In the normal course of business, the Company enters into transactions with related parties. Related parties include entities that share common directorship, such as Liberty Global plc (“Liberty Global”), Liberty Broadband Corporation ("Liberty Broadband") and their subsidiaries and equity method investees (together(collectively the “Liberty Group”). Discovery’s Board of Directors includes Mr.Dr. Malone, who is Chairman of the Board of Liberty Global and beneficially owns approximately 26%30% of the aggregate voting power with respect to the election of directors of Liberty Global. Mr.Dr. Malone is also Chairman of the Board of Liberty Broadband and beneficially owns approximately 46%47% of the aggregate voting power with respect to the election of directors of Liberty Broadband. The majority of the revenue earned from the Liberty Group relates to multi-year network distribution arrangements. Related party transactions also include revenues and expenses for content and services provided to or acquired from equity method investees, such as OWN, All3Media and a Russian cable television business, or minority partners of consolidated subsidiaries, such as Hasbro. For the three and nine months ended September 30, 2017, related party transaction costs include expenses associated with the Exchange Agreement executed with Advance/Newhouse.subsidiaries.
The accounting policies of the reportable segments are the same as the Company’s, except that certain inter-segment transactions that are eliminated for consolidation are not eliminated at the segment level. Inter-segment transactions primarily include advertising and content purchases. The Company does not report assets by segment because this is not used to allocate resources or evaluate segment performance.
|
| | | | | | | | | | | | |
| | Contract Terminations | | Employee Terminations | | Total |
December 31, 2016 | | $ | 3 |
| | $ | 36 |
| | $ | 39 |
|
Net Accruals | | 1 |
| | 38 |
| | 39 |
|
Cash Paid | | — |
| | (47 | ) | | (47 | ) |
September 30, 2017 | | $ | 4 |
| | $ | 27 |
| | $ | 31 |
|
NOTE 18. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
Overview
As of September 30, 2017 and December 31, 2016, all of the outstanding senior notes have been issued by DCL, a wholly owned subsidiary of the Company, pursuant to one or more Registration Statements on Form S-3 filed with the U.S. Securities and Exchange Commission ("SEC"). (See Note 6.) The Company fully and unconditionally guarantees the senior notes on an unsecured basis. Each of the Company, DCL, and/or Discovery Communications Holding LLC (“DCH”) (collectively the “Issuers”) may issue additional debt securities under the Company's current Registration Statement on Form S-3 that are fully and unconditionally guaranteed by the other Issuers.
Set forth below are condensed consolidating financial statements presenting the financial position, results of operations and comprehensive income and cash flows of (i) the Company, (ii) DCH, (iii) DCL, (iv) the non-guarantor subsidiaries of DCL on a combined basis, (v) the other non-guarantor subsidiaries of the Company on a combined basis, and (vi) reclassifications and eliminations necessary to arrive at the consolidated financial statement balances for the Company. DCL and the non-guarantor subsidiaries of DCL are the primary operating subsidiaries of the Company. DCL primarily includes the Discovery Channel and TLC networks in the U.S. The non-guarantor subsidiaries of DCL include substantially all of the Company’s other U.S. and international networks, education businesses, production companies, and most of the Company’s websites and digital distribution arrangements. The non-guarantor subsidiaries of DCL are wholly owned subsidiaries of DCL with the exception of certain equity
DISCOVERY, COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
method investments. DCL is a wholly owned subsidiary of DCH. The Company wholly owns DCH through a 33 1/3% direct ownership interest and a 66 2/3% indirect ownership interest through Discovery Holding Company (“DHC”), a wholly owned subsidiary of the Company. DHC is included in the other non-guarantor subsidiaries of the Company.
Basis of Presentation
Solely for purposes of presenting the condensed consolidating financial statements, investments in the Company’s subsidiaries have been accounted for by their respective parent company using the equity method. Accordingly, in the following condensed consolidating financial statements the equity method has been applied to (i) the Company’s interests in DCH and the other non-guarantor subsidiaries of the Company, (ii) DCH’s interest in DCL, and (iii) DCL’s interests in the non-guarantor subsidiaries of DCL. Inter-company accounts and transactions have been eliminated to arrive at the consolidated financial statement amounts for the Company. The Company’s accounting bases in all subsidiaries, including goodwill and recognized intangible assets, have been “pushed down” to the applicable subsidiaries.
The operations of certain of the Company’s international subsidiaries are excluded from the Company’s consolidated U.S. income tax return. Tax expense related to permanent differences has been allocated to the entity that created the difference. Tax expense related to temporary differences has been allocated to the entity that created the difference, where identifiable. The remaining temporary differences are allocated to each entity included in the Company’s consolidated U.S. income tax return based on each entity’s relative pretax income. Deferred taxes have been allocated based upon the temporary differences between the carrying amounts of the respective assets and liabilities of the applicable entities.
The condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of the Company.
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheet
September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | — |
| | $ | 6,586 |
| | $ | 408 |
| | $ | — |
| | $ | — |
| | $ | 6,994 |
|
Receivables, net | | — |
| | — |
| | 454 |
| | 1,198 |
| | — |
| | — |
| | 1,652 |
|
Content rights, net | | — |
| | — |
| | 2 |
| | 380 |
| | — |
| | — |
| | 382 |
|
Prepaid expenses and other current assets | | 47 |
| | 44 |
| | 200 |
| | 158 |
| | — |
| | — |
| | 449 |
|
Inter-company trade receivables, net | | — |
| | — |
| | 165 |
| | — |
| | — |
| | (165 | ) | | — |
|
Total current assets | | 47 |
| | 44 |
| | 7,407 |
| | 2,144 |
| | — |
| | (165 | ) | | 9,477 |
|
Investment in and advances to subsidiaries | | 5,695 |
| | 5,652 |
| | 8,263 |
| | — |
| | 3,811 |
| | (23,421 | ) | | — |
|
Noncurrent content rights, net | | — |
| | — |
| | 646 |
| | 1,449 |
| | — |
| | — |
| | 2,095 |
|
Goodwill, net | | — |
| | — |
| | 3,677 |
| | 4,565 |
| | — |
| | — |
| | 8,242 |
|
Intangible assets, net | | — |
| | — |
| | 262 |
| | 1,277 |
| | — |
| | — |
| | 1,539 |
|
Equity method investments, including note receivable | | — |
| | — |
| | 29 |
| | 725 |
| | — |
| | — |
| | 754 |
|
Other noncurrent assets, including property and equipment, net | | — |
| | 20 |
| | 339 |
| | 697 |
| | — |
| | (20 | ) | | 1,036 |
|
Total assets | | $ | 5,742 |
| | $ | 5,716 |
| | $ | 20,623 |
| | $ | 10,857 |
| | $ | 3,811 |
| | $ | (23,606 | ) | | $ | 23,143 |
|
LIABILITIES AND EQUITY | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Current portion of debt | | $ | — |
