EX-99.1 2 g02601exv99w1.htm EX-99.1 PRESS RELEASE ISSUED AUGUST 2, 2006 EX-99.1 PRESS RELEASE ISSUED AUGUST 2, 2006
 

Exhibit 99.1
TIME WARNER INC. REPORTS SECOND QUARTER 2006 RESULTS
NEW YORK, August 2, 2006 — Time Warner Inc. (NYSE:TWX) today reported financial results for its second quarter ended June 30, 2006.
In making the announcement, Chairman and Chief Executive Officer Dick Parsons said: “We’re pleased with this quarter’s results, which put us firmly on track to achieve our full-year financial objectives. Especially significant was our generation of Free Cash Flow over the first half of the year, totaling more than $2.6 billion, or 49% of our Adjusted OIBDA. Our Cable, Filmed Entertainment and Networks segments delivered standout operating performances, while AOL posted a better-than-expected quarter. Key to these results were impressive strength in AOL’s advertising revenues and across-the-board subscriber and profit growth at Time Warner Cable.”
Mr. Parsons added: “With the closing of the Adelphia-Comcast transaction, Time Warner Cable is now focused on integrating and upgrading the acquired systems and setting the stage for an aggressive deployment of Time Warner Cable’s advanced digital video, high-speed data and Digital Phone services in the coming months. In addition, we’re continuing to return substantial value directly to our shareholders — including repurchasing 14% of our outstanding common stock for approximately $11.7 billion since starting the program last year.”
Company Results
In the quarter, Revenues rose 1% over the same period in 2005 to $10.7 billion, led by growth at the Cable and Networks segments.
Adjusted Operating Income before Depreciation and Amortization climbed 7% to $2.7 billion, reflecting double-digit increases at the Cable and Filmed Entertainment segments as well as a gain at the Networks segment. This growth was offset partly by declines at the Publishing and AOL segments. Operating Income rose to $1.8 billion from a prior year loss, reflecting primarily higher Adjusted Operating Income before Depreciation and Amortization and the absence of the $3 billion in legal reserves related to securities litigation recognized in the prior year quarter.
For the first six months, Cash Provided by Operations was $4.2 billion, and Free Cash Flow totaled $2.6 billion (reflecting a 49% conversion rate of Adjusted Operating Income before Depreciation and Amortization). As of June 30, Net Debt totaled $22.2 billion, up $6.1 billion from $16.1 billion at the end of 2005.
Diluted Income per Common Share before Discontinued Operations and Cumulative Effect of Accounting Change was $0.20 for the three months ended June 30, compared to a loss of $0.09 in last year’s second quarter. The current and prior year amounts included certain items affecting comparability that are described in detail in the Consolidated Reported Net Income and Per Share Results section below. Such items did not meaningfully affect the current year’s diluted common share results and decreased prior year results by $0.25 per diluted common share.

1

 

Stock Repurchase Program Update
From the inception of its stock repurchase program through August 1, 2006, the Company has repurchased approximately 675 million shares of common stock for approximately $11.7 billion.
At existing price levels, the Company continues to expect that it will purchase approximately $15 billion of its common stock by the end of 2006, and the remainder of its $20 billion program in 2007.

2

 

Performance of Segments
The schedules below reflect Time Warner’s performance for the three and six months ended June 30, by line of business (in millions):
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005     2006     2005  
            (recast)             (recast)  
Revenues:
AOL
   $ 2,046     $ 2,097     $ 4,027     $ 4,230  
Cable
     2,721       2,357       5,301       4,603  
Filmed Entertainment
     2,363       2,636       5,142       5,650  
Networks
     2,694       2,479       5,106       4,754  
Publishing
     1,322       1,351       2,448       2,480  
Intersegment elimination
     (438 )     (335 )     (805 )     (769 )
 
                        
Total Revenues
   $ 10,708     $ 10,585     $ 21,219     $ 20,948  
 
                        
 
                                
Adjusted Operating Income (Loss) before Depreciation and Amortization (a):
AOL (b)
   $ 505     $ 528     $ 947     $ 1,058  
Cable
     1,033       891       1,965       1,687  
Filmed Entertainment
     229       209       686       592  
Networks (c)
     696       641       1,565       1,435  
Publishing (d)
     272       306       388       438  
Corporate (e)(f)
     (94 )     (107 )     (211 )     (220 )
Intersegment elimination(c)
     14       21       22       (1 )
 
                        
Total Adjusted Operating Income (Loss) before Depreciation and Amortization
   $ 2,655     $ 2,489     $ 5,362     $ 4,989  
 
                        
 
                                
Operating Income (Loss):
                                
AOL (b)
   $ 328     $ 346     $ 597     $ 660  
Cable
     595       486       1,096       886  
Filmed Entertainment
     141       127       509       428  
Networks (c)
     621       576       1,419       1,311  
Publishing (d)
     230       251       301       333  
Corporate (e)
     (103 )     (117 )     (213 )     (239 )
Securities litigation expenses, net (g)
     (32 )     (3,003 )     (61 )     (3,009 )
Intersegment elimination (c)
     14       21       22       (1 )
 
                        
Total Operating Income (Loss)
   $ 1,794     $ (1,313 )   $ 3,670     $ 369  
 
                        
 
(a)   Adjusted Operating Income (Loss) before Depreciation and Amortization excluded the impact of noncash impairments of goodwill, intangible and fixed assets, as well as gains and losses on asset sales and amounts related to securities litigation and government investigations. Operating Income (Loss) included these amounts in their respective periods. Refer to the reconciliations of Adjusted Operating Income (Loss) before Depreciation and Amortization to Operating Income (Loss) before Depreciation and Amortization on page 13.
 
(b)   For the six months ended June 30, 2006, Adjusted Operating Income before Depreciation and Amortization excluded a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of Network Security Solutions. For the three and six months ended June 30, 2005, Adjusted Operating Income before Depreciation and Amortization excluded a $5 million gain related to the sale of a building and a $3 million gain from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions. Additionally, for the six months ended June 30, 2005, Adjusted Operating Income before Depreciation and Amortization excluded a $24 million noncash goodwill impairment charge related to America Online Latin America, Inc., and a $2 million gain from the resolution of a contingent gain related to the 2004 sale of Network Security Solutions. Operating Income included these amounts in their respective periods.
 
