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Warner Media, LLC – ‘10-Q’ for 9/30/16

On:  Wednesday, 11/2/16, at 12:09pm ET   ·   For:  9/30/16   ·   Accession #:  1193125-16-756548   ·   File #:  1-15062

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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

Commission file number 001-15062

TIME WARNER INC.

(Exact name of Registrant as specified in its charter)

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):

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.

Table of Contents

TIME WARNER INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER FINANCIAL INFORMATION

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

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, Adult Swim, Cartoon Network, CNN, HBO, Cinemax, Warner Bros. and New Line Cinema. During the nine months ended September 30, 2016, the Company generated Revenues of $21.427 billion (up 2% from $21.039 billion in 2015), Operating Income of $5.856 billion (up 7% from $5.479 billion in 2015), Income from continuing operations of $3.597 billion (up 22% from $2.938 billion in 2015), Net Income attributable to Time Warner shareholders of $3.633 billion (up 22% from $2.976 billion in 2015) and Cash provided by operations of $3.534 billion (up 18% from $2.997 billion in 2015).

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 14, “Segment Information,” to the accompanying consolidated financial statements.

Turner.  The Turner segment consists of businesses managed by Turner Broadcasting System, Inc. (“Turner”). During the nine months ended September 30, 2016, the Turner segment recorded Revenues of $8.526 billion (39% of the Company’s total Revenues) and Operating Income of $3.531 billion.

Turner operates domestic and international television networks and related properties that offer entertainment, sports, kids and news programming on television and digital platforms for consumers around the world. The Turner networks and related properties include TNT, TBS, Adult Swim, truTV, Turner Classic Movies, Turner Sports, Cartoon Network, Boomerang, CNN and HLN. The Turner networks generate revenues principally from licensing programming to affiliates that have contracted to receive and distribute this programming to subscribers, from the sale of advertising and from licensing its original programming, including to over-the-top (“OTT”) services such as subscription-video-on-demand (“SVOD”) services, and its brands and characters for consumer products and other business ventures. Turner’s programming is available to audiences for viewing live and on demand across television, mobile devices and other digital platforms through services provided by affiliates and on Turner’s digital properties. Turner also owns and operates various digital media businesses, including Bleacher Report; the CNN digital properties, including CNNgo, CNN.com and CNNMoney.com; and other digital properties associated with its networks, all of which generate revenues principally from the sale of advertising and sponsorships. In addition, Turner manages and operates sports-related digital properties in conjunction with associated television rights, such as NBA Digital and NCAA.com, which also generate revenues primarily from the sale of advertising and sponsorships.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Home Box Office.  The Home Box Office segment consists of businesses managed by Home Box Office, Inc. (“Home Box Office”). During the nine months ended September 30, 2016, the Home Box Office segment recorded Revenues of $4.399 billion (21% of the Company’s total Revenues) and Operating Income of $1.488 billion.

Home Box Office operates the HBO and Cinemax multichannel premium pay television services, with the HBO service ranking as the most widely distributed multichannel premium pay television service. HBO- and Cinemax-branded premium pay, basic tier television or OTT services are distributed in over 60 countries in Latin America, Asia and Europe.

In the U.S., Home Box Office generates revenues principally from licensing programming to affiliates that have contracted to receive and distribute such programming to their customers who subscribe to the HBO or Cinemax services. HBO and Cinemax programming is available in the U.S. to subscribers of affiliates for viewing on Home Box Office’s main HBO and Cinemax channels and its multiplex channels, through its on demand services, HBO On Demand and Cinemax On Demand, and through its broadband-delivered on demand services, HBO GO and MAX GO. HBO GO and MAX GO are available on a variety of digital platforms, including mobile devices, gaming consoles and internet-connected streaming devices and televisions. In April 2015, Home Box Office launched HBO NOW, an OTT service available to consumers in the U.S. Home Box Office’s agreements with its 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.

Internationally, Home Box Office generates subscription revenues by providing country-specific HBO and Cinemax premium pay and basic tier television services to international affiliates that have contracted to receive and distribute such services to their local customers. In some countries, Home Box Office also generates subscription revenues from OTT services that are distributed to consumers either directly or through third parties. Additional sources of revenues for Home Box Office are the home entertainment sales of its original programming, including Game of Thrones, True Detective, True Blood and Girls, via physical and digital formats and the licensing of its original programming to OTT services, including SVOD services, and international television networks.

Warner Bros.  The Warner Bros. segment consists of businesses managed by Warner Bros. Entertainment Inc. (“Warner Bros.”) that principally produce and distribute television shows, feature films and videogames. Warner Bros.’ television, film and videogame businesses benefit from a shared infrastructure, including shared production, distribution, marketing and administrative functions and resources. During the nine months ended September 30, 2016, the Warner Bros. segment recorded Revenues of $9.169 billion (40% of the Company’s total Revenues) and Operating Income of $1.160 billion.

Warner Bros. is a leader in television production and distribution. For the 2016/2017 season, Warner Bros. is producing over 65 original series in the U.S., including (i) at least three series for each of the five broadcast networks (including 2 Broke Girls, Arrow, The Bachelor, The Big Bang Theory, Blindspot, DC’s Legends of Tomorrow, The Flash, Gotham, Little Big Shots, Lucifer, The Middle, Mom, Supergirl, Supernatural, Vampire Diaries and The Voice), (ii) series for basic cable networks (including Animal Kingdom, People of Earth and Pretty Little Liars), (iii) series for premium pay television services (including The Leftovers, Shameless and Westworld), (iv) series for SVOD services (including Fuller House, Gilmore Girls: A Year in the Life and Longmire), (v) series for first-run syndication (including The Ellen DeGeneres Show, Extra, The Real and TMZ) and (vi) animated series for Cartoon Network and Adult Swim (including Be Cool, Scooby Doo!, Mike Tyson Mysteries, Teen Titans Go! and Wabbit). Warner Bros. also licenses the rights to many of its U.S. original television series in international territories. Outside the U.S., Warner Bros. has a global network of production companies in many countries (located across Europe and South America and in Australia and New Zealand), which allows Warner Bros. to develop programming specifically tailored for the audiences in these territories. These local production companies also focus on developing non-scripted programs and formats that can be adapted and sold internationally and in the U.S. Warner Bros. generates television product revenues principally from the licensing of programs to broadcast and cable television networks and premium pay television and OTT services, including SVOD services.

Warner Bros. is a leader in the feature film industry and produces feature films under its Warner Bros. and New Line Cinema banners. The Warner Bros. segment’s theatrical product revenues are generated principally through rental fees from theatrical

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

exhibition of feature films, including the following recently released films: The Accountant, Barbershop: The Next Cut, Batman v Superman: Dawn of Justice, Central Intelligence, The Conjuring 2, The Legend of Tarzan, Lights Out, Me Before You, Storks, Suicide Squad and Sully and subsequently through licensing fees received from the distribution of films on premium pay television, broadcast and cable television networks and OTT services, including SVOD services.

Warner Bros. is a leader in the home entertainment and videogame industries. The segment generates television and theatrical product revenues from the distribution of television and theatrical product in various physical and digital formats (e.g., electronic sell-through (“EST”) and video-on-demand). In addition, the segment generates revenues through the development and distribution of videogames, including the following recently released videogames: LEGO Marvel’s Avengers, LEGO Star Wars: The Force Awakens and Mortal Kombat XL.

The distribution and sale of home entertainment product in physical formats is a large contributor to the segment’s revenues and profits. For the past several years, sales of home entertainment product in physical formats have declined as the home entertainment industry has been undergoing significant changes as it transitions from the physical distribution of film and television content via physical discs to the electronic delivery of such content. Several factors have contributed to this decline, including consumers shifting to OTT services, which generate significantly less revenue per transaction for the Company than sales of home entertainment product in physical formats; changing retailer initiatives and strategies (e.g., reduction of floor space devoted to home entertainment product in physical formats); retail store closures; increasing competition for consumer discretionary time and spending; and piracy. During the first nine months of 2016, across the home entertainment industry, consumer spending on home entertainment product in physical formats continued to decline and consumer spending on electronic delivery continued to increase. 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 home entertainment product in physical formats.

Television Industry

The television industry is continuing to evolve, with changes in technology, rapid growth in new video services, and a corresponding increase in overall video content consumption and shift in consumer viewing patterns. Consumers are watching an increasing amount of programming on-demand and across a wide variety of services and devices, including smartphones, tablets, PCs and internet-connected televisions. Over the past few years, the number of multichannel video service (“MVPD”) subscribers in the U.S. declined slightly, and the Company expects further modest declines. To counteract this trend, some MVPD providers are placing greater emphasis on selling smaller bundles of cable networks, resulting in higher subscriber declines for most individual networks than for MVPDs in total.

At the same time, the penetration of broadband and internet-connected devices has grown, which has led to a growing number and variety of internet-delivered video services that do not require a traditional MVPD subscription or MVPD provider set-top box hardware. These include SVOD services such as Amazon Prime, Hulu and Netflix, which have continued to increase their number of subscribers and have been, and are expected to continue, making significant investments in acquired and original programming. Some television networks have launched OTT services, such as HBO NOW. In addition, MVPD providers as well as media and technology companies have launched, or have announced that they will launch, virtual MVPDs, which offer bundles of networks delivered via the internet. Ad-supported broadband video services, such as those offered through YouTube and Facebook, also have continued to gain in popularity.

As a result of these changes, consumers have more options for obtaining video content, including lower-cost alternatives. At the same time, however, the combination of new competitors, changes in viewing habits and declines in MVPD subscribers has negatively affected overall television ratings and, as a result, television advertising revenues for the industry and certain of the Company’s networks. There also has been a corresponding shift of advertising dollars to non-traditional video outlets.

To address these changes, the Company’s strategy over the past few years has focused on strengthening its position within the traditional TV ecosystem, enhancing the value of traditional pay television subscriptions for consumers, and pursuing new opportunities outside the traditional TV ecosystem. As part of this strategy, the Company plans to continue increasing its investment in high-quality distinctive programming to enhance the value of its networks. The Company is also working to enhance the value to consumers of the traditional MVPD bundle and capitalize on the shift in consumption habits in a number of ways, including by expanding the amount of its content that is available on demand and supporting the development of better user interfaces for on-demand multiplatform viewing. The Company is also pursuing a number of initiatives to capitalize on the new opportunities presented by these changes, including launching, investing in, and obtaining distribution through OTT services, including through

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

virtual MVPDs, as well as investing in short-form content production and digital-first news and entertainment networks. In addition, Turner has introduced new advertising products that provide greater data analytic tools and targeting capabilities to advertisers in order to compete more effectively with non-traditional outlets.

Recent Developments

AT&T and Time Warner Merger Agreement

On October 22, 2016, Time Warner entered into an Agreement and Plan of Merger (the “Merger Agreement”) with AT&T Inc. (“AT&T”), pursuant to which Time Warner will combine with AT&T in a stock-and-cash transaction. The Merger Agreement has been approved unanimously by the boards of directors of both companies. Subject to the conditions in the Merger Agreement, at the effective time of the merger, Time Warner’s stockholders will receive $107.50 per share under the terms of the Merger Agreement, consisting of $53.75 per share in cash and $53.75 per share in AT&T stock. The stock portion will be subject to a collar such that Time Warner stockholders will receive 1.437 AT&T shares if AT&T’s stock price is below $37.411 at closing and 1.300 AT&T shares if AT&T’s stock price is above $41.349 at closing. If AT&T’s stock price at closing is between $37.411 and $41.349, Time Warner stockholders will receive a number of shares between 1.300 and 1.437, equal to $53.75 in value. The merger is subject to approval by Time Warner stockholders and the receipt of certain antitrust and other regulatory consents. The transaction is expected to close before year-end 2017. Should Time Warner terminate the Merger Agreement in specified circumstances, including in order to consummate a competing transaction, Time Warner will be required to pay AT&T a termination fee equal to $1.725 billion.

In connection with entering into the Merger Agreement, the Company granted a total of 4.8 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 other than its Chairman and CEO, on October 24, 2016. 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.

Strategic Review

As part of its long-range planning process, the Company routinely reviews opportunities to streamline its operations and optimize its programming. In connection with that review, the Company will evaluate its future use of certain owned and licensed programming rights and could incur charges of approximately $60 million to $80 million in the fourth quarter of 2016.

Time Warner Pension Plan Amendment

On August 1, 2016, the Time Warner Pension Plan (the “Pension Plan”) was amended to provide for a one-time lump sum window program for eligible vested participants who (i) had terminated employment as of May 31, 2016, (ii) had not yet commenced payment of their benefits as of May 31, 2016, (iii) are not otherwise eligible for an immediate lump sum payment of their benefits and (iv) have benefits with a present value of less than $50,000. Eligible participants had the opportunity to elect, during the period beginning on August 16, 2016 and ending on October 7, 2016, to receive their benefits in the form of an immediate lump sum payment. Certain annuity options were also available. Payments to those eligible participants who elected to receive their benefit under the window program will be made or commence as of December 2016. During the three months ended December 31, 2016, the Company expects to recognize settlement losses of approximately $55 million to $70 million in connection with this amendment to the Pension Plan, the majority of which will be related to businesses the Company has previously disposed of.

Hulu

On August 2, 2016, Time Warner purchased a 10% ownership interest in Hulu, LLC, a company that provides OTT video services, for $590 million in cash, including transaction costs. Time Warner accounts for this investment under the equity method of accounting.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

2016 Debt Offering

On May 10, 2016, Time Warner issued $800 million aggregate principal amount of 2.95% Notes due 2026 under a shelf registration statement. See “Financial Condition and Liquidity — Outstanding Debt and Other Financing Arrangements” for further information.

NCAA

On March 14, 2016, Turner and CBS entered into an agreement with the National Collegiate Athletic Association (the “NCAA”) to license the television, digital and marketing rights to the NCAA Division I Men’s Basketball Championship Tournament (the “NCAA Tournament”) from 2025 through 2032 for an aggregate rights fee of $8.8 billion. While the aggregate rights fee will be paid by Turner to the NCAA, the rights fee, production costs, advertising revenues and sponsorship revenues related to the NCAA Tournament and related programming will continue to be shared by Turner and CBS. Annually, for 2025 through 2032, Turner will be allocated the first $90 million of revenue subject to the arrangement. However, if the amount paid for the rights fee and production costs in any year during that period exceeds advertising and sponsorship revenues for that year, including the $90 million of revenue allocated to Turner, CBS’ share of such shortfall will be limited to $45 million. Under the existing agreement among Turner, CBS and the NCAA, Turner and CBS have licensed rights to the NCAA Tournament through 2024.

Fandango

In April 2016, Warner Bros. sold its Flixster business to Fandango Media, LLC (“Fandango”), a subsidiary of NBCUniversal Media LLC, in exchange for a 25% interest in Fandango. For the nine months ended September 30, 2016, Warner Bros. recorded a pre-tax gain of $90 million in connection with this transaction.

Central European Media Enterprises Ltd.

On February 19, 2016, CME Media Enterprises B.V. (“CME BV”), a subsidiary of Central European Media Enterprises Ltd. (“CME”), entered into a credit agreement (the “2016 Credit Agreement”) with third-party financial institutions for an approximate €470 million senior unsecured term loan (the “2016 Term Loan”) that was funded in April 2016 and matures on February 19, 2021. Time Warner has guaranteed CME BV’s obligations under the 2016 Credit Agreement for a fee equal to a rate based on CME’s net leverage, which initially was 10.5%, less the interest rate on the 2016 Term Loan, which initially was approximately 1.78%, to be paid to Time Warner semi-annually. CME BV must pay a portion of the fee in cash and may, at CME BV’s option, pay the remainder in cash or in kind. In April 2016, CME used cash on hand and the proceeds of the 2016 Term Loan to repay in their entirety both its Senior Secured Notes due 2017 (the “Senior Secured Notes”) and the term loan Time Warner provided CME in 2014 (the “TW Term Loan”), which also was due in 2017. Time Warner received approximately $485 million in connection with CME’s repayment of the Senior Secured Notes and the TW Term Loan. As consideration for assisting CME in refinancing its debt due in 2017, Time Warner earned a fee equal to 1% of the aggregate principal amount of the 2016 Term Loan borrowed at funding. Prior to the funding, CME BV entered into unsecured interest rate hedge arrangements to protect against changes in the interest rate on the 2016 Term Loan during its term, and Time Warner has guaranteed CME BV’s obligations under such arrangements.

In addition, on February 19, 2016, CME entered into an amendment to extend the maturity of its €251 million senior unsecured term loan obtained in 2014 from third-party financial institutions (the “2014 Term Loan”) from November 1, 2017 to November 1, 2018. Time Warner continues to guarantee CME’s obligations under the 2014 Term Loan.

Time Warner and CME also agreed on February 19, 2016 to amend and restate the $115 million revolving credit facility Time Warner provided CME in 2014 to reduce the size of the facility to $50 million as of January 1, 2018 and to extend its term from December 2017 to February 2021. Amounts outstanding under the revolving credit facility bear interest at a rate based on CME’s net leverage. Beginning in April 2016, CME must pay a portion of the interest for each applicable quarterly interest period in cash and may, at CME’s option, pay the remainder in kind by adding such amount to the outstanding principal amount of the revolving credit facility. As of September 30, 2016, there were no amounts outstanding under the revolving credit facility.

The Company recorded a pretax gain of $95 million in Investment gains (losses), net in the accompanying Consolidated Statement of Operations in the second quarter of 2016 in connection with these transactions. Additionally, when recognizing CME’s results in the second quarter of 2016 under the equity method of accounting, the Company recorded a pretax charge of $150 million in Other loss, net in the accompanying Consolidated Statement of Operations related to these transactions.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

RESULTS OF OPERATIONS

Recent Accounting Guidance

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

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):

In addition to the items affecting comparability described above, the Company incurred Restructuring and severance costs of $11 million and $64 million for the three and nine months ended September 30, 2016, respectively, and $9 million and $31 million for the three and nine months ended September 30, 2015, respectively. For further discussion of Restructuring and severance costs, see “Consolidated Results” and “Business Segment Results.”

Asset Impairments

During the three and nine months ended September 30, 2016, the Company recognized asset impairments of $30 million and $35 million, respectively, which consisted of $25 million at Turner for both periods relating to an international broadcast license, $5 million and $6 million, respectively, at Warner Bros. relating to certain internally developed software and, for the nine months ended September 30, 2016, $4 million at Corporate relating to miscellaneous assets. During the three and nine months ended September 30, 2015, the Company recognized asset impairments of $7 million and $8 million, respectively, which consisted of $5 million and $6 million, respectively, at Corporate primarily related to certain internally developed software, and $1 million for both the three and nine months ended September 30, 2015 at both the Turner and Warner Bros. segments relating to miscellaneous assets.

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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 months ended September 30, 2016, the Company recognized $12 million of loss on operating assets, primarily relating to the pending disposition of a business at the Turner segment. For the nine months ended September 30, 2016, the Company recognized $77 million of net gain on operating assets, consisting of $92 million of gains at the Warner Bros. segment, principally relating to the gain on the sale of Flixster’s net assets to Fandango, and $15 million of losses at the Turner segment, principally relating to the pending disposition of a business. For the three and nine months ended September 30, 2015, the Company recognized $2 million of net gains on operating assets at the Turner segment, reflecting a $3 million gain upon its acquisition of the controlling interest of iStreamPlanet and a $1 million loss on the sale of a business. For the nine months ended September 30, 2015, the Company also recognized $2 million of net losses at the Turner segment related to the remeasurement of certain previously held investments upon the Turner segment’s acquisition of controlling interests in those investments as well as a $1 million loss at the Warner Bros. segment.

Venezuelan Foreign Currency Loss

For the nine months ended September 30, 2015, the Company recognized a pretax foreign exchange loss of $22 million, consisting of $17 million at the Turner segment and $5 million at the Warner Bros. segment, related to a change in the foreign currency exchange rate used by the Company for remeasuring its Venezuelan net monetary assets from the SICAD 2 rate to the Simadi rate. The Venezuelan foreign currency loss is included in Selling, general and administrative expenses in the accompanying Consolidated Statement of Operations.

Other

For the three and nine months ended September 30, 2016, Other includes external costs related to mergers, acquisitions or dispositions of $4 million and $9 million, respectively, consisting of $3 million and $4 million, respectively, at the Turner segment and $1 million and $2 million, respectively, at the Warner Bros. segment and, for the nine months ended September 30, 2016, $3 million at Corporate. For the three and nine months ended September 30, 2016, Other also includes $10 million of pension settlement charges at Corporate, and for the nine months ended September 30, 2016, $9 million of expenses at the Home Box Office segment related to Home Box Office’s withdrawal from a multiemployer benefit plan. For the three and nine months ended September 30, 2015, Other reflects external costs related to mergers, acquisitions or dispositions of $3 million and $8 million, respectively, consisting of $0 and $1 million, respectively, at the Turner segment, $2 million and $5 million, respectively, at the Warner Bros. segment and $1 million and $2 million, respectively, at Corporate. External costs related to mergers, acquisitions or dispositions, the pension settlement charges and the accrued pension withdrawal expenses 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, 2016, the Company recognized $57 million and $93 million, respectively, of investment gains, net, consisting of a $41 million gain for both periods associated with an agreement to dissolve a Home Box Office joint venture in the Netherlands, $18 million of gains and $44 million of losses, respectively, relating to fair value adjustments on warrants to purchase common stock of CME held by the Company, $2 million of miscellaneous investment losses and $1 million of miscellaneous investment gains, respectively, and, for the nine months ended September 30, 2016, a $95 million gain in connection with the 2016 CME financing transactions. For the three and nine months ended September 30, 2015, the Company recognized $15 million of net investment gains and $70 million of net investment losses, respectively, consisting of $5 million and $110 million, respectively, of losses related to fair value adjustments on warrants to purchase common stock of CME held by the Company and $20 million and $40 million, respectively, of net miscellaneous investment gains. Investment losses, net are included in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Separation of Time Warner Cable Inc.

For the three and nine months ended September 30, 2015, the Company recognized $4 million of losses related to payments made to Time Warner Cable Inc. (“TWC”) in accordance with a tax sharing agreement with TWC and, for the nine months ended September 30, 2015, the Company also recognized $4 million of losses related to changes in the value of a TWC tax indemnification receivable. These amounts have 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, 2016, the Company recognized $3 million and $4 million, respectively, of losses related to the disposition of Warner Music Group (“WMG”), primarily related to a legal settlement. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Amounts Related to the Separation of Time Inc.

The Company recognized expenses of $5 million and $13 million for the three and nine months ended September 30, 2016, respectively, and $2 million and $7 million for the three and nine months ended September 30, 2015, respectively, primarily reflecting pension and other retirement benefit costs related to employees and former employees of Time Inc. These amounts have been reflected in Other loss, net in the accompanying Consolidated Statement of Operations.

Premiums Paid and Costs Incurred on Debt Redemption

For the three and nine months ended September 30, 2015, the Company recognized $21 million of premiums paid and costs incurred principally on the redemption of $313 million aggregate principal amount of its 5.875% Notes due 2016. For the nine months ended September 30, 2015, the Company also recognized $51 million of premiums paid and costs incurred on the purchase of $687 million aggregate principal amount of its 5.875% Notes due 2016 through a tender offer. The premiums paid and costs incurred on the debt redemptions were recorded in Other loss, net in the accompanying Consolidated Statement of Operations.

Items Affecting Comparability Relating to Equity Method Investments

For the three and nine months ended September 30, 2016, the Company recognized $1 million and $11 million of income, respectively, primarily related to net investment gains recorded by equity method investees and, for the nine months ended September 30, 2016, $150 million of losses related to the financing transactions with CME in 2016. For the three and nine months ended September 30, 2015, the Company recognized a $3 million asset impairment recorded by an equity method investee for both periods and $2 million of income and $1 million of losses, respectively, from discontinued operations recorded by an equity method investee. In addition, for the three months ended September 30, 2015, the Company recognized an $18 million reversal of an accrual related to government investigations 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 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. Also included in the income tax impact for the three and nine months ended September 30, 2016 is a tax benefit of approximately $19 million related to the settlement of Netherlands tax liabilities associated with the repayment of the CME Senior Secured Notes and TW Term Loan.

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.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Revenues.   The components of Revenues are as follows (millions):

For the three and nine months ended September 30, 2016, Revenues at the Turner segment increased primarily driven by higher Subscription and Advertising revenues. Revenues at the Home Box Office segment increased for the three and nine months ended September 30, 2016 due to higher Subscription revenues. For the three months ended September 30, 2016, Revenues increased at the Warner Bros. segment driven by higher Theatrical product revenues, partially offset by lower Videogames and other revenues. For the nine months ended September 30, 2016, Revenues at the Warner Bros. segment decreased primarily due to lower Videogames and other revenues. Changes in exchange rates associated with the foreign currencies to which the Company is exposed negatively impacted the Company’s Revenues by approximately $55 million and $230 million for the three and nine months ended September 30, 2016, respectively, as compared to the three and nine months ended September 30, 2015, with negative impacts of approximately $25 million and $120 million, respectively, at the Turner segment, $30 million and $100 million, respectively, at the Warner Bros. segment and $0 and $10 million, respectively, at the Home Box Office segment. If the foreign exchange rates relative to the U.S. Dollar remain at the levels they were at as of September 30, 2016 or if the U.S. Dollar strengthens further in 2016 relative to the foreign currencies to which the Company is exposed, the Company’s Revenues in 2016 will be negatively affected as compared to its Revenues in 2015. Each of the revenue categories is discussed in greater detail by segment in “Business Segment Results.”

Costs of Revenues.   For the three and nine months ended September 30, 2016, Costs of revenues were $3.873 billion and $11.718 billion, respectively, as compared to $3.526 billion and $11.802 billion for the three and nine months ended September 30, 2015, respectively. The increase in Costs of revenues for the three months ended September 30, 2016 reflected increases across all of the segments. The decrease in Costs of revenues for the nine months ended September 30, 2016 reflected a decrease at the Warner Bros. segment, partially offset by increases at the Turner and Home Box Office segments. The segment variations are discussed in “Business Segment Results.”

Selling, General and Administrative Expenses.  For the three months ended September 30, 2016, Selling, general and administrative expenses increased 3% to $1.179 billion from $1.143 billion for the three months ended September 30, 2015, primarily reflecting an increase at Corporate. For the nine months ended September 30, 2016, Selling, general and administrative expenses increased 3% to $3.688 billion from $3.580 billion for the nine months ended September 30, 2015, primarily reflecting increases at the Turner segment and Corporate, partially offset by a decline at the Warner Bros. segment. For the nine months ended September 30, 2015, Selling, general and administrative expenses included a $22 million foreign currency charge related to a change in the foreign currency exchange rate used by the Company for remeasuring its Venezuelan net monetary assets from the SICAD 2 rate to the Simadi rate. The segment variations are discussed in “Business Segment Results.”

Included in Costs of revenues and Selling, general and administrative expenses is depreciation expense of $118 million and $359 million for the three and nine months ended September 30, 2016, respectively, and $120 million and $363 million for the three and nine months ended September 30, 2015, respectively.

Amortization Expense.   Amortization expense was $48 million and $143 million for the three and nine months ended September 30, 2016, respectively, and $47 million and $138 million for the three and nine months ended September 30, 2015, respectively.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Restructuring and Severance Costs.  For the three and nine months ended September 30, 2016 and 2015, the Company incurred Restructuring and severance costs primarily related to employee terminations and other exit activities. Restructuring and severance costs are as follows (millions):

Operating Income.  Operating Income increased to $2.014 billion for the three months ended September 30, 2016 from $1.834 billion for the three months ended September 30, 2015. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $56 million and $8 million of expense for the three months ended September 30, 2016 and 2015, respectively, Operating Income increased $228 million, primarily reflecting an increase at the Turner segment.

Operating Income increased to $5.856 billion for the nine months ended September 30, 2016 from $5.479 billion for the nine months ended September 30, 2015. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $14 million of income and $39 million of expense for the nine months ended September 30, 2016 and 2015, respectively, Operating Income increased $324 million, primarily reflecting an increase at the Turner segment.

Interest Expense, Net.  Interest expense, net detail is shown in the table below (millions):

The increase in interest expense for the nine months ended September 30, 2016 was primarily due to higher average debt balances, partially offset by lower average interest rates.

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

Investment gains (losses), net, premiums paid and costs incurred on debt redemption and amounts related to the separations of TWC and Time Inc. and the disposition of WMG are discussed under “Transactions and Other Items Affecting Comparability.” The increase in loss from equity method investees for the nine months ended September 30, 2016 was mainly due to the Company’s share of losses from CME primarily related to the 2016 CME financing transactions.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Income Tax Provision.  Income tax provision decreased to $217 million for the three months ended September 30, 2016 from $452 million for the three months ended September 30, 2015. The Company’s effective tax rate was 13% and 30% for the three months ended September 30, 2016 and 2015, respectively. Income tax provision decreased to $1.187 billion for the nine months ended September 30, 2016 from $1.371 billion for the nine months ended September 30, 2015. The Company’s effective tax rate was 25% and 32% for the nine months ended September 30, 2016 and 2015, respectively. The decreases in the effective tax rate for both the three and nine months ended September 30, 2016 were primarily due to a change in the Company’s tax method of accounting for film and television cost amortization that was approved by the Internal Revenue Service during the third quarter of 2016. The change in method generated a tax benefit related to extra-territorial income exclusions for tax years dating back to 2001.

Income from Continuing Operations.  Income from continuing operations was $1.472 billion and $1.034 billion for the three months ended September 30, 2016 and 2015, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $29 million and $6 million of income for the three months ended September 30, 2016 and 2015, respectively, Income from continuing operations increased $415 million, primarily reflecting higher Operating Income and lower income tax expense. Basic and Diluted income from continuing operations per common share were $1.89 and $1.87, respectively, for the three months ended September 30, 2016 and were $1.27 and $1.26, respectively, for the three months ended September 30, 2015.

Income from continuing operations was $3.597 billion and $2.938 billion for the nine months ended September 30, 2016 and 2015, respectively. Excluding the items noted under “Transactions and Other Items Affecting Comparability” totaling $67 million and $145 million of expense for the nine months ended September 30, 2016 and 2015, respectively, Income from continuing operations increased $581 million, primarily reflecting higher Operating Income, lower income tax expense and lower Other loss, net. Basic and Diluted income from continuing operations per common share were $4.58 and $4.53, respectively, for the nine months ended September 30, 2016 and were $3.57 and $3.52, respectively, for the nine months ended September 30, 2015.

Discontinued Operations, Net of Tax.  For the three months ended September 30, 2016, Discontinued operations, net of tax was expense of $5 million related to pension settlement charges related to businesses the Company previously disposed of. For the nine months ended September 30, 2016, Discontinued operations, net of tax was income of $35 million, which also included the recognition of additional tax benefits associated with certain foreign tax attributes of WMG, which the Company disposed of in 2004. For the nine months ended September 30, 2015, Discontinued operations, net of tax was income of $37 million, primarily related to the final resolution of a tax indemnification obligation associated with the disposition of WMG. Basic and Diluted income from discontinued operations per common share were both $0.04 for the nine months ended September 30, 2016 and $0.05 and $0.04, respectively, for the nine months ended September 30, 2015.

Net Income attributable to Time Warner shareholders.  Net income attributable to Time Warner shareholders was $1.467 billion and $3.633 billion for the three and nine months ended September 30, 2016, respectively, and $1.035 billion and 2.976 billion for the three and nine months ended September 30, 2015, respectively. Basic and Diluted net income per common share were $1.89 and $1.86, respectively, for the three months ended September 30, 2016 and $1.27 and $1.26, respectively, for the three months ended September 30, 2015. Basic and Diluted net income per common share were $4.62 and $4.57, respectively, for the nine months ended September 30, 2016 and were $3.62 and $3.56, respectively, for the nine months ended September 30, 2015.

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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, 2016 and 2015 are as follows (millions):

Domestic subscription revenues for the three and nine months ended September 30, 2016 increased $160 million and $462 million, respectively, primarily due to higher contractual rates, partially offset by a decrease in subscribers. For the three and nine months ended September 30, 2016, international subscription revenues increased $3 million and decreased $14 million, respectively, as growth mainly in Latin America was offset by the unfavorable impact of foreign exchange rates of approximately $15 million and $70 million, respectively.

The increase in Advertising revenues for the three months ended September 30, 2016 reflected domestic growth of $15 million primarily driven by Turner’s news business, mainly due to the 2016 U.S. Presidential election coverage, partially offset by lower audience delivery at certain entertainment networks. For the nine months ended September 30, 2016, the increase in Advertising revenues reflected domestic growth of $160 million primarily driven by Turner’s news business, mainly due to the 2016 U.S. Presidential election coverage, as well as the 2016 NCAA Tournament, partially offset by lower audience delivery at certain entertainment networks. For the three and nine months ended September 30, 2016, international advertising revenues increased $1 million and decreased $15 million, respectively, as growth mainly in Latin America was offset by the unfavorable impact of foreign exchange rates of approximately $10 million and $40 million, respectively.

The increase in Content and other revenue for the three months ended September 30, 2016 was primarily due to higher licensing revenues.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

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

For the three and nine months ended September 30, 2016, programming costs increased mainly due to the 2016 U.S. Presidential election coverage and also, for the nine months ended September 30, 2016, higher costs for sports programming. The increase in other direct operating costs for the three and nine months ended September 30, 2016 primarily related to costs associated with Turner’s and Warner Bros.’ strategic partnership to grow their global kids businesses.

For the nine months ended September 30, 2016, Selling, general and administrative expenses increased primarily due to higher marketing expense for new original series.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Gain (loss) on operating assets, Asset impairments, Venezuelan foreign currency loss and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2016 and 2015, which affected the comparability of the Turner segment’s results.

Operating Income for the three and nine months ended September 30, 2016 increased driven by higher Revenues, partially offset by higher Costs of revenues and Selling, general and administrative expenses.

Home Box Office.  Revenues and Operating Income of the Home Box Office segment for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

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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, 2016, the increase in Subscription revenues was driven by higher domestic subscription revenues of $51 million and $167 million, respectively, primarily due to higher contractual rates.

For the nine months ended September 30, 2016, Content and other revenues increased primarily due to higher licensing revenues of $42 million, partially offset by lower home entertainment revenues of $32 million.

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

During the second quarter of 2016, the Home Box Office segment revised its estimate of the period over which its original programming is utilized by its subscribers. The updated estimate gives consideration to Home Box Office’s original programming history and was driven by consumer viewing patterns, which are influenced by the increased availability of and on-demand access to Home Box Office’s content across a wide variety of devices and services, including HBO NOW, which launched in April 2015. As a result, in determining amortization under the film forecast computation method, the weighted average subscriber utilization period for the majority of Home Box Office’s original programming was increased by approximately five months. This change resulted in a reduction of amortization expense, as compared to the amount determined using Home Box Office’s previous estimate, of approximately $35 million and $130 million for the three and nine months ended September 30, 2016, respectively.

The increase in originals and sports programming costs for the three and nine months ended September 30, 2016 was primarily due to higher original programming expenses, partially offset by the impact of the change in the estimate of the utilization period of its original programming described in the preceding paragraph. For the nine months ended September 30, 2016, the higher original programming expenses also included higher original programming charges. The increase in acquired films and syndicated series programming costs for the three and nine months ended September 30, 2016 primarily related to acquired programming for both HBO’s domestic and international businesses.

For the three months ended September 30, 2016, Selling, general and administrative expenses decreased due to lower marketing expenses. For the nine months ended September 30, 2016, Selling, general and administrative expenses were essentially flat primarily due to $9 million of expenses related to Home Box Office’s withdrawal from a multiemployer benefit plan, partially offset by lower marketing expenses.

The results for the nine months ended September 30, 2016 included $41 million of Restructuring and severance costs principally related to executive severance costs.

The increase in Operating Income for the three and nine months ended September 30, 2016 was primarily due to higher Revenues, partially offset by higher Costs of revenues and, for the nine months ended September 30, 2016, higher Restructuring and severance costs.

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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, 2016 and 2015 are as follows (millions):

The change in Revenues for the three and nine months ended September 30, 2016 included the net unfavorable impact of foreign exchange rates of approximately $30 million and $100 million, respectively. 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 traditional television or OTT services, including SVOD services). The components of Revenues for the three and nine months ended September 30, 2016 and 2015 are as follows (millions):

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Theatrical product revenue from film rentals increased for the three months ended September 30, 2016, primarily reflecting higher revenues of $483 million from theatrical films released during the third quarter of 2016 compared to the third quarter of 2015 and higher revenues of $52 million from international local language releases as well as from prior period releases. Theatrical product revenues from film rentals increased for the nine months ended September 30, 2016, reflecting higher revenues of $644 million from theatrical films released during first nine months of 2016 compared to the first nine months of 2015, partially offset by lower revenues of $343 million from prior period releases. The Company released six and seven theatrical films in the third quarters of 2016 and 2015, respectively, and fifteen and eighteen theatrical films in the first nine months of 2016 and 2015, respectively.

For the three months ended September 30, 2016, theatrical product revenues from home video and electronic delivery increased due to higher revenues of $122 million from releases during the third quarter of 2016 compared to the third quarter of 2015, partially offset by lower revenues of $109 million from prior period releases, including catalog titles, during the third quarter of 2016 compared to the third quarter of 2015. For the nine months ended September 30, 2016, theatrical product revenues from home video and electronic delivery decreased due to lower revenues of $241 million from releases during the first nine months of 2016 compared to the first nine months of 2015 and lower revenues of $34 million from prior period releases, including catalog titles, during the first nine months of 2016 compared to the first nine months of 2015. There were seven and four home video and electronic delivery releases in the third quarters of 2016 and 2015, respectively, and sixteen and fifteen home video and electronic delivery releases in the first nine months of 2016 and 2015, respectively.

The decrease in theatrical product revenues from television licensing for the three months ended September 30, 2016 was primarily due to lower international license fees. The increase in theatrical product revenues from television licensing for the nine months ended September 30, 2016 was primarily due to higher international license fees.

The decrease in television product revenues from television licensing for the three and nine months ended September 30, 2016 was primarily due to the unfavorable impact of the timing and mix of availabilities, partially offset by higher initial telecast revenues.

Videogames and other revenues decreased for the three months ended September 30, 2016 primarily due to lower revenues of $166 million from releases during the third quarter of 2016 compared to the third quarter of 2015 and lower carryover revenues of $111 million from prior period releases. Videogames and other revenues decreased for the nine months ended September 30, 2016 primarily due to lower revenues of $715 million from releases during the first nine months of 2016, respectively, compared to first nine months of 2015, partially offset by higher carryover revenues of $127 million from prior period releases. The Company released three and two videogames in the third quarters of 2016 and 2015, respectively, and eight and twelve videogames in the first nine months of 2016 and 2015, respectively.

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

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 were $1 million and $74 million for the nine months ended September 30, 2016 and 2015, respectively. Videogame valuation adjustments were $4 million and $17 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in film and television production costs for the three months ended September 30, 2016 was primarily a result of higher revenues for theatrical product. The decrease in film and television production

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

costs for the nine months ended September 30, 2016 was primarily due to lower costs for videogames, partially offset by higher costs for television and theatrical product. The increase in print and advertising costs for the three months ended September 30, 2016 was primarily due to the type of theatrical and videogames releases. The decrease in print and advertising costs for the nine months ended September 30, 2016 was primarily due to the type and number of theatrical, home entertainment and videogames releases. Other costs, including merchandise and related costs decreased for the three and nine months ended September 30, 2016 primarily due to lower distribution-related costs of sales primarily as a result of lower revenues for videogames and, for the nine months ended September 30, 2016, lower revenues for home entertainment.

Selling, general and administrative expenses was essentially flat for the three months ended September 30, 2016 primarily due to higher third party distribution fees, mainly as a result of higher theatrical product revenues, partially offset by lower bad debt expense of $16 million. Selling, general and administrative expenses decreased for the nine months ended September 30, 2016 mainly due to lower bad debt expense of $23 million, lower third party distribution fees of $14 million and cost savings initiatives.

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Gain on operating assets, Asset impairments, Venezuelan foreign currency loss and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2016 and 2015, which affected the comparability of the Warner Bros. segment’s results.

The increase in Operating Income for the three months ended September 30, 2016 was primarily due to higher Revenues, partially offset by higher Costs of revenues. The increase in Operating Income for the nine months ended September 30, 2016 was primarily due to lower Costs of revenues, a Gain on operating assets and lower Selling, general and administrative expenses, partially offset by lower Revenues.

Corporate.  Corporate’s Operating Loss for the three and nine months ended September 30, 2016 and 2015 was as follows (millions):

Refer to “Transactions and Other Items Affecting Comparability” for a discussion of Asset impairments, pension settlements and external costs related to mergers, acquisitions and dispositions for the three and nine months ended September 30, 2016 and 2015, which affected the comparability of Corporate’s results.

Operating loss increased primarily due to higher equity-based compensation expense of $24 million and $34 million for the three and nine months ended September 30, 2016, respectively, which mainly reflected higher expenses for performance stock units due to an increase in the Company’s stock price, $10 million of pension settlement charges for both the three and nine months ended September 30, 2016 and, for the nine months ended September 30, 2016, higher costs of $14 million related to enterprise efficiency initiatives primarily focused on technology.

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, 2016 was $7.336 billion, which included $2.308 billion of Cash and equivalents.

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TIME WARNER INC.

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Current Financial Condition

At September 30, 2016, Time Warner had $24.471 billion of debt and $2.308 billion of Cash and equivalents, resulting in net debt of $22.163 billion, compared to $23.792 billion of debt and $2.155 billion of Cash and equivalents, or net debt of $21.637 billion, at December 31, 2015. At September 30, 2016, Total equity was $24.279 billion compared to $23.619 billion at December 31, 2015.

The following table shows the significant items contributing to the increase in net debt from December 31, 2015 to September 30, 2016 (millions):

In January 2016, Time Warner’s Board of Directors authorized up to $5.0 billion of share repurchases beginning January 1, 2016, including the amount remaining at December 31, 2015 under the prior authorization. Purchases under the stock repurchase program could be made on the open market or in privately negotiated transactions, with the size and timing of purchases based on a number of factors, including price and business and market conditions. From January 1, 2016 through October 21, 2016, the Company repurchased 31 million shares of common stock for $2.307 billion pursuant to trading plans under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In connection with entering into the Merger Agreement, the Company discontinued share repurchases.

Cash Flows

For the nine months ended September 30, 2016 and 2015, Cash and equivalents increased by $153 million and decreased by $844 million, respectively. Components of these changes are discussed below in more detail.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Operating Activities

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

Cash provided by operations for the nine months ended September 30, 2016 increased primarily due to higher Operating Income. For the nine months ended September 30, 2016, all other, net, including working capital changes was favorably impacted by approximately $280 million related to CME’s repayment of the Senior Secured Notes and the TW Term Loan.

Investing Activities

Details of Cash used by investing activities are as follows (millions):

The increase in Cash used by investing activities for the nine months ended September 30, 2016 was primarily due to an increase in investments and acquisitions, net of cash acquired. Other investment proceeds for the nine months ended September 30, 2016 primarily related to CME’s repayment of the Senior Secured Notes and the TW Term Loan.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

Financing Activities

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

Cash used by financing activities for the nine months ended September 30, 2016 decreased primarily due to decreases in Debt repayments and Repurchases of common stock, partially offset by a decrease in Borrowings.

Outstanding Debt and Other Financing Arrangements

Outstanding Debt and Committed Financial Capacity

At September 30, 2016, Time Warner had total committed capacity, defined as maximum available borrowings under various existing debt arrangements and cash and short-term investments, of $31.835 billion. Of this committed capacity, $7.336 billion was unused and $24.471 billion was outstanding as debt. At September 30, 2016, total committed capacity, outstanding letters of credit, outstanding debt and total unused committed capacity were as follows (millions):

2016 Debt Offering

On May 10, 2016, Time Warner issued $800 million aggregate principal amount of 2.95% Notes due 2026 under a shelf registration statement. The notes issued are guaranteed, on an unsecured basis, by Historic TW Inc. (“Historic TW”). In addition, Turner and Home Box Office guarantee, on an unsecured basis, Historic TW’s guarantee of the notes. The net proceeds to the Company from the debt offering were $785 million, after deducting underwriting discounts and offering expenses.

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

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 and OTT exhibition. Backlog was $6.9 billion and $6.3 billion at September 30, 2016 and December 31, 2015, 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 $499 million and $619 million at September 30, 2016 and December 31, 2015, 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 $712 million and $737 million at September 30, 2016 and December 31, 2015, 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 the forward-looking statements in this report include, but are not limited to, the statements regarding (i) the expected timing of the completion of the merger, (ii) expected pension settlement losses of approximately $55 million to $70 million during the three months ended December 31, 2016 in connection with an amendment to the Pension Plan and (iii) the possible incurrence of charges of approximately $60 million to $80 million during the three months ended December 31, 2016 in connection with the Company’s evaluation of its future use of certain programming rights.

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:

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)

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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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, 2016 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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CONSOLIDATED BALANCE SHEET

(Unaudited; millions, except share amounts)