| | $ | — |
| | $ | 7 |
| | $ | 25 |
| | $ | — |
| | $ | — |
| | $ | 32 |
|
Other current liabilities | | — |
| | — |
| | 534 |
| | 1,049 |
| | — |
| | — |
| | 1,583 |
|
Inter-company trade payables, net | | — |
| | — |
| | — |
| | 165 |
| | — |
| | (165 | ) | | — |
|
Total current liabilities | | — |
| | — |
| | 541 |
| | 1,239 |
| | — |
| | (165 | ) | | 1,615 |
|
Noncurrent portion of debt | | — |
| | — |
| | 14,146 |
| | 530 |
| | — |
| | — |
| | 14,676 |
|
Other noncurrent liabilities | | 2 |
| | — |
| | 284 |
| | 465 |
| | 21 |
| | (20 | ) | | 752 |
|
Total liabilities | | 2 |
| | — |
| | 14,971 |
| | 2,234 |
| | 21 |
| | (185 | ) | | 17,043 |
|
Redeemable noncontrolling interests | | — |
| | — |
| | — |
| | 360 |
| | — |
| | — |
| | 360 |
|
Total equity | | 5,740 |
| | 5,716 |
| | 5,652 |
| | 8,263 |
| | 3,790 |
| | (23,421 | ) | | 5,740 |
|
Total liabilities and equity | | $ | 5,742 |
| | $ | 5,716 |
| | $ | 20,623 |
| | $ | 10,857 |
| | $ | 3,811 |
| | $ | (23,606 | ) | | $ | 23,143 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Balance Sheet
December 31, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
ASSETS | | | | | | | | | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | — |
| | $ | — |
| | $ | 20 |
| | $ | 280 |
| | $ | — |
| | $ | — |
| | $ | 300 |
|
Receivables, net | | — |
| | — |
| | 421 |
| | 1,074 |
| | — |
| | — |
| | 1,495 |
|
Content rights, net | | — |
| | — |
| | 8 |
| | 302 |
| | — |
| | — |
| | 310 |
|
Prepaid expenses and other current assets | | 62 |
| | 36 |
| | 180 |
| | 119 |
| | — |
| | — |
| | 397 |
|
Inter-company trade receivables, net | | — |
| | — |
| | 195 |
| | — |
| | — |
| | (195 | ) | | — |
|
Total current assets | | 62 |
| | 36 |
| | 824 |
| | 1,775 |
| | — |
| | (195 | ) | | 2,502 |
|
Investment in and advances to subsidiaries | | 5,106 |
| | 5,070 |
| | 7,450 |
| | — |
| | 3,417 |
| | (21,043 | ) | | — |
|
Noncurrent content rights, net | | — |
| | — |
| | 663 |
| | 1,426 |
| | — |
| | — |
| | 2,089 |
|
Goodwill, net | | — |
| | — |
| | 3,769 |
| | 4,271 |
| | — |
| | — |
| | 8,040 |
|
Intangible assets, net | | — |
| | — |
| | 272 |
| | 1,240 |
| | — |
| | — |
| | 1,512 |
|
Equity method investments, including note receivable | | — |
| | — |
| | 30 |
| | 527 |
| | — |
| | — |
| | 557 |
|
Other noncurrent assets, including property and equipment, net | | — |
| | 20 |
| | 306 |
| | 666 |
| | — |
| | (20 | ) | | 972 |
|
Total assets | | $ | 5,168 |
| | $ | 5,126 |
| | $ | 13,314 |
| | $ | 9,905 |
| | $ | 3,417 |
| | $ | (21,258 | ) | | $ | 15,672 |
|
LIABILITIES AND EQUITY | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | |
Current portion of debt | | $ | — |
| | $ | — |
| | $ | 52 |
| | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | 82 |
|
Other current liabilities | | — |
| | — |
| | 516 |
| | 963 |
| | — |
| | — |
| | 1,479 |
|
Inter-company trade payables, net | | — |
| | — |
| | — |
| | 195 |
| | — |
| | (195 | ) | | — |
|
Total current liabilities | | — |
| | — |
| | 568 |
| | 1,188 |
| | — |
| | (195 | ) | | 1,561 |
|
Noncurrent portion of debt | | — |
| | — |
| | 7,315 |
| | 526 |
| | — |
| | — |
| | 7,841 |
|
Other noncurrent liabilities | | 1 |
| | — |
| | 361 |
| | 498 |
| | 20 |
| | (20 | ) | | 860 |
|
Total liabilities | | 1 |
| | — |
| | 8,244 |
| | 2,212 |
| | 20 |
| | (215 | ) | | 10,262 |
|
Redeemable noncontrolling interests | | — |
| | — |
| | — |
| | 243 |
| | — |
| | — |
| | 243 |
|
Total equity | | 5,167 |
| | 5,126 |
| | 5,070 |
| | 7,450 |
| | 3,397 |
| | (21,043 | ) | | 5,167 |
|
Total liabilities and equity | | $ | 5,168 |
| | $ | 5,126 |
| | $ | 13,314 |
| | $ | 9,905 |
| | $ | 3,417 |
| | $ | (21,258 | ) | | $ | 15,672 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Revenues | | $ | — |
| | $ | — |
| | $ | 493 |
| | $ | 1,160 |
| | $ | — |
| | $ | (2 | ) | | $ | 1,651 |
|
Costs of revenues, excluding depreciation and amortization | | — |
| | — |
| | 126 |
| | 546 |
| | — |
| | (2 | ) | | 670 |
|
Selling, general and administrative | | 39 |
| | — |
| | 99 |
| | 319 |
| | — |
| | — |
| | 457 |
|
Depreciation and amortization | | — |
| | — |
| | 11 |
| | 69 |
| | — |
| | — |
| | 80 |
|
Restructuring and other charges | | — |
| | — |
| | 2 |
| | 9 |
| | — |
| | — |
| | 11 |
|
Total costs and expenses | | 39 |
| | — |
|
| 238 |
| | 943 |
| | — |
| | (2 | ) | | 1,218 |
|
Operating (loss) income | | (39 | ) | | — |
| | 255 |
| | 217 |
| | — |
| | — |
| | 433 |
|
Equity in earnings of subsidiaries | | 252 |
| | 252 |
| | 243 |
| | — |
| | 168 |
| | (915 | ) | | — |
|
Interest expense | | — |
| | — |
| | (130 | ) | | (6 | ) | | — |
| | — |
| | (136 | ) |
Loss from equity investees, net
| | — |
| | — |
| | — |
| | (27 | ) | | — |
| | — |
| | (27 | ) |
Other (expense) income, net | | — |
| | — |
| | (119 | ) | | 13 |
| | — |
| | — |
| | (106 | ) |
Income before income taxes | | 213 |
| | 252 |
| | 249 |
| | 197 |
| | 168 |
| | (915 | ) | | 164 |
|
Income tax benefit | | 5 |
| | — |
| | 3 |
| | 51 |
| | — |
| | — |
| | 59 |
|
Net income | | 218 |
| | 252 |
| | 252 |
| | 248 |
| | 168 |
| | (915 | ) | | 223 |
|
Net income attributable to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (5 | ) |
Net income available to Discovery Communications, Inc. | | $ | 218 |
| | $ | 252 |
| | $ | 252 |
| | $ | 248 |
| | $ | 168 |
| | $ | (920 | ) | | $ | 218 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Revenues | | $ | — |
| | $ | — |
| | $ | 471 |
| | $ | 1,088 |
| | $ | — |
| | $ | (3 | ) | | $ | 1,556 |
|
Costs of revenues, excluding depreciation and amortization | | — |
| | — |
| | 109 |
| | 484 |
| | — |
| | (1 | ) | | 592 |
|
Selling, general and administrative | | 3 |
| | — |
| | 82 |
| | 336 |
| | — |
| | (2 | ) | | 419 |
|
Depreciation and amortization | | — |
| | — |
| | 9 |
| | 71 |
| | — |
| | — |
| | 80 |
|
Restructuring and other charges | | — |
| | — |
| | — |
| | 7 |
| | — |
| | — |
| | 7 |
|
Total costs and expenses | | 3 |
| | — |
| | 200 |
| | 898 |
| | — |
| | (3 | ) | | 1,098 |
|
Operating (loss) income | | (3 | ) | | — |
| | 271 |
| | 190 |
| | — |
| | — |
| | 458 |
|
Equity in earnings of subsidiaries | | 221 |
| | 221 |
| | 108 |
| | — |
| | 147 |
| | (697 | ) | | — |
|
Interest expense | | — |
| | — |
| | (86 | ) | | (5 | ) | | — |
| | — |
| | (91 | ) |
Income from equity investees, net | | — |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | 3 |
|
Other expense, net | | — |
| | — |
| | (13 | ) | | (36 | ) | | — |
| | — |
| | (49 | ) |
Income before income taxes | | 218 |
| | 221 |
| | 283 |
| | 149 |
| | 147 |
| | (697 | ) | | 321 |
|
Income tax benefit (expense) | | 1 |
| | — |
| | (62 | ) | | (35 | ) | | — |
| | — |
| | (96 | ) |
Net income | | 219 |
| | 221 |
| | 221 |
| | 114 |
| | 147 |
| | (697 | ) | | 225 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net income attributable to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
Net income available to Discovery Communications, Inc. | | $ | 219 |
| | $ | 221 |
| | $ | 221 |
| | $ | 114 |
| | $ | 147 |
| | $ | (703 | ) | | $ | 219 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Revenues | | $ | — |
| | $ | — |
| | $ | 1,509 |
| | $ | 3,509 |
| | $ | — |
| | $ | (9 | ) | | $ | 5,009 |
|
Costs of revenues, excluding depreciation and amortization | | — |
| | — |
| | 346 |
| | 1,567 |
| | — |
| | (2 | ) | | 1,911 |
|
Selling, general and administrative | | 48 |
| | — |
