First-Quarter Highlights
- Revenues increased 6% to $7.7
billion
- Operating Income grew 4% to
$2.1 billion and Adjusted Operating Income grew 7% to $2.2
billion
- Home Box Office posted record
quarterly Operating Income and Adjusted Operating Income
- EPS grew 23% to $1.80 and Adjusted
EPS grew 11% to $1.66
- Cash Provided by Operations from
Continuing Operations and Free Cash Flow totaled $1.5 billion and
$1.4 billion, respectively, up 94% and 92%, respectively
Time Warner Inc. (NYSE:TWX) today reported financial results for
its first quarter ended March 31, 2017.
Chairman and Chief Executive Officer Jeff Bewkes said: “We’re
off to a strong start to 2017, as we continue to benefit from the
investments we’re making in the best content while also developing
new revenue streams that will drive growth and meet consumer demand
for great experiences built around their favorite programming and
brands. Warner Bros. delighted audiences in both film and
television, with global hits in Kong: Skull Island and The LEGO
Batman Movie and more series across broadcast for the current
season than any other studio. Turner had another successful airing
of the NCAA Division I Men’s Basketball Tournament across
platforms, while CNN grew its total day ratings by 21% among adults
25-54, and remained the leader in digital news. Together, Turner
and Warner Bros. also launched our new Boomerang-branded SVOD
service, adding to our growing portfolio of products that are
reaching consumers directly.”
Mr. Bewkes continued: “Home Box Office shined in the quarter
highlighted by our limited series Big Little Lies, which was both a
critical and cultural breakout. Last Week Tonight with John Oliver
is having its most-watched season to date, and we recently had the
much anticipated returns of Silicon Valley and Veep. Looking ahead,
we remain on track, pending completion of regulatory reviews and
receipt of consents, to close our merger with AT&T Inc. before
the end of 2017. We remain excited about the potential for this
combination to accelerate the pace of innovation in our
businesses.”
Company Results
Revenues grew 6% to $7.7 billion due to increases at all
operating divisions, partially offset by higher intersegment
eliminations. Operating Income increased 4% to $2.1 billion and
Adjusted Operating Income increased 7% to $2.2 billion due to
growth at Home Box Office and Warner Bros. and lower corporate
expenses, partially offset by a decrease at Turner and higher
intersegment eliminations.
The Company posted Diluted Income per Common Share from
Continuing Operations (“EPS”) of $1.80, up 23% compared to $1.46
for the prior year quarter. Adjusted Diluted Income per Common
Share from Continuing Operations (“Adjusted EPS”) was $1.66, up 11%
from $1.49 for the prior year quarter.
For the first three months of 2017, Cash Provided by Operations
from Continuing Operations reached $1.5 billion and Free Cash Flow
totaled $1.4 billion.
Refer to “Use of Non-GAAP Financial Measures” in this release
for a discussion of the non-GAAP financial measures used in this
release and the reconciliations of the non-GAAP financial measures
to the most directly comparable GAAP financial measures.
Segment Performance
The schedule below reflects Time Warner’s financial performance
for the three months ended March 31, by line of business
(millions).
Three Months Ended March 31, 2017
2016 Revenues: Turner $ 3,088 $ 2,906 Home Box
Office 1,568 1,506 Warner Bros. 3,365 3,109 Intersegment
eliminations (286 ) (213 )
Total Revenues $ 7,735 $
7,308
Operating Income (Loss)
(a): Turner $ 1,170 $ 1,239 Home Box Office 583 477
Warner Bros. 488 424 Corporate (114 ) (140 ) Intersegment
eliminations (51 ) (4 )
Total Operating Income $ 2,076
$ 1,996
Adjusted Operating Income
(Loss) (a): Turner $ 1,187 $ 1,239 Home Box
Office 595 486 Warner Bros. 510 426 Corporate (88 ) (135 )
Intersegment eliminations (51 ) (4 )
Total Adjusted Operating
Income $ 2,153 $ 2,012
Depreciation and
Amortization: Turner $ 54 $ 51 Home Box Office 23 22 Warner
Bros. 81 88 Corporate 7 6
Total Depreciation and
Amortization $ 165 $ 167 (a)
Operating Income (Loss) and Adjusted Operating Income (Loss) for
the three months ended March 31, 2017 and 2016 included
restructuring and severance costs of (millions):
Three Months Ended March 31, 2017 2016
Turner $ (2 ) $ (1 ) Home Box Office (2 ) (4 ) Warner Bros. (9 ) (1
) Corporate 1 1
Total Restructuring and Severance
Costs $ (12 ) $ (5 )
Presented below is a discussion of the performance of Time
Warner’s segments for the first quarter of 2017. Unless otherwise
noted, the dollar amounts in parentheses represent year-over-year
changes.
