Time Magazine 2012 Annual Report Download - page 66

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TIME WARNER INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION – (Continued)
production costs denominated in foreign currencies as well as other transactions, assets and liabilities
denominated in foreign currencies. 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
principally 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, 2012 and 2011, Time Warner
had contracts for the sale and the purchase of foreign currencies at fixed rates as summarized below by currency
(millions):
December 31, 2012 December 31, 2011
Sales Purchases Sales Purchases
British pound .................................. $ 701 $ 425 $ 915 $ 594
Euro ......................................... 371 426 525 434
Canadian dollar ................................ 692 425 771 548
Australian dollar ................................ 485 269 676 474
Other ........................................ 718 244 656 530
Total ......................................... $ 2,967 $ 1,789 $ 3,543 $ 2,580
Based on the foreign exchange contracts outstanding at December 31, 2012, a 10% devaluation of the
U.S. dollar as compared to the level of foreign exchange rates for currencies under contract at December 31,
2012 would result in a decrease of approximately $118 million in the value of such contracts. Conversely, a 10%
appreciation of the U.S. dollar would result in an increase of approximately $118 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, 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. See Note 7, “Derivative Instruments,” to the accompanying
consolidated financial statements for additional information.
Equity Risk
The Company is exposed to market risk as it relates to changes in the market value of its investments. The
Company invests in equity instruments of public and private companies for operational and strategic business
purposes. These securities are subject to significant fluctuations in fair market value due to the volatility of the
stock markets and the industries in which the companies operate. At December 31, 2012 and 2011, these
securities, which are classified in Investments, including available-for-sale securities in the accompanying
Consolidated Balance Sheet, included $931 million and $939 million, respectively, of investments accounted for
using the equity method of accounting, $390 million and $204 million, respectively, of cost-method investments,
$609 million and $591 million, respectively, of investments related to the Company’s deferred compensation
program and $117 million and $86 million, respectively, of investments in available-for-sale securities.
The potential loss in fair value resulting from a 10% adverse change in the prices of the Company’s equity-
method investments, cost-method investments and available-for-sale securities would be approximately
$145 million. The potential loss in fair value resulting from a 10% adverse change in the prices of the certain of
the Company’s deferred compensation investments accounted for as trading securities would be approximately
$25 million. While Time Warner has recognized all declines that are believed to be other-than-temporary, it is
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