| | 229 |
| | 991 |
| | — |
| | (7 | ) | | 1,261 |
|
Depreciation and amortization | | — |
| | — |
| | 34 |
| | 206 |
| | — |
| | — |
| | 240 |
|
Restructuring and other charges | | — |
| | — |
| | 21 |
| | 22 |
| | — |
| | — |
| | 43 |
|
Loss on disposition | | — |
| | — |
| | — |
| | 4 |
| | — |
| | — |
| | 4 |
|
Total costs and expenses | | 48 |
| | — |
| | 630 |
| | 2,790 |
| | — |
| | (9 | ) | | 3,459 |
|
Operating (loss) income | | (48 | ) | | — |
| | 879 |
| | 719 |
| | — |
| | — |
| | 1,550 |
|
Equity in earnings of subsidiaries | | 846 |
| | 846 |
| | 628 |
| | — |
| | 564 |
| | (2,884 | ) | | — |
|
Interest expense | | — |
| | — |
| | (299 | ) | | (19 | ) | | — |
| | — |
| | (318 | ) |
Loss on extinguishment of debt | | — |
| | — |
| | (54 | ) | | — |
| | — |
| | — |
| | (54 | ) |
Income (loss) from equity investees, net | | — |
| | — |
| | 1 |
| | (123 | ) | | — |
| | — |
| | (122 | ) |
Other (expense) income, net | | — |
| | — |
| | (208 | ) | | 65 |
| | — |
| | — |
| | (143 | ) |
Income before income taxes | | 798 |
| | 846 |
| | 947 |
| | 642 |
| | 564 |
| | (2,884 | ) | | 913 |
|
Income tax benefit (expense) | | 9 |
| | — |
| | (101 | ) | | 3 |
| | — |
| | — |
| | (89 | ) |
Net income | | 807 |
| | 846 |
| | 846 |
| | 645 |
| | 564 |
| | (2,884 | ) | | 824 |
|
Net income attributable to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (17 | ) | | (17 | ) |
Net income available to Discovery Communications, Inc. | | $ | 807 |
| | $ | 846 |
| | $ | 846 |
| | $ | 645 |
| | $ | 564 |
| | $ | (2,901 | ) | | $ | 807 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Revenues | | $ | — |
| | $ | — |
| | $ | 1,473 |
| | $ | 3,362 |
| | $ | — |
| | $ | (10 | ) | | $ | 4,825 |
|
Costs of revenues, excluding depreciation and amortization | | — |
| | — |
| | 339 |
| | 1,451 |
| | — |
| | (3 | ) | | 1,787 |
|
Selling, general and administrative | | 11 |
| | — |
| | 211 |
| | 1,012 |
| | — |
| | (7 | ) | | 1,227 |
|
Depreciation and amortization | | — |
| | — |
| | 28 |
| | 211 |
| | — |
| | — |
| | 239 |
|
Restructuring and other charges | | — |
| | — |
| | 23 |
| | 29 |
| | — |
| | — |
| | 52 |
|
Gain on disposition | | — |
| | — |
| | — |
| | (13 | ) | | — |
| | — |
| | (13 | ) |
Total costs and expenses | | 11 |
| | — |
| | 601 |
| | 2,690 |
| | — |
| | (10 | ) | | 3,292 |
|
Operating (loss) income | | (11 | ) | | — |
| | 872 |
| | 672 |
| | — |
| | — |
| | 1,533 |
|
Equity in earnings of subsidiaries | | 897 |
| | 897 |
| | 498 |
| | — |
| | 598 |
| | (2,890 | ) | | — |
|
Interest expense | | — |
| | — |
| | (251 | ) | | (16 | ) | | — |
| | — |
| | (267 | ) |
Loss from equity investees, net | | — |
| | — |
| | (2 | ) | | (26 | ) | | — |
| | — |
| | (28 | ) |
Other (expense) income, net | | — |
| | — |
| | (32 | ) | | 5 |
| | — |
| | — |
| | (27 | ) |
Income before income taxes | | 886 |
| | 897 |
| | 1,085 |
| | 635 |
| | 598 |
| | (2,890 | ) | | 1,211 |
|
Income tax benefit (expense) | | 4 |
| | — |
| | (188 | ) | | (118 | ) | | — |
| | — |
| | (302 | ) |
Net income | | 890 |
| | 897 |
| | 897 |
| | 517 |
| | 598 |
| | (2,890 | ) | | 909 |
|
Net income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Net income attributable to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (18 | ) | | (18 | ) |
Net income available to Discovery Communications, Inc. | | $ | 890 |
| | $ | 897 |
| | $ | 897 |
| | $ | 517 |
| | $ | 598 |
| | $ | (2,909 | ) | | $ | 890 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Comprehensive Income
Three Months Ended September 30, 2017
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Net income | | $ | 218 |
| | $ | 252 |
| | $ | 252 |
| | $ | 248 |
| | $ | 168 |
| | $ | (915 | ) | | $ | 223 |
|
Other comprehensive income (loss) adjustments, net of tax: | | | | | | | | | | | | | | |
Currency translation | | 33 |
| | 33 |
| | 33 |
| | 37 |
| | 22 |
| | (125 | ) | | 33 |
|
Available-for-sale securities | | 10 |
| | 10 |
| | 10 |
| | 10 |
| | 6 |
| | (36 | ) | | 10 |
|
Derivatives | | (12 | ) | | (12 | ) | | (12 | ) | | (1 | ) | | (8 | ) | | 33 |
| | (12 | ) |
Comprehensive income | | 249 |
| | 283 |
| | 283 |
| | 294 |
| | 188 |
| | (1,043 | ) | | 254 |
|
Comprehensive income attributable to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (5 | ) | | (5 | ) |
Comprehensive income attributable to Discovery Communications, Inc. | | $ | 249 |
| | $ | 283 |
| | $ | 283 |
| | $ | 294 |
| | $ | 188 |
| | $ | (1,048 | ) | | $ | 249 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Comprehensive Income
Three Months Ended September 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Net income | | $ | 219 |
| | $ | 221 |
| | $ | 221 |
| | $ | 114 |
| | $ | 147 |
| | $ | (697 | ) | | $ | 225 |
|
Other comprehensive (loss) income adjustments, net of tax: | | | | | | | | | | | | | | |
Currency translation | | (16 | ) | | (16 | ) | | (16 | ) | | (16 | ) | | (10 | ) | | 58 |
| | (16 | ) |
Available-for-sale securities | | 50 |
| | 50 |
| | 50 |
| | 50 |
| | 34 |
| | (184 | ) | | 50 |
|
Derivatives | | 3 |
| | 3 |
| | 3 |
| | 2 |
| | 2 |
| | (10 | ) | | 3 |
|
Comprehensive income | | 256 |
| | 258 |
| | 258 |
| | 150 |
| | 173 |
| | (833 | ) | | 262 |
|
Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Comprehensive income attributable to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
Comprehensive income attributable to Discovery Communications, Inc. | | $ | 256 |
| | $ | 258 |
| | $ | 258 |
| | $ | 150 |
| | $ | 173 |
| | $ | (839 | ) | | $ | 256 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Comprehensive Income (Loss)
Nine Months Ended September 30, 2017
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Net income | | $ | 807 |
| | $ | 846 |
| | $ | 846 |
| | $ | 645 |
| | $ | 564 |
| | $ | (2,884 | ) | | $ | 824 |
|
Other comprehensive income (loss) adjustments, net of tax: | | | | | | | | | | | | | | |
Currency translation | | 192 |
| | 192 |
| | 192 |
| | 196 |
| | 128 |
| | (708 | ) | | 192 |
|
Available-for-sale securities | | 14 |
| | 14 |
| | 14 |
| | 14 |
| | 9 |
| | (51 | ) | | 14 |
|
Derivatives | | (29 | ) | | (29 | ) | | (29 | ) | | (19 | ) | | (19 | ) | | 96 |
| | (29 | ) |
Comprehensive income | | 984 |
| | 1,023 |
| | 1,023 |
| | 836 |
| | 682 |
| | (3,547 | ) | | 1,001 |
|
Comprehensive income attributable to redeemable noncontrolling interests | | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) | | (13 | ) | | (18 | ) |
Comprehensive income attributable to Discovery Communications, Inc. | | $ | 983 |
| | $ | 1,022 |
| | $ | 1,022 |
| | $ | 835 |
| | $ | 681 |
| | $ | (3,560 | ) | | $ | 983 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Comprehensive Income (Loss)
Nine Months Ended September 30, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Net income | | $ | 890 |
| | $ | 897 |
| | $ | 897 |
| | $ | 517 |
| | $ | 598 |
| | $ | (2,890 | ) | | $ | 909 |
|
Other comprehensive (loss) income adjustments, net of tax: | | | | | | | | | | | | | | |
Currency translation | | (23 | ) | | (23 | ) | | (23 | ) | | (23 | ) | | (15 | ) | | 84 |
| | (23 | ) |
Available-for-sale securities | | 25 |
| | 25 |
| | 25 |
| | 25 |
| | 17 |
| | (92 | ) | | 25 |
|
Derivatives | | (9 | ) | | (9 | ) | | (9 | ) | | (11 | ) | | (6 | ) | | 35 |
| | (9 | ) |
Comprehensive income | | 883 |
| | 890 |
| | 890 |
| | 508 |
| | 594 |
| | (2,863 | ) | | 902 |
|