TURNER
Revenues increased 6% ($182 million) to $3.1 billion, due
to increases of 12% ($175 million) in Subscription revenues and 16%
($29 million) in Content and other revenues, partially offset by a
decline of 2% ($22 million) in Advertising revenues. Subscription
revenues benefited from higher domestic rates and growth at
Turner’s international networks, partially offset by lower domestic
subscribers. Content and other revenues increased due to higher
domestic licensing revenues. The decline in Advertising revenues
was primarily due to lower delivery at certain domestic networks,
partially offset by increases at Turner’s sports and news
businesses and growth at Turner’s international networks.
Operating Income decreased 6% ($69 million) to $1.2
billion. The growth in revenues was more than offset by higher
expenses mainly due to increased programming costs. Programming
expenses increased 17% primarily due to higher sports costs related
to the first year of Turner’s new agreement with the NBA and higher
original programming costs.
Adjusted Operating Income decreased 4% ($52 million) to
$1.2 billion.
The NCAA Division I Men’s Basketball Tournament across TBS, TNT,
truTV and CBS was the second most-watched NCAA Tournament in 23
years and viewership increased 16%. March Madness Live, the
tournament’s streaming product managed by Turner, set records for
total live unique users, total number of live streams and total
live streaming hours. In the first quarter of 2017, Adult Swim was
the #1 ad-supported cable network in total day among adults 18-34
and adults 18-49. Also in the first quarter, among adults 25-54,
CNN grew total day ratings 21% and had its most-watched first
quarter in 14 years. Turner, in conjunction with Fox Sports Latin
America, recently announced its acquisition of the rights to first
division soccer in Argentina. Turner, in conjunction with
Twenty-First Century Fox, Inc. and Viacom Inc., recently announced
OpenAP, a single platform that supports standardized audience
targeting as well as independent reporting and verification by an
unaffiliated third party.
HOME BOX OFFICE
Revenues increased 4% ($62 million) to $1.6 billion, due
to an increase of 5% ($66 million) in Subscription revenues,
partially offset by a decline of 1% ($4 million) in Content and
other revenues. Subscription revenues increased due to higher
domestic rates and subscribers and international growth. The
decrease in Content and other revenues was primarily due to lower
home entertainment revenues, partially offset by higher licensing
revenues.
Operating Income increased 22% ($106 million) to $583
million, reflecting the growth in revenues and lower selling,
general and administrative, programming and distribution expenses.
Programming costs decreased 2%, reflecting lower original
programming expenses related to a reduction in amortization
resulting from using a longer estimated utilization period for
original programming beginning in the second quarter of 2016,
partially offset by higher acquired theatrical programming
expenses.
Adjusted Operating Income increased 22% ($109 million) to
$595 million.
The limited series Big Little Lies reached over 8 million
viewers on average. The finale of the sixth and final season of
Girls increased viewership 43% from last season’s finale and was
the most-watched finale since Season 1. The premiere episode of the
final season of The Leftovers increased viewership 26% compared to
the season two premiere. The current season of Last Week Tonight
with John Oliver is the most-watched season to date and viewership
for the current season of Real Time with Bill Maher is up 22%.
WARNER BROS.
Revenues increased 8% ($256 million) to $3.4 billion,
primarily due to higher television and theatrical revenues
partially offset by lower videogames revenues. Television revenues
increased primarily due to higher domestic licensing revenues
related to certain library series. Theatrical revenues grew due to
an increased number and the mix of box office releases, which
included Kong: Skull Island and The LEGO Batman Movie, as well as
higher home entertainment revenues primarily related to the release
of Fantastic Beasts and Where to Find Them and higher carryover
revenue. Videogames revenues declined due to a fewer number and the
mix of releases in the current year period and lower carryover
revenue.
Operating Income increased 15% ($64 million) to $488
million, due to the increase in revenues, partially offset by
higher associated theatrical and television costs of revenues and
print and advertising expenses.
Adjusted Operating Income increased 20% ($84 million) to
$510 million.