(c)   For the three and six months ended June 30, 2006, Adjusted Operating Income before Depreciation and Amortization and Operating Income included The WB Network shutdown costs of $81 million at the Networks segment. Excluded from the $81 million of shutdown costs is $29 million of intersegment eliminations related to terminating programming arrangements with other Time Warner divisions. Including intersegment eliminations, the net impact to the Company is $52 million.
 
(d)   For the six months ended June 30, 2005, Adjusted Operating Income before Depreciation and Amortization excluded an $8 million gain related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life Inc., which was previously fully reserved due to concerns about recoverability. Operating Income included this amount in the same period.
 
(e)   For the six months ended June 30, 2006, Adjusted Operating Loss before Depreciation and Amortization excluded a $20 million gain on the sale of two aircraft. Operating Loss included this amount in the same period.
 
(f)   For the three and six months ended June 30, 2006, Adjusted Operating Loss before Depreciation and Amortization excluded $32 million and $61 million, respectively, in net expenses related to the securities litigation and government investigations. For the three and six months ended June 30, 2005, Adjusted Operating Loss before Depreciation and Amortization excluded $3 billion in legal reserves related to the securities litigation. Additionally, for the three and six months ended June 30, 2005, Adjusted Operating Loss before Depreciation and Amortization excluded $3 million and $9 million, respectively, in net expenses related to the securities litigation and government investigations.
 
(g)   Represents amounts related to the securities litigation and government investigations. For segment reporting purposes in the Company’s financial statements, amounts are reflected in the results of the Corporate segment. For the three and six months ended June 30, 2006, $32 million and $61 million, respectively, in net expenses related to the securities litigation and government investigations were included. For the three and six months ended June 30, 2005, $3 billion in legal reserves related to the securities litigation were included. Additionally, for the three and six months ended June 30, 2005, $3 million and $9 million, respectively, in net expenses related to the securities litigation and government investigations were included.

3

 

Presented below is a discussion of Time Warner’s segments for the second quarter of 2006. Unless otherwise noted, the dollar amounts in parentheses represent year-over-year changes.
AOL
Revenues declined 2% ($51 million) to $2.0 billion, due to an 11% decrease ($188 million) in Subscription revenues, offset in part by a 40% increase ($129 million) in Advertising revenues. The decline in Subscription revenues was due primarily to a decrease in domestic AOL brand subscribers and an unfavorable impact from changes in foreign currency exchange rates ($16 million). The growth in Advertising revenues reflected strong growth across each of the major advertising categories — display, pay for performance and paid-search.
Adjusted Operating Income before Depreciation and Amortization decreased 4% ($23 million) to $505 million, as lower Subscription revenues and higher traffic acquisition costs were offset partly by higher Advertising revenues and a reduction in marketing and network costs. This quarter’s results included $15 million in restructuring charges related to the closure of one member services center and the scaling back of two others. The year-ago quarter benefited from a $15 million favorable tax settlement at AOL Europe and a $2 million reversal of restructuring costs.
Operating Income declined 5% ($18 million) to $328 million, due largely to lower Adjusted Operating Income before Depreciation and Amortization as well as the absence of the prior year quarter’s gain from the sale of a building ($5 million) and the resolution of a previously contingent gain from the 2004 sale of Netscape Security Solutions ($3 million), offset partially by lower depreciation ($8 million) and amortization ($5 million) expenses.
Audience and Member Updates
During the second quarter, AOL had 113 million average monthly domestic unique visitors and nearly 52 billion domestic page views, according to comScore Media Metrix, which translates into 153 average monthly page views per unique visitor.
As of June 30, 2006, the AOL service totaled 17.7 million U.S. members, a decline of 976,000 from the prior quarter and 3.1 million from the year-ago quarter. In Europe, the AOL service had 5.6 million members as of June 30, 2006 a decrease of 218,000 from the previous quarter and a decline of 571,000 from last year’s quarter.
CABLE (Time Warner Cable)
Revenues rose 15% ($364 million) to $2.7 billion, reflecting primarily an increase of 16% ($358 million) in Subscription revenues. Subscription revenues benefited from a 23% increase ($121 million) in high-speed data revenues, significant growth in Digital Phone revenues ($112 million), a 21% rise ($41 million) in enhanced digital video services revenues and higher current year basic cable rates and subscriber levels. Average monthly subscription revenue per basic cable subscriber rose 14% to approximately $91, marking 22 consecutive quarters of double-digit, year-over-year growth.
Operating Income before Depreciation and Amortization climbed 16% ($142 million) to $1.0 billion, benefiting from growth in Subscription revenues, offset in part by a 9% increase ($49 million) in programming expenses and an increase in operating expenses driven by the expansion of new services. Included in this quarter’s results was a $13 million charge reflecting an adjustment to a prior period facility rent expense, offset partially by a $10 million benefit related to third-party maintenance fees due to the resolution of terms with an equipment vendor. Additionally, the prior year quarter included a $14 million

4

 

charge related to the resolution of contractual terms with a program vendor. The current and prior year periods also reflect merger-related and restructuring charges of $12 million and $13 million, respectively.
Operating Income grew 22% ($109 million) to $595 million, driven by the increase in Operating Income before Depreciation and Amortization, offset partly by higher depreciation expense ($32 million).
Highlights
On July 31, 2006, a subsidiary of Time Warner Cable acquired, concurrently with Comcast Corporation, substantially all of the assets of Adelphia Communications Corporation.
As of June 30, 2006, Time Warner Cable managed 11.1 million basic video cable subscribers, which included 1.6 million subscribers in an unconsolidated joint venture. Last month, Comcast Corporation notified Time Warner Cable of its desire to dissolve the Texas and Kansas City Cable joint venture representing all of these unconsolidated subscribers. As a result, on August 1, 2006, Time Warner Cable notified Comcast Corporation of its intent to take full ownership of Kansas City, Southwest Texas and New Mexico cable systems, while Comcast Corporation would receive Houston cable systems.
Basic video cable subscribers increased 18,000 during the quarter — the fourth straight quarter of growth and the largest second-quarter gain since 2002. Digital video subscribers rose 171,000 over the previous quarter for a total of 5.8 million, also marking the largest second-quarter increase since 2002. Digital penetration of basic video cable subscribers reached nearly 53% at the end of the quarter. Digital Video Recorder subscribers climbed 157,000 to end the quarter at 1.9 million subscribers, representing 32% of digital video customers.
Residential high-speed data subscribers rose by 230,000 during the quarter for a total of 5.4 million, representing 27% of service-ready homes passed. This is the sixth consecutive quarter in which net subscriber additions surpassed 200,000. Digital Phone subscribers grew by 234,000 in the quarter for a total of 1.6 million — the fifth straight quarter with growth of over 200,000 subscribers — representing 9% of service-ready homes passed.
FILMED ENTERTAINMENT  (Warner Bros. Entertainment & New Line Cinema)
Revenues declined 10% ($273 million) to $2.4 billion, due primarily to difficult comparisons to higher home video revenues in the prior year quarter, which included Ocean’s 12 and The Aviator as well as several seasons of Seinfeld. Additionally, the second quarter of 2005 benefited from significant revenue from theatrical product on television, including various Harry Potter availabilities.
Operating Income before Depreciation and Amortization grew 10% ($20 million) to $229 million, reflecting higher contributions from television product at Warner Bros., due to reduced costs on the current mix of product as well as the first-cycle, off-network availability of the first three seasons of Without A Trace and the second-cycle, off-network availability of Friends, offset partly by lower contributions from theatrical product due to difficult prior year comparisons.
Operating Income rose 11% ($14 million) to $141 million, reflecting an increase in Operating Income before Depreciation and Amortization, offset partly by increases in depreciation and amortization expenses ($6 million).
Highlights
Warner Bros.’ Superman Returns, released domestically on June 28, 2006, has generated worldwide box office receipts of approximately $320 million through July 31, 2006.

5

 

Warner Home Video ranked #1 in home video sales in the U.S. for the year through June 24, 2006, with a 19.4% share.
Warner Bros. Television received 25 Primetime Emmy nominations this year, led by Two and a Half Men and The West Wing, and Warner Home Video received five nominations for documentaries produced as part of two Warner Home Video retrospective collections — John Ford/John Wayne: The Filmmaker and the Legend and Stardust: The Bette Davis Story.
NETWORKS (Turner Broadcasting, HBO & The WB Network)
Revenues rose 9% ($215 million) to $2.7 billion, reflecting higher Subscription and Advertising revenues — including the consolidation of Court TV ($65 million). Subscription revenues climbed 9% ($125 million), due to higher rates and increased subscribers at Turner and HBO as well as the consolidation of Court TV ($20 million), offset in part by a favorable audit claim settlement in the prior year quarter. Advertising revenues were up 8% ($67 million), led by 11% growth at Turner, including Court TV ($43 million), offset partly by a 9% decrease at The WB Network. Content revenues increased 7% ($16 million), due primarily to higher ancillary sales of HBO’s original programming.
Operating Income before Depreciation and Amortization climbed 9% ($55 million) to $696 million. Growth in revenues and the consolidation of Court TV ($13 million) were offset in part by higher programming expenses. The current quarter’s results also include $81 million of shutdown costs at The WB Network, excluding the impact of intersegment eliminations (see footnote (c) on page 3).
Operating Income grew 8% ($45 million) to $621 million, due to the increase in Operating Income before Depreciation and Amortization as well as lower amortization expense ($3 million), offset partly by higher depreciation expense ($13 million).
Highlights
On May 12, 2006, the Company acquired the 50% interest in Court TV it did not already own from Liberty Media Corporation. Court TV results have been consolidated retroactive to the beginning of 2006.
Among advertising-supported cable networks, TNT finished the quarter ranked #1 in prime-time among Adults 18-49, Adults 25-54, Persons 2+ and Households as well as Total-Day Delivery among Adults 18-49 and 25-54. TNT’s June 12 premiere of The Closer set advertising-supported cable records for the largest delivery ever of Persons 2+ and Households for an original scripted series telecast and was advertising-supported cable’s top program for the month of June among Adults 25-54. TNT’s July 12 premiere of Nightmares and Dreamscapes: From the Stories of Stephen King ranks as advertising-supported cable’s #1 new original scripted series debut of the year among Adults 18-49 and Adults 25-54. TBS accounted for four of the top five comedies on advertising-supported cable networks among Adults 18-49 for the quarter.
For the quarter, Cartoon Network was the #1 advertising-supported cable network in prime-time delivery of Kids 2-11 and 6-11. Adult Swim finished the quarter #1 in total-day delivery of Adults 18-34 and Men 18-34 among all advertising-supported cable networks.
HBO received 97 Primetime Emmy nominations — the most of any network for the sixth year in a row — led by Elizabeth I, Mrs. Harris, Six Feet Under and Rome. Turner’s TNT earned 17 nominations, more than any other basic cable network. TNT’s Into the West outpaced all other programs this year with 16 nominations — the most nominations ever for a basic cable mini-series. The WB Network garnered four nominations, and Cartoon Network and Turner Classic Movies each collected two nominations.

6

 

PUBLISHING (Time Inc.)
Revenues declined 2% ($29 million) to $1.3 billion, reflecting decreases in Subscription ($23 million), Other ($14 million) and Content ($6 million) revenues, offset partially by higher Advertising revenues ($14 million). The decline in Subscription revenues was related to an unfavorable impact from changes in foreign currency exchange rates at IPC ($9 million) as well as decreases at Southern Living due primarily to one fewer issue in 2006. The decrease in Other revenues was due largely to lower commerce revenues at Oxmoor House and Synapse. Advertising revenues benefited mainly from an increase in online Advertising revenues, driven by CNNMoney and SI.com. In addition, revenue increases from Time and People, as well as recent magazine launches, such as Life, were more than offset by decreases in certain domestic magazines.
Operating Income before Depreciation and Amortization decreased 11% ($34 million) to $272 million, driven by declines at the non-magazine businesses and certain domestic magazines as well as the impact of the quarter’s $22 million in restructuring costs, offset in part by lower start-up losses.
Operating Income declined 8% ($21 million) to $230 million, due to lower Operating Income before Depreciation and Amortization, offset partly by lower amortization ($11 million) and depreciation ($2 million) expenses.
Highlights
Based on Publishers Information Bureau (PIB) data, Time Inc.’s 2006 industry-leading share of overall domestic advertising through June 30, 2006 was 22.8%.
Time magazine won the top award at the National Magazine Awards, placing first in the General Excellence category among magazines with a circulation of over two million. In addition, Time’s special report on Hurricane Katrina was recognized as the best Single-Topic issue. Golf Magazine received its first-ever National Magazine Award in the category of Leisure Interests, something no other golf publication has achieved.
Consolidated Reported Net Income (Loss) and Per Share Results
For the three months ended June 30, 2006, the Company reported Net Income of $1.0 billion, or $0.24 per diluted common share. This compares to a Net Loss in 2005 of $409 million, or $0.09 per diluted common share.
For the three months ended June 30, 2006, the Company reported Income before Discontinued Operations and Cumulative Effect of Accounting Change of $865 million, or $0.20 per diluted common share. This compares to Loss before Discontinued Operations and Cumulative Effect of Accounting Change in 2005 of $425 million, or $0.09 per diluted common share.
Certain pretax items in the current year quarter affected comparability, including $32 million in expenses related to securities litigation and government investigations offset by $20 million of net investment gains and a $9 million tax benefit associated with the recognition of net capital loss carryforwards. Certain pretax items in the prior year quarter’s amount similarly affected comparability, including $3 billion in legal reserves related to securities litigation, a $27 million loss on the Warner Music Group option and $3 million in expenses related to securities litigation. These 2005 items were offset in part by a $925 million gain on the sale of the Company’s remaining stake in Google, a $36 million gain on the sale of an

7

 

investment in Columbia House, $21 million of net investment gains, a $5 million gain on the sale of a building at AOL, a $3 million gain related to the 2004 sale of Netscape Security Solutions, and an approximate $305 million tax benefit related to state tax law changes.
In the aggregate, these items had the net effect of increasing the current year quarter’s Income before Discontinued Operations and Cumulative Effect of Accounting Change by $2 million (net of taxes), having no meaningful effect on earnings per diluted common share, and reducing the previous year quarter’s Income before Discontinued Operations and Cumulative Effect of Accounting Change by $1.2 billion (net of taxes), or $0.25 per diluted common share. Excluding such items, the growth in Income before Discontinued Operations and Cumulative Effect of Accounting Change and Diluted Income per Common Share before Discontinued Operations and Cumulative Effect of Accounting Change was driven primarily by an increase in Operating Income (Loss) and a decrease in the provision for income taxes.
Use of Operating Income (Loss) before Depreciation and Amortization, Adjusted Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow
The Company utilizes Operating Income (Loss) before Depreciation and Amortization, among other measures, to evaluate the performance of its businesses. The Company also evaluates the performance of its businesses using Operating Income (Loss) before Depreciation and Amortization excluding the impact of noncash impairments of goodwill, intangible and fixed assets, as well as gains and losses on asset sales, and amounts related to securities litigation and government investigations (referred to herein as Adjusted Operating Income (Loss) before Depreciation and Amortization). Both Operating Income (Loss) before Depreciation and Amortization and Adjusted Operating Income (Loss) before Depreciation and Amortization are considered important indicators of the operational strength of the Company’s businesses. Operating Income (Loss) before Depreciation and Amortization eliminates the uneven effect across all business segments of considerable amounts of noncash depreciation of tangible assets and amortization of certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in the Company’s businesses. Moreover, Adjusted Operating Income (Loss) before Depreciation and Amortization does not reflect gains and losses on asset sales or amounts related to securities litigation and government investigations or any impairment charge related to goodwill, intangible assets and fixed assets. Management evaluates the investments in such tangible and intangible assets through other financial measures, such as capital expenditure budgets, investment spending levels and return on capital.
Free Cash Flow is Cash Provided by Operations (as defined by U.S. generally accepted accounting principles) plus payments related to securities litigation and government investigations (net of any insurance recoveries) and excess tax benefits from the exercise of stock options, less cash flow attributable to discontinued operations, capital expenditures and product development costs, principal payments on capital leases and partnership distributions, if any. The Company uses Free Cash Flow to evaluate the performance of its businesses and this measure is considered 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 limitation of this measure, however, is that it does not reflect payments made in connection with the securities litigation and government investigations, which reduce liquidity.
Operating Income (Loss) before Depreciation and Amortization, Adjusted Operating Income (Loss) before Depreciation and Amortization and Free Cash Flow should be considered in addition to, not as a substitute for, the Company’s Operating Income (Loss), Net Income (Loss) and various cash flow measures (e.g., Cash Provided by Operations), as well as other measures of financial performance and liquidity reported in accordance with U.S. generally accepted accounting principles.

8

 

About Time Warner Inc.
Time Warner Inc. is a leading media and entertainment company, whose businesses include interactive services, cable systems, filmed entertainment, television networks and publishing.
Information on Business Outlook Release and Earnings Conference Call
Time Warner Inc. issued a separate release today regarding its 2006 full-year business outlook. The Company’s earnings conference call can be heard live at 8:30 am ET on Wednesday, August 2, 2006. To listen to the call, visit www.timewarner.com/investors or AOL Keyword: IR.
Information on AOL’s Business Strategy and Conference Call
Time Warner Inc. issued a separate release today regarding AOL’s business strategy.
The Company’s conference call to discuss AOL’s business strategy can be heard live at 11:00 am ET on Wednesday, August 2, 2006. To listen to the call, visit www.timewarner.com/investors or AOL Keyword: IR.
Caution Concerning Forward-Looking Statements
This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s current expectations or beliefs, and are subject to uncertainty and changes in circumstances. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological and/or regulatory factors, and other factors affecting the operation of the businesses of Time Warner Inc. More detailed information about these factors may be found in filings by Time Warner with the Securities and Exchange Commission, including its most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q. Time Warner is under no obligation to, and expressly disclaims any such obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, or otherwise.
Contacts:
     
Corporate Communications
  Investor Relations
Edward Adler (212) 484-6630
  Jim Burtson (212) 484-8719
Susan Duffy (212) 484-6686
  Chris Clipper (212) 484-6297
 
  Mark Holmes (212) 484-8206

9

 

TIME WARNER INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
                 
          June 30,           December 31,  
    2006     2005  
            (recast)  
    (millions)  
ASSETS
                
 
                
Current assets
                
Cash and equivalents
   $ 1,244     $ 4,220  
Restricted cash
     73       —  
Receivables, less allowances of $1.949 and $2.061 billion
     5,600       6,546  
Inventories
     1,804       2,041  
Prepaid expenses and other current assets
     1,355       892  
Current assets of discontinued operations
     —       351  
 
            
Total current assets
     10,076       14,050  
Noncurrent inventories and film costs
     4,580       4,597  
Investments, including available-for-sale securities
     3,247       3,518  
Property, plant and equipment, net
     14,119       13,664  
Intangible assets subject to amortization, net
     4,534       3,492  
Intangible assets not subject to amortization
     38,437       39,685  
Goodwill
     41,457       40,234  
Other assets
     3,142       3,120  
Noncurrent assets of discontinued operations
     —       383  
 
            
Total assets
   $ 119,592     $ 122,743  
 
            
 
                
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
 
                
Current liabilities
                
Accounts payable
   $ 889     $ 1,207  
Participations payable
     2,451       2,401  
Royalties and programming costs payable
     998       946  
Deferred revenue
     1,550       1,473  
Debt due within one year
     73       92  
Other current liabilities
     5,064       6,158  
Current liabilities of discontinued operations
     70       230  
 
            
Total current liabilities
     11,095       12,507  
Long-term debt
     23,396       20,238  
Deferred income taxes
     13,967       13,045  
Deferred revenue
     651       681  
Other liabilities
     5,112       5,369  
Noncurrent liabilities of discontinued operations
     7       15  
Minority interests
     6,057       5,747  
 
                
Shareholders’ equity
                
Series LMCN-V common stock, $0.01 par value, 92.6 and 87.2 million shares issued and outstanding
     1       1  
Time Warner common stock, $0.01 par value, 4.729 and 4.706 billion shares issued and 3.990 and 4.498 billion shares outstanding
     47       47  
Paid-in-capital
     169,755       168,635  
Treasury stock, at cost (739.0 and 208.0 million shares)
     (14,659 )     (5,463 )
Accumulated other comprehensive gain (loss), net
     151       (64 )
Accumulated deficit
     (95,988 )     (98,015 )
 
            
Total shareholders’ equity
     59,307       65,141  
 
            
Total liabilities and shareholders’ equity
   $ 119,592     $ 122,743  
 
            
Note: Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2006 presentation.
See accompanying notes.

10

 

TIME WARNER INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005     2006     2005  
            (recast)             (recast)  
    (millions, except per share amounts)  
Revenues:
                                
Subscription
   $ 5,861     $ 5,611     $ 11,542     $ 11,096  
Advertising
     2,239       2,016       4,041       3,661  
Content
    2,306       2,674       5,062       5,650  
Other
    302       284       574       541  
 
                        
Total revenues
    10,708       10,585       21,219       20,948  
Costs of revenues
    (6,022 )     (6,173 )     (11,864 )     (12,087 )
Selling, general and administrative
    (2,622 )     (2,568 )     (5,245 )     (5,155 )
Amortization of intangible assets
    (135 )     (151 )     (268 )     (299 )
Amounts related to securities litigation and government investigations
    (32 )     (3,003 )     (61 )     (3,009 )
Merger-related, restructuring and shutdown costs
    (103 )     (11 )     (133 )     (23 )
Asset impairments
    —       —       —       (24 )
Gains on disposal of assets, net
    —       8       22       18  
 
                        
Operating income (loss)
    1,794       (1,313 )     3,670       369  
Interest expense, net
    (337 )     (324 )     (636 )     (670 )
Other income, net
    49       989       360       1,100  
Minority interest expense, net
    (114 )     (69 )     (196 )     (123 )
 
                        
Income (loss) before income taxes, discontinued operations and cumulative effect of accounting change
    1,392       (717 )     3,198       676  
Income tax benefit (provision)
    (527 )     292       (1,135 )     (193 )
 
                        
Income (loss) before discontinued operations and cumulative effect of accounting change
    865       (425 )     2,063       483  
Discontinued operations, net of tax
    142       16       374       23  
 
                        
Income (loss) before cumulative effect of accounting change
    1,007       (409 )     2,437       506  
Cumulative effect of accounting change, net of tax
    —       —       25       —  
 
                        
Net income (loss)
  $ 1,007     $ (409 )   $ 2,462     $ 506  
 
                        
Basic income (loss) per common share before discontinued operations and cumulative effect of accounting change
  $ 0.20     $ (0.09 )   $ 0.47     $ 0.10  
Discontinued operations
    0.04       —       0.09       0.01  
Cumulative effect of accounting change
    —       —       —       —  
 
                        
Basic net income (loss) per common share
  $ 0.24     $ (0.09 )   $ 0.56     $ 0.11  
 
                        
Diluted income (loss) per common share before discontinued operations and cumulative effect of accounting change
  $ 0.20     $ (0.09 )   $ 0.47     $ 0.10  
Discontinued operations
    0.04       —       0.09       0.01  
Cumulative effect of accounting change
     —       —       —       —  
 
                        
Diluted net income (loss) per common share
  $ 0.24     $ (0.09 )   $ 0.56     $ 0.11  
 
                        
Average basic common shares
     4,227.9       4,683.1       4,363.7       4,636.6  
 
                        
Average diluted common shares
    4,266.2       4,683.1       4,405.7       4,725.6  
 
                        
Cash dividends declared per share of common stock
  $ 0.05     $ —     $ 0.10     $ —  
 
                        
Note: Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2006 presentation.
See accompanying notes.

11

 

TIME WARNER INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended June 30,
(Unaudited)
                 
    2006     2005  
            (recast)  
    (millions)
OPERATIONS    
Net income(a)
   $ 2,462     $ 506  
Adjustments for noncash and nonoperating items:
                
Cumulative effect of accounting change, net of tax
     (25 )     —  
Depreciation and amortization
     1,653       1,605  
Amortization of film costs
     1,564       1,675  
Asset impairments
     —       24  
Gain on investments and other assets, net
     (321 )     (1,074 )
Equity in income of investee companies, net of cash distributions
     (28 )     (33 )
Equity-based compensation
     161       213  
Amounts related to securities litigation and government investigations(b)
     (166 )     2,700  
Changes in operating assets and liabilities, net of acquisitions
     (771 )     (2,171 )
Adjustments relating to discontinued operations
     (372 )     (13 )
 
            
Cash provided by operations (c)
     4,157       3,432  
 
            
 
                
INVESTING ACTIVITIES
                
Investments and acquisitions, net of cash acquired
     (1,015 )     (258 )
Capital expenditures and product development costs
     (1,736 )     (1,446 )
Capital expenditures from discontinued operations
     —       (2 )
Investment proceeds from available-for-sale securities
     23       976  
Other investment proceeds
     2,229       368  
 
            
Cash used by investing activities
     (499 )     (362 )
 
            
 
                
FINANCING ACTIVITIES
                
Borrowings
     4,818       1  
Debt repayments
     (1,667 )     (1,835 )
Proceeds from exercise of stock options
     306       158  
Excess tax benefit on stock options
     47       31  
Principal payments on capital leases
     (47 )     (67 )
Repurchases of common stock
     (9,300 )     —  
Prepaid stock repurchase contracts
     (340 )     —  
Dividends paid
     (435 )     —  
Other
     (16 )     95  
 
            
Cash used by financing activities
     (6,634 )     (1,617 )
 
            
 
                
INCREASE (DECREASE) IN CASH AND EQUIVALENTS
     (2,976 )     1,453  
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
     4,220       6,139  
 
            
CASH AND EQUIVALENTS AT END OF PERIOD
   $ 1,244     $ 7,592  
 
            
 
(a)   The six months ended June 30, 2006 and 2005 include net income from discontinued operations of $374 million and $23 million, respectively.
 
(b)   The six months ended June 30, 2005 includes a $300 million payment related to the government investigations.
 
(c)   The six months ended June 30, 2006 and 2005 include an approximate $181 million source of cash and $36 million use of cash, respectively, related to changing the fiscal year end of certain international operations from November 30 to December 31.
Note: Certain reclassifications have been made to the prior year’s financial information to conform to the June 30, 2006 presentation.
See accompanying notes.

12

 

TIME WARNER INC.
RECONCILIATION OF ADJUSTED OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION TO
OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION
(millions, unaudited)
Three Months Ended June 30, 2006
                                         
    Adjusted
Operating		             Amounts
Related
To Securities		           Operating  
    Income/(Loss)             Litigation &     Gains/(Losses)     Income/(Loss)  
    Before Depreciation     Asset     Government     From     Before Depreciation  
      And Amortization               Impairments                 Investigations               Asset Disposals           And Amortization  
AOL(a)
   $ 505     $ —     $ —     $ —     $ 505  
Cable
     1,033       —       —       —       1,033  
Filmed Entertainment
     229       —       —       —       229  
Networks
     696       —       —       —       696  
Publishing
     272       —       —       —       272  
Corporate(b)
     (94 )     —       (32 )     —       (126 )
Intersegment elimination
     14       —       —       —       14  
 
                              
Total
   $ 2,655     $ —     $ (32 )   $ —     $ 2,623  
 
                              
 
Three Months Ended June 30, 2005
(Recast)
 
    Adjusted
Operating		             Amounts
Related
To Securities		           Operating  
    Income/(Loss)             Litigation &     Gains/(Losses)     Income/(Loss)  
    Before Depreciation     Asset     Government     From     Before Depreciation  
      And Amortization               Impairments                 Investigations               Asset Disposals           And Amortization  
AOL(a)
  $ 528     $ —     $ —     $ 8     $ 536  
Cable
    891       —       —       —       891  
Filmed Entertainment
    209       —       —       —       209  
Networks
    641       —       —       —       641  
Publishing
    306       —       —       —       306  
Corporate(b)
     (107 )     —       (3,003 )     —       (3,110 )
Intersegment elimination
    21       —       —       —       21  
 
                              
Total
  $ 2,489     $ —     $ (3,003 )   $ 8     $ (506 )
 
                              
 
(a)   For the three months ended June 30, 2005, Operating Income (Loss) before Depreciation and Amortization includes a $5 million gain related to the sale of a building and a $3 million gain from the resolution of a previously contingent gain related to the 2004 sale of Netscape Security Solutions (“NSS”).
 
(b)   For the three months ended June 30, 2006, Operating Income before Depreciation and Amortization includes $32 million in net expenses related to securities litigation and government investigations. For the three months ended June 30, 2005, Operating Income (Loss) before Depreciation and Amortization includes $3 billion in legal reserves related to securities litigation and $3 million in net expenses related to securities litigation and government investigations.

13

 

TIME WARNER INC.
RECONCILIATION OF ADJUSTED OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION TO
OPERATING INCOME (LOSS) BEFORE DEPRECIATION AND AMORTIZATION
(millions, unaudited)
Six Months Ended June 30, 2006
                                         
    Adjusted
Operating		             Amounts
Related
To Securities		           Operating  
    Income/(Loss)             Litigation &     Gains/(Losses)     Income/(Loss)  
    Before Depreciation     Asset     Government     From     Before Depreciation  
      And Amortization               Impairments                 Investigations               Asset Disposals           And Amortization  
AOL(a)
  $ 947     $ —     $ —     $ 2     $ 949  
Cable
    1,965       —       —       —       1,965  
Filmed Entertainment
    686       —       —       —       686  
Networks
    1,565       —       —       —       1,565  
Publishing
    388       —       —       —       388  
Corporate(b)
     (211 )     —       (61 )     20       (252 )
Intersegment elimination
    22       —       —       —       22  
 
                              
Total
  $ 5,362     $ —     $ (61 )   $ 22     $ 5,323  
 
                              
 
Six Months Ended June 30, 2005
(Recast)
 
    Adjusted
Operating		             Amounts
Related
To Securities		           Operating  
    Income/(Loss)             Litigation &     Gains/(Losses)     Income/(Loss)  
    Before Depreciation     Asset     Government     From     Before Depreciation  
      And Amortization               Impairments                 Investigations               Asset Disposals           And Amortization  
AOL(a)
  $ 1,058     $ (24 )   $ —     $ 10     $ 1,044  
Cable
    1,687       —       —       —       1,687  
Filmed Entertainment
    592       —       —       —       592  
Networks
    1,435       —       —       —       1,435  
Publishing(c)
    438       —       —       8       446  
Corporate(b)
     (220 )     —       (3,009 )     —       (3,229 )
Intersegment elimination
    (1 )     —       —       —       (1 )
 
                              
Total
  $ 4,989     $ (24 )   $ (3,009 )   $ 18     $ 1,974  
 
                              
 
(a)   For the six months ended June 30, 2006, Operating Income before Depreciation and Amortization includes a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS. For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization includes a $24 million noncash goodwill impairment charge related to America Online Latin America, Inc. (“AOLA”), a $5 million gain related to the sale of a building and a $5 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.
 
(b)   For the six months ended June 30, 2006, Operating Income before Depreciation and Amortization includes a $20 million gain on the sale of two aircraft and $61 million in net expenses related to securities litigation and government investigations. For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization includes $3 billion in legal reserves related to securities litigation and $9 million in net expenses related to securities litigation and government investigations.
 
(c)   For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization includes an $8 million gain related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life Inc. (“Time Life”), which was previously fully reserved due to concerns about recoverability.

14

 

TIME WARNER INC.
RECONCILIATION OF OPERATING INCOME (LOSS) BEFORE DEPRECIATION
AND AMORTIZATION TO OPERATING INCOME (LOSS)
(millions, unaudited)
Three Months Ended June 30, 2006
                                 
    Operating
Income/(Loss)		                        
    Before Depreciation                     Operating  
          And Amortization                       Depreciation                             Amortization                             Income/(Loss)              
AOL(a)
  $ 505     $ (135 )   $ (42 )   $ 328  
Cable
    1,033       (418 )     (20 )     595  
Filmed Entertainment
    229       (34 )     (54 )     141  
Networks
    696       (70 )     (5 )     621  
Publishing
    272       (28 )     (14 )     230  
Corporate(b)
    (126 )     (9 )     —       (135 )
Intersegment elimination
    14       —       —       14  
 
                        
Total
  $ 2,623     $ (694 )   $ (135 )   $ 1,794  
 
                        
 
Three Months Ended June 30, 2005
(Recast)
 
    Operating
Income/(Loss)		                        
    Before Depreciation                     Operating  
    And Amortization     Depreciation     Amortization     Income/(Loss)  
AOL(a)
  $ 536     $ (143 )   $ (47 )   $ 346  
Cable
    891       (386 )     (19 )     486  
Filmed Entertainment
    209       (30 )     (52 )     127  
Networks
    641       (57 )     (8 )     576  
Publishing
    306       (30 )     (25 )     251  
Corporate(b)
     (3,110 )     (10 )     —       (3,120 )
Intersegment elimination
    21       —       —       21  
 
                        
Total
  $ (506 )   $ (656 )   $ (151 )   $ (1,313 )
 
                        
 
(a)   For the three months ended June 30, 2005, Operating Income (Loss) before Depreciation and Amortization and Operating Income (Loss) include a $5 million gain related to the sale of a building and a $3 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.
 
(b)   For the three months ended June 30, 2006, Operating Income before Depreciation and Amortization and Operating Income include $32 million in net expenses related to securities litigation and government investigations. For the three months ended June 30, 2005, Operating Income (Loss) before Depreciation and Amortization and Operating Income (Loss) include $3 billion in legal reserves related to securities litigation and $3 million in net expenses related to securities litigation and government investigations.

15

 

TIME WARNER INC.
RECONCILIATION OF OPERATING INCOME (LOSS) BEFORE DEPRECIATION
AND AMORTIZATION TO OPERATING INCOME (LOSS)
(millions, unaudited)
Six Months Ended June 30, 2006
                                 
    Operating
Income/(Loss)		                        
    Before Depreciation                     Operating  
          And Amortization                       Depreciation                             Amortization                             Income/(Loss)              
AOL(a)
  $ 949     $ (270 )   $ (82 )   $ 597  
Cable
    1,965       (829 )     (40 )     1,096  
Filmed Entertainment
    686       (68 )     (109 )     509  
Networks
    1,565       (138 )     (8 )     1,419  
Publishing
    388       (58 )     (29 )     301  
Corporate(b)
    (252 )     (22 )     —       (274 )
Intersegment elimination
    22       —       —       22  
 
                        
Total
  $ 5,323     $ (1,385 )   $ (268 )   $ 3,670  
 
                        
 
Six Months Ended June 30, 2005
(Recast)
 
    Operating
Income/(Loss)		                        
    Before Depreciation                     Operating  
          And Amortization                       Depreciation                             Amortization                             Income/(Loss)              
AOL(a)
  $ 1,044     $ (290 )   $ (94 )   $ 660  
Cable
    1,687       (762 )     (39 )     886  
Filmed Entertainment
    592       (60 )     (104 )     428  
Networks
    1,435       (112 )     (12 )     1,311  
Publishing(c)
    446       (63 )     (50 )     333  
Corporate(b)
     (3,229 )     (19 )     —       (3,248 )
Intersegment elimination
    (1 )     —       —       (1 )
 
                        
Total
  $ 1,974     $ (1,306 )   $ (299 )   $ 369  
 
                        
 
(a)   For the six months ended June 30, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $2 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS. For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization and Operating Income include a $24 million noncash goodwill impairment charge related to AOLA, a $5 million gain related to the sale of a building and a $5 million gain from the resolution of a previously contingent gain related to the 2004 sale of NSS.
 