Comprehensive income attributable to noncontrolling interests | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
Comprehensive income attributable to redeemable noncontrolling interests | | (3 | ) | | (3 | ) | | (3 | ) | | (3 | ) | | (2 | ) | | (7 | ) | | (21 | ) |
Comprehensive income attributable to Discovery Communications, Inc. | | $ | 880 |
| | $ | 887 |
| | $ | 887 |
| | $ | 505 |
| | $ | 592 |
| | $ | (2,871 | ) | | $ | 880 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2017 (in millions)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Operating Activities | | | | | | | | | | | | | | |
Cash provided by (used in) operating activities | | $ | 8 |
| | $ | (9 | ) | | $ | 340 |
| | $ | 828 |
| | $ | — |
| | $ | — |
| | $ | 1,167 |
|
Investing Activities | | | | | | | | | | | | | | |
Payments for investments | | — |
| | — |
| | (12 | ) | | (375 | ) | | — |
| | — |
| | (387 | ) |
Distributions from equity method investees | | — |
| | — |
| | — |
| | 38 |
| | — |
| | — |
| | 38 |
|
Purchases of property and equipment | | — |
| | — |
| | (39 | ) | | (64 | ) | | — |
| | — |
| | (103 | ) |
Payments for (proceeds from) derivative instruments, net | | — |
| | — |
| | (110 | ) | | 11 |
| | — |
| | — |
| | (99 | ) |
Proceeds from dispositions, net of cash disposed | | — |
| | — |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
Business acquisitions, net of cash acquired | | — |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | (4 | ) |
Other investing activities, net | | — |
| | — |
| | — |
| | 3 |
| | — |
| | — |
| | 3 |
|
Inter-company distributions | | — |
| | — |
| | 30 |
| | — |
| | — |
| | (30 | ) | | — |
|
Cash used in investing activities | | — |
| | — |
| | (131 | ) | | (362 | ) | | — |
| | (30 | ) | | (523 | ) |
Financing Activities | | | | | | | | | | | | | | |
Commercial paper repayments, net | | — |
| | — |
| | (48 | ) | | — |
| | — |
| | — |
| | (48 | ) |
Borrowings under revolving credit facility
| | — |
| | — |
| | 350 |
| | — |
| | — |
| | — |
| | 350 |
|
Principal repayments of revolving credit facility | | — |
| | — |
| | (475 | ) | | — |
| | — |
| | — |
| | (475 | ) |
Borrowings from debt, net of discount and including premiums | | — |
| | — |
| | 7,488 |
| | — |
| | — |
| | — |
| | 7,488 |
|
Principal repayments of debt, including discount payment and premiums to par value | | — |
| | — |
| | (650 | ) | | — |
| | — |
| | — |
| | (650 | ) |
Payments for bridge financing commitment fees | | — |
| | — |
| | (40 | ) | | — |
| | — |
| | — |
| | (40 | ) |
Principal repayments of capital lease obligations | | — |
| | — |
| | (5 | ) | | (21 | ) | | — |
| | — |
| | (26 | ) |
Repurchases of stock | | (603 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (603 | ) |
Cash settlement of common stock repurchase contracts | | 58 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 58 |
|
Distributions to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | (22 | ) | | — |
| | — |
| | (22 | ) |
Share-based plan payments, net | | 15 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 15 |
|
Inter-company distributions | | — |
| | — |
| | — |
| | (30 | ) | | — |
| | 30 |
| | — |
|
Inter-company contributions and other financing activities, net | | 522 |
| | 9 |
| | (263 | ) | | (332 | ) | | — |
| | — |
| | (64 | ) |
Cash (used in) provided by financing activities | | (8 | ) | | 9 |
| | 6,357 |
| | (405 | ) | | — |
| | 30 |
| | 5,983 |
|
Effect of exchange rate changes on cash and cash equivalents | | — |
| | — |
| | — |
| | 67 |
| | — |
| | — |
| | 67 |
|
Net change in cash and cash equivalents | | — |
| | — |
| | 6,566 |
| | 128 |
| | — |
| | — |
| | 6,694 |
|
Cash and cash equivalents, beginning of period | | — |
| | — |
| | 20 |
| | 280 |
| | — |
| | — |
| | 300 |
|
Cash and cash equivalents, end of period | | $ | — |
| | $ | — |
| | $ | 6,586 |
| | $ | 408 |
| | $ | — |
| | $ | — |
| | $ | 6,994 |
|
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2016
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Discovery | | DCH | | DCL | | Non-Guarantor Subsidiaries of DCL | | Other Non- Guarantor Subsidiaries of Discovery | | Reclassifications and Eliminations | | Discovery and Subsidiaries |
Operating Activities | | | | | | | | | | | | | | |
Cash (used in) provided by operating activities | | $ | (31 | ) | | $ | (20 | ) | | $ | 203 |
| | $ | 682 |
| | $ | — |
| | $ | — |
| | $ | 834 |
|
Investing Activities | | | | | | | | | | | | | | |
Payments for investments | | — |
| | — |
| | (8 | ) | | (63 | ) | | — |
| | — |
| | (71 | ) |
Purchases of property and equipment | | — |
| | — |
| | (18 | ) | | (51 | ) | | — |
| | — |
| | (69 | ) |
Distributions from equity method investees | | — |
| | — |
| | — |
| | 69 |
| | — |
| | — |
| | 69 |
|
Proceeds from dispositions, net of cash disposed | | — |
| | — |
| | — |
| | 19 |
| | — |
| | — |
| | 19 |
|
Inter-company distributions | | — |
| | — |
| | 23 |
| | — |
| | — |
| | (23 | ) | | — |
|
Other investing activities, net | | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | (2 | ) |
Cash used in investing activities | | — |
| | — |
| | (3 | ) | | (28 | ) | | — |
| | (23 | ) | | (54 | ) |
Financing Activities | | | | | | | | | | | | | | |
Commercial paper repayments, net | | — |
| | — |
| | (23 | ) | | — |
| | — |
| | — |
| | (23 | ) |
Borrowings under revolving credit facility | | — |
| | — |
| | 225 |
| | 220 |
| | — |
| | — |
| | 445 |
|
Principal repayments of revolving credit facility | | — |
| | — |
| | (200 | ) | | (472 | ) | | — |
| | — |
| | (672 | ) |
Borrowings from debt, net of discount and including premiums | | — |
| | — |
| | 498 |
| | — |
| | — |
| | — |
| | 498 |
|
Principal repayments of capital lease obligations | | — |
| | — |
| | (4 | ) | | (19 | ) | | — |
| | — |
| | (23 | ) |
Repurchases of stock | | (1,124 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1,124 | ) |
Prepayments for common stock repurchase contracts | | (71 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (71 | ) |
Distributions to redeemable noncontrolling interests | | — |
| | — |
| | — |
| | (17 | ) | | — |
| | — |
| | (17 | ) |
Share-based plan payments, net | | 25 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 25 |
|
Inter-company distributions | | — |
| | — |
| | — |
| | (23 | ) | | — |
| | 23 |
| | — |
|
Inter-company contributions and other financing activities, net | | 1,201 |
| | 20 |
| | (691 | ) | | (543 | ) | | — |
| | — |
| | (13 | ) |
Cash provided by (used in) financing activities | | 31 |
| | 20 |
| | (195 | ) | | (854 | ) | | — |
| | 23 |
| | (975 | ) |
Effect of exchange rate changes on cash and cash equivalents | | — |
| | — |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
Net change in cash and cash equivalents | | — |
| | — |
| | 5 |
| | (171 | ) | | — |
| | — |
| | (166 | ) |
Cash and cash equivalents, beginning of period | | — |
| | — |
| | 3 |
| | 387 |
| | — |
| | — |
| | 390 |
|
Cash and cash equivalents, end of period | | $ | — |
| | $ | — |
| | $ | 8 |
| | $ | 216 |
| | $ | — |
| | $ | — |
| | $ | 224 |
|
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and related notes. This section provides additional information regarding Discovery, Communications, Inc.’s (“Discovery,” the “Company,” “we,” “us,” or “our”) businesses, current developments, results of operations, cash flows and financial condition. Additional context can also be found in the 2016our 2020 Annual Report on Form 10-K.
