Time Magazine 2015 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)
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, 2015 and 2014, the Company had a cash balance of $2.155 billion and $2.618 billion, respectively,
which is primarily invested in short-term variable-rate interest-earning assets. Based on Time Warner’s short-term
variable-rate interest-earning assets outstanding at December 31, 2015, a 25 basis point increase or decrease in the level of
interest rates would have an insignificant impact on pretax income.
Foreign Currency Risk
Time Warner principally uses foreign exchange contracts to hedge the risk related to 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 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 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, 2015 and 2014, Time Warner had contracts for the sale and the purchase of
foreign currencies at fixed rates as summarized below by currency (millions):
December 31, 2015 December 31, 2014
Sales Purchases Sales Purchases
British pound ..................................... $ 1,267 $ 1,265 $ 1,115 $ 920
Euro ............................................ 752 527 738 466
Canadian dollar ................................... 1,009 517 651 350
Australian dollar .................................. 407 249 355 211
Other ........................................... 638 199 481 187
Total ........................................... $ 4,073 $ 2,757 $ 3,340 $ 2,134
Based on the foreign exchange contracts outstanding at December 31, 2015, a 10% devaluation of the U.S. dollar as
compared to the level of foreign exchange rates for currencies under contract at December 31, 2015 would result in a
decrease of approximately $132 million in the value of such contracts. Conversely, a 10% appreciation of the U.S. dollar
would result in an increase of approximately $132 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.
On July 28, 2015, Time Warner issued €700 million aggregate principal amount of 1.95% Notes due 2023. At
December 31, 2015, the carrying amount of the Company’s €700 million aggregate principal amount of debt is designated as
a hedge of the variability in the Company’s Euro-denominated net investments. The gain or loss on the debt that is
designated as, and is effective as, an economic hedge of the net investment in a foreign operation is recorded as a currency
translation adjustment within Accumulated other comprehensive loss, net in the accompanying Consolidated Balance Sheet.
For the year ended December 31, 2015, such amounts totaled $1 million of gains.
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