(b)   For the six months ended June 30, 2006, Operating Income before Depreciation and Amortization and Operating Income include a $20 million gain on the sale of two aircraft and $61 million in net expenses related to securities litigation and government investigations. For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization and Operating Income include $3 billion in legal reserves related to securities litigation and $9 million in net expenses related to securities litigation and government investigations.
 
(c)   For the six months ended June 30, 2005, Operating Income before Depreciation and Amortization and Operating Income include an $8 million gain related to the collection of a loan made in conjunction with the Company’s 2003 sale of Time Life, which was previously fully reserved due to concerns about recoverability.

16

 

TIME WARNER INC.
RECONCILIATION OF CASH PROVIDED BY OPERATIONS TO FREE CASH FLOW
(millions, unaudited)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2006     2005     2006     2005  
            (recast)             (recast)  
Cash provided by operations
   $ 1,810     $ 1,600     $ 4,157     $ 3,432  
Less discontinued operations:
                                
Net income (loss)
     (142 )     (16 )     (374 )     (23 )
Other changes
     146       27       372       13  
 
                        
 
                                
Cash provided by continuing operations
     1,814       1,611       4,155       3,422  
Add payments related to securities litigation and government investigations
     203       3       227       309  
Add excess tax benefits on stock options
     15       9       47       31  
Less capital expenditures and product development costs
     (955 )     (796 )     (1,736 )     (1,446 )
Less principal payments on capital leases
     (24 )     (30 )     (47 )     (67 )
 
                        
Free Cash Flow(a)
   $ 1,053     $ 797     $ 2,646     $ 2,249  
 
                        
 
(a)   Free Cash Flow is cash provided by operations (as defined by U.S. generally accepted accounting principles (“GAAP”)) plus payments related to securities litigation and government investigations (net of any insurance recoveries), and excess tax benefits from the exercise of stock options, less cash flow attributable to discontinued operations, capital expenditures and product development costs, principal payments on capital leases, and partnership distributions, if any.

17

 

TIME WARNER INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Changes in Basis of Presentation
On May 12, 2006, the Company acquired the remaining 50% interest in Courtroom Television Network LLC (“Court TV”) that it did not already own from Liberty Media Corporation (“Liberty”) for $697 million in cash, net of cash acquired. As permitted by GAAP, Court TV results have been consolidated retroactive to the beginning of 2006. Previously, the Company had accounted for its investment using the equity method of accounting. The allocation of the Company’s purchase price is preliminary as the Company is performing a valuation analysis of the fair values of the identifiable tangible and intangible assets; however, the Company expects that intangible assets with finite lives will be identified in this process. Accordingly, as of June 30, 2006, approximately $853 million has been recorded as goodwill. For the three and six months ended June 30, 2006, Court TV revenues were $65 million and $127 million, respectively, and Operating Income was $12 million and $22 million, respectively.
In preparing the accompanying consolidated financial statements, the Company has recast the 2005 financial statements so that the basis of presentation is consistent with that of 2006. In particular, the Company has recast the 2005 financial statements to reflect the following:
Effective January 1, 2006, the Company adopted Financial Accounting Standards Board Statement of Financial Accounting Standards No. 123 (Revised 2004), “Share-Based Payment” (“FAS 123R”). As provided for in FAS 123R, the Company has recast prior year financial statements so that they are comparable to those of 2006. The impact of the adoption of FAS 123R for the three months ended June 30, 2005 was to decrease the Company’s consolidated Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $69 million, $67 million and $97 million, respectively, and at December 31, 2005 to increase shareholders’ equity and decrease deferred tax liabilities by approximately $2.2 billion. The impact of the adoption of FAS 123R for the six months ended June 30, 2005 was to decrease the Company’s consolidated Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $196 million, $188 million and $171 million, respectively.
In the first quarter of 2006, the Company sold Time Warner Book Group (“TWBG”) and announced an agreement to sell Turner South (which closed on May 1, 2006). Accordingly, the Company has presented the financial condition and results of operations of TWBG and Turner South as discontinued operations for all periods presented. For the three months ended June 30, 2005, the impact of the sale of TWBG on the consolidated results was to decrease revenues, Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $151 million, $31 million, $29 million and $19 million, respectively. For the six months ended June 30, 2005, the impact of the sale of TWBG on the consolidated results was to decrease revenues, Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $261 million, $44 million, $38 million and $23 million, respectively. For the three months ended June 30, 2005, the impact of the sale of Turner South on the consolidated results was to decrease revenues and increase Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $8 million, $1 million, $2 million and $0 million, respectively. For the six months ended June 30, 2005, the impact of the sale of Turner South on the consolidated results was to decrease revenues, Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $18 million, $0 million, $0 million and $0 million, respectively.
In the first quarter of 2006, the Company changed its methodology for recognizing programming inventory costs at HBO. In accordance with Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections,” because this change involves a revision to an inventory costing principle, the change is reflected retrospectively for all periods presented. For the three months ended June 30, 2005, the impact of the methodology change on the consolidated results was to increase Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $14 million, $14 million and $9 million, respectively. For the six months ended June 30, 2005, the impact of the methodology change on the

18

 

consolidated results was to increase Operating Income before Depreciation and Amortization, income before income taxes, discontinued operations and cumulative effect of accounting change, and net income by $56 million, $56 million and $35 million, respectively.

19