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Time Warner Inc. (TWX)

Analysis of Operating Leases

Difficulty: Advanced

An operating lease is treated like a rental contract. Neither the leased asset nor the associated liability is reported on the lessee statement of financial position, but the rights may be very similar to the rights of an owner. The lessee only records the lease payments as a rental expense in income statement.

Present Value of Future Operating Lease Payments

Time Warner Inc., future operating lease payments

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total undiscounted future operating lease payments1 (USD $ in millions) 1,128  1,154  1,260  1,480  1,910 
Discount rate2 4.10% 3.91% 5.45% 5.38% 5.83%
Total present value of future operating lease payments (USD $ in millions) 976  1,016  1,083  1,262  1,600 

1 Source: Time Warner Inc. Annual Reports

2 Internal rate of return on capital leases

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 4.10%
2018 323  2018 323  310 
2019 184  2019 184  170 
2020 123  2020 123  109 
2021 94  2021 94  80 
2022 85  2022 85  70 
2023 and thereafter 319  2023 85  67 
2024 85  64 
2025 85  62 
2026 64  45 
Total: 1,128  1,128  976 

1 Source: Time Warner Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 3.91%
2017 310  2017 310  298 
2018 285  2018 285  264 
2019 146  2019 146  130 
2020 91  2020 91  78 
2021 63  2021 63  52 
2022 and thereafter 259  2022 63  50 
2023 63  48 
2024 63  46 
2025 63  45 
2026 7  5 
Total: 1,154  1,154  1,016 

1 Source: Time Warner Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 5.45%
2016 314  2016 314  298 
2017 300  2017 300  270 
2018 275  2018 275  235 
2019 135  2019 135  109 
2020 82  2020 82  63 
2021 and thereafter 154  2021 82  60 
2022 72  50 
Total: 1,260  1,260  1,083 

1 Source: Time Warner Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 5.38%
2015 317  2015 317  301 
2016 309  2016 309  278 
2017 284  2017 284  243 
2018 259  2018 259  210 
2019 125  2019 125  96 
2020 and thereafter 186  2020 125  91 
2021 61  42 
Total: 1,480  1,480  1,262 

1 Source: Time Warner Inc. Annual Reports

Year Future operating lease payments (as reported)1 Year Future operating lease payments (estimated) Present value at 5.83%
2014 410  2014 410  387 
2015 378  2015 378  338 
2016 343  2016 343  289 
2017 310  2017 310  247 
2018 192  2018 192  145 
2019 and thereafter 277  2019 192  137 
2020 85  57 
Total: 1,910  1,910  1,600 

1 Source: Time Warner Inc. Annual Reports

Analyst Adjustments for Operating Leases

Time Warner Inc., adjustments to financial data

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Adjustment to Total Assets
Total assets (as reported) 69,209  65,966  63,848  63,259  67,994 
Add: Operating leased assets1 976  1,016  1,083  1,262  1,600 
Total assets (adjusted) 70,185  66,982  64,931  64,521  69,594 
Adjustment to Total Debt
Total debt (as reported) 23,744  24,339  23,792  22,494  20,165 
Add: Operating lease obligations2 976  1,016  1,083  1,262  1,600 
Total debt (adjusted) 24,720  25,355  24,875  23,756  21,765 
Adjustment to Earnings before Interest and Tax (EBIT)
EBIT3 (as reported) 7,159  6,583  6,828  6,032  6,586 
Add-back: Rent expense, excluding sublease income4 348  334  348  391  463 
Less: Depreciation expense, operating leased assets5 296  283  274  307  349 
EBIT (adjusted) 7,211  6,634  6,902  6,116  6,700 
Adjustment to Interest Expense
Interest expense (as reported) 1,214  1,388  1,382  1,353  1,283 
Add: Interest expense, operating lease obligations6 52  51  74  84  114 
Interest expense (adjusted) 1,266  1,439  1,456  1,437  1,397 