BUSINESS OVERVIEW
We are a global media company that provides content across multiple distribution platforms, including linear platforms such as pay-television ("pay-TV"), free-to-air, and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer ("DTC") subscription products. As one of the world’s largest pay-TV programmers, we provide original and purchased content and live events to approximately 3.7 billion cumulative subscribers and viewers worldwide through networks that we wholly or partially own. As of June 30, 2021, we had 17 million total paid DTC subscribers. We define a subscription as (i) a subscription to a direct-to-consumer product for which we have recognized subscription revenue from a direct-to-consumer platform; (ii) a subscription received through wholesale arrangements in which we receive a fee for the distribution of our direct-to-consumer platforms, as well as subscriptions provided directly or through third-party platforms; and (iii) a subscription recognized by certain joint venture partners and affiliated parties. We may refer to the aggregate number of subscriptions across our direct-to-consumer services as subscribers. A subscriber is only counted if they are on a paying status and excludes users on free trials. We distribute customized content in the U.S. and over 220 other countries and territories in nearly 50 languages. We have an extensive library of content and own most rights to our content and footage, which enables us to leverage our library to quickly launch brands and services into new markets and on new platforms. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms.
Our content spans genres including survival, natural history, exploration, sports, general entertainment, home, food, travel, heroes, adventure, crime and investigation, health, and kids. Our global portfolio of networks includes prominent nonfiction television brands such as Discovery Channel, our most widely distributed global brand, HGTV, Food Network, TLC, Animal Planet, Investigation Discovery, Travel Channel, Science, and MotorTrend (previously known as Velocity domestically and currently known as Turbo in most international countries). Among other networks in the U.S., Discovery also features two Spanish-language services, Discovery en Español and Discovery Familia. Our international portfolio also includes Eurosport, a leading sports entertainment provider and broadcaster of the Olympic Games (the "Olympics") across Europe (excluding Russia), TVN, a Polish media company, as well as Discovery Kids, a leading children's entertainment brand in Latin America. We participate in joint ventures including Magnolia, the recently formed multi-platform venture with Chip and Joanna Gaines, and Group Nine Media, a digital media holding company home to top digital brands including NowThis News, the Dodo, Thrillist, PopSugar, and Seeker. We also operate production studios.
During the fourth quarter of 2020, we announced the global launch of our aggregated DTC product, discovery+, a non-fiction, real life subscription service. In January 2021, we launched discovery+ in the U.S. across several streaming platforms and entered into a partnership with Verizon, which is offering access to discovery+ for up to 12 months to certain of its customers. The global rollout of discovery+ across more than 25 markets has already begun with the U.K. and Ireland, where we have partnered with Sky, and India. We also have a partnership with Vodafone, which will provide discovery+ to existing Vodafone TV and mobile customers in 12 markets across Europe. Upon launch in the U.S., discovery+ included an extensive content library comprised of more than 55,000 episodes and features a wide array of exclusive, original series from the Discovery portfolio of brands that have a strong leadership position. The service is available with ads or on an ad-free tier, providing us with dual revenue streams.
We invest in high-quality content for our networks and brands with the objective of building viewership, optimizing distribution revenue, capturing advertising revenue, and creating or repositioning branded channels and business to sustain long-term growth and occupy a desired content niche with strong consumer appeal. Our strategy is to maximize the distribution, ratings and profit potential of each of our branded networks. In addition to growing distribution and advertising revenues for our branded networks, we have extended content distribution across new platforms, including brand-aligned websites, online streaming platforms, including discovery+, mobile devices, video on demand, and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue. Audience ratings are a key driver in generating advertising revenue and creating demand on the part of cable television operators, direct-to-home satellite operators, telecommunication service providers, and other content distributors who deliver our content to their customers.
Although we utilize certain brands and content globally, we classify our operations in two reportable segments: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting primarily of international television networks and digital content services. Our segment presentation aligns with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments.
WarnerMedia
In May 2021, we entered into an agreement with AT&T Inc. to combine WarnerMedia’s ("WarnerMedia") entertainment, sports and news assets with our nonfiction and international entertainment and sports businesses to create a standalone, global entertainment company.
The proposed combination transaction will be executed through a Reverse Morris Trust type transaction, under which WarnerMedia will be distributed to AT&T’s shareholders via dividend or through an exchange offer or a combination of both and immediately thereafter, combined with Discovery. In connection with the combination transaction, AT&T will receive $43 billion (subject to adjustment) in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. We are in the process of establishing an interest rate derivative program to mitigate interest rate risk associated with the anticipated issuance of future fixed-rate debt.
Upon closing, all shares of Series A, Series B, and Series C common stock and Series A-1 and Series C-1 convertible preferred stock will be reclassified and converted to one class of Discovery common stock. AT&T’s shareholders will receive stock representing 71% of the new company and Discovery shareholders will own 29% of the new company. The Boards of Directors of both AT&T and Discovery have approved the transaction.
The transaction is anticipated to close in mid-2022, subject to approval by Discovery shareholders and customary closing conditions, including receipt of regulatory approvals. Agreements are in place with Dr. John Malone and Advance/Newhouse Programming Partnership to vote in favor of the transaction. The transaction requires, among other things, the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder the Series A-1 Preferred Stock. In exchange for Advance/Newhouse Programming Partnership providing its consent to the proposed combination transaction, which will result in the forfeiture of its significant approval rights pursuant to the terms of the Series A-1 Preferred Stock and reclassification of the shares of Series A-1 Preferred Stock into common stock, it will receive a premium in the form of an increase to the number of shares of common stock of Discovery into which the Series A-1 Preferred Stock would be converted. Upon the closing, such premium will be recorded as a transaction expense. No vote by AT&T shareholders is required.
The merger agreement contains certain customary termination rights for Discovery and AT&T, including, without limitation, a right for either party to terminate if the transaction is not completed on or before July 15, 2023. Termination under specified circumstances will require Discovery to pay AT&T a termination fee of $720 million or AT&T to pay Discovery a termination fee of $1.8 billion.
In anticipation of this combination, in June 2021, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan that will be guaranteed by the Company and certain material subsidiaries of the Company upon closing of the transaction.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. COVID-19 continues to spread throughout the world, and the duration and severity of its effects and associated economic disruption remain uncertain. We continue to closely monitor the impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties.