From its opening through April 30, Kong: Skull Island grossed
over $560 million at the worldwide box office. For the 2016-2017
television season to date among adults 18-49 on broadcast, Warner
Bros. has the top-2 non-scripted series with The Voice and The
Bachelor, and The Big Bang Theory is both the #1 comedy and #1
series. The Big Bang Theory has been renewed for two additional
seasons, with a prequel series, Young Sheldon, ordered for the
2017-2018 television season. In April, Warner Bros. and Turner
launched a new subscription video-on-demand service in the U.S.
under the Boomerang brand, which offers new and library animated
series from Warner Bros.’ and Turner’s libraries. In addition,
Warner Bros. recently announced plans for two series, live-action
drama Titans and Season 3 of the animated series Young Justice,
which will air on a DC-branded direct-to-consumer digital service
scheduled to launch in 2018.
CONSOLIDATED NET INCOME AND PER SHARE RESULTS
First-Quarter Results
For the three months ended March 31, 2017, the Company had
Income from Continuing Operations attributable to Time Warner Inc.
shareholders of $1.4 billion and EPS of $1.80. This compares to
Income from Continuing Operations attributable to Time Warner Inc.
shareholders for the first quarter of 2016 of $1.2 billion and EPS
of $1.46. The increase in EPS primarily reflects higher Operating
Income, lower interest expense, and a lower effective tax rate due
in part to the Company’s adoption of new guidance on accounting for
tax benefits on equity-based compensation.
Adjusted EPS was $1.66 for the three months ended March 31,
2017, compared to $1.49 for last year’s first quarter.
For the first quarters of 2017 and 2016, the Company had Net
Income attributable to Time Warner Inc. shareholders of $1.4
billion and $1.2 billion, respectively.
USE OF NON-GAAP FINANCIAL MEASURES
The Company utilizes Adjusted Operating Income (Loss), Adjusted
Operating Income margin and Adjusted EPS, among other measures, to
evaluate the performance of its businesses. These measures are
considered important indicators of the operational strength of the
Company’s businesses. Some limitations of Adjusted Operating Income
(Loss), Adjusted Operating Income margin and Adjusted EPS are that
they do not reflect certain charges that affect the operating
results of the Company’s businesses and they involve judgment as to
whether items affect fundamental operating performance.
Adjusted Operating Income (Loss) is Operating Income (Loss)
excluding the impact of noncash impairments of goodwill, intangible
and fixed assets; gains and losses on operating assets (other than
deferred gains on sale-leasebacks); gains and losses recognized in
connection with pension and other postretirement benefit plan
curtailments or settlements; external costs related to mergers,
acquisitions or dispositions (including restructuring and severance
costs associated with dispositions), as well as contingent
consideration related to such transactions, to the extent such
costs are expensed; amounts related to securities litigation and
government investigations; and the foreign currency loss during the
three months ended March 31, 2015 related to the translation
of net monetary assets denominated in Venezuelan currency resulting
from the Company’s change to the Simadi exchange rate during the
quarter ended March 31, 2015. Adjusted Operating Income margin
is defined as Adjusted Operating Income divided by Revenues.
Beginning with periods ending on or after October 1, 2016,
Adjusted Operating Income (Loss) is defined as Operating Income
(Loss) excluding the impact of noncash impairments of goodwill,
intangible and fixed assets; gains and losses on operating assets
(other than deferred gains on sale-leasebacks); gains and losses
recognized in connection with pension and other postretirement
benefit plan curtailments or settlements; costs related to the
pending acquisition by AT&T Inc. (including retention,
restructuring and severance costs associated with the transaction);
external costs related to mergers, acquisitions or dispositions
(including restructuring and severance costs associated with
dispositions), as well as contingent consideration related to such
transactions, to the extent such costs are expensed; amounts
related to securities litigation and government investigations; and
the foreign currency loss during the three months ended March 31,
2015 related to the translation of net monetary assets denominated
in Venezuelan currency resulting from the Company's change to the
Simadi exchange rate during the quarter ended March 31, 2015.
Adjusted EPS is Diluted Income per Common Share from Continuing
Operations attributable to Time Warner Inc. common shareholders
with the following items excluded from Income from Continuing
Operations attributable to Time Warner Inc. common shareholders:
noncash impairments of goodwill, intangible and fixed assets and
investments; gains and losses on operating assets (other than
deferred gains on sale-leasebacks), liabilities (including
extinguishments of debt) and investments, in each case including
associated costs of the transaction; gains and losses recognized in
connection with pension and other postretirement benefit plan
curtailments or settlements; external costs related to mergers,
acquisitions, investments or dispositions (including restructuring
and severance costs associated with dispositions), as well as
contingent consideration related to such transactions, to the
extent such costs are expensed; amounts related to securities
litigation and government investigations; the foreign currency loss
during the three months ended March 31, 2015 related to the
translation of net monetary assets denominated in Venezuelan
currency resulting from the Company’s change to the Simadi exchange
rate during the quarter ended March 31, 2015; and amounts
attributable to businesses classified as discontinued operations;
as well as the impact of taxes and noncontrolling interests on the
above items and the Company’s share of the above items with respect
to equity method investments. Adjusted EPS is considered an
important indicator of the operational strength of the Company’s
businesses as this measure eliminates amounts that do not reflect
the fundamental performance of the Company’s businesses. The
Company utilizes Adjusted EPS, among other measures, to evaluate
the performance of its businesses both on an absolute basis and
relative to its peers and the broader market. Many investors also
use an adjusted EPS measure as a common basis for comparing the
performance of different companies.
