, respectively, and to a lesser extent for the nine months ended September 30, 2014, the consolidation of HBO Nordic in June 2013.

 

13


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The increase in Content revenues for the three months ended September 30, 2014 was primarily due to higher home video revenues. The increase in Content revenues for the nine months ended September 30, 2014 was primarily due to the licensing of select original programming to the Amazon SVOD Service.

The components of Costs of revenues for the Home Box Office segment are as follows (millions):

 

                                                                                                                                                     
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Programming costs:

                 

Originals and sports

   $ 219       $ 191       15%    $ 697       $ 627       11%

Acquired films and syndicated series

     262         222       18%      751         671       12%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total programming costs

     481         413       16%      1,448         1,298       12%

Other direct operating costs

     197         145       36%      544         445       22%
  

 

 

    

 

 

       

 

 

    

 

 

    

Costs of revenues(a)

   $ 678       $ 558       22%    $ 1,992       $ 1,743       14%
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

(a)

Costs of revenues exclude depreciation.

The increase in Costs of revenues for the three and nine months ended September 30, 2014 reflected higher programming and other direct operating costs. The increase in programming costs for the three and nine months ended September 30, 2014 was primarily due to higher Acquired films and syndicated series programming costs, which for the three months ended September 30, 2014 included the consolidation of HBO Asia and for the nine months ended September 30, 2014 included the consolidations of both HBO Asia and HBO Nordic, as well as higher Originals and sports programming costs, reflecting higher costs for original series. The increase in other direct operating costs for the three and nine months ended September 30, 2014 was mainly due to higher participation expenses and for the nine months ended September 30, 2014 the absence of a $31 million reduction to a receivable allowance recorded in 2013.

For the three months ended September 30, 2014, Selling, general and administrative expenses decreased mainly due to lower domestic marketing expenses of $9 million, partially offset by the consolidation of HBO Asia, which contributed $6 million of expenses. For the nine months ended September 30, 2014, Selling, general and administrative expenses increased due to the consolidations of HBO Asia and HBO Nordic, which contributed $31 million of expenses.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments and Gain (loss) on operating assets for the three and nine months ended September 30, 2014 and 2013, which affected the comparability of the Home Box Office segment’s results.

The results for the three months ended September 30, 2014 included $48 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. For the three and nine months ended September 30, 2013, Home Box Office incurred Restructuring and severance costs primarily related to executive severance costs.

The decrease in Operating Income for the three months ended September 30, 2014 was primarily due to the impact of a $105 million gain on operating assets on the results for the three months ended September 30, 2013 and higher costs of revenues, partially offset by higher revenues. The increase in Operating Income for the nine months ended September 30, 2014 was primarily due to higher Revenues, partially offset by higher Costs of revenues and the impact of a $105 million gain on operating assets on the results for the nine months ended September 30, 2013.

 

14


Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Warner Bros.  Revenues and Operating Income of the Warner Bros. segment for the three and nine months ended September 30, 2014 and 2013 are as follows (millions):

 

                                                                                                                                                                 
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Revenues:

                 

Subscription

   $ 35       $ 30       17%    $ 102       $ 95       7%

Advertising

     23         25       (8%)      57         57       -

Content

     2,634         2,564       3%      8,268         7,927       4%

Other

     83         75       11%      284         237       20%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total revenues

     2,775         2,694       3%      8,711         8,316       5%

Costs of revenues(a)

     (1,941)         (1,862)       4%      (6,162)         (5,874)       5%

Selling, general and administrative(a)

     (452)         (438)       3%      (1,361)         (1,381)       (1%)

Gain on operating assets

                  NM                   NM

Asset impairments

                   NM      (5)         (5)       -

Restructuring and severance costs

     (45)         (2)       NM      (50)         (33)       52%

Depreciation

     (56)         (48)       17%      (164)         (148)       11%

Amortization

     (44)         (43)       2%      (129)         (130)       (1%)
  

 

 

    

 

 

       

 

 

    

 

 

    

Operating Income

   $ 237       $ 307       (23%)    $ 840       $ 751       12%
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

(a)

Costs of revenues and Selling, general and administrative expenses exclude depreciation.

Content revenues primarily relate to theatrical product (which is content made available for initial exhibition in theaters) and television product (which is content made available for initial airing on television). The components of Content revenues for the three and nine months ended September 30, 2014 and 2013 are as follows (millions):

 

                                                                                                                                                                 
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Theatrical product:

                 

Film rentals

   $ 271       $ 520       (48%)    $ 1,264       $ 1,473       (14%)

Home video and electronic delivery

     390         371       5%      1,335         1,271       5%

Television licensing

     430         346       24%      1,274         1,227       4%

Consumer products and other

     75         57       32%      184         142       30%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total theatrical product

     1,166         1,294       (10%)      4,057         4,113       (1%)

Television product:

                 

Television licensing

     993         897       11%      2,967         2,663       11%

Home video and electronic delivery

     144         162       (11%)      368         458       (20%)

Consumer products and other

     59         51       16%      205         178       15%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total television product

     1,196         1,110       8%      3,540         3,299       7%

Other

     272         160       70%      671         515       30%
  

 

 

    

 

 

       

 

 

    

 

 

    

Total Content revenues

   $            2,634       $            2,564       3%    $          8,268       $      7,927       4%
  

 

 

    

 

 

       

 

 

    

 

 

    

Theatrical product revenues from film rentals decreased for the three months ended September 30, 2014, primarily reflecting lower revenues of $262 million from theatrical films released during the third quarter of 2014 compared to the third quarter of 2013. The Company released 5 theatrical films during both the three months ended September 30, 2014 and

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

2013. Theatrical product revenues from film rentals decreased for the nine months ended September 30, 2014, reflecting lower revenues of $248 million from theatrical films released in the first nine months of 2014 compared to the first nine months of 2013, partially offset by higher carryover revenues of $39 million from prior period releases. The Company released 14 theatrical films in the first nine months of both 2014 and 2013.

For the three months ended September 30, 2014, theatrical product revenues from home video and electronic delivery increased due to higher revenues of $38 million from prior period releases, including catalog titles, partially offset by lower revenues of $19 million from releases during the third quarter of 2014 compared to the third quarter of 2013. There were 3 home video and electronic delivery releases during both the three months ended September 30, 2014 and 2013. For the nine months ended September 30, 2014, theatrical product revenues from home video and electronic delivery increased due to higher revenues of $108 million from releases in the first nine months of 2014 compared to the first nine months of 2013, partially offset by lower revenues of $44 million from prior period releases, including catalog titles. There were 11 and 10 home video and electronic delivery releases during the first nine months of 2014 and 2013, respectively.

Theatrical product revenues from television licensing increased for the three and nine months ended September 30, 2014 due primarily to the timing and mix of availabilities.

Television product revenues from television licensing for the three and nine months ended September 30, 2014 increased primarily due to higher license fees from SVOD services and growth in television production reflecting additional series produced and revenues from the Eyeworks Acquisition. In addition, the growth in television product revenues from television licensing for the three months ended September 30, 2014 was partly offset by lower license fees from networks, television station groups and premium pay television services.

The decrease in television product revenues from home video and electronic delivery for the three and nine months ended September 30, 2014 was primarily due to continued declines in sales of consumer packaged goods.

Other content revenues increased for the three months ended September 30, 2014 reflecting higher revenues of $28 million from videogames released during the third quarter of 2014 compared to the third quarter of 2013, and for the nine months ended September 30, 2014 due to higher carryover revenues of $53 million from videogames released in prior periods. The Company released 3 and 6 videogames during the three and nine months ended September 30, 2014, respectively, and 1 and 6 videogames during the three and nine months ended September 30, 2013, respectively. In addition, Other content revenues increased for the three and nine months ended September 30, 2014 due to $75 million of revenues from a patent license and settlement agreement.

Other revenues increased for the nine months ended September 30, 2014 primarily due to an increase in the production of television series on behalf of third parties.

The components of Costs of revenues for the Warner Bros. segment are as follows (millions):

 

                                                                                                                                                     
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Film and television production costs

   $ 1,321       $ 1,234       7%    $ 4,082       $ 3,828       7%

Print and advertising costs

     409         416       (2%)      1,368         1,377       (1%)

Other costs, including merchandise and related costs

     211         212       -      712         669       6%
  

 

 

    

 

 

       

 

 

    

 

 

    

Costs of revenues(a)

   $ 1,941       $ 1,862       4%    $ 6,162       $ 5,874       5%
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

(a)

Costs of revenues exclude depreciation.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Included in film and television production costs are production costs related to videogames, as well as theatrical film and videogame valuation adjustments resulting primarily from revisions to estimates of ultimate revenue and/or costs for certain theatrical films and videogames. Theatrical film valuation adjustments for the three and nine months ended September 30, 2014 were $14 million and $50 million, respectively, and $21 million and $31 million for the three and nine months ended September 30, 2013, respectively. Videogame valuation adjustments for the three and nine months ended September 30, 2014 were $27 million and $45 million, respectively, and $27 million for both the three and nine months ended September 30, 2013. The changes in film and television production costs for the three and nine months ended September 30, 2014 were primarily due to the performance and mix of product released.

For the nine months ended September 30, 2014, Selling, general and administrative expenses decreased mainly due to a reversal of certain bad debt reserves.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2014 and 2013, which affected the comparability of the Warner Bros. segment’s results.

The results for the three months ended September 30, 2014 included $45 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. As discussed in “Recent Developments,” the Warner Bros. segment expects additional headcount reductions and related Restructuring and severance costs in the fourth quarter of 2014. For the nine months ended September 30, 2013, Warner Bros. incurred Restructuring and severance costs primarily related to executive severance costs.

The decrease in Operating Income for the three months ended September 30, 2014 was primarily due to higher Costs of revenues and higher Restructuring and severance costs, partially offset by higher Revenues. The increase in Operating Income for the nine months ended September 30, 2014 was primarily due to higher Revenues and lower Selling, general and administrative expenses, partially offset by higher Costs of revenues and higher Restructuring and severance costs.

Corporate.  Corporate’s Operating Income (Loss) for the three and nine months ended September 30, 2014 and 2013 was as follows (millions):

 

                                                                                                                                   
     Three Months Ended    Nine Months Ended
     9/30/14      9/30/13      % Change    9/30/14      9/30/13      % Change

Selling, general and administrative(a)

   $ (101)       $ (97)       4%    $ (345)       $ (293)       18%

Curtailment

             38       (100%)              38       (100%)

Gain on operating assets

                   -      441              NM

Asset impairments

     (1)               NM      (7)         (7)       -

Restructuring and severance costs

     (11)               NM      (16)              NM

Depreciation

     (6)         (6)       -      (20)         (21)       (5%)
  

 

 

    

 

 

       

 

 

    

 

 

    

Operating Income (Loss)

   $ (119)       $ (65)       83%    $ 53       $ (274)       (119%)
  

 

 

    

 

 

       

 

 

    

 

 

    

 

 

(a) 

Selling, general and administrative expenses exclude depreciation.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, Gain (loss) on operating assets, the Curtailment and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2014 and 2013, which affected the comparability of Corporate’s results.

The results for the three months ended September 30, 2014 included $11 million of Restructuring and severance costs primarily related to headcount reductions in connection with restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives.

Excluding the transactions noted above, Operating Loss for the nine months ended September 30, 2014 increased primarily due to the absence of a benefit associated with a reduction in certain accrued employee benefit plan liabilities in 2013.