Beginning in the second quarter of 2020, demand for our advertising products and services decreased due to economic disruptions from limitations on social and commercial activity. These economic disruptions and the resulting effect on the Company eased during the second half of 2020. We currently do not expect the pandemic will have a significant impact on demand during fiscal year 2021. Many of our third-party production partners that were shut down during most of the second quarter of 2020 due to COVID-19 restrictions came back online in the third quarter of 2020 and, as a result, we have incurred additional costs to comply with various governmental regulations and implement certain safety measures for our employees, talent, and partners. Additionally, certain sporting events that we have rights to were cancelled or postponed, thereby eliminating or deferring the related revenues and expenses, including the Tokyo 2020 Olympic Games, which were rescheduled to July and August 2021. The postponement of the Olympic Games deferred both Olympic-related revenues and significant expenses from fiscal year 2020 to fiscal year 2021.
In response to the impact of the pandemic, we employed and continue to employ innovative production and programming strategies, including producing content filmed by our on-air talent and seeking viewer feedback on which content to air. We continue to pursue a number of cost savings initiatives, which began during the third quarter of 2020 through the implementation of travel, marketing, production and other operating cost reductions, including personnel reductions, restructurings and resource reallocations to align our expense structure to ongoing changes within the industry.
The nature and full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. We will continue to monitor COVID-19 and its impact on our business results and financial condition. Our consolidated financial statements reflect management’s latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.
RESULTS OF OPERATIONS
Foreign Exchange Impacting Comparability
The impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S. dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis ("ex-FX"), in addition to results reported in accordance with U.S. GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with U.S. GAAP.
The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2021 Baseline Rate”), and the prior year amounts translated at the same 2021 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.
Consolidated Results of Operations
The table below presents our consolidated results of operations (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2021 | | 2020 | | % Change | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Advertising | | $ | 1,637 | | | $ | 1,273 | | | 29 | % | | 26 | % |
Distribution | | 1,368 | | | 1,225 | | | 12 | % | | 10 | % |
Other | | 57 | | | 43 | | | 33 | % | | 32 | % |
Total revenues | | 3,062 | | | 2,541 | | | 21 | % | | 18 | % |
Costs of revenues, excluding depreciation and amortization | | 1,055 | | | 810 | | | 30 | % | | 25 | % |
Selling, general and administrative | | 952 | | | 635 | | | 50 | % | | 46 | % |
Depreciation and amortization | | 341 | | | 334 | | | 2 | % | | — | % |
Impairment of goodwill and other intangible assets | | — | | | 38 | | | NM | | NM |
Restructuring and other charges | | 7 | | | 7 | | | — | % | | — | % |
Gain on disposition | | (72) | | | — | | | NM | | NM |
Total costs and expenses | | 2,283 | | | 1,824 | | | 25 | % | | 21 | % |
Operating income | | 779 | | | 717 | | | 9 | % | | 10 | % |
Interest expense, net | | (157) | | | (161) | | | (2) | % | | |
Loss on extinguishment of debt | | (1) | | | (71) | | | (99) | % | | |
Loss from equity investees, net | | (7) | | | (23) | | | (70) | % | | |
Other income (expense), net | | 106 | | | (6) | | | NM | | |
Income before income taxes | | 720 | | | 456 | | | 58 | % | | |
Income tax expense | | (2) | | | (156) | | | (99) | % | | |
Net income | | 718 | | | 300 | | | NM | | |
Net income attributable to noncontrolling interests | | (38) | | | (25) | | | 52 | % | | |
Net income attributable to redeemable noncontrolling interests | | (8) | | | (4) | | | NM | | |
Net income available to Discovery, Inc. | | $ | 672 | | | $ | 271 | | | NM | | |
NM - Not meaningful
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | % Change | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Advertising | | $ | 3,052 | | | $ | 2,675 | | | 14 | % | | 12 | % |
Distribution | | 2,678 | | | 2,448 | | | 9 | % | | 8 | % |
Other | | 124 | | | 101 | | | 23 | % | | 21 | % |
Total revenues | | 5,854 | | | 5,224 | | | 12 | % | | 10 | % |
Costs of revenues, excluding depreciation and amortization | | 2,024 | | | 1,728 | | | 17 | % | | 13 | % |
Selling, general and administrative | | 2,003 | | | 1,280 | | | 56 | % | | 53 | % |
Depreciation and amortization | | 702 | | | 660 | | | 6 | % | | 4 | % |
Impairment of goodwill and other intangible assets | | — | | | 38 | | | NM | | NM |
Restructuring and other charges | | 22 | | | 22 | | | — | % | | — | % |
Gain on disposition | | (72) | | | — | | | NM | | NM |
Total costs and expenses | | 4,679 | | | 3,728 | | | 26 | % | | 22 | % |
Operating income | | 1,175 | | | 1,496 | | | (21) | % | | (20) | % |
Interest expense, net | | (320) | | | (324) | | | (1) | % | | |
Loss on extinguishment of debt | | (4) | | | (71) | | | (94) | % | | |
Loss from equity investees, net | | (11) | | | (44) | | | (75) | % | | |
Other income (expense), net | | 177 | | | (64) | | | NM | | |
Income before income taxes | | 1,017 | | | 993 | | | 2 | % | | |
Income tax expense | | (108) | | | (286) | | | (62) | % | | |
Net income | | 909 | | | 707 | | | 29 | % | | |
Net income attributable to noncontrolling interests | | (84) | | | (53) | | | 58 | % | | |
Net income attributable to redeemable noncontrolling interests | | (13) | | | (6) | | | NM | | |
Net income available to Discovery, Inc. | | $ | 812 | | | $ | 648 | | | 25 | % | | |
Revenues
Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, market demand, the mix in sales of commercial time between the upfront and scatter markets, and economic conditions. These factors impact the pricing and volume of our advertising inventory.
Advertising revenue increased 29% and 14% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, advertising revenue increased 26% and 12% for the three and six months ended June 30, 2021, respectively. The increase for the three and six months ended June 30, 2021 was primarily attributable to improved overall performance in International Networks as advertising markets have recovered from the impact of COVID-19.
Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from subscription video on demand content licensing and DTC subscription services.
Distribution revenue increased 12% and 9% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, distribution revenue increased 10% and 8% for the three and six months ended June 30, 2021, respectively. The increase for the three and six months ended June 30, 2021 was primarily attributable to an increase of 12% at U.S. Networks due to discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers and certain prior year non-recurring items
Other revenue increased 33% and 23% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, other revenue increased 32% and 21% for the three and six months ended June 30, 2021, respectively.
Revenue for our segments is discussed separately below under the heading “Segment Results of Operations.”
Costs of Revenues
The Company's principal component of costs of revenues is content expense. Content expense includes television series, television specials, films, sporting events and digital products. The costs of producing a content asset and bringing that asset to market consist of film costs, participation costs, exploitation costs and production costs.
Costs of revenues increased 30% and 17% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, cost of revenues increased 25% and 13% for the three and six months ended June 30, 2021, respectively. The increase for the three and six months ended June 30, 2021, was primarily attributable to European sporting events and leagues returning to a more normalized schedule and higher content investment related to discovery+.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees.
Selling, general and administrative expenses increased 50% and 56% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses increased 46% and 53% for the three and six months ended June 30, 2021, respectively. The increase for the three and six months ended June 30, 2021 was primarily attributable to higher marketing-related expenses to support the launch discovery+ at U.S. Networks and International Networks.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization increased 2% and 6% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, depreciation and amortization was flat and increased 4% for the three and six months ended June 30, 2021, respectively. The increase for the six months ended June 30, 2021 was primarily attributable to assets placed in service related to the launch of discovery+.
Restructuring and Other Charges
Restructuring and other charges were $7 million and $22 million for the three and six months ended June 30, 2021 and 2020, respectively. Restructuring and other charges primarily include employee relocation and termination costs during the three and six months ended June 30, 2021 and 2020. (See Note 18 to the accompanying consolidated financial statements.)