Beginning with periods ending on or after October 1, 2016,
Adjusted EPS is Diluted Income per Common Share from Continuing
Operations attributable to Time Warner Inc. common shareholders
with the following items excluded from Income from Continuing
Operations attributable to Time Warner Inc. common shareholders:
noncash impairments of goodwill, intangible and fixed assets and
investments; gains and losses on operating assets (other than
deferred gains on sale-leasebacks), liabilities (including
extinguishments of debt) and investments, in each case including
associated costs of the transaction; gains and losses recognized in
connection with pension and other postretirement benefit plan
curtailments or settlements; costs related to the pending
acquisition by AT&T Inc. (including retention, restructuring
and severance costs associated with the transaction); external
costs related to mergers, acquisitions, investments or dispositions
(including restructuring and severance costs associated with
dispositions), as well as contingent consideration related to such
transactions, to the extent such costs are expensed; amounts
related to securities litigation and government investigations; the
foreign currency loss during the three months ended March 31, 2015
related to the translation of net monetary assets denominated in
Venezuelan currency resulting from the Company's change to the
Simadi exchange rate during the quarter ended March 31, 2015; and
amounts attributable to businesses classified as discontinued
operations; as well as the impact of taxes and noncontrolling
interests on the above items and the Company's share of the above
items with respect to equity method investments.
For periods ending on or before December 31, 2016, Free Cash
Flow has been defined as Cash Provided by Operations from
Continuing Operations plus payments related to securities
litigation and government investigations (net of any insurance
recoveries), external costs related to mergers, acquisitions,
investments or dispositions (including restructuring and severance
costs associated with dispositions), to the extent such costs are
expensed, contingent consideration payments made in connection with
acquisitions, and excess tax benefits from equity instruments, less
capital expenditures, principal payments on capital leases and
partnership distributions, if any.
On January 1, 2017, the Company adopted, on a prospective basis,
new accounting guidance that requires excess tax benefits from
equity instruments to be classified as a cash flow from operating
activities in the Consolidated Statement of Cash Flows. Previously,
excess tax benefits from equity instruments were classified as a
cash flow from financing activities and amounts related to such
excess tax benefits were added in the calculation of Free Cash
Flow. Because of the Company’s adoption of the new accounting
guidance, such adjustment is no longer necessary. Therefore,
beginning with periods ending on or after January 1, 2017, Free
Cash Flow is defined as Cash Provided by Operations from Continuing
Operations plus payments related to securities litigation and
government investigations (net of any insurance recoveries),
external costs related to mergers, acquisitions, investments or
dispositions (including restructuring and severance costs
associated with dispositions), to the extent such costs are
expensed, and contingent consideration payments made in connection
with acquisitions, less capital expenditures, principal payments on
capital leases and partnership distributions, if any. The Company
uses Free Cash Flow to evaluate the performance and liquidity of
its businesses and considers Free Cash Flow when making decisions
regarding strategic investments, dividends and share repurchases.
The Company believes Free Cash Flow provides useful information to
investors because it is an important indicator of the Company’s
liquidity, including its ability to reduce net debt, make strategic
investments, pay dividends to common shareholders and repurchase
stock.
A general limitation of these measures is that they are not
prepared in accordance with U.S. generally accepted accounting
principles and may not be comparable to similarly titled measures
of other companies due to differences in methods of calculation and
excluded items. Adjusted Operating Income (Loss), Adjusted EPS and
Free Cash Flow should be considered in addition to, not as a
substitute for, the Company’s Operating Income (Loss), Diluted
Income per Common Share from Continuing Operations and various cash
flow measures (e.g., Cash Provided by Operations from Continuing
Operations), as well as other measures of financial performance and
liquidity reported in accordance with U.S. generally accepted
accounting principles.
