Time Magazine 2011 Annual Report Download - page 55

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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 Filmed Entertainment segment are as follows (millions):
Year Ended December 31,
2010 2009 % Change
Film costs .............................................. $ 5,194 $ 4,724 10%
Print and advertising costs ................................. 2,168 1,965 10%
Other costs, including merchandise and related costs ............ 1,067 1,116 (4%)
Costs of revenues(a) ....................................... $ 8,429 $ 7,805 8%
(a) Costs of revenues exclude depreciation.
The increase in Costs of revenues resulted primarily from higher film costs due mainly to higher television
product costs and higher print and advertising costs due mainly to the quantity and mix of films released,
including a higher number of international releases. Included in film costs are net theatrical film valuation
adjustments, which were $78 million in 2010 compared to $85 million in 2009. In 2009, the Company also
recognized a net benefit of $50 million related to adjustments to correct prior period participation accruals.
Selling, general and administrative expenses were essentially flat as higher employee related costs of $42
million and increased costs associated with acquisitions of $30 million were offset by lower bad debt expenses of
$51 million and lower other costs.
As previously noted under “Transactions and Other Items Affecting Comparability,” the 2010 results
included an $11 million noncash gain related to a fair value adjustment on certain contingent consideration
arrangements relating to acquisitions and a $9 million noncash impairment of intangible assets related to the
termination of a videogames licensing relationship. The 2009 results included a $33 million loss on the sale of
Warner Bros.’ Italian cinema assets. In addition, the results for the years ended December 31, 2010 and 2009
included $30 million and $105 million of Restructuring and severance costs, respectively, primarily related to
headcount reductions and the outsourcing of certain functions.
The increase in Operating Income was primarily due to higher Revenues, lower Restructuring and severance
costs and the absence in 2010 of the $33 million loss on the 2009 sale of Warner Bros.’ Italian cinema assets,
partially offset by higher Costs of revenues, the 2009 net benefit of $50 million related to adjustments to correct
prior period participation accruals, the impact of improved home video catalog returns in 2009 of approximately
$30 million, and the absence in 2010 of a $26 million benefit in connection with the resolution of an international
VAT matter in 2009.
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