NEW YORK (CNN/Money) -
AOL Time Warner reported a $44.9 billion fourth-quarter loss Wednesday due to another huge charge for the shrinking value of its America Online unit and announced vice-chairman Ted Turner was stepping down.
The charge left AOL Time Warner, the nation's biggest media company, with an annual loss of about $99 billion, the biggest ever for a U.S. company, according to Chuck Hill, director of research for earnings tracker First Call. Still the loss was not caused by operations, and the Internet and media conglomerate posted operating income slightly better than analysts' forecasts.
Shares of AOL Time Warner (AOL: Research, Estimates) fell $1.41, or 10 percent, to $12.55 in after-hours trading on the news, after gaining 30 cents in regular-hours trading before the announcement.
While the loss was essentially due to a non-cash charge, it was a huge number, roughly half the size of the annual U.S. federal budget deficit and more than 10 times the projected operating losses throughout the battered U.S. airline industry last year. It was also roughly equal to the price America Online paid for Time Warner Inc. in the merger that created the company two years ago.
"The charge signifies that AOL used its highly inflated stock to purchase hard assets," said Hill. He said while the loss due to accounting practices, not a flow of cash away from the company, it could become a problem because banks require the company to have a certain net worth in order to comply with loan agreements.
"It puts you in a precarious spot where you have to worry about further losses pushing you into situation where you wouldn't meet the debt covenants," said Hill.
But AOL Time Warner Chief Financial Officer Wayne Pace said the company still has shareholder equity of $52.8 billion, just above the $50 billion level required by the banks. And he said those loan provisions are being renegotiated and the decline in value should not cause a liquidity problem for the company going forward.
Operating earnings top forecasts
Despite the hit to earnings, the company posted fourth-quarter earnings excluding the special items of 28 cents a share, slightly better than analysts' consensus forecasts of 26 cents a share. The company also earned 26 cents a share on that basis in the year earlier quarter.
AOL Time Warner Vice Chairman Ted Turner
While earnings before interest, taxes, depreciation and amortization (ebitda) fell 11 percent at the troubled America Online unit, it rose at all the company's other divisions, with 13 percent gains at both its studios and cable operations, a 46 percent rise in its networks, a 25 percent rise in its music division and a 21 percent gain at publishing.
"We are glad to see solid operational performance even though a much larger-than-expected goodwill write down was taken for the AOL and cable divisions, about $45 billion in total," David Joyce, analyst at Guzman & Co., said in a note to clients.
Company-wide revenue rose to $11.4 billion from $10.6 billion, as strong box office and DVD sales and improving ad revenue from old line media such as television and magazines overcame declining revenue at AOL. That beat First Call's revenue forecast of $11.2 billion.
America Online saw a continued decline in revenue due mostly to a long-term fall in advertising and commerce revenue. It also saw a 176,000 decline in the quarter in the number of AOL subscribers in the United States, leaving the service 26.5 million U.S. customers, the first quarterly decline the unit has ever had.
Difficult year ahead
But the company said that ebitda should be essentially flat for the year and slightly lower in the first quarter than a year ago. Analysts had been looking for earnings per share to fall to 13 cents in the first quarter from 18 cents a year earlier.
The company also said its revenue for the year should be up in the mid single digit percentage range, which is roughly in line with forecasts by analysts who see revenue rising to $43.1 billion, about 5 percent better than the $41.1 billion in revenue it posted for 2002.
"2003 will be a reset year at AOL Time Warner," company CEO Richard Parsons told analysts. He said efforts to turn around problems at AOL and cut debt and overall costs, "will allow us to return to a growth in cash flow and ebitda."
As to the charges, the New York-based company took a charge of $45.5 billion to reflect the loss of value at its various business units in the quarter, more than twice what some industry analysts had expected. The America Online unit took the brunt of the charge, about $33.5 billion, but the cable operations caused $10.5 billion of that, while the music segment booked $1.5 billion.
The charges are based on assessments of the units' value, considering their current operations and market values. The reduced value in the cable operations was a surprise and not good news for a company that is planning an initial public offering of a minority stake in the unit sometime later this year as one of its moves to reduce debt.
AOL Time Warner, which owns Time magazine, the Warner Bros. movie studio, CNN, CNN/Money and other properties in addition to its troubled AOL online service, had taken a $54.2 billion charge earlier in the year, mostly to reflect the impairment to goodwill on its balance sheet.
The company was able to reduce its long-term debt level to $27.4 billion from $28.2 billion at the end of the third quarter, although that number is well above the $22.8 billion debt level of a year earlier. Parsons and Pace promised the company would take steps to reduce net debt from about $25.8 billion to below $20 billion by the end of 2004. Parsons said he hoped to accomplish much of the debt payment through the company's profits but said asset sales could also be a part of the equation.
"The bottom line is we think we have a lot of ways to get home," Parsons said. "We'll explore and exploit the ones that stand out to be the most beneficial to the company."
Parsons confirmed reports the company sold its stake in satellite television operator Hughes Electronics (GMH: Research, Estimates) for about $800 million Tuesday as part of its effort to cut debt. That sale of the 8 percent stake in the unit of General Motors Corp. (GM: Research, Estimates) came at a loss.
Turner leaving board's No. 2 post
Meanwhile, Turner, the founder of CNN and the company's largest individual shareholder, is stepping down as vice chairman of AOL Time Warner, effective in May, but he will remain on the company's board of directors.
In handing in his notice, Turner, 64, said he wants to spend more time to pursue the charity and "socially responsible business efforts" he has become involved with in recent years. In 1997, Turner pledged $1 billion to a foundation to support the United Nations. He is an outspoken environmentalist and the largest private landowner in the United States.
"I have not come to this decision lightly," Turner wrote. "As you know, this company has been a significant part of my life for over fifty years. I have the deepest respect for you, the senior management and my fellow members of the board. With this team in place, I am optimistic that the company will be able to move forward and reach its true potential."
The move follows a series of shakeups at AOL Time Warner. AOL Chairman Steve Case announced earlier this month that he will resign that post in May. Turner had been a critic of Case at the time his resignation as chairman was announced.
The board voted earlier this month to give the chairman post to Parsons in addition to his CEO position. Parsons praised Turner Wednesday and said he looked forward to his continued advice. AOL Time Warner spokeswoman Tricia Primrose said Parsons expects that he will remain on the board and the two would discuss the matter soon.
Case has announced plans to run for reelection to remain on the board. A source close to Turner told CNN/Money he has yet to make a decision on whether to seek to stay on the board and that decision would be made as the board meeting gets closer.