ABOUT TIME WARNER INC.
Time Warner Inc., a global leader in media and entertainment
with businesses in television networks and film and TV
entertainment, uses its industry-leading operating scale and brands
to create, package and deliver high-quality content worldwide on a
multi-platform basis.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
This document contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
These statements are based on management’s current expectations or
beliefs, and are subject to uncertainty and changes in
circumstances. Actual results may vary materially from those
expressed or implied by the statements herein due to changes in
economic, business, competitive, technological, strategic and/or
regulatory factors and other factors affecting the operation of
Time Warner’s businesses, including the pending merger with
AT&T Inc. More detailed information about these factors may be
found in filings by Time Warner with the Securities and Exchange
Commission, including its most recent Annual Report on Form 10-K
and subsequent Quarterly Reports on Form 10-Q. Time Warner is under
no obligation to, and expressly disclaims any such obligation to,
update or alter its forward-looking statements, whether as a result
of new information, future events, or otherwise.
INFORMATION ON CONFERENCE CALL
The Company’s conference call can be heard live at 8:30 am ET on
Wednesday, May 3, 2017. To listen to the call, visit
www.timewarner.com/investors.
TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited; millions, except share
amounts)
March 31, 2017 December 31, 2016 ASSETS
Current assets Cash and equivalents $ 1,450 $ 1,539
Receivables, less allowances of $848 and $981 8,540 8,699
Inventories 1,983 2,062 Prepaid expenses and other current assets
935 1,185 Total current assets 12,908 13,485
Noncurrent inventories and theatrical film and television
production costs 7,923 7,916 Investments, including
available-for-sale securities 3,412 3,337 Property, plant and
equipment, net 2,462 2,510 Intangible assets subject to
amortization, net 738 783 Intangible assets not subject to
amortization 7,005 7,005 Goodwill 27,738 27,752 Other assets 3,463
3,178 Total assets $ 65,649 $ 65,966
LIABILITIES AND EQUITY Current liabilities Accounts
payable and accrued liabilities $ 6,766 $ 7,192 Deferred revenue
588 564 Debt due within one year 808 1,947 Total
current liabilities 8,162 9,703 Long-term debt 22,402 22,392
Deferred income taxes 2,620 2,678 Deferred revenue 493 486 Other
noncurrent liabilities 6,515 6,341 Redeemable noncontrolling
interest 30 29
Equity Common stock, $0.01 par value, 1.652
billion and 1.652 billion shares issued and 775 million and 772
million shares outstanding 17 17 Additional paid-in capital 146,279
146,780 Treasury stock, at cost (877 million and 880 million
shares) (47,313 ) (47,497 ) Accumulated other comprehensive loss,
net (1,527 ) (1,510 ) Accumulated deficit (72,031 ) (73,455 ) Total
Time Warner Inc. shareholders’ equity 25,425 24,335 Noncontrolling
interest 2 2 Total equity 25,427 24,337
Total liabilities and equity $ 65,649 $ 65,966
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF
OPERATIONS
(Unaudited; millions, except per share
amounts)
Three Months Ended March 31, 2017
2016 Revenues $ 7,735 $ 7,308 Costs of revenues (4,333 )
(4,005 ) Selling, general and administrative (1,275 ) (1,251 )
Amortization of intangible assets (45 ) (48 ) Restructuring and
severance costs (12 ) (5 ) Asset impairments (1 ) (3 ) Gain on
operating assets, net 7 — Operating income 2,076
1,996 Interest expense, net (259 ) (284 ) Other income (loss), net
76 (40 ) Income from continuing operations before income
taxes 1,893 1,672 Income tax provision (470 ) (498 ) Income from
continuing operations 1,423 1,174 Discontinued operations, net of
tax — 40 Net income 1,423 1,214 Less Net loss
attributable to noncontrolling interests 1 — Net
income attributable to Time Warner Inc. shareholders $ 1,424
$ 1,214
Amounts attributable to Time Warner Inc.
shareholders: Income from continuing operations $ 1,424 $ 1,174
Discontinued operations, net of tax — 40 Net income $
1,424 $ 1,214
Per share information attributable
to Time Warner Inc. common shareholders: Basic income per
common share from continuing operations $ 1.84 $ 1.48 Discontinued
operations — 0.05 Basic net income per common share $
1.84 $ 1.53 Average basic common shares outstanding
773.6 790.7 Diluted income per common share from
continuing operations $ 1.80 $ 1.46 Discontinued operations —
0.05 Diluted net income per common share $ 1.80
$ 1.51 Average diluted common shares outstanding
789.3 802.3 Cash dividends declared per share of
common stock $ 0.4025 $ 0.4025
See accompanying notes.
TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH
FLOWS
Three Months Ended March 31,
(Unaudited; millions)
2017 2016 OPERATIONS Net income $ 1,423
$ 1,214 Less Discontinued operations, net of tax — (40 ) Net
income from continuing operations 1,423 1,174 Adjustments for
noncash and nonoperating items: Depreciation and amortization 165
167 Amortization of film and television costs 2,203 2,112 Asset
impairments 1 3 (Gain) loss on investments and other assets, net
(166 ) 11 Equity in losses of investee companies, net of cash
distributions 93 50 Equity-based compensation 57 108 Deferred
income taxes (44 ) 113 Changes in operating assets and liabilities,
net of acquisitions (2,266 ) (2,981 ) Cash provided by operations
from continuing operations 1,466 757 Cash used by operations from
discontinued operations (5 ) (4 ) Cash provided by operations 1,461
753
INVESTING ACTIVITIES Investments in
available-for-sale securities — (5 ) Investments and acquisitions,
net of cash acquired (168 ) (93 ) Capital expenditures (98 ) (75 )
Other investment proceeds 240 18 Cash used by
investing activities (26 ) (155 )
FINANCING ACTIVITIES
Borrowings — 2 Debt repayments (1,144 ) (152 ) Proceeds from
exercise of stock options 56 56 Excess tax benefit from equity
instruments — 27 Principal payments on capital leases (3 ) (3 )
Repurchases of common stock — (711 ) Dividends paid (316 ) (322 )
Other financing activities (117 ) (110 ) Cash used by financing
activities (1,524 ) (1,213 )
DECREASE IN CASH AND
EQUIVALENTS (89 ) (615 )
CASH AND EQUIVALENTS AT BEGINNING
OF PERIOD 1,539 2,155
CASH AND EQUIVALENTS AT
END OF PERIOD $ 1,450 $ 1,540
See accompanying notes.
TIME WARNER INC.NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Note 1. DESCRIPTION OF BUSINESS AND BASIS OF
PRESENTATION
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 and a service that
delivers video content to consumers over the internet (“OTT
service”) domestically and premium pay, basic tier television and
OTT services internationally; and Warner Bros.: consisting
principally of television, feature film, home video and videogame
production and distribution.
On October 22, 2016, the Company entered into
an Agreement and Plan of Merger with AT&T Inc. (“AT&T”),
West Merger Sub, Inc., and West Merger Sub II, LLC, pursuant to
which the Company will be acquired by AT&T for a combination of
$53.75 and shares of AT&T stock. At the time of entry into the
merger agreement, the value of the merger consideration was $107.50
per share of Time Warner common stock and the value will vary,
subject to a collar, prior to the closing of the transaction. Time
Warner shareholders adopted the merger agreement at a special
meeting of shareholders held on February 15, 2017. The merger is
conditioned on the receipt of certain antitrust and other required
regulatory consents. The merger is expected to close before
year-end 2017.
Note 2. INTERSEGMENT TRANSACTIONS
Revenues recognized by Time Warner’s segments
on intersegment transactions are as follows (millions):
Three Months Ended March 31, 2017
2016 Intersegment Revenues Turner $ 21 $ 20 Home Box
Office 2 3 Warner Bros. 263 190 Total intersegment revenues
$ 286 $ 213
Note 3. WARNER BROS. HOME VIDEO AND ELECTRONIC DELIVERY
REVENUES
Home video and electronic delivery of
theatrical and television product revenues are as follows
(millions):
Three Months Ended March 31, 2017
2016 Home video and electronic delivery of theatrical
product revenues $ 368 $ 321 Home video and electronic delivery of
television product revenues 87 94
Note 4. SUMMARY OF DISCONTINUED OPERATIONS
For the three months ended March 31,
2016, Discontinued operations, net of tax was income of $40 million
($0.05 of diluted income from discontinued operations per common
share), related to the recognition of certain foreign tax benefits
associated with the tax attributes of Warner Music Group, which the
Company disposed of in 2004.
TIME WARNER INC.
