Time Magazine 2010 Annual Report Download - page 63

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Interest Rate Risk
Time Warner has issued fixed-rate debt that, at December 31, 2010, had an outstanding balance of
$16.276 billion and an estimated fair value of $18.545 billion. Based on Time Warner’s fixed-rate debt
obligations outstanding at December 31, 2010, a 25 basis point increase or decrease in the level of interest
rates would, respectively, decrease or increase the fair value of the fixed-rate debt by approximately $411 million.
Such potential increases or decreases are based on certain simplifying assumptions, including a constant level of
fixed-rate debt and an immediate, across-the-board increase or decrease in the level of interest rates with no other
subsequent changes for the remainder of the period.
At December 31, 2010, the Company had a cash balance of $3.663 billion, which is primarily invested in
variable-rate interest-earning assets. Based on Time Warner’s variable-rate interest-earning assets outstanding at
December 31, 2010, a 25 basis point increase or decrease in the level of interest rates would have an insignificant
impact on interest income.
Foreign Currency Risk
Time Warner uses foreign exchange contracts primarily to hedge the risk that unremitted or forecasted royalties
and license fees owed to Time Warner domestic companies for the sale or anticipated sale of U.S. copyrighted
products abroad because such amounts may be adversely affected by changes in foreign currency exchange rates.
Similarly, the Company enters into foreign exchange contracts to hedge certain film production costs denominated
in a foreign currency as well as other transactions, assets and liabilities denominated in a foreign currency. As part of
its overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, Time
Warner hedges a portion of its foreign currency exposures anticipated over a rolling twelve-month period. The
hedging period for royalties and license fees covers revenues expected to be recognized during the calendar year;
however, there is often a lag between the time that revenue is recognized and the transfer of foreign-denominated
cash to U.S. dollars. To hedge this exposure, Time Warner uses foreign exchange contracts that generally have
maturities of three months to eighteen months and provide continuing coverage throughout the hedging period. At
December 31, 2010 and 2009, Time Warner had contracts for the sale of $2.760 billion and $2.320 billion,
respectively, and the purchase of $2.206 billion and $1.762 billion, respectively, of foreign currencies at fixed rates.
The following provides a summary of foreign currency contracts by currency (millions):
Sales Purchases Sales Purchases
December 31, 2010 December 31, 2009
British pound .................................. $ 612 $ 646 $ 684 $ 519
Euro......................................... 427 302 482 243
Canadian dollar ................................ 634 416 484 338
Australian dollar ................................ 587 534 331 419
Other ........................................ 500 308 339 243
Total ........................................ $2,760 $2,206 $2,320 $1,762
Based on the foreign exchange contracts outstanding at December 31, 2010, a 10% devaluation of the
U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at December 31, 2010
would result in a decrease of approximately $55 million in the value of such contracts. Conversely, a 10%
appreciation of the U.S. dollar would result in an increase of approximately $55 million in the value of such
contracts. For a hedge of forecasted royalty or license fees denominated in a foreign currency, consistent with the
nature of the economic hedge provided by such foreign exchange contracts, such unrealized gains or losses largely
would be offset by corresponding decreases or increases, respectively, in the dollar value of future foreign currency
royalty and license fee payments that would be received in cash within the hedging period from the sale of
U.S. copyrighted products abroad. See Note 7 to the accompanying consolidated financial statements for additional
discussion.
51
TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)