Gain on Disposition
Gain on disposition was $72 million for the three and six months ended June 30, 2021, and was attributable to the sale of our Great American Country network. (See Note 2 to the accompanying consolidated financial statements.)
Interest Expense, net
Interest expense, net decreased 2% and 1% for the three and six months ended June 30, 2021 compared to the prior year period. (See Note 7 and Note 8 to the accompanying consolidated financial statements.)
Loss from equity investees, net
We reported losses from our equity method investees of $7 million and $11 million for the three and six months ended June 30, 2021, respectively, as compared to losses of $23 million and $44 million for the three and six months ended June 30, 2020, respectively. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 3 to the accompanying consolidated financial statements.)
Other Income (Expense), net
The table below presents the details of other income (expense), net (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2021 | | 2020 | | 2021 | | 2020 |
Foreign currency (loss) gain, net | | $ | (5) | | | $ | (18) | | | $ | 47 | | | $ | (29) | |
(Losses) gains on derivative instruments, net | | (1) | | | 4 | | | (21) | | | (23) | |
Change in the value of investments with readily determinable fair value | | 29 | | | 7 | | | 46 | | | (15) | |
Change in the value of equity investments without readily determinable fair value | | 81 | | | (2) | | | 81 | | | (2) | |
Gain on sale of investment with readily determinable fair value | | — | | | — | | | 16 | | | — | |
(Loss) gain on sale of equity method investments | | (1) | | | 3 | | | 4 | | | 3 | |
| | | | | | | | |
| | | | | | | | |
Interest income | | 2 | | | 1 | | | 3 | | | 5 | |
| | | | | | | | |
Other expense, net | | 1 | | | (1) | | | 1 | | | (3) | |
Total other income (expense), net | | $ | 106 | | | $ | (6) | | | $ | 177 | | | $ | (64) | |
Income Tax Expense
Income tax expense was $2 million and $108 million for the three and six months ended June 30, 2021, respectively, and $156 million and $286 million for the three and six months ended June 30, 2020, respectively. The decrease in income tax expense for the three and six months ended June 30, 2021 was primarily attributable to a deferred tax benefit of $162 million as a result of the UK Finance Act 2021 that was enacted in June 2021.
Income tax expense for the three and six months ended June 30, 2021 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to a deferred tax benefit of $162 million as a result of the UK Finance Act 2021 that was enacted in June 2021, the effect of foreign operations, which included taxation and allocation of income and losses among multiple foreign jurisdictions, state and local income taxes, and favorable noncontrolling interest tax adjustments.
Segment Results of Operations
We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration costs, and (viii) other items impacting comparability. We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We exclude employee share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. We also exclude the depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. GAAP.
The tables below present our reconciliation of consolidated net income available to Discovery, Inc. to Adjusted OIBDA and Adjusted OIBDA by segment (in millions). | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | 2021 | | 2020 | | % Change |
Net income available to Discovery, Inc. | | $ | 672 | | | $ | 271 | | | NM |
Net income attributable to redeemable noncontrolling interests | | 8 | | | 4 | | | NM |
Net income attributable to noncontrolling interests | | 38 | | | 25 | | | 52 | % |
Income tax expense | | 2 | | | 156 | | | (99) | % |
Income before income taxes | | 720 | | | 456 | | | 58 | % |
Other (income) expense, net | | (106) | | | 6 | | | NM |
Loss from equity investees, net | | 7 | | | 23 | | | (70) | % |
Loss on extinguishment of debt | | 1 | | | 71 | | | (99) | % |
Interest expense, net | | 157 | | | 161 | | | (2) | % |
Operating income | | 779 | | | 717 | | | 9 | % |
Gain on disposition | | (72) | | | — | | | NM |
Restructuring and other charges | | 7 | | | 7 | | | — | % |
Impairment of goodwill and other intangible assets | | — | | | 38 | | | NM |
Depreciation and amortization | | 341 | | | 334 | | | 2 | % |
Employee share-based compensation | | 27 | | | 31 | | | (13) | % |
Transaction and integration costs | | 35 | | | — | | | NM |
| | | | | | |
Adjusted OIBDA | | $ | 1,117 | | | $ | 1,127 | | | (1) | % |
| | | | | | |
Adjusted OIBDA | | | | | | |
U.S. Networks | | $ | 1,050 | | | $ | 1,062 | | | (1) | % |
International Networks | | 215 | | | 193 | | | 11 | % |
Corporate, inter-segment eliminations, and other | | (148) | | | (128) | | | (16) | % |
Adjusted OIBDA | | $ | 1,117 | | | $ | 1,127 | | | (1) | % |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2021 | | 2020 | | % Change |
Net income available to Discovery, Inc. | | $ | 812 | | | $ | 648 | | | 25 | % |
Net income attributable to redeemable noncontrolling interests | | 13 | | | 6 | | | NM |
Net income attributable to noncontrolling interests | | 84 | | | 53 | | | 58 | % |
Income tax expense | | 108 | | | 286 | | | (62) | % |
Income before income taxes | | 1,017 | | | 993 | | | 2 | % |
Other (income) expense, net | | (177) | | | 64 | | | NM |
Loss from equity investees, net | | 11 | | | 44 | | | (75) | % |
Loss on extinguishment of debt | | 4 | | | 71 | | | (94) | % |
Interest expense, net | | 320 | | | 324 | | | (1) | % |
Operating income | | 1,175 | | | 1,496 | | | (21) | % |
Gain on disposition | | (72) | | | — | | | NM |
Restructuring and other charges | | 22 | | | 22 | | | — | % |
Impairment of goodwill and other intangible assets | | — | | | 38 | | | NM |
Depreciation and amortization | | 702 | | | 660 | | | 6 | % |
Employee share-based compensation | | 88 | | | 24 | | | NM |
Transaction and integration costs | | 39 | | | — | | | NM |
| | | | | | |
Adjusted OIBDA | | $ | 1,954 | | | $ | 2,240 | | | (13) | % |
| | | | | | |
Adjusted OIBDA | | | | | | |
U.S. Networks | | $ | 1,873 | | | $ | 2,078 | | | (10) | % |
International Networks | | 366 | | | 400 | | | (9) | % |
Corporate, inter-segment eliminations, and other | | (285) | | | (238) | | | (20) | % |
Adjusted OIBDA | | $ | 1,954 | | | $ | 2,240 | | | (13) | % |
The table below presents the calculation of Adjusted OIBDA (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
Revenues: | | | | | | | | | | | | |
U.S. Networks | | $ | 1,973 | | | $ | 1,756 | | | 12 | % | | $ | 3,779 | | | $ | 3,512 | | | 8 | % |
International Networks | | 1,093 | | | 783 | | | 40 | % | | 2,080 | | | 1,706 | | | 22 | % |
Corporate, inter-segment eliminations, and other | | (4) | | | 2 | | | NM | | (5) | | | 6 | | | NM |
Total revenues | | 3,062 | | | 2,541 | | | 21 | % | | 5,854 | | | 5,224 | | | 12 | % |
Costs of revenues, excluding depreciation and amortization | | 1,055 | | | 810 | | | 30 | % | | 2,024 | | | 1,728 | | | 17 | % |
Selling, general and administrative (a) | | 890 | | | 604 | | | 47 | % | | 1,876 | | | 1,256 | | | 49 | % |
Adjusted OIBDA | | $ | 1,117 | | | $ | 1,127 | | | (1) | % | | $ | 1,954 | | | $ | 2,240 | | | (13) | % |
| | | | | | | | | | | | |
(a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs. |
U.S. Networks
The table below presents, for our U.S. Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
Revenues: | | | | | | | | | | | | |
Advertising | | $ | 1,119 | | | $ | 997 | | | 12 | % | | $ | 2,099 | | | $ | 2,023 | | | 4 | % |
Distribution | | 828 | | | 739 | | | 12 | % | | 1,624 | | | 1,447 | | | 12 | % |
Other | | 26 | | | 20 | | | 30 | % | | 56 | | | 42 | | | 33 | % |
Total revenues | | 1,973 | | | 1,756 | | | 12 | % | | 3,779 | | | 3,512 | | | 8 | % |
Costs of revenues, excluding depreciation and amortization | | 452 | | | 442 | | | 2 | % | | 880 | | | 889 | | | (1) | % |
Selling, general and administrative | | 471 | | | 252 | | | 87 | % | | 1,026 | | | 545 | | | 88 | % |
Adjusted OIBDA | | 1,050 | | | 1,062 | | | (1) | % | | 1,873 | | | 2,078 | | | (10) | % |
Employee share-based compensation | | (1) | | | — | | | | | (1) | | | — | | | |
Depreciation and amortization | | 225 | | | 225 | | | | | 449 | | | 451 | | | |
Restructuring and other charges | | 1 | | | — | | | | | 1 | | | 12 | | | |
| | | | | | | | | | | | |
Inter-segment eliminations | | (2) | | | 1 | | | | | (2) | | | 2 | | | |
Gain on disposition | | (77) | | | — | | | | | (77) | | | — | | | |
Operating income | | $ | 904 | | | $ | 836 | | | | | $ | 1,503 | | | $ | 1,613 | | | |
Revenues
Advertising revenue increased 12% and 4% for the three and six months ended June 30, 2021, respectively. The increases were primarily attributable to higher pricing, the continued monetization of content offerings on our next generation initiatives, primarily discovery+ and TV Everywhere, and higher inventory, partially offset by lower overall ratings, and to a lesser extent, secular declines in the pay-TV ecosystem.