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Selling, general and administrative expenses included costs related to enterprise efficiency initiatives of $10 million and $14 million for the three months ended September 30, 2014 and 2013, respectively, and $34 million and $36 million for the nine months ended September 30, 2014 and 2013, respectively. The enterprise efficiency initiatives involve the centralization of certain administrative functions to generate cost savings or other benefits for the Company.

FINANCIAL CONDITION AND LIQUIDITY

Management believes that cash generated by or available to the Company should be sufficient to fund its capital and liquidity needs for the foreseeable future, including scheduled debt repayments, quarterly dividend payments and the purchase of common stock under the Company’s stock repurchase program. Time Warner’s sources of cash include Cash provided by operations, Cash and equivalents on hand, available borrowing capacity under its committed credit facilities and commercial paper program and access to capital markets. Time Warner’s unused committed capacity at September 30, 2014 was $8.230 billion, which included $3.210 billion of Cash and equivalents.

In connection with the Time Separation, the Company received $1.4 billion from Time Inc. consisting of proceeds from Time Inc.’s acquisition of the IPC publishing business in the U.K. from a wholly-owned subsidiary of Time Warner and a special dividend.

Current Financial Condition

At September 30, 2014, Time Warner had net debt of $19.347 billion ($22.557 billion of debt less $3.210 billion of Cash and equivalents) and $25.230 billion of Shareholders’ equity, compared to net debt of $18.311 billion ($20.127 billion of debt less $1.816 billion of Cash and equivalents) and $29.904 billion of Shareholders’ equity at December 31, 2013.

The following table shows the significant items contributing to the increase in net debt from December 31, 2013 to September 30, 2014 (millions):

 

                

Balance at December 31, 2013 (recast)

   $ 18,311   

Cash provided by operations from continuing operations

     (2,674)   

Capital expenditures

     316   

Repurchases of common stock

     4,481   

Dividends paid to common stockholders

     841   

Investments and acquisitions, net of cash acquired

     908   

Proceeds from Time Inc. in the Time Separation

     (1,400)   

Proceeds from the sale of Time Warner Center

     (1,264)   

Other investment and sale proceeds

     (142)   

Proceeds from the exercise of stock options

     (276)   

All other, net

     246   
  

 

 

 

Balance at September 30, 2014

   $ 19,347   
  

 

 

 

On June 13, 2014, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases in addition to the $5.0 billion it had previously authorized for share repurchases beginning January 1, 2014. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions. From January 1, 2014 through October 31, 2014, the Company repurchased 69 million shares of common stock for $4.859 billion pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended.

On January 16, 2014, Time Warner sold the space it owned in Time Warner Center for approximately $1.3 billion and agreed to lease space in Time Warner Center from the buyer until early 2019. In connection with these transactions, the Company recognized a pretax gain of $441 million and a tax benefit of $58 million in the first quarter of 2014. Additionally, a pretax gain of approximately $325 million has been deferred and is being recognized ratably over the lease period. The Company also reached a preliminary agreement relating to the move of its Corporate headquarters and its New

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

York City-based employees to the Hudson Yards development on the west side of Manhattan, which remains subject to further negotiation and execution of final agreements. Assuming final agreements are reached, the Company expects to invest approximately $1.3 billion in the Hudson Yards development project over the next several years.

Cash Flows

Cash and equivalents increased by $1.394 billion, including $184 million of Cash used by discontinued operations, for the nine months ended September 30, 2014. Cash and equivalents decreased by $1.256 million, including $259 million of Cash provided by discontinued operations for the nine months ended September 30, 2013. Components of these changes are discussed below in more detail.

Operating Activities from Continuing Operations

Details of Cash provided by operations from continuing operations are as follows (millions):

 

                                 
     Nine Months Ended September 30,  
     2014      2013  
            (recast)  

Operating Income

   $ 4,586       $ 4,535   

Depreciation and amortization

     551         559   

Net interest payments(a)

     (847)         (840)   

Net income taxes paid(b)

     (1,381)         (782)   

All other, net, including working capital changes

     (235)         (904)   
  

 

 

    

 

 

 

Cash provided by operations from continuing operations

   $ 2,674       $ 2,568   
  

 

 

    

 

 

 

 

 

(a)

Includes cash interest received of $44 million and $38 million for the nine months ended September 30, 2014 and 2013, respectively.

(b)

Includes income tax refunds received of $43 million and $62 million for the nine months ended September 30, 2014 and 2013, respectively.

Cash provided by operations from continuing operations for the nine months ended September 30, 2014 increased primarily due to lower cash used by working capital and higher Operating Income, partially offset by higher net income taxes paid. Cash used by working capital decreased primarily due to the timing of Restructuring and severance payments and lower participation payments.

Investing Activities from Continuing Operations

Details of Cash provided (used) by investing activities from continuing operations are as follows (millions):

 

                                 
     Nine Months Ended September 30,  
     2014      2013  
            (recast)  

Investments in available-for-sale securities

   $ (30)       $ (25)   

Investments and acquisitions, net of cash acquired:

     

Eyeworks

     (267)           

CME

     (371)         (287)   

All other

     (240)         (172)   

Capital expenditures

     (316)         (296)   

Proceeds from the sale of available-for-sale securities

     17              33   

Proceeds from Time Inc. in the Time Separation

     1,400           

Proceeds from the sale of Time Warner Center

     1,264           

Other investment proceeds

     125         167   
  

 

 

    

 

 

 

Cash provided (used) by investing activities from continuing operations

   $ 1,582       $ (580)   
  

 

 

    

 

 

 

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

The change in Cash provided (used) by investing activities from continuing operations for the nine months ended September 30, 2014 was primarily due to cash received in connection with the Time Separation and proceeds from the sale of space in Time Warner Center. Included in Other investment proceeds for the nine months ended September 30, 2014 is $99 million of payments related to the Company’s investment in the Hudson Yards development in connection with the Company’s plan to consolidate its New York City locations to the Hudson Yards development.

Financing Activities from Continuing Operations

Details of Cash used by financing activities from continuing operations are as follows (millions):

 

                                                 
     Nine Months Ended September 30,  
     2014      2013  
            (recast)  

Borrowings

   $ 2,406       $ 24   

Debt repayments

     (21)         (756)   

Proceeds from the exercise of stock options

     276         596   

Excess tax benefit from equity instruments

     138         154   

Principal payments on capital leases

     (8)         (6)   

Repurchases of common stock

     (4,481)         (2,603)   

Dividends paid

     (841)         (811)   

Other financing activities

     (147)         (101)   
  

 

 

    

 

 

 

Cash used by financing activities from continuing operations

   $ (2,678)       $     (3,503)   
  

 

 

    

 

 

 

Cash used by financing activities from continuing operations for the nine months ended September 30, 2014 decreased primarily due to an increase in Borrowings and lower Debt repayments, partially offset by higher Repurchases of common stock and lower Proceeds from the exercise of stock options.

During the nine months ended September 30, 2014, the Company issued approximately 8 million shares of common stock and received $276 million in connection with the exercise of stock options. At September 30, 2014, all of the approximately 24 million exercisable stock options outstanding on such date had exercise prices below the closing price of the Company’s common stock on the New York Stock Exchange.

Cash Flows from Discontinued Operations

Details of Cash provided (used) by discontinued operations are as follows (millions):

 

                                                 
     Nine Months Ended September 30,  
     2014      2013  
            (recast)  

Cash provided (used) by operations from discontinued operations

   $ (10)       $        263   

Cash used by investing activities from discontinued operations

     (51)         (22)   

Cash used by financing activities from discontinued operations

     (36)           

Effect of change in cash and equivalents of discontinued operations

     (87)         18   
  

 

 

    

 

 

 

Cash provided (used) by discontinued operations

   $    (184)       $ 259   
  

 

 

    

 

 

 

 

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

At September 30, 2014, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $30.823 billion. Of this committed capacity, $8.230 billion was unused and $22.557 billion was outstanding as debt. At September 30, 2014, total committed capacity, outstanding letters of credit, outstanding debt and total unused committed capacity were as follows (millions):

 

                                                                                               
     Committed
Capacity (a)
     Letters of
Credit (b)
     Outstanding
Debt (c)
     Unused
Committed
Capacity
 

Cash and equivalents

   $ 3,210       $       $       $ 3,210   

Revolving credit facilities and commercial paper program(d)

     5,000                         5,000   

Fixed-rate public debt

     21,914                 21,914           

Other obligations(e)

     699         36         643         20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,823       $ 36       $ 22,557       $ 8,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(a) 

The revolving credit facilities, commercial paper program and public debt of the Company rank pari passu with the senior debt of the respective obligors thereon. The weighted average maturity of the Company’s outstanding debt and other financing arrangements was 13.4 years as of September 30, 2014.

(b) 

Represents the portion of committed capacity, including from bilateral letter of credit facilities, reserved for outstanding and undrawn letters of credit.

(c) 

Represents principal amounts adjusted for premiums and discounts. At September 30, 2014, the principal amounts of the Company’s publicly issued debt mature as follows: $0 in 2014, $1.000 billion in 2015, $1.150 billion in 2016, $500 million in 2017, $600 million in 2018, $650 million in 2019 and $18.131 billion thereafter. In the period after 2019, no more than $2.0 billion will mature in any given year.

(d) 

The revolving credit facilities consist of two $2.5 billion revolving credit facilities. The Company may issue unsecured commercial paper notes up to the amount of the unused committed capacity under the revolving credit facilities.

(e) 

Unused committed capacity includes committed financings of subsidiaries under local bank credit agreements. Other debt obligations totaling $168 million are due within the next twelve months.

2014 Debt Offering

On May 20, 2014, Time Warner issued $2.0 billion aggregate principal amount of debt securities from its shelf registration statement, consisting of $650 million aggregate principal amount of 2.10% Notes due 2019, $750 million aggregate principal amount of 3.55% Notes due 2024 and $600 million aggregate principal amount of 4.65% Debentures due 2044.

Programming Licensing Backlog

Programming licensing backlog represents the amount of future revenues not yet recorded from cash contracts for the worldwide licensing of theatrical and television product for premium cable, basic cable, network and syndicated television exhibition. Backlog was approximately $6.7 billion and $5.5 billion at September 30, 2014 and December 31, 2013, respectively. Included in the backlog amounts is licensing of theatrical and television product from the Warner Bros. segment to the Turner segment in the amount of $665 million and $477 million at September 30, 2014 and December 31, 2013, respectively. Also included in the backlog amounts is licensing of theatrical product from the Warner Bros. segment to the Home Box Office segment in the amount of $748 million and $749 million at September 30, 2014 and December 31, 2013, respectively.

CAUTION CONCERNING FORWARD-LOOKING STATEMENTS

This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the fact that they do not relate strictly to historical or current facts. Forward-looking statements often include words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes” and words and terms of similar substance in connection with discussions of future operating or financial performance. Examples of forward-looking statements in this report include, but are not limited to, statements regarding

 

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Table of Contents

TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

 

(i) the adequacy of the Company’s liquidity to meet its needs for the foreseeable future; (ii) the Company’s expected investment in space in the Hudson Yards development; (iii) the Company’s expectation that it will incur additional headcount reductions and related Restructuring and severance costs in the fourth quarter of 2014, primarily at the Warner Bros. segment; and (iv) the size of the headcount reductions associated with the Company’s restructuring activities.

