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ime Warner Inc. Reports Third-Quarter 2016 Results

TimeWarner_logoTime Warner Inc. (NYSE:TWX) reported financial results for its third quarter ended September 30, 2016.

Chairman and Chief Executive Officer Jeff Bewkes said: “We had a strong third quarter, which keeps us on track to exceed our original 2016 outlook and underscores our leadership in creating and distributing the very best content. In television, HBO took home more Primetime Emmy Awards than any other network for the 15th consecutive year and Time Warner’s divisions won a total of 40 Emmys, more than any other company. CNN’s standout election coverage made it the #1 news network in primetime among adults 18-49 for the fourth consecutive quarter and Turner’s momentum doesn’t stop there. Year-to-date, TBS, TNT and Adult Swim are three of the top five ad-supported cable networks in primetime among adults 18-49. In film, Warner Bros. had a strong quarter led by Suicide Squad and has the #1 release of the fall in Sully, while anticipation is off the charts for J.K. Rowling’s Fantastic Beasts and Where to Find Them, which hits the big screen on November 18.”

Mr. Bewkes continued: “The agreement we announced on October 22 to be acquired by AT&T Inc. represents a great outcome for our shareholders and an excellent opportunity to drive long-term value well into the future. Combining with AT&T is the natural next step in the evolution of our business and allows us to significantly accelerate our most important strategies.”

Company Results

Revenues grew 9% to $7.2 billion, Operating Income increased 10% to $2.0 billion and Adjusted Operating Income increased 12% to $2.1 billion due to increases at all operating divisions and lower intercompany eliminations. Revenues included the unfavorable impact of foreign exchange rates of approximately $55 million in the quarter.

The Company posted Diluted Income per Common Share from Continuing Operations (“EPS”) of $1.87 compared to $1.26 for the prior year quarter. Adjusted Diluted Income per Common Share from Continuing Operations (“Adjusted EPS”) was $1.83 versus $1.25 for the prior year quarter. EPS and Adjusted EPS included a net tax benefit of $0.28 related to an Internal Revenue Service (“IRS”)-approved tax accounting method change.

For the first nine months of 2016, Cash Provided by Operations from Continuing Operations reached $3.5 billion and Free Cash Flow totaled $3.3 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.

Stock Repurchase Program Update

From January 1, 2016 through October 21, 2016, the Company repurchased approximately 31 million shares of common stock for approximately $2.3 billion. These amounts reflect the purchase of approximately 8 million shares of common stock for approximately $660 million since the amounts reported in the Company’s second quarter earnings release on August 3, 2016.

Segment Performance

The schedule below reflects Time Warner’s financial performance for the three and nine months ended September 30, by line of business (millions).

Three Months Ended
September 30,

Nine Months Ended
September 30,

2016201520162015
Revenues:
Turner$2,610$2,398$8,526$7,935
Home Box Office1,4261,3674,3994,203
Warner Bros.3,4023,1909,1699,687
Intersegment eliminations(271)(391)(667)(786)
Total Revenues$7,167$6,564$21,427$21,039
Operating Income (Loss) (a):
Turner$1,162$1,072$3,531$3,310
Home Box Office5305191,4881,485
Warner Bros.4283851,1601,050
Corporate(95)(64)(330)(257)
Intersegment eliminations(11)(78)7(109)
Total Operating Income$2,014$1,834$5,856$5,479
Adjusted Operating Income (Loss) (a):
Turner$1,203$1,071$3,575$3,329
Home Box Office5305191,4971,485
Warner Bros.4333881,0761,062
Corporate(85)(58)(313)(249)
Intersegment eliminations(11)(78)7(109)
Total Adjusted Operating Income$2,070$1,842$5,842$5,518
Depreciation and Amortization:
Turner$52$51$156$155
Home Box Office21226668
Warner Bros.8688261262
Corporate761916
Total Depreciation and Amortization$166$167$502$501
(a)Operating Income (Loss) and Adjusted Operating Income (Loss) for the three and nine months ended September 30, 2016 and 2015 included restructuring and severance costs of (millions):

Three Months Ended September 30,

Nine Months Ended September 30,
2016201520162015
Turner$(8)$(5)$(15)$(23)
Home Box Office(41)(5)
Warner Bros.(1)(1)(6)(3)
Corporate(2)(3)(2)
Total Restructuring and Severance Costs$(11)$(9)$(64)$(31)

Presented below is a discussion of the performance of Time Warner’s segments for the third quarter of 2016. Unless otherwise noted, the dollar amounts in parentheses represent year-over-year changes.

TURNER

Revenues increased 9% ($212 million) to $2.6 billion, due to increases of 12% ($163 million) in Subscription revenues, 33% ($33 million) in Content and other revenues, and 2% ($16 million) in Advertising revenues. Subscription revenues increased due to higher domestic rates and growth at Turner’s international networkspartially offset by the impact of lower domestic subscribers and foreign exchange ratesAdvertising revenues benefited from growth at Turner’s domestic news business, partially offset by lower delivery at certain domestic entertainment networks. International advertising was essentially flat with local currency growth offset by the impact of foreign exchange rates. Content and other revenues increased due to higher international licensing revenues.

Operating Income increased 8% ($90 million) to $1.2 billion. The growth in revenues more than offset higher expenses, including programming costs, which grew 5% primarily due to increases at Turner’s news business related to its coverage of the 2016 U.S. Presidential Election.