1, 2 Equal to total present value of future operating lease payments. See Details »

3 See Details »

4 Source: Time Warner Inc. Annual Reports

5 See Details »

6 See Details »

Adjusted Ratios for Operating Leases (Summary)

Time Warner Inc., adjusted ratios

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total Asset Turnover1
Reported total asset turnover 0.45 0.44 0.44 0.43 0.44
Adjusted total asset turnover 0.45 0.44 0.43 0.42 0.43
Debt to Equity2
Reported debt to equity 0.84 1.00 1.01 0.92 0.67
Adjusted debt to equity 0.87 1.04 1.05 0.97 0.73
Return on Assets3 (ROA)
Reported ROA 7.58% 5.95% 6.00% 6.05% 5.43%
Adjusted ROA 7.48% 5.86% 5.90% 5.93% 5.30%
Interest Coverage4
Reported interest coverage 5.90 4.74 4.94 4.46 5.13
Adjusted interest coverage 5.70 4.61 4.74 4.26 4.80

1 See Details »

2 See Details »

3 See Details »

4 See Details »

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Time Warner Inc.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Time Warner Inc.'s adjusted debt-to-equity improved from 2015 to 2016 and from 2016 to 2017.
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Time Warner Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.
Adjusted interest coverage A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Time Warner Inc.'s adjusted interest coverage deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

Adjusted Total Asset Turnover

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Revenues (USD $ in millions) 31,271  29,318  28,118  27,359  29,795 
Total assets (USD $ in millions) 69,209  65,966  63,848  63,259  67,994 
Total asset turnover1 0.45 0.44 0.44 0.43 0.44
Adjusted for Operating Leases
Revenues (USD $ in millions) 31,271  29,318  28,118  27,359  29,795 
Adjusted total assets (USD $ in millions) 70,185  66,982  64,931  64,521  69,594 
Adjusted total asset turnover2 0.45 0.44 0.43 0.42 0.43

2017 Calculations

1 Total asset turnover = Revenues ÷ Total assets
= 31,271 ÷ 69,209 = 0.45

2 Adjusted total asset turnover = Revenues ÷ Adjusted total assets
= 31,271 ÷ 70,185 = 0.45

Ratio Description The company
Adjusted total asset turnover An activity ratio calculated as total revenue divided by adjusted total assets. Time Warner Inc.'s adjusted total asset turnover improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Debt to Equity

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Total debt (USD $ in millions) 23,744  24,339  23,792  22,494  20,165 
Total Time Warner Inc. shareholders' equity (USD $ in millions) 28,375  24,335  23,619  24,476  29,904 
Debt to equity1 0.84 1.00 1.01 0.92 0.67
Adjusted for Operating Leases
Adjusted total debt (USD $ in millions) 24,720  25,355  24,875  23,756  21,765 
Total Time Warner Inc. shareholders' equity (USD $ in millions) 28,375  24,335  23,619  24,476  29,904 
Adjusted debt to equity2 0.87 1.04 1.05 0.97 0.73

2017 Calculations

1 Debt to equity = Total debt ÷ Total Time Warner Inc. shareholders' equity
= 23,744 ÷ 28,375 = 0.84

2 Adjusted debt to equity = Adjusted total debt ÷ Total Time Warner Inc. shareholders' equity
= 24,720 ÷ 28,375 = 0.87

Ratio Description The company
Adjusted debt-to-equity A solvency ratio calculated as adjusted total debt divided by total shareholders' equity. Time Warner Inc.'s adjusted debt-to-equity improved from 2015 to 2016 and from 2016 to 2017.

Adjusted Return on Assets (ROA)

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Net income attributable to Time Warner Inc. shareholders (USD $ in millions) 5,247  3,926  3,833  3,827  3,691 
Total assets (USD $ in millions) 69,209  65,966  63,848  63,259  67,994 
ROA1 7.58% 5.95% 6.00% 6.05% 5.43%
Adjusted for Operating Leases
Net income attributable to Time Warner Inc. shareholders (USD $ in millions) 5,247  3,926  3,833  3,827  3,691 
Adjusted total assets (USD $ in millions) 70,185  66,982  64,931  64,521  69,594 
Adjusted ROA2 7.48% 5.86% 5.90% 5.93% 5.30%

2017 Calculations

1 ROA = 100 × Net income attributable to Time Warner Inc. shareholders ÷ Total assets
= 100 × 5,247 ÷ 69,209 = 7.58%

2 Adjusted ROA = 100 × Net income attributable to Time Warner Inc. shareholders ÷ Adjusted total assets
= 100 × 5,247 ÷ 70,185 = 7.48%

Ratio Description The company
Adjusted ROA A profitability ratio calculated as net income divided by adjusted total assets. Time Warner Inc.'s adjusted ROA deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

Adjusted Interest Coverage

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
As Reported
Earnings before interest and tax1 (EBIT) (USD $ in millions) 7,159  6,583  6,828  6,032  6,586 
Interest expense (USD $ in millions) 1,214  1,388  1,382  1,353  1,283 
Interest coverage2 5.90 4.74 4.94 4.46 5.13
Adjusted for Operating Leases
Adjusted EBIT (USD $ in millions) 7,211  6,634  6,902  6,116  6,700 
Adjusted interest expense (USD $ in millions) 1,266  1,439  1,456  1,437  1,397 
Adjusted interest coverage3 5.70 4.61 4.74 4.26 4.80

1 See Details »

2017 Calculations

2 Interest coverage = EBIT ÷ Interest expense
= 7,159 ÷ 1,214 = 5.90

3 Adjusted interest coverage = Adjusted EBIT ÷ Adjusted interest expense
= 7,211 ÷ 1,266 = 5.70

Ratio Description The company
Adjusted interest coverage ratio A solvency ratio calculated as adjusted EBIT divided by adjusted interest payments. Time Warner Inc.'s adjusted interest coverage ratio deteriorated from 2015 to 2016 but then improved from 2016 to 2017 exceeding 2015 level.

Estimation of Depreciation Expense, Operating Leased Assets

USD $ in millions

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Rent expense, excluding sublease income1 348  334  348  391  463 
Less: Estimated interest expense, operating lease obligations2 52  51  74  84  114 
Estimated depreciation expense, operating leased assets 296  283  274  307  349 

1 Source: Time Warner Inc., Annual Reports

2 See Details »

Estimation of Interest Expense, Operating Lease Obligations

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Operating leased assets, at beginning of year1 (USD $ in millions) 1,272  1,300  1,357  1,568  1,949 
Discount rate2 4.10% 3.91% 5.45% 5.38% 5.83%
Estimated interest expense, operating lease obligations3 (USD $ in millions) 52  51  74  84  114 

1 See Details »

2 Internal rate of return on capital leases

2017 Calculations

3 Estimated interest expense, operating lease obligations = Operating leased assets, at beginning of year × Discount rate
= 1,272 × 4.10% = 52

Present Value of Operating Lease Payments, at Beginning of Year

Microsoft Excel LibreOffice Calc
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Total present value of future operating lease payments1 (USD $ in millions) 976  1,016  1,083  1,262  1,600 
Rent expense, excluding sublease income2 (USD $ in millions) 348  334  348  391  463 
Discount rate3 4.10% 3.91% 5.45% 5.38% 5.83%
Total present value of operating lease payments, at beginning of year4 (USD $ in millions) 1,272  1,300  1,357  1,568  1,949 

1 Equal to total present value of future operating lease payments. See Details »

2 Source: Time Warner Inc., Annual Reports

3 Internal rate of return on capital leases

2017 Calculations

4 Total present value of operating lease payments, at beginning of year = (Total present value of future operating lease payments + Rent expense, excluding sublease income) ÷ (1 + Discount rate)
= (976 + 348) ÷ (1 + 4.10%) = 1,272