RECONCILIATIONS OF NON-GAAP FINANCIAL
MEASURES
(Unaudited; dollars in
millions)
Reconciliations of
Adjusted Operating Income (Loss) to
Operating Income (Loss) and
Adjusted Operating Income Margin to
Operating Income Margin
Three Months Ended March 31,
2017(a)
AdjustedOperatingIncome
(Loss)
AssetImpairments
Gain (Loss)
onOperatingAssets, Net
AT&T MergerCosts
Other
OperatingIncome (Loss)
Turner $ 1,187 $ — $ 6 $ (22 ) $ (1 ) $ 1,170 Home Box Office 595 —
— (12 ) — 583 Warner Bros. 510 (1 ) 1 (22 ) — 488 Corporate (88 ) —
— (26 ) — (114 ) Intersegment eliminations (51 ) — —
— — (51 ) Time Warner $ 2,153 $ (1 ) $ 7
$ (82 ) $ (1 ) $ 2,076 Margin(b) 27.8 % — % 0.1 %
(1.1 )% — % 26.8 %
Three Months Ended March 31,
2016(a)
AdjustedOperatingIncome
(Loss)
AssetImpairments
Gain (Loss)
onOperatingAssets, Net
AT&T MergerCosts
Other
OperatingIncome (Loss)
Turner $ 1,239 $ — $ — $ — $ — $ 1,239 Home Box Office 486 — — — (9
) 477 Warner Bros. 426 (1 ) — — (1 ) 424 Corporate (135 ) (2 ) — —
(3 ) (140 ) Intersegment eliminations (4 ) — — —
— (4 ) Time Warner $ 2,012 $ (3 ) $ — $
— $ (13 ) $ 1,996 Margin(b) 27.5 % — % — % — % (0.2
)% 27.3 %
Please see below for additional information on items affecting
comparability.
____________
(a) Descriptions of the adjustments presented in the table
follow the reconciliations of Adjusted EPS to Diluted Income per
Common Share from Continuing Operations. (b) Adjusted Operating
Income margin is defined as Adjusted Operating Income divided by
Revenues. Operating Income margin is defined as Operating Income
divided by Revenues.
TIME WARNER INC.
RECONCILIATIONS OF NON-GAAP FINANCIAL
MEASURES
(Unaudited; millions, except per share
amounts)
Reconciliation of
Adjusted EPS to Diluted Income per
Common Share from Continuing Operations attributable to Time Warner
Inc. common shareholders
Three Months Ended March 31, 2017
2016 Asset impairments $ (1 ) $ (3 ) Gain on operating
assets, net 7 — Costs related to the AT&T merger (82 ) — Other
(1 ) (13 ) Impact on Operating Income (77 ) (16 ) Investment gains
(losses), net 159 (11 ) Amounts related to the separation or
disposition of former Time Warner segments (4 ) (4 ) Items
affecting comparability relating to equity method investments (1 )
9 Pretax impact 77 (22 ) Income tax impact of above items 39
4 Impact of items affecting comparability on income
from continuing operations $ 116 $ (18 )
Amounts
attributable to Time Warner Inc. shareholders: Income from
continuing operations $ 1,424 $ 1,174 Less Impact of items
affecting comparability on income from continuing operations 116
(18 ) Adjusted income from continuing operations $ 1,308
$ 1,192
Per share information attributable to Time
Warner Inc. common shareholders: Diluted income per common
share from continuing operations $ 1.80 $ 1.46 Less Impact of items
affecting comparability on diluted income per common share from
continuing operations 0.14 (0.03 ) Adjusted EPS $ 1.66
$ 1.49 Average diluted common shares outstanding
789.3 802.3
Asset Impairments
During the three months ended March 31,
2017, the Company recognized miscellaneous asset impairments of $1
million at the Warner Bros. segment. During the three months ended
March 31, 2016, the Company recognized miscellaneous asset
impairments of $3 million, consisting of $2 million at Corporate
and $1 million at the Warner Bros. segment.
Gain on Operating Assets, Net
During the three months ended March 31,
2017, the Company recognized miscellaneous gains on operating
assets of $7 million, consisting of $6 million at the Turner
segment and $1 million at the Warner Bros. segment.
Costs related to the AT&T merger
For the three months ended March 31,
2017, the Company recognized $82 million of costs related to the
AT&T merger, consisting of $26 million at Corporate, $22
million at the Turner segment, $22 million at the Warner Bros.
segment and $12 million at the Home Box Office segment. These costs
reflected $18 million of external transaction costs and $64 million
of costs from employee retention programs (as discussed below).
Approximately $80 million of these costs are included in Selling,
general and administrative expenses in the accompanying
Consolidated Statement of Operations and the remainder in Costs of
revenues in the accompanying Consolidated Statement of
Operations.
In connection with entering into the Merger
Agreement, as of March 31, 2017, the Company has granted 5.7
million special retention restricted stock units (“Special
Retention RSUs”) to certain employees of Time Warner and its
divisions, including all executive officers of Time Warner. Half of
the Special Retention RSUs will vest 25% per year on each of the
first four anniversaries of February 15, 2017, and the remaining
half will vest 25% per year on each of the first four anniversaries
of February 15, 2018. Pursuant to the Special Retention RSU
agreements, vesting as a result of retirement is not permitted
unless the employee retires after the merger has closed. In
addition, the awards do not accelerate automatically following the
closing of the merger. Instead, the employee must remain employed
following the closing, and the awards will vest only upon the
scheduled vesting date or upon termination of employment under
certain circumstances, such as termination without cause, for good
reason or due to retirement.
In addition, certain employees of Time Warner
and its divisions, including executive officers other than the
Chairman and CEO, have received or will receive a cash retention
award. Half of the award will become payable upon the closing of
the merger, and the remaining half will become payable six months
thereafter, in both cases, subject to continued employment on the
relevant payment date. Payment will also be made upon termination
without cause or for good reason.
Other
For the three months ended March 31,
2017, Other includes external costs related to mergers,
acquisitions or dispositions of $1 million at the Turner segment.
For the three months ended March 31, 2016, Other includes external
costs related to mergers, acquisitions or dispositions of $4
million, consisting of $3 million at Corporate and $1 million at
the Warner Bros. segment. For the three months ended March 31,
2016, Other also includes $9 million of expenses at the Home Box
Office segment related to Home Box Office’s withdrawal from a
multiemployer benefit plan. External costs related to mergers,
acquisitions or dispositions and the accrued benefit plan
withdrawal expenses are included in Selling, general and
administrative expenses in the accompanying Consolidated Statement
of Operations.
Investment Gains (Losses), Net
Investment gains (losses), net are included in
Other income (loss), net in the accompanying Consolidated Statement
of Operations. The detail of Investment gains (losses), net is
shown in the table below (millions):
Three Months Ended March 31, 2017
2016 Sale of interest in Omni Atlanta hotel joint venture $
99 $ —
Fair value adjustments (a)
54 (19 ) Gains on other investments 6 8 Investment
gains (losses), net $ 159 $ (11 )
____________
(a) Related to warrants to purchase common stock of Central
European Media Enterprises Ltd. held by the Company.
Amounts Related to the Separation or Disposition of Former
Time Warner Segments
For both the three months ended March 31,
2017 and 2016, the Company recognized $4 million of losses related
to the disposition of former Time Warner segments, primarily
reflecting pension and other retirement benefits related to
employees and former employees of Time Inc. These amounts have been
reflected in Other income (loss), net in the accompanying
Consolidated Statement of Operations.
Items Affecting Comparability Relating to Equity Method
Investments
For the three months ended March 31,
2017, the Company recognized $1 million of losses related to its
share of investment losses recorded by equity method investees. For
the three months ended March 31, 2016, the Company recognized
$9 million of income primarily related to its share of investment
gains recorded by equity method investees. These amounts have been
reflected in Other income (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 using the effective tax rate for the item. The
estimated tax provision or tax benefit can vary based on certain
factors, including the taxability or deductibility of the item and
the applicable tax jurisdiction for the item. For the three months
ended March 31, 2017, the income tax impact includes a $69 million
benefit primarily reflecting the reversal of a valuation allowance
related to the use of capital loss carryforwards to offset the gain
on the sale by the Turner segment of its interest in the joint
venture that owns the Omni Atlanta hotel and the expected use of
capital loss carryforwards in connection with the Turner segment’s
entry into an agreement to sell its Atlanta broadcast television
station, which closed in the second quarter of 2017.
TIME WARNER INC.
RECONCILIATIONS OF NON-GAAP FINANCIAL
MEASURES
(Unaudited; millions)
Reconciliation of Free Cash Flow to
Cash Provided by Operations from Continuing Operations
Three Months Ended March 31, 2017
2016 Cash provided by operations from continuing operations
$ 1,466 $ 757 Add external costs related to mergers, acquisitions,
investments or dispositions and contingent consideration payments 5
8 Add excess tax benefits from equity instruments — 27 Less capital
expenditures (98 ) (75 ) Less principal payments on capital leases
(3 ) (3 ) Free Cash Flow $ 1,370 $ 714
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170503005657/en/
Time Warner Inc.Corporate CommunicationsKeith Cocozza
(212) 484-7482orInvestor RelationsJessica Holscott (212)
484-6720Michael Senno (212) 484-8950
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