Adjusted Operating Income increased 12% ($132 million) to $1.2 billion. Adjusted Operating Income for the current year quarter excludes a $25 million asset impairment.

In September, Turner received 10 Primetime Emmy Awards and CNN received four News & Documentary Emmy Awards. CNN’s coverage of the second U.S. Presidential debate was its most watched general election debate ever and it was the #1 cable network in total viewers and among adults 25-54. Last week, viewership of TNT’s NBA Opening Night doubleheader increased 8%. Year-to-date through the third quarter, Turner had three of the top five ad-supported cable networks in primetime among adults 18-49 with TBS, TNT and Adult Swim ranking #1, #4 and #5, respectively. During the third quarter of 2016, Adult Swim was the #1 ad-supported cable network in primetime and total day among adults 18-34. CNN was also the #1 news network among adults 18-49 in primetime for the fourth consecutive quarter, had its most-watched quarter in eight years among total viewers and adults 25-54, and was the #1 digital news destination in mobile and multiplatform unique visitors and in video starts.

HOME BOX OFFICE

Revenues increased 4% ($59 million) to $1.4 billion, due to an increase of 5% ($62 million) in Subscription revenues, partially offset by a decline of 2% ($3 million) in Content and other revenues. Subscription revenues increased due to higher domestic rates and international growth. The decrease in Content and other revenues was due to lower domestic licensing revenues, partially offset by higher international licensing revenues.

Operating Income and Adjusted Operating Income both increased 2% ($11 million) to $530 million, as the growth in revenues more than offset higher expenses. Programming costs grew 15% reflecting higher acquired theatrical programming expenses due to the timing of availabilities and increased expenses for original series.

In September, HBO received 22 Primetime Emmy Awards, the most of any network for the 15th consecutive year, including Outstanding Drama Series for Game of Thrones, Outstanding Comedy Series for Veep and Outstanding Variety Talk Series for Last Week Tonight with John OliverGame of Thrones received 12 awards and is now the most awarded scripted show ever with a cumulative 38 Primetime Emmy Awards. The premiere episode of Westworld has totaled more than 13 millionviewers, putting it ahead of the premieres of True Detective and Game of Thrones after a similar period of time. HBO and Cinemax recently launched on Sony’s PlayStation Vue and HBO NOW recently launched on Sony’s PlayStation platforms.

WARNER BROS.

Revenues increased 7% ($212 million) to $3.4 billion, primarily due to higher theatrical revenues partially offset by lower videogames revenues. Theatrical revenues increased due to the box office releases of Suicide Squad, The Legend of Tarzan,Sully and Lights Out. Videogames revenues declined due to the comparison to the launch of LEGO Dimensions and carryover revenues from Mortal Kombat X in the prior year quarter.

Operating Income increased 11% ($43 million) to $428 million, due to the increase in revenues, partially offset by higher costs of revenues associated with the mix of film releases.

Adjusted Operating Income increased 12% ($45 million) to $433 million.

In September, Warner Bros. received eight Primetime Emmy Awards. For the 2016-2017 television season, Warner Bros. is producing 33 shows across the broadcast networks, including, season-to-date among adults 18-49, the #1 show, The Big Bang Theory and the #1 unscripted series, The Voice. Through October 31, Suicide Squad grossed nearly $750 million at the global box office.

CONSOLIDATED NET INCOME AND PER SHARE RESULTS

Third-Quarter Results

For the three months ended September 30, 2016, the Company had Income from Continuing Operations attributable to Time Warner Inc. shareholders of $1.5 billion and EPS of $1.87. This compares to Income from Continuing Operations attributable to Time Warner Inc. shareholders for the third quarter of 2015 of $1.0 billion and EPS of $1.26. The increase in EPS primarily reflects the increase in Operating Income, a lower effective tax rate primarily due to the benefit from an IRS-approved tax accounting method change and fewer shares outstanding.

Adjusted EPS was $1.83 for the three months ended September 30, 2016, compared to $1.25 for last year’s third quarter.

For the third quarters of 2016 and 2015, the Company had Net Income attributable to Time Warner Inc. shareholders of $1.5 billion and $1.0 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 losses during the three months ended December 31, 2014 and March 31, 2015, related to the translation of net monetary assets denominated in Venezuelan currency resulting from the Company’s change to the SICAD 2 exchange rate beginning December 31, 2014 and the Simadi exchange rate during the quarter ended March 31, 2015, respectively. 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) will be 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 losses during the three months ended December 31, 2014 and March 31, 2015 related to the translation of net monetary assets denominated in Venezuelan currency resulting from the Company’s change to the SICAD 2 exchange rate beginning December 31, 2014 and the Simadi exchange rate during the quarter ended March 31, 2015, respectively.

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 losses during the three months ended December 31, 2014 and March 31, 2015 related to the translation of net monetary assets denominated in Venezuelan currency resulting from the Company’s change to the SICAD 2 exchange rate beginning December 31, 2014 and the Simadi exchange rate during the quarter ended March 31, 2015, respectively; 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 will be 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 losses during the three months ended December 31, 2014 and March 31, 2015 related to the translation of net monetary assets denominated in Venezuelan currency resulting from the Company’s change to the SICAD 2 exchange rate beginning December 31, 2014 and the Simadi exchange rate during the quarter ended March 31, 2015, respectively; 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.

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, 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. 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.

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