The Company’s forward-looking statements are based on management’s current expectations and assumptions regarding the Company’s business and performance, the economy and other future conditions and forecasts of future events, circumstances and results. As with any projection or forecast, forward-looking statements are inherently susceptible to uncertainty and changes in circumstances. The Company’s actual results may vary materially from those expressed or implied in its forward-looking statements. Important factors that could cause the Company’s actual results to differ materially from those in its forward-looking statements include government regulation, economic, strategic, political and social conditions and the following factors:

 

   

recent and future changes in technology, services and standards, including, but not limited to, alternative methods for the delivery, storage and consumption of digital media and evolving home entertainment formats;

   

changes in consumer behavior, including changes in spending behavior and changes in when, where and how digital content is consumed;

   

the popularity of the Company’s content;

   

changes in the Company’s plans, initiatives and strategies, and consumer acceptance thereof;

   

changes in the plans, initiatives and strategies of the third parties that distribute, license and/or sell Time Warner’s content;

   

competitive pressures, including as a result of audience fragmentation and changes in technology;

   

the Company’s ability to deal effectively with economic slowdowns or other economic or market difficulties;

   

changes in advertising market conditions or advertising expenditures due to, among other things, economic conditions, changes in consumer behavior, pressure from public interest groups, changes in laws and regulations and other societal or political developments;

   

piracy and the Company’s ability to exploit and protect its intellectual property rights in and to its content and other products;

   

lower than expected valuations associated with the cash flows and revenues at Time Warner’s reporting units, which could result in Time Warner’s inability to realize the value recorded for intangible assets and goodwill at those reporting units;

   

increased volatility or decreased liquidity in the capital markets, including any limitation on the Company’s ability to access the capital markets for debt securities, refinance its outstanding indebtedness or obtain bank financings on acceptable terms;

   

the effects of any significant acquisitions, dispositions and other similar transactions by the Company;

   

the failure to meet earnings expectations;

   

the adequacy of the Company’s risk management framework;

   

changes in U.S. GAAP or other applicable accounting policies;

   

the impact of terrorist acts, hostilities, natural disasters (including extreme weather) and pandemic viruses;

   

a disruption or failure of the Company’s or its vendors’ network and information systems or other technology relied on by the Company;

   

the effect of union or labor disputes or player lockouts affecting the professional sports leagues whose programming is shown on the Company’s networks;

   

changes in tax, federal communication and other laws and regulations;

   

currency exchange restrictions and currency devaluation risks in some foreign countries, including, but not limited to, Venezuela;

   

changes in foreign exchange rates; and

   

the other risks and uncertainties detailed in Part I, Item 1A. “Risk Factors,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

Any forward-looking statement made by the Company in this report speaks only as of the date on which it is made. The Company is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, subsequent events or otherwise.

 

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TIME WARNER INC.

Item  4. CONTROLS AND PROCEDURES

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company, under the supervision and with the participation of its management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed in reports filed or submitted by the Company under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that information required to be disclosed by the Company is accumulated and communicated to the Company’s management to allow timely decisions regarding the required disclosure.

Changes in Internal Control Over Financial Reporting

There have not been any changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

 

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TIME WARNER INC.

CONSOLIDATED BALANCE SHEET

(Unaudited; millions, except share amounts)

 

                                             
     September 30,
2014
     December 31,
2013
 
            (recast)  

ASSETS

     

Current assets

     

Cash and equivalents

   $ 3,210       $ 1,816   

Receivables, less allowances of $940 and $1,383

     7,005         7,305   

Inventories

     1,776         1,648   

Deferred income taxes

     181         369   

Prepaid expenses and other current assets

     721         559   

Current assets of discontinued operations

             834   
  

 

 

    

 

 

 

Total current assets

     12,893         12,531   

Noncurrent inventories and theatrical film and television production costs

     6,779         7,016   

Investments, including available-for-sale securities

     2,336         2,009   

Property, plant and equipment, net

     2,678         3,291   

Intangible assets subject to amortization, net

     1,225         1,338   

Intangible assets not subject to amortization

     7,034         7,043   

Goodwill

     27,587         27,401   

Other assets

     2,563         2,458   

Noncurrent assets of discontinued operations

             4,912   
  

 

 

    

 

 

 

Total assets

   $ 63,095       $ 67,999   
  

 

 

    

 

 

 

LIABILITIES AND EQUITY

     

Current liabilities

     

Accounts payable and accrued liabilities

   $ 7,052       $ 6,754   

Deferred revenue

     504         542   

Debt due within one year

     1,168         66   

Current liabilities of discontinued operations

             1,026   
  

 

 

    

 

 

 

Total current liabilities

     8,724         8,388   

Long-term debt

     21,389         20,061   

Deferred income taxes

     1,797         2,287   

Deferred revenue

     349         351   

Other noncurrent liabilities

     5,606         6,324   

Noncurrent liabilities of discontinued operations

             684   

Commitments and Contingencies (Note 14)

     

Equity

     

Common stock, $0.01 par value, 1.652 billion and 1.652 billion shares issued and 842 million and 895 million shares outstanding

     17         17   

Additional paid-in capital

     149,549         153,410   

Treasury stock, at cost (810 million and 757 million shares)

     (41,563)         (37,630)   

Accumulated other comprehensive loss, net

     (841)         (852)   

Accumulated deficit

     (81,932)         (85,041)   
  

 

 

    

 

 

 

Total Time Warner Inc. shareholders’ equity

     25,230         29,904   

Noncontrolling interests

               
  

 

 

    

 

 

 

Total equity

     25,230         29,904   
  

 

 

    

 

 

 

Total liabilities and equity

   $ 63,095       $ 67,999   
  

 

 

    

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF OPERATIONS

(Unaudited; millions, except per share amounts)

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Revenues

   $ 6,243       $ 6,042       $ 19,834       $ 18,857   

Costs of revenues

     (3,681)         (3,158)         (11,457)         (10,508)   

Selling, general and administrative

     (1,226)         (1,157)         (3,713)         (3,626)   

Amortization of intangible assets

     (52)         (50)         (152)         (151)   

Restructuring and severance costs

     (303)         (56)         (346)         (132)   

Asset impairments

     (5)         (5)         (31)         (35)   

Gain (loss) on operating assets, net

     (5)         113         451         130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

     971         1,729         4,586         4,535   

Interest expense, net

     (307)         (300)         (868)         (889)   

Other loss, net

     (135)         (20)         (140)         (60)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations before income taxes

     529         1,409         3,578         3,586   

Income tax (provision) benefit

     437         (451)         (404)         (1,166)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations

     966         958         3,174         2,420   

Discontinued operations, net of tax

            225         (65)         288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     967         1,183         3,109         2,708   

Less Net loss attributable to noncontrolling interests

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Time Warner Inc. shareholders

   $ 967       $ 1,183       $ 3,109       $ 2,708   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share information attributable to Time Warner Inc. common shareholders:

           

Basic income per common share from continuing operations

   $ 1.13       $ 1.04       $ 3.63       $ 2.60   

Discontinued operations

             0.25         (0.08)         0.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per common share

   $ 1.13       $ 1.29       $ 3.55       $ 2.91   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average basic common shares outstanding

     850.9         916.8         872.2         926.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted income per common share from continuing operations

   $ 1.11       $ 1.02       $ 3.56       $ 2.55   

Discontinued operations

             0.24         (0.07)         0.30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income per common share

   $ 1.11       $ 1.26       $ 3.49       $ 2.85   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted common shares outstanding

     870.2         938.8         891.6         948.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Cash dividends declared per share of common stock

   $ 0.3175       $ 0.2875       $ 0.9525       $ 0.8625   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(Unaudited; millions)

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  

Net income

   $ 967       $ 1,183       $ 3,109       $ 2,708   

Other comprehensive income (loss), net of tax:

           

Foreign currency translation:

           

Unrealized gains (losses) occurring during the period

     (49)         14         (67)         (85)   

Reclassification adjustment for gains realized in net income

                             (6)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in foreign currency translation

     (49)         14         (67)         (91)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Securities:

           

Unrealized gains (losses) occurring during the period

                   (3)          

Reclassification adjustment for gains realized in net income

                     (5)           
  

 

 

    

 

 

    

 

 

    

 

 

 

Net gains (losses) on securities

                   (8)          
  

 

 

    

 

 

    

 

 

    

 

 

 

Benefit obligations:

           

Unrealized gains (losses) occurring during the period

                   (36)         (17)   

Reclassification adjustment for losses realized in net income

                   15         16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in benefit obligations

                   (21)         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Derivative financial instruments:

           

Unrealized gains occurring during the period

            13                26   

Reclassification adjustment for (gains) losses realized in net income

            (6)                 (19)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Change in derivative financial instruments

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

     (37)         28         (93)         (84)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income

     930         1,211         3,016         2,624   

Less Comprehensive loss attributable to noncontrolling interests

                               
  

 

 

    

 

 

    

 

 

    

 

 

 

Comprehensive income attributable to Time Warner Inc. shareholders

   $ 930       $ 1,211       $ 3,016       $ 2,624   
  

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Nine Months Ended September 30,

(Unaudited; millions)

 

                                             
     2014      2013  
            (recast)  

OPERATIONS

     

Net income

   $ 3,109       $ 2,708   

Less Discontinued operations, net of tax

     65         (288)   
  

 

 

    

 

 

 

Net income from continuing operations

     3,174         2,420   

Adjustments for noncash and nonoperating items:

     

Depreciation and amortization

     551         559   

Amortization of film and television costs

     5,933         5,202   

Asset impairments

     31         35   

Gain on investments and other assets, net

     (453)         (70)   

Equity in losses of investee companies, net of cash distributions

     136         165   

Equity-based compensation

     174         189   

Deferred income taxes

     (315)         708   

Changes in operating assets and liabilities, net of acquisitions

     (6,557)         (6,640)   
  

 

 

    

 

 

 

Cash provided by operations from continuing operations

     2,674         2,568   
  

 

 

    

 

 

 

INVESTING ACTIVITIES

     

Investments in available-for-sale securities

     (30)         (25)   

Investments and acquisitions, net of cash acquired

     (878)         (459)   

Capital expenditures

     (316)         (296)   

Investment proceeds from available-for-sale securities

     17         33   

Proceeds from Time Inc. in the Time Separation

     1,400           

Proceeds from the sale of Time Warner Center

     1,264           

Other investment proceeds

     125         167   
  

 

 

    

 

 

 

Cash provided (used) by investing activities from continuing operations

     1,582         (580)   
  

 

 

    

 

 

 

FINANCING ACTIVITIES

     

Borrowings

     2,406         24   

Debt repayments

     (21)         (756)   

Proceeds from exercise of stock options

     276         596   

Excess tax benefit from equity instruments

     138         154   

Principal payments on capital leases

     (8)         (6)   

Repurchases of common stock

     (4,481)         (2,603)   

Dividends paid

     (841)         (811)   

Other financing activities

     (147)         (101)   
  

 

 

    

 

 

 

Cash used by financing activities from continuing operations

     (2,678)         (3,503)   
  

 

 

    

 

 

 

Cash provided (used) by continuing operations

     1,578         (1,515)   
  

 

 

    

 

 

 

Cash provided (used) by operations from discontinued operations

     (10)         263   

Cash used by investing activities from discontinued operations

     (51)         (22)   

Cash used by financing activities from discontinued operations

     (36)           

Effect of change in cash and equivalents of discontinued operations

     (87)         18   
  

 

 

    

 

 

 

Cash provided (used) by discontinued operations

     (184)         259   
  

 

 

    

 

 

 

INCREASE (DECREASE) IN CASH AND EQUIVALENTS

     1,394         (1,256)   

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD

     1,816         2,760   
  

 

 

    

 

 

 

CASH AND EQUIVALENTS AT END OF PERIOD

   $ 3,210       $ 1,504   
  

 

 

    

 

 

 

See accompanying notes.

 

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Table of Contents

TIME WARNER INC.

CONSOLIDATED STATEMENT OF EQUITY

Nine Months Ended September 30,

(Unaudited; millions)

 

                                                                                                                                               
     2014      2013  
     Time Warner
Shareholders
     Noncontrolling
Interests
     Total Equity      Time Warner
Shareholders
     Noncontrolling
Interests
     Total Equity  

BALANCE AT BEGINNING OF PERIOD

   $ 29,904       $       $ 29,904       $ 29,796       $      $ 29,797   

Net income

     3,109                 3,109         2,708                 2,708   

Other comprehensive loss attributable to Continuing Operations

     (115)                 (115)         (50)                 (50)   

Other comprehensive income (loss) attributable to Discontinued Operations

     22                 22         (34)                 (34)   

Amounts related to the Time Separation

     (2,797)                 (2,797)                           

Cash dividends

     (841)                 (841)         (811)                 (811)   

Common stock repurchases

     (4,500)                 (4,500)         (2,604)                 (2,604)   

Amounts related primarily to stock options and restricted stock units

     448                 448         924                 924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

BALANCE AT END OF PERIOD

   $ 25,230       $       $ 25,230       $ 29,929       $      $ 29,930   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See accompanying notes.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business

Time Warner Inc. (“Time Warner” or the “Company”) is a leading media and entertainment company, whose businesses include television networks and film and TV entertainment. Time Warner classifies its operations into three reportable segments: Turner: consisting principally of cable networks and digital media properties; Home Box Office: consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally; and Warner Bros.: consisting principally of feature film, television, home video and videogame production and distribution.

Separation of Time Inc.

On June 6, 2014 (the “Distribution Date”), the Company completed the legal and structural separation of the Company’s Time Inc. segment from the Company (the “Time Separation”). The Time Separation was effected as a pro rata dividend of all shares of Time Inc. common stock held by Time Warner in a spin-off to Time Warner stockholders. With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in the Company’s consolidated financial statements. Accordingly, the Company has recast its financial information to present the financial condition and results of operations of its former Time Inc. segment as discontinued operations in the accompanying consolidated financial statements for all periods presented. For a summary of discontinued operations, see Note 2.

In connection with the Time Separation, the Company received $1.4 billion from Time Inc., consisting of proceeds relating to Time Inc.’s acquisition of the IPC publishing business in the U.K. from a wholly-owned subsidiary of Time Warner and a special dividend.

Basis of Presentation

Changes in Basis of Presentation

The 2013 financial information has been recast so that the basis of presentation is consistent with that of the 2014 financial information. This recast reflects the financial condition and results of operations of the Company’s former Time Inc. segment as discontinued operations for all periods presented.

Interim Financial Statements

The consolidated financial statements are unaudited; however, in the opinion of management, they contain all of the adjustments (consisting of those of a normal recurring nature) considered necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. generally accepted accounting principles (“GAAP”) applicable to interim periods. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements of Time Warner included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 (the “2013 Form 10-K”).

Basis of Consolidation

The consolidated financial statements include all of the assets, liabilities, revenues, expenses and cash flows of entities in which Time Warner has a controlling interest (“subsidiaries”). Intercompany accounts and transactions between consolidated entities have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and footnotes thereto. Actual results could differ from those estimates.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, multiple-element transactions, allowances for doubtful accounts, depreciation and amortization, the determination of ultimate revenues as it relates to amortization of capitalized film and programming costs and participations and residuals, home video and videogames product, business combinations, pension and other postretirement benefits, equity-based compensation, income taxes, contingencies, litigation matters, reporting revenue for certain transactions on a gross versus net basis, and the determination of whether the Company should consolidate certain entities.

Venezuela Currency

Certain of the Company’s divisions conduct business in Venezuela. As of September 30, 2014, the Company has $163 million of net Venezuelan Bolivares Fuertes (“VEF”) denominated consolidated monetary assets, primarily consisting of cash and accounts receivable, which have been remeasured at the official exchange rate as published by the Central Bank of Venezuela of 6.3 VEF to each U.S. Dollar. However, because of Venezuelan government-imposed restrictions on the exchange of foreign currency in Venezuela, the Company has not been able to convert VEF earned in Venezuela into U.S. Dollars at the official government rate. While there are two other legal exchange systems available in Venezuela, the Company believes the official exchange rate is appropriate to use as its remeasurement rate at September 30, 2014 for several reasons, including (i) the Company’s belief that it is not eligible to access those other exchange systems due to the requirement that an entity be domiciled in Venezuela to participate, (ii) a lack of clarity about those exchange systems’ stability and transaction volume and (iii) the Company’s eligibility to access Venezuelan currency exchange markets operated by the government in the past several years. If the Company had used the least favorable legal published exchange rate as of September 30, 2014 to remeasure its VEF-denominated consolidated monetary assets, the Company would have recognized foreign exchange losses of approximately $143 million, on a pretax basis, in the Consolidated Statement of Operations.

Accounting Guidance Adopted in 2014

Share-Based Payment Awards with Performance Targets Attainable After the Requisite Service Period

On July 1, 2014, the Company early adopted guidance that clarifies that a performance target that affects the vesting of an award payable in shares and that can be met after the requisite service period is a performance condition. Therefore, compensation expense related to such awards should only be recognized when it becomes probable that the performance target will be met, which could occur after the requisite service period has been satisfied. The adoption of this guidance did not have an impact on the Company’s consolidated financial statements.

Presentation of Unrecognized Tax Benefits

On January 1, 2014, the Company adopted on a prospective basis guidance requiring a liability related to an unrecognized tax benefit to be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a net operating loss carryforward, a similar tax loss or a tax credit carryforward is not available at the reporting date under the tax law of a jurisdiction or the tax law of a jurisdiction does not require it, and the Company does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit would be presented in the financial statements as a liability and will not be combined with deferred tax assets. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

Accounting Guidance Not Yet Adopted

Revenue Recognition

In May 2014, guidance was issued that establishes a new revenue recognition framework in U.S. GAAP for all companies and industries. The core principle of the guidance is that an entity should recognize revenue from the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive for those goods or services. The guidance includes a five-step framework to determine the timing and amount of revenue to recognize related to contracts with customers. In addition, this guidance requires new or expanded disclosures related to

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

the judgments made by companies when following this framework. The guidance will become effective on either a full or modified retrospective basis for the Company on January 1, 2017. The Company is evaluating the impact the guidance will have on its consolidated financial statements.

Discontinued Operations

In April 2014, guidance was issued that raises the threshold for disposals to qualify as discontinued operations. Under this new guidance, a discontinued operation is (i) a component of an entity or group of components that has been disposed of or is classified as held for sale and represents a strategic shift that has or will have a major effect on an entity’s operations and financial results or (ii) an acquired business that is classified as held for sale on the acquisition date. This guidance also requires expanded or new disclosures for discontinued operations, individually material disposals that do not meet the definition of a discontinued operation, an entity’s continuing involvement with a discontinued operation following disposal and retained equity method investments in a discontinued operation. This guidance will become effective on a prospective basis for the Company on January 1, 2015 and is not expected to have a material impact on the Company’s consolidated financial statements.

 

2.

BUSINESS DISPOSITIONS AND ACQUISITIONS

Separation of Time Inc.

As discussed in Note 1, on June 6, 2014, the Company completed the legal and structural separation of the Company’s Time Inc. segment from the Company. With the completion of the Time Separation, the Company disposed of the Time Inc. segment in its entirety and ceased to consolidate its assets, liabilities and results of operations in the Company’s consolidated financial statements. Accordingly, the Company has recast its financial information to present the financial condition and results of operations of its former Time Inc. segment as discontinued operations in the consolidated financial statements for all periods presented.

Eyeworks

On June 2, 2014, Warner Bros. acquired the operations outside the U.S. of Eyeworks Group, a television production and distribution company, which are located in 15 countries across Europe, South America, Australia and New Zealand, for approximately $267 million, net of cash acquired.

Summary of Discontinued Operations

Discontinued operations primarily reflects the Company’s former Time Inc. segment. In addition, during the third quarter of 2013, the Company recognized additional net tax benefits of $137 million associated with certain foreign tax attributes of the Warner Music Group, which the Company disposed of in 2004.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Discontinued operations for the three and nine months ended September 30, 2014 and 2013 is as follows (millions, except per share amounts):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  

Total revenues

   $      $ 818       $ 1,415       $ 2,388   

Pretax income (loss)

            114         (94)         226   

Income tax benefit (provision)

     (2)         111         29         62   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss)

   $      $ 225       $ (65)       $ 288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to Time Warner Inc. shareholders

   $      $ 225       $ (65)       $ 288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Per share information attributable to Time Warner Inc. common shareholders:

           

Basic net income (loss) per common share

   $      $ 0.25       $ (0.08)       $ 0.31   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average basic common shares outstanding

     850.9         916.8         872.2         926.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted net income (loss) per common share

   $      $ 0.24       $ (0.07)       $ 0.30   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted common shares outstanding

     870.2         938.8         891.6         948.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

3.

INVESTMENTS

Central European Media Enterprises Ltd.

During the second quarter of 2014, Time Warner and Central European Media Enterprises Ltd. (“CME”) completed a series of related financing transactions.

On May 2, 2014, pursuant to a rights offering by CME, Time Warner acquired approximately 2.8 million units, each consisting of $100 principal amount of 15% senior secured notes due 2017 (the “Senior Secured Notes”) and 21 unit warrants, with each unit warrant entitling the Company to purchase one share of CME Class A common stock. In addition, Time Warner acquired 581,533 units in a private offering, and CME issued warrants to Time Warner to purchase an additional 30 million shares of Class A common stock. The warrants issued to Time Warner, including the unit warrants in connection with the rights offering and the private offering, have a four-year term and an exercise price of $1.00 per share, do not contain any voting rights and are not exercisable until the second anniversary of their issuance. The warrants are subject to a limited right whereby the Company can exercise any of its warrants earlier solely to own up to 49.9% of CME’s Class A common stock.

Additionally, Time Warner provided CME with a $115 million revolving credit facility and a $30 million term loan that mature on December 1, 2017. Amounts outstanding under the revolving credit facility will bear interest at a rate per annum based on LIBOR (subject to a minimum rate of 1.00%) plus 14%. CME can pay accrued interest for an applicable quarterly interest period either fully in cash or by adding such amount to the principal amount of the revolving credit facility. The revolving credit facility also contains a commitment fee on the average daily unused amount under the facility of 0.50% per annum. As of September 30, 2014, no amounts have been drawn under the revolving credit facility. The $30 million term loan bears interest at a rate of 15.0% per annum, paid semi-annually either fully in cash or by adding such amount to the principal amount of the loan.

These transactions did not change the Company’s approximate 49% voting interest, but resulted in the Company holding an approximate 75% economic interest in CME on a diluted basis. The Company accounts for its investment in CME’s Class A common stock and Series A convertible preferred stock under the equity method of accounting. The Company accounts for its investment in CME’s Series B convertible redeemable preferred shares under the cost method of accounting. The warrants issued to Time Warner are recorded at fair value in the Consolidated Balance Sheet. The initial value of the warrants was recognized as a discount to the Senior Secured Notes and term loan and a deferred gain related to providing the revolving credit facility. The Senior Secured Notes are accounted for at their amortized cost and classified as held-to-maturity in the Consolidated Balance Sheet.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

4.

FAIR VALUE MEASUREMENTS

A fair value measurement is determined based on the assumptions that a market participant would use in pricing an asset or liability. A three-tiered hierarchy draws distinctions between market participant assumptions based on (i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than quoted prices in active markets that are observable either directly or indirectly (Level 2) and (iii) unobservable inputs that require the Company to use present value and other valuation techniques in the determination of fair value (Level 3). The following table presents information about assets and liabilities required to be carried at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, respectively (millions):

 

                                                                                                       
     September 30, 2014      December 31, 2013  
     Level 1      Level 2      Level 3      Total      Level 1      Level 2      Level 3      Total  
                                 (recast)  

Assets:

                       

Trading securities:

                       

Diversified equity securities(a)

   $ 233       $      $      $ 238       $ 254       $      $      $ 259   

Available-for-sale securities:

                       

Equity securities

     25                       25         56                       56   

Debt securities

            61                61                40                40   

Derivatives:

                       

Foreign exchange contracts

            16                16                10                10   

Other

                   159         159                              14   

Liabilities:

                       

Derivatives:

                       

Foreign exchange contracts

                                        (17)                (17)   

Other

                   (6)         (6)                       (7)         (7)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 258       $ 82       $ 153       $ 493       $ 316       $ 38       $      $ 355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(a) 

Consists of investments related to deferred compensation.

The Company primarily applies the market approach for valuing recurring fair value measurements.

The balance as of September 30, 2014 of assets and liabilities valued using significant unobservable inputs (Level 3) primarily related to an asset of $154 million related to warrants to purchase shares of CME Class A common stock. The Company estimates the fair value of these warrants using a Monte Carlo Simulation model. Significant unobservable inputs used in the fair value measurement at September 30, 2014 are an expected term of 2.94 years and an expected volatility of approximately 83%. As of both September 30, 2014 and 2013, the other Level 3 assets and liabilities consisted of assets related to equity instruments held by employees of former subsidiaries of the Company, liabilities for contingent consideration and options to redeem securities.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table reconciles the beginning and ending balances of net derivative assets and liabilities classified as Level 3 and identifies the total gains (losses) the Company recognized during the nine months ended September 30, 2014 and 2013 on such assets and liabilities that were included in the Consolidated Balance Sheet as of September 30, 2014 and 2013 (millions):

 

                                                 
     September 30,
2014
     September 30,
2013
 

Balance as of the beginning of the period

   $      $  

Included in other loss, net

     (58)         12   

Purchases

     213          

Settlements

     (19)         (13)   

Issuances

     16         (2)   

Transfers in and/or out of Level 3

             
  

 

 

    

 

 

 

Balance as of the end of the period

   $ 153       $  
  

 

 

    

 

 

 

Net gain (loss) for the period included in net income related to assets and liabilities still held as of the end of the period

   $ (57)       $ 10   
  

 

 

    

 

 

 

Other Financial Instruments

The Company’s other financial instruments, including debt, are not required to be carried at fair value. Based on the interest rates prevailing at September 30, 2014, the fair value of Time Warner’s debt exceeded its carrying value by approximately $3.706 billion and, based on interest rates prevailing at December 31, 2013, the fair value of Time Warner’s debt exceeded its carrying value by approximately $2.754 billion. The fair value of Time Warner’s debt was considered a Level 2 measurement as it was based on observable market inputs such as current interest rates and, where available, actual sales transactions. Unrealized gains or losses on debt do not result in the realization or expenditure of cash and generally are not recognized in the consolidated financial statements unless the debt is retired prior to its maturity.

Information about the Company’s investments in CME that are not required to be carried at fair value on a recurring basis is as follows (millions):

 

                                                                                               
     Carrying Value      Fair Value      Fair Value Hierarchy

Class A common stock(a)

   $ 45       $ 163       Level 1

Series B convertible redeemable preferred shares

     227         204       Level 2

Senior secured notes

     222         364       Level 2

 

 

(a) 

Includes one share of Series A convertible preferred stock.

The fair values of the Company’s investments in CME’s Class A common stock (including Series A convertible preferred stock) and Series B convertible redeemable preferred shares are primarily determined by reference to the September 30, 2014 closing price of CME’s common stock. The fair value of the Company’s investment in CME’s Senior Secured Notes is primarily determined by reference to observable sales transactions.

The carrying value for the majority of the Company’s other financial instruments approximates fair value due to the short-term nature of the financial instruments or because the financial instruments are of a longer-term nature and are recorded on a discounted basis.

Non-Financial Instruments

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be carried at fair value on a recurring basis. However, if certain triggering events occur (or at least annually for goodwill and indefinite-lived intangible assets), a non-financial instrument is required to be evaluated for impairment. If the Company determines that the non-financial instrument is impaired, the Company would be required to write down the non-financial instrument to its fair value.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

During the nine months ended September 30, 2014, the Company performed impairment reviews of certain intangible assets at international subsidiaries of Turner and Home Box Office. As a result, the Company recorded noncash impairments of $5 million to write down the value of these assets to $7 million. During the three and nine months ended September 30, 2013, the Company performed impairment reviews of certain intangible assets at international subsidiaries of Turner. As a result, the Company recorded noncash impairments of $5 million and $17 million, respectively, to write down the value of these assets to zero. The resulting fair value measurements were considered to be Level 3 measurements and were determined using a discounted cash flow (“DCF”) methodology with assumptions for cash flows associated with the use and eventual disposition of the assets.

In determining the fair value of its theatrical films, the Company employs a DCF methodology that includes cash flow estimates of a film’s ultimate revenue and costs as well as a discount rate. The discount rate utilized in the DCF analysis is based on the weighted average cost of capital of the respective business (e.g., Warner Bros.) plus a risk premium representing the risk associated with producing a particular theatrical film. The fair value of any theatrical film and television production that management plans to abandon is zero. As the primary determination of fair value is determined using a DCF model, the resulting fair value is considered a Level 3 measurement. The following table presents certain theatrical film and television production costs, which were recorded as inventory in the Consolidated Balance Sheet, that were written down to fair value (millions):

 

                                                     
     Carrying value
before write down
     Carrying value
after write down
 

Fair value measurements made during the three months ended September 30,:

     

2014

   $ 46       $  

2013

     70         45   

Fair value measurements made during the nine months ended September 30,:

     

2014

   $ 234       $ 140   

2013

     105         49   

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

5.

INVENTORIES AND THEATRICAL FILM AND TELEVISION PRODUCTION COSTS

Inventories and theatrical film and television production costs consist of (millions):

 

                                             
     September 30,
2014
     December 31,
2013
 
            (recast)  

Inventories:

     

Programming costs, less amortization

   $ 3,306       $ 3,416   

Other inventory, primarily DVDs and Blu-ray Discs

     271         269   
  

 

 

    

 

 

 

Total inventories

     3,577         3,685   

Less: current portion of inventory

     (1,776)         (1,648)   
  

 

 

    

 

 

 

Total noncurrent inventories

     1,801         2,037   
  

 

 

    

 

 

 

Theatrical film production costs:(a)

     

Released, less amortization

     604         660   

Completed and not released

     496         246   

In production

     1,300         1,480   

Development and pre-production

     99         107   

Television production costs:(a)

     

Released, less amortization

     1,256         1,249   

Completed and not released

     529         536   

In production

     684         694   

Development and pre-production

     10          
  

 

 

    

 

 

 

Total theatrical film and television production costs

     4,978         4,979   
  

 

 

    

 

 

 

Total noncurrent inventories and theatrical film and television production costs

   $ 6,779       $ 7,016   
  

 

 

    

 

 

 

 

 

(a)

Does not include $852 million and $958 million of acquired film library intangible assets as of September 30, 2014 and December 31, 2013, respectively, which are included in Intangible assets subject to amortization, net in the Consolidated Balance Sheet.

 

6.

DERIVATIVE INSTRUMENTS

Time Warner uses derivative instruments, principally forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies and changes in fair value resulting from changes in foreign currency exchange rates. The principal currencies being hedged include the British Pound, Euro, Australian Dollar and Canadian Dollar. Time Warner uses foreign exchange contracts that generally have maturities of three to 18 months to hedge various foreign exchange exposures, including the following: (i) variability in foreign-currency-denominated cash flows, such as the hedges of unremitted or forecasted royalty and license fees owed to Time Warner’s domestic companies for the sale or anticipated sale of U.S. copyrighted products abroad or cash flows for certain film production costs denominated in a foreign currency (i.e., cash flow hedges) and (ii) currency risk associated with foreign-currency-denominated operating assets and liabilities (i.e., fair value hedges). For these qualifying hedge relationships, the Company excludes the impact of forward points from its assessment of hedge effectiveness. As a result, changes in the fair value due to forward points are recorded in Other income (loss), net in the Consolidated Statement of Operations each quarter.

The Company also enters into derivative contracts that economically hedge certain of its foreign currency risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. These economic hedges are used primarily to offset the change in certain foreign currency denominated long-term receivables and certain foreign-currency-denominated debt due to changes in the underlying foreign exchange rates.

Gains and losses from hedging activities recognized in the Consolidated Statement of Operations, including hedge ineffectiveness, were not material for the three and nine months ended September 30, 2014 and 2013. In addition, such gains and losses were largely offset by corresponding economic gains or losses from the respective transactions that were hedged.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions and has entered into collateral agreements with certain of these counterparties to further protect the Company in the event of deterioration of the credit quality of such counterparties on outstanding transactions. Additionally, netting provisions are included in agreements in situations where the Company executes multiple contracts with the same counterparty. For such foreign exchange contracts, the Company offsets the fair value of the amounts owed to or due from the counterparty and classifies the net amount as a net asset or net liability within Prepaid expenses and other current assets or Accounts payable and accrued liabilities, respectively, in the Consolidated Balance Sheet. The following is a summary of amounts recorded in the Consolidated Balance Sheet pertaining to Time Warner’s use of foreign currency derivatives at September 30, 2014 and December 31, 2013 (millions):

 

                                             
     September 30,
2014(a)
     December 31,
2013(b)
 

Prepaid expenses and other current assets

   $ 16       $ 10   

Accounts payable and accrued liabilities

            (17)   

 

 

(a)

Includes $64 million ($46 million of qualifying hedges and $18 million of economic hedges) and $48 million ($35 million of qualifying hedges and $13 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively.

(b) 

Includes $77 million ($64 million of qualifying hedges and $13 million of economic hedges) and $84 million ($53 million of qualifying hedges and $31 million of economic hedges) of foreign exchange derivative contracts in asset and liability positions, respectively.

At September 30, 2014 and December 31, 2013, $34 million and $28 million of gains, respectively, related to cash flow hedges are recorded in Accumulated other comprehensive loss, net and are expected to be recognized in earnings at the same time the hedged items affect earnings. Included in Accumulated other comprehensive loss, net at September 30, 2014 and December 31, 2013 are net gains of $1 million and $21 million, respectively, related to hedges of cash flows associated with films that are not expected to be released within the next twelve months.

 

7.

LONG-TERM DEBT AND OTHER FINANCING ARRANGEMENTS

Debt Offering

On May 20, 2014, Time Warner issued $650 million aggregate principal amount of 2.10% Notes due 2019, $750 million aggregate principal amount of 3.55% Notes due 2024 and $600 million aggregate principal amount of 4.65% Debentures due 2044 in a public offering. The securities issued pursuant to the offering are directly or indirectly guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”), Home Box Office and Turner.

 

8.

SHAREHOLDERS’ EQUITY

Common Stock Repurchase Program

In January 2014, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases beginning January 1, 2014, including amounts available under the Company’s prior stock repurchase program as of December 31, 2013. In June 2014, Time Warner’s Board of Directors authorized an additional $5.0 billion of share repurchases. Purchases under the stock repurchase program may be made from time to time on the open market and in privately negotiated transactions. The size and timing of these purchases are based on a number of factors, including price and business and market conditions.

From January 1, 2014 through September 30, 2014, the Company repurchased approximately 64 million shares of common stock for approximately $4.500 billion pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended. As of September 30, 2014, $5.500 billion was remaining under the stock repurchase program.

Comprehensive Income (Loss)

Comprehensive income (loss) is reported in the Consolidated Statement of Comprehensive Income and consists of Net income and other gains and losses affecting shareholders’ equity that, under GAAP, are excluded from Net income. For Time Warner, such items consist primarily of foreign currency translation gains (losses), unrealized gains and losses on certain derivative financial instruments and equity securities, and changes in benefit plan obligations.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following summary sets forth the activity within Other comprehensive income (loss) (millions):

 

                                                                                                                                         
     Three Months Ended September 30, 2014      Nine Months Ended September 30, 2014  
     Pretax      Tax
(provision)
benefit
     Net of tax      Pretax      Tax
(provision)
benefit
     Net of tax  

Unrealized losses on foreign currency translation

   $ (54)       $      $ (49)       $ (66)       $ (1)       $ (67)   

Unrealized gains (losses) on securities

            (2)                (5)                (3)   

Reclassification adjustment for gains on securities realized in net income(a)

                          (8)                (5)   

Unrealized gains (losses) on benefit obligations

            (1)                (50)         14         (36)   

Reclassification adjustment for losses on benefit obligations realized in net income(b)

            (2)                23         (8)         15   

Unrealized gains on derivative financial instruments

            (2)                       (2)          

Reclassification adjustment for losses on derivative financial instruments realized in net income(c)

                                         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive loss

   $ (35)       $ (2)       $ (37)       $ (101)       $      $ (93)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended September 30, 2013      Nine Months Ended September 30, 2013  
     Pretax      Tax
(provision)
benefit
     Net of tax      Pretax      Tax
(provision)
benefit
     Net of tax  

Unrealized gains (losses) on foreign currency translation

   $ 10       $      $ 14       $ (117)       $ 32       $ (85)   

Reclassification adjustment for gains on foreign currency translation realized in net income(a)

                          (9)                (6)   

Unrealized gains on securities

            (1)                       (1)          

Unrealized gains (losses) on benefit obligations

     16         (14)                (2)         (15)         (17)   

Reclassification adjustment for losses on benefit obligations realized in net income(b)

            (2)                24         (8)         16   

Unrealized gains on derivative financial instruments

     21         (8)         13         42         (16)         26   

Reclassification adjustment for gains on derivative financial instruments realized in net income(c)

     (10)                (6)         (31)         12         (19)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss)

   $ 45       $ (17)       $ 28       $ (91)       $      $ (84)   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

(a) 

Pretax (gains) losses included in Other income (loss), net.

(b) 

Pretax (gains) losses included in Selling, general and administrative expenses.

(c) 

Pretax (gains) losses included in Selling, general and administrative expenses, Costs of revenues and Other income (loss), net are as follows (millions):

 

                                                                                           
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  

Selling, general and administrative expenses

   $      $ (2)       $ (3)       $ (3)   

Costs of revenues

            (8)                (25)   

Other loss, net

                          (3)   

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

9.

INCOME PER COMMON SHARE

Set forth below is a reconciliation of Basic and Diluted income per common share from continuing operations attributable to Time Warner Inc. common shareholders (millions, except per share amounts):

 

                                                                                                           
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Income from continuing operations attributable to Time Warner Inc. shareholders

   $ 966       $ 958       $ 3,174       $ 2,420   

Income allocated to participating securities

     (3)         (4)         (11)         (12)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from continuing operations attributable to Time Warner Inc. common shareholders — basic

   $ 963       $ 954       $ 3,163       $ 2,408   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average basic common shares outstanding

     850.9         916.8         872.2         926.1   

Dilutive effect of equity awards

     19.3         22.0         19.4         22.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Average diluted common shares outstanding

     870.2         938.8         891.6         948.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive common share equivalents excluded from computation

                           
  

 

 

    

 

 

    

 

 

    

 

 

 

Income per common share from continuing operations attributable to Time Warner Inc. common shareholders:

           

Basic

   $ 1.13       $ 1.04       $ 3.63       $ 2.60   

Diluted

   $ 1.11       $ 1.02       $ 3.56       $ 2.55   

 

10.

EQUITY-BASED COMPENSATION

The table below summarizes the weighted-average assumptions used to value stock options at their grant date and the weighted-average grant date fair value per share:

 

                                                                                                   
               Nine Months Ended September 30,  
               2014      2013  

Expected volatility

           28.0%         29.7%   

Expected term to exercise from grant date

           5.92 years         6.31 years   

Risk-free rate

           1.9%         1.2%   

Expected dividend yield

           1.9%         2.1%   

Weighted average grant date fair value per option

         $ 15.61      $ 12.79  

The following table sets forth the weighted average grant date fair value of restricted stock units (“RSUs”) and target performance stock units (“PSUs”). For PSUs, the service inception date precedes the grant date and requires the Company to apply mark-to-market accounting that is reflected in the grant date fair values presented:

 

                                                                                                   
               Nine Months Ended September 30,  
               2014      2013  

RSUs

         $ 65.42       $ 53.71   

PSUs

           77.02         87.17   

 

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Table of Contents

TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

The following table sets forth the number of stock options, RSUs and target PSUs granted (millions):

 

                                                                                                   
               Nine Months Ended September 30,  
               2014      2013  

Stock options

           1.0         1.3   

RSUs

           2.6         3.2   

PSUs

           0.2         0.2   

In connection with the Time Separation and in accordance with existing antidilution provisions in the Company’s equity plans, the number of stock options, RSUs and PSUs outstanding at the Distribution Date and the exercise prices of such stock options were prospectively adjusted to maintain the value of those awards subsequent to the Time Separation. The changes in the number of shares subject to outstanding equity awards and the exercise prices were determined by comparing the value of such awards immediately prior to the Time Separation to the value of such awards immediately after the Time Separation. Accordingly, the number of shares subject to each equity award outstanding as of the Distribution Date was increased by multiplying such number of shares by a factor of approximately 1.04, while the per share exercise price of each stock option was decreased by dividing such exercise price by a factor of approximately 1.04. The adjustments resulted in an increase of approximately 2 million shares subject to outstanding equity awards following the Time Separation. The adjustments to the outstanding equity awards did not result in any additional compensation expense.

Compensation expense recognized for equity-based awards is as follows (millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

RSUs and PSUs

   $ 44       $ 43       $ 151       $ 160   

Stock options

                   23         29   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impact on operating income

   $ 48       $ 49       $ 174       $ 189   
  

 

 

    

 

 

    

 

 

    

 

 

 

Tax benefit recognized

   $ 19       $ 16       $ 64       $ 64   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unrecognized compensation cost related to unvested RSUs and target PSUs as of September 30, 2014, without taking into account expected forfeitures, is $215 million and is expected to be recognized over a weighted-average period between one and two years.

Total unrecognized compensation cost related to unvested stock option awards as of September 30, 2014, without taking into account expected forfeitures, is $15 million and is expected to be recognized over a weighted-average period within one year.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

11.

BENEFIT PLANS

Components of Net Periodic Benefit Costs

A summary of the components of the net periodic benefit costs from continuing operations recognized for substantially all of Time Warner’s defined benefit pension plans for the three and nine months ended September 30, 2014 and 2013 is as follows (millions):

 

                                                                                                           
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Service cost

   $      $      $      $  

Interest cost

     20         20         69         59   

Expected return on plan assets

     (22)         (23)         (72)         (67)   

Amortization of prior service cost

                           

Amortization of net loss

                   10         12   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit costs

   $      $      $ 10       $  
  

 

 

    

 

 

    

 

 

    

 

 

 

Contributions

   $      $      $ 24       $ 24   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

12.

RESTRUCTURING AND SEVERANCE COSTS

The Company’s Restructuring and severance costs primarily related to employee termination costs, ranging from senior executives to line personnel, and other exit costs, including lease terminations and real estate consolidations. For the three months ended September 30, 2014, the Company incurred $303 million of Restructuring and severance costs related to restructuring activities designed to position the Company for the current operating environment and reallocate resources to the Company’s growth initiatives. The restructuring activities and related costs relate to headcount reductions. Restructuring and severance costs expensed as incurred by segment for the three and nine months ended September 30, 2014 and 2013 are as follows (millions):

 

                                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Turner

   $ 199       $ 30       $ 223       $ 64   

Home Box Office

     48         24         57         36   

Warner Bros.

     45                50         33   

Corporate

     11                16         (1)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and severance costs

   $ 303       $ 56       $ 346       $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

2014 activity

   $ 300       $      $ 340       $  

2013 and prior activity

            56                132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total restructuring and severance costs

   $ 303       $ 56       $ 346       $ 132   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Selected information relating to accrued restructuring and severance costs is as follows (millions):

 

                                                                                                                       
          Employee
Terminations
     Other Exit Costs      Total  

Remaining liability as of December 31, 2013 (recast)

      $ 180       $      $ 186   

Net accruals

           341                5            346   

Noncash reductions(a)

        (1)                (1)   

Cash paid

        (97)         (6)         (103)   
     

 

 

    

 

 

    

 

 

 

Remaining liability as of September 30, 2014

      $ 423       $      $ 428   
     

 

 

    

 

 

    

 

 

 

 

 

(a) 

Noncash reductions relate to the settlement of certain employee-related liabilities with equity instruments.

As of September 30, 2014, of the remaining liability of $428 million, $280 million was classified as a current liability in the Consolidated Balance Sheet, with the remaining $148 million classified as a long-term liability. Amounts classified as long-term are expected to be paid through 2017.

 

13.

SEGMENT INFORMATION

Time Warner classifies its operations into three reportable segments: Turner: consisting principally of cable networks and digital media properties; Home Box Office: consisting principally of premium pay television services domestically and premium pay and basic tier television services internationally; and Warner Bros.: consisting principally of feature film, television, home video and videogame production and distribution.

Information as to the Revenues, intersegment revenues, Operating Income (Loss) and Assets of Time Warner in each of its reportable segments is set forth below (millions):

 

                                                                                                                               
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Revenues

           

Turner

   $ 2,446       $ 2,338       $ 7,789       $ 7,435   

Home Box Office

     1,304         1,186         4,060         3,630   

Warner Bros.

     2,775         2,694         8,711         8,316   

Intersegment eliminations

     (282)         (176)         (726)         (524)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 6,243       $ 6,042       $ 19,834       $ 18,857   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Intersegment Revenues

           

Turner

   $ 19       $ 19       $ 76       $ 65   

Home Box Office

                   27          

Warner Bros.

     255         156         623         454   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total intersegment revenues

   $ 282       $ 176       $ 726       $ 524   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Operating Income (Loss)

           

Turner

   $ 337       $ 967       $ 2,166       $ 2,633   

Home Box Office

     380         502         1,392         1,378   

Warner Bros.

     237         307         840         751   

Corporate

     (119)         (65)         53         (274)   

Intersegment eliminations

     136         18         135         47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating income (loss)

   $ 971       $ 1,729       $ 4,586       $ 4,535   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                                                   
               September 30,
2014
     December 31,
2013
 
                      (recast)  

Assets

           

Turner

         $ 25,284       $ 26,067   

Home Box Office

           13,941         13,687   

Warner Bros.

           20,173         20,066   

Corporate

           3,697         2,433   

Assets of discontinued operations

                  5,746   
        

 

 

    

 

 

 

Total assets

         $ 63,095       $ 67,999   
        

 

 

    

 

 

 

 

14.

COMMITMENTS AND CONTINGENCIES

Commitments

Six Flags

In connection with the Company’s former investment in the Six Flags theme parks located in Georgia and Texas (collectively, the “Parks”), in 1997, certain subsidiaries of the Company (including Historic TW and, in connection with the separation of TWC in 2009, Warner Bros. Entertainment Inc.) agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including: annual payments made at the Parks or to the limited partners and additional obligations at the end of the respective terms for the Partnerships in 2027 and 2028 (the “Guaranteed Obligations”). The aggregate undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) are $935 million (for a net present value of $418 million). To date, no payments have been made by the Company pursuant to the Six Flags Guarantee.

Six Flags Entertainment Corporation (formerly known as Six Flags, Inc. and Premier Parks Inc.) (“Six Flags”), which has the controlling interest in the Parks, has agreed, pursuant to a subordinated indemnity agreement (the “Subordinated Indemnity Agreement”), to guarantee the performance of the Guaranteed Obligations when due and to indemnify Historic TW, among others, if the Six Flags Guarantee is called upon. If Six Flags defaults in its indemnification obligations, Historic TW has the right to acquire control of the managing partner of the Parks. Six Flags’ obligations to Historic TW are further secured by its interest in all limited partnership units held by Six Flags.

Because the Six Flags Guarantee existed prior to December 31, 2002 and no modifications to the arrangements have been made since the date the guarantee came into existence, the Company is required to continue to account for the Guaranteed Obligations as a contingent liability. Based on its evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may be incurred under the Guaranteed Obligations, and no liability for the arrangements has been recognized at September 30, 2014. Because of the specific circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Contingencies

In the ordinary course of business, the Company and its subsidiaries are defendants in or parties to various legal claims, actions and proceedings. These claims, actions and proceedings are at varying stages of investigation, arbitration or adjudication, and involve a variety of areas of law.

On October 8, 2004, certain heirs of Jerome Siegel, one of the creators of the “Superman” character, filed suit against the Company, DC Comics and Warner Bros. Entertainment Inc. in the U.S. District Court for the Central District of California. Plaintiffs’ complaint alleged, among other things, that plaintiffs terminated Siegel’s grants of one-half the rights in the Superman character as of April 16, 1999, and plaintiffs were entitled to up to one-half of the profits made on Superman since that date. On March 26, 2008, the court entered summary judgment, finding that plaintiffs’ termination notices were valid and recaptured a one-half interest in the Superman character as of April 16, 1999. On January 10, 2013, the U.S. Court of Appeals for the Ninth Circuit reversed the March 2008 summary judgment decision, holding that the parties reached a binding settlement agreement in 2001. By orders dated March 20, 2013, April 18, 2013, and June 18, 2013, the district court entered final judgment in this lawsuit and the related Superboy lawsuit, described below, in DC Comics’ favor, ruling that the plaintiffs had transferred any and all rights in the Superman and Superboy properties to DC Comics in 2001 pursuant to a binding settlement agreement. On July 16, 2013, the plaintiffs filed an appeal from the final judgment to the U.S. Court of Appeals for the Ninth Circuit.

On October 22, 2004, the same Siegel heirs filed a related lawsuit against the same defendants, as well as Warner Communications Inc. (now known as Warner Communications LLC) and Warner Bros. Television Production Inc. (now known as WB Studio Enterprises Inc.), in the U.S. District Court for the Central District of California. Plaintiffs claimed that Siegel was the sole creator of the character Superboy and, as such, DC Comics has had no right to create new Superboy works since plaintiffs’ alleged October 17, 2004 termination of Siegel’s grants of rights to the Superboy character. Plaintiffs sought a declaration regarding the validity of the alleged termination and an injunction against future use of the Superboy character. As described in the paragraph above regarding the Superman lawsuit, by orders dated March 20, 2013, April 18, 2013 and June 18, 2013, the district court entered final judgment in DC Comics’ favor, ruling that the plaintiffs had transferred any and all rights in the Superman and Superboy properties to DC Comics in 2001 pursuant to a binding settlement agreement. On July 16, 2013, the plaintiffs filed an appeal from the final judgment to the U.S. Court of Appeals for the Ninth Circuit.

On May 14, 2010, DC Comics filed a related lawsuit in the U.S. District Court for the Central District of California against the heirs of Superman co-creator Joseph Shuster, the Siegel heirs, their attorney Marc Toberoff and certain companies that Mr. Toberoff controls. The lawsuit asserted, among other things, a claim for declaratory relief concerning the validity of the copyright termination notice served by the Shuster heirs, who purported to reclaim their rights to the Superman character from DC Comics with the termination notice. The lawsuit also asserted state law based claims, including seeking declaratory relief challenging the validity of various agreements between Mr. Toberoff, certain companies that he controls and the Shuster and Siegel heirs, as well as claims for intentional interference by Mr. Toberoff with DC Comics’ contracts and prospective economic advantage with the Shuster and Siegel heirs for which DC Comics sought monetary damages. On October 17, 2012, the district court granted summary judgment in favor of DC Comics, holding that the copyright termination notice served by the Shuster heirs was invalid and that the Shuster heirs had transferred any and all rights in the Superman properties to DC Comics in 1992 pursuant to a binding agreement with DC Comics. On November 21, 2013, the U.S. Court of Appeals for the Ninth Circuit affirmed the district court’s October 2012 decision. On October 6, 2014, the U.S. Supreme Court denied the Shuster heirs’ petition for writ of certiorari. DC Comics’ other claims against the Siegel heirs, Mr. Toberoff and certain companies that Mr. Toberoff controls were either dismissed by the district court or are moot following the U.S. Supreme Court’s denial of the Shuster heirs’ petition for writ of certiorari.

On April 4, 2007, the National Labor Relations Board (“NLRB”) issued a complaint against CNN America Inc. (“CNN America”) and Team Video Services, LLC (“Team Video”). This administrative proceeding relates to CNN America’s December 2003 and January 2004 terminations of its contractual relationships with Team Video, under which Team Video had provided electronic newsgathering services in Washington, DC and New York, NY. The National Association of Broadcast Employees and Technicians, under which Team Video’s employees were unionized, initially filed charges of unfair labor practices with the NLRB in February 2004, alleging that CNN America and Team Video were joint employers, that CNN America was a successor employer to Team Video, and/or that CNN America discriminated in its hiring practices to avoid becoming a successor employer or due to specific individuals’ union affiliation or activities. The NLRB complaint seeks, among other things, the reinstatement of certain union members and monetary damages. On November 19, 2008, the presiding NLRB Administrative Law Judge (“ALJ”) issued a non-binding recommended decision and order, finding CNN America liable. On September 15, 2014, the NLRB affirmed the ALJ’s decision and adopted the ALJ’s order with certain modifications. On September 16, 2014, CNN America filed a notice of appeal with the U.S. Court of Appeals for the D.C. Circuit.

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

In April 2013, the Internal Revenue Service (the “IRS”) Appeals Division issued a notice of deficiency to the Company relating to the appropriate tax characterization of stock warrants received from Google Inc. in 2002. On May 6, 2013, the Company filed a petition with the United States Tax Court seeking a redetermination of the deficiency set forth in the notice. The Company’s petition asserts that the IRS erred in determining that the stock warrants were taxable upon exercise (in 2004) rather than at the date of grant based on, among other things, a misapplication of Section 83 of the Internal Revenue Code. Should the IRS prevail in this litigation, the additional tax payable by the Company would be approximately $70 million.

The Company intends to vigorously defend against or prosecute, as applicable, the matters described above.

The Company establishes an accrued liability for legal claims when the Company determines that a loss is both probable and the amount of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.

For matters disclosed above for which a loss is probable or reasonably possible, whether in excess of an accrued liability or where there is no accrued liability, the Company has estimated a range of possible loss. The Company believes the estimate of the aggregate range of possible loss in excess of accrued liabilities for such matters is between $0 and $130 million at September 30, 2014. The estimated aggregate range of possible loss is subject to significant judgment and a variety of assumptions. The matters represented in the estimated aggregate range of possible loss will change from time to time and actual results may vary significantly from the current estimate.

In view of the inherent difficulty of predicting the outcome of litigation and claims, the Company often cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, fines or penalties related to each pending matter may be. An adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any particular reporting period.

Income Tax Uncertainties

During the nine months ended September 30, 2014, the Company recorded net decreases to income tax reserves of approximately $745 million, of which approximately $475 million impacted the Company’s effective tax rate. During the nine months ended September 30, 2014, the Company recorded net decreases to interest reserves related to the income tax reserves of approximately $85 million.

During the third quarter of 2014, the Company recognized a tax benefit of $687 million primarily related to the reversal of certain tax reserves, including related interest accruals, in connection with a Federal tax settlement on the examination of the Company’s 2005-2007 tax returns. Certain matters involving the Company’s capital loss carryforward and research and development tax credits were not resolved as part of the settlement and, accordingly, the Company is pursuing resolution of such matters through the IRS’s administrative appeals process. The IRS is currently examining the Company’s 2008-2010 tax returns. In addition, during the third quarter of 2014, the Company recorded an increase to income tax reserves of $48 million related to a foreign tax matter. The Company believes that reasonably possible changes in the total amount of unrecognized tax benefits within the next twelve months are not significant.

 

15.

RELATED PARTY TRANSACTIONS

The Company has entered into certain transactions in the ordinary course of business with unconsolidated investees accounted for under the equity method of accounting. These transactions have been executed on terms comparable to the terms of transactions with unrelated third parties and primarily relate to the licensing of television programming to The CW broadcast network and certain international networks by the Warner Bros. segment. Revenues and expenses resulting from transactions with related parties consist of (millions):

 

                                                                                                   
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Revenues

   $ 54       $ 80       $ 278       $ 341   

Expenses

     (3)         (11)         (7)         (32)   

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

16.

ADDITIONAL FINANCIAL INFORMATION

Additional financial information with respect to cash payments and receipts, Interest expense, net, Other loss, net, Accounts payable and accrued liabilities and Other noncurrent liabilities is as follows (millions):

 

                                                                                                   
                   Nine Months Ended September 30,  
                   2014      2013  
                          (recast)  

Cash Flows

           

Cash payments made for interest

         $ (891)       $ (878)   

Interest income received

           44         38   
        

 

 

    

 

 

 

Cash interest payments, net

         $ (847)       $ (840)   
        

 

 

    

 

 

 

Cash payments made for income taxes

         $ (1,424)       $ (844)   

Income tax refunds received

           43         62   
        

 

 

    

 

 

 

Cash tax payments, net

         $ (1,381)       $ (782)   
        

 

 

    

 

 

 
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Interest Expense, Net

           

Interest income

   $ 39       $ 21       $ 139       $ 72   

Interest expense

     (346)         (321)         (1,007)         (961)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total interest expense, net

   $ (307)       $ (300)       $ (868)       $ (889)   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Three Months Ended      Nine Months Ended  
     9/30/14      9/30/13      9/30/14      9/30/13  
            (recast)             (recast)  

Other Loss, Net

           

Investment gains (losses), net

   $ (78)       $ 12       $ (57)       $ 67   

Loss on equity method investees

     (63)         (26)         (83)         (117)   

Other

            (6)                (10)   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other loss, net

   $ (135)       $ (20)       $ (140)       $ (60)   
  

 

 

    

 

 

    

 

 

    

 

 

 
                   September 30,
2014
     December 31,
2013
 
                          (recast)  

Accounts Payable and Accrued Liabilities

           

Accounts payable

         $ 499       $ 505   

Accrued expenses

           2,012         1,724   

Participations payable

           2,415         2,302   

Programming costs payable

           739         705   

Accrued compensation

           880         1,047   

Accrued interest

           364         313   

Accrued income taxes

           143         158   
        

 

 

    

 

 

 

Total accounts payable and accrued liabilities

         $ 7,052       $ 6,754   
        

 

 

    

 

 

 

 

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TIME WARNER INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

                                             
     September 30,
2014
     December 31,
2013
 
            (recast)  

Other Noncurrent Liabilities

     

Noncurrent tax and interest reserves

   $ 1,599       $ 2,540   

Participations payable

     1,012         1,078   

Programming costs payable

     1,001         1,076   

Noncurrent pension and post-retirement liabilities

     716         696   

Deferred compensation

     489         542   

Other noncurrent liabilities

     789         392   
  

 

 

    

 

 

 

Total other noncurrent liabilities

   $ 5,606       $ 6,324   
  

 

 

    

 

 

 

Accounting for Collaborative Arrangements

The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to jointly finance and distribute theatrical productions and the arrangement entered into with CBS Broadcasting, Inc. (“CBS”) and The National Collegiate Athletic Association (the “NCAA”) that provides Turner and CBS with exclusive television, Internet and wireless rights to the NCAA Division I Men’s Basketball Championship events (the “NCAA Tournament”) in the United States and its territories and possessions through 2024.

For the Company’s collaborative arrangements entered into with third parties to jointly finance and distribute theatrical productions, net participation costs of $69 million and $108 million were recorded in Costs of revenues for the three months ended September 30, 2014 and 2013, respectively, and $374 million and $351 million were recorded in Costs of revenues for the nine months ended September 30, 2014 and 2013, respectively.

The aggregate programming rights fee, production costs, advertising revenues and sponsorship revenues related to the NCAA Tournament and related programming are shared equally by Turner and CBS. However, if the amount paid for the programming rights fee and production costs, in any given year, exceeds advertising and sponsorship revenues for that year, CBS’ share of such shortfall is limited to specified annual amounts, ranging from approximately $90 million to $30 million.

 

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TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

 

Overview

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations and cash flows of (i) Time Warner Inc. (the “Parent Company”), (ii) Historic TW Inc. (in its own capacity and as successor by merger to Time Warner Companies, Inc.), Home Box Office, Inc., and Turner Broadcasting System, Inc., each a wholly owned subsidiary of the Parent Company (collectively, the “Guarantor Subsidiaries”), on a combined basis, (iii) the direct and indirect non-guarantor subsidiaries of the Parent Company (the “Non-Guarantor Subsidiaries”), on a combined basis, and (iv) the eliminations necessary to arrive at the information for Time Warner Inc. on a consolidated basis. The Guarantor Subsidiaries fully and unconditionally, jointly and severally guarantee securities issued under certain of the Company’s indentures on an unsecured basis.

There are no legal or regulatory restrictions on the Parent Company’s ability to obtain funds from any of its wholly owned subsidiaries through dividends, loans or advances.

Basis of Presentation

The Company’s financial information has been recast to reflect the financial condition and results of operations of the Company’s former Time Inc. segment as discontinued operations for all periods presented. Amounts presented in the Consolidating Balance Sheet at December 31, 2013 related to discontinued operations of the Parent Company and the Guarantor Subsidiaries principally relate to the impact of the Time Separation on the Parent Company’s and the Guarantor Subsidiaries’ deferred income taxes.

In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Parent Company’s interests in the Guarantor Subsidiaries and (ii) the Guarantor Subsidiaries’ interests in the Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions between the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”

The Parent Company’s accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries. Corporate overhead expenses have been reflected as expenses of the Parent Company and have not been allocated to the Guarantor Subsidiaries or the Non-Guarantor Subsidiaries. Interest income (expense) is determined based on outstanding debt and the relevant intercompany amounts at the respective subsidiary.

All direct and indirect domestic subsidiaries are included in Time Warner Inc.’s consolidated U.S. tax return. In the condensed consolidating financial statements, tax (provision) benefit has been allocated based on each such subsidiary’s relative pretax income to the consolidated pretax income. With respect to the use of certain consolidated tax attributes (principally operating and capital loss carryforwards), such benefits have been allocated to the respective subsidiary that generated the taxable income permitting such use (i.e., pro-rata based on where the income was generated). For example, to the extent a Non-Guarantor Subsidiary generated a gain on the sale of a business for which the Parent Company utilized tax attributes to offset such gain, the tax attribute benefit would be allocated to that Non-Guarantor Subsidiary. Deferred taxes of the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been determined based on the temporary differences between the book and tax basis of the respective assets and liabilities of the applicable entities.

Certain transfers of cash between subsidiaries and their parent companies and intercompany dividends are reflected as cash flows from investing and financing activities in the accompanying Condensed Consolidating Statements of Cash Flows. All other intercompany activity is reflected in cash flows from operations.

Management believes that the allocations and adjustments noted above are reasonable. However, such allocations and adjustments may not be indicative of the actual amounts that would have been incurred had the Parent Company, Guarantor Subsidiaries and Non-Guarantor Subsidiaries operated independently.

 

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Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Balance Sheet

September 30, 2014

(Unaudited; millions)

 

                                                                                                                                           
     Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations      Time
Warner
Consolidated
 

ASSETS

              

Current assets

              

Cash and equivalents

   $ 2,127       $ 214       $ 869       $      $ 3,210   

Receivables, net

     64         1,056         5,890         (5)         7,005   

Inventories

            468         1,308                1,776   

Deferred income taxes

     181         58         (44)         (14)         181   

Prepaid expenses and other current assets

     116         112         493                721   

Current assets of discontinued operations

                                  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     2,488         1,908         8,516         (19)         12,893   

Noncurrent inventories and theatrical film and television production costs

            1,813         5,035         (69)         6,779   

Investments in amounts due to and from consolidated subsidiaries

     44,102         10,746         12,550         (67,398)          

Investments, including available-for-sale securities

     114         421         1,801                2,336   

Property, plant and equipment, net

     76         389         2,213                2,678   

Intangible assets subject to amortization, net

                   1,225                1,225   

Intangible assets not subject to amortization

            2,007         5,027                7,034   

Goodwill

            9,880         17,707                27,587   

Other assets

     380         169         2,014                2,563   

Noncurrent assets of discontinued operations

                                  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 47,160       $ 27,333       $ 56,088       $ (67,486)       $ 63,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND EQUITY

              

Current liabilities

              

Accounts payable and accrued liabilities

   $ 811       $ 955       $ 5,483       $ (197)       $ 7,052   

Deferred revenue

            33         481         (10)         504   

Debt due within one year

     1,147                12                1,168   

Current liabilities of discontinued operations

                                  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     1,958         997         5,976         (207)         8,724   

Long-term debt

     17,107         4,007         275                21,389   

Due to (from) affiliates

     (721)                721                 

Deferred income taxes

     1,797         2,242         1,478         (3,720)         1,797   

Deferred revenue

            21         352         (24)         349   

Other noncurrent liabilities

     1,789         1,655         3,213         (1,051)         5,606   

Noncurrent liabilities of discontinued operations

                                  

Equity

              

Due to (from) Time Warner Inc. and subsidiaries

            (42,392)         7,260         35,132          

Other shareholders’ equity

     25,230         60,803         36,813         (97,616)         25,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Time Warner Inc. shareholders’ equity

     25,230         18,411         44,073         (62,484)         25,230   

Noncontrolling interests

                                  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     25,230         18,411         44,073         (62,484)         25,230   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 47,160       $ 27,333       $ 56,088       $ (67,486)       $ 63,095   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Balance Sheet

December 31, 2013

(Unaudited; recast; millions)

 

                                                                                                                                           
     Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations      Time
Warner
Consolidated
 

ASSETS

              

Current assets

              

Cash and equivalents

   $ 1,039       $ 148       $ 629       $      $ 1,816   

Receivables, net

     73         901         6,341         (10)         7,305   

Inventories

            383         1,265                1,648   

Deferred income taxes

     369         50         (52)                369   

Prepaid expenses and other current assets

     103         84         372                559   

Current assets of discontinued operations

     79         78         832         (155)         834   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     1,663         1,644         9,387         (163)         12,531   

Noncurrent inventories and theatrical film and television production costs

            1,726         5,371         (81)         7,016   

Investments in amounts due to and from consolidated subsidiaries

     48,549         21,248         12,288         (82,085)          

Investments, including available-for-sale securities

     130         460         1,419                2,009   

Property, plant and equipment, net

     373         377         2,541                3,291   

Intangible assets subject to amortization, net

                   1,338                1,338   

Intangible assets not subject to amortization

            2,007         5,036                7,043   

Goodwill

            9,879         17,522                27,401   

Other assets

     322         194         1,942                2,458   

Noncurrent assets of discontinued operations

                   4,912                4,912   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ 51,037       $ 37,535       $ 61,756       $ (82,329)       $ 67,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND EQUITY

              

Current liabilities

              

Accounts payable and accrued liabilities

   $ 618       $ 770       $ 5,425       $ (59)       $ 6,754   

Deferred revenue

            28         524         (10)         542   

Debt due within one year

     48                              66   

Current liabilities of discontinued operations

                   1,026         (1)         1,026   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     667         807         6,984         (70)         8,388   

Long-term debt

     16,046         4,001         14                20,061   

Due to (from) affiliates

     (900)                900                 

Deferred income taxes

     2,287         2,666         2,016         (4,682)         2,287   

Deferred revenue

            36         348         (33)         351   

Other noncurrent liabilities

     2,657         1,939         3,352         (1,624)         6,324   

Noncurrent liabilities of discontinued operations

     376         411         713         (816)         684   

Equity

              

Due to (from) Time Warner Inc. and subsidiaries

            (33,497)         6,155         27,342          

Other shareholders’ equity

     29,904         61,172         41,274         (102,446)         29,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Time Warner Inc. shareholders’ equity

     29,904         27,675         47,429         (75,104)         29,904   

Noncontrolling interests

                                  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     29,904         27,675         47,429         (75,104)         29,904   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 51,037       $ 37,535       $ 61,756       $ (82,329)       $ 67,999   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

TIME WARNER INC.

SUPPLEMENTARY INFORMATION

CONDENSED CONSOLIDATING FINANCIAL STATEMENTS – (Continued)

 

Consolidating Statement of Operations

For The Three Months Ended September 30, 2014

(Unaudited; millions)

 

                                                                                                                                           
     Parent
Company
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations      Time
Warner
Consolidated
 

Revenues

   $      $ 1,634       $ 4,818       $ (209)       $ 6,243   

Costs of revenues

            (891)         (2,976)         186         (3,681)   

Selling, general and administrative

     (97)         (256)         (895)         22         (1,226)   

Amortization of intangible assets

                   (52)