Distribution revenue increased 12% for the three and six months ended June 30, 2021. The increases were primarily attributable to discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers and certain prior year non-recurring items. Excluding these prior year non-recurring items, distribution revenue increased 18% and 15% for the three and six months ended June 30, 2021, respectively. Total subscribers to our linear networks at June 30, 2021 were 7% lower than at June 30, 2020, while subscribers to our fully distributed linear networks were 3% lower than the prior year. Excluding the impact of the sale of our Great American Country linear network, total subscribers to our linear networks at June 30, 2021 were 3% lower than at June 30, 2020.
Other revenues increased $6 million and $14 million for the three and six months ended June 30, 2021, respectively.
Costs of Revenues
Costs of revenues increased 2% for the three months ended June 30, 2021 and decreased 1% for the six months ended June 30, 2021. The increase for the three months ended June 30, 2021 was primarily attributable to our growing content investment in discovery+ and a non-recurring, non-cash item in the second quarter of 2020, partially offset by more efficient content spend on our linear networks. The decrease for the six months ended June 30, 2021 was primarily attributable to more efficient content spend on our linear networks, partially offset by our growing content investment in discovery+ and a non-recurring, non-cash item in the second quarter of 2020.
Content expense was $375 million and $431 million for the three months ended June 30, 2021 and 2020, respectively, and $739 million and $818 million for the six months ended June 30, 2021 and 2020, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 87% and 88% for the three and six months ended June 30, 2021, respectively. The increase was primarily attributable to higher marketing-related expenses to support the launch and growth of discovery+.
Adjusted OIBDA
Adjusted OIBDA decreased 1% and 10% for the three and six months ended June 30, 2021, respectively.
International Networks
The following tables present, for our International Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | Six Months Ended June 30, | | | | |
| | 2021 | | 2020 | | % Change | | % Change (ex-FX) | | 2021 | | 2020 | | % Change | | % Change (ex-FX) |
Revenues: | | | | | | | | | | | | | | | | |
Advertising | | $ | 518 | | | $ | 276 | | | 88 | % | | 70 | % | | $ | 953 | | | $ | 652 | | | 46 | % | | 35 | % |
Distribution | | 540 | | | 486 | | | 11 | % | | 6 | % | | 1,054 | | | 1,001 | | | 5 | % | | 2 | % |
Other | | 35 | | | 21 | | | 67 | % | | 64 | % | | 73 | | | 53 | | | 38 | % | | 34 | % |
Total revenues | | 1,093 | | | 783 | | | 40 | % | | 31 | % | | 2,080 | | | 1,706 | | | 22 | % | | 16 | % |
Costs of revenues, excluding depreciation and amortization | | 603 | | | 365 | | | 65 | % | | 51 | % | | 1,146 | | | 835 | | | 37 | % | | 27 | % |
Selling, general and administrative | | 275 | | | 225 | | | 22 | % | | 14 | % | | 568 | | | 471 | | | 21 | % | | 13 | % |
Adjusted OIBDA | | 215 | | | 193 | | | 11 | % | | 11 | % | | 366 | | | 400 | | | (9) | % | | (5) | % |
Depreciation and amortization | | 87 | | | 84 | | | | | | | 191 | | | 166 | | | | | |
Impairment of goodwill and other intangible assets | | — | | | 38 | | | | | | | — | | | 38 | | | | | |
Restructuring and other charges | | 5 | | | 3 | | | | | | | 20 | | | 4 | | | | | |
Transaction and integration costs | | — | | | — | | | | | | | 4 | | | — | | | | | |
Inter-segment eliminations | | 2 | | | — | | | | | | | 2 | | | — | | | | | |
Loss on disposition | | 5 | | | — | | | | | | | 5 | | | — | | | | | |
| | | | | | | | | | | | | | | | |
Operating income | | $ | 116 | | | $ | 68 | | | | | | | $ | 144 | | | $ | 192 | | | | | |
Revenues
Advertising revenue increased 88% and 46% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, advertising revenue increased 70% and 35% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to improved overall performance in all regions as advertising markets continued to recover from the impact of COVID-19.
Distribution revenue increased 11% and 5% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, distribution revenue increased 6% and 2% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to an increase in next generation revenues due to subscriber growth for discovery+, partially offset by lower contractual affiliate rates in some European markets.
Other revenue increased $14 million and $20 million for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, other revenue increased $14 million and $19 million for the three and six months ended June 30, 2021, respectively.
Costs of Revenues
Costs of revenues increased 65% and 37% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, costs of revenues increased 51% and 27% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to European sporting events and leagues returning to a more normalized schedule and higher content investment related to discovery+.
Content expense, excluding the impact of foreign currency fluctuations, was $396 million and $241 million for the three months ended June 30, 2021 and 2020, respectively, and $777 million and $581 million for the six months ended June 30, 2021 and 2020, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 22% and 21% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses increased 14% and 13% for the three and six months ended June 30, 2021. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to higher marketing-related expenses and personnel costs to support discovery+.
Adjusted OIBDA
Adjusted OIBDA increased 11% and decreased 9% for the three and six months ended June 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, Adjusted OIBDA increased 11% and decreased 5% for the three and six months ended June 30, 2021, respectively.
Corporate, Inter-segment Eliminations, and Other
The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating loss (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2021 | | 2020 | | % Change | | 2021 | | 2020 | | % Change |
Revenues | | $ | (4) | | | $ | 2 | | | NM | | $ | (5) | | | $ | 6 | | | NM |
Costs of revenues, excluding depreciation and amortization | | — | | | 3 | | | NM | | (2) | | | 4 | | | NM |
Selling, general and administrative | | 144 | | | 127 | | | 13 | % | | 282 | | | 240 | | | 18 | % |
Adjusted OIBDA | | (148) | | | (128) | | | (16) | % | | (285) | | | (238) | | | (20) | % |
Employee share-based compensation | | 28 | | | 31 | | | | | 89 | | | 24 | | | |
Depreciation and amortization | | 29 | | | 25 | | | | | 62 | | | 43 | | | |
Restructuring and other charges | | 1 | | | 4 | | | | | 1 | | | 6 | | | |
Transaction and integration costs | | 35 | | | — | | | | | 35 | | | — | | | |
Inter-segment eliminations | | — | | | (1) | | | | | — | | | (2) | | | |
Operating loss | | $ | (241) | | | $ | (187) | | | | | $ | (472) | | | $ | (309) | | | |
Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation, and third-party transaction and integration costs.
FINANCIAL CONDITION
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the six months ended June 30, 2021, we funded our working capital needs primarily through cash flows from operations. As of June 30, 2021, we had $2.8 billion of cash and cash equivalents on hand. We are a well-known seasoned issuer and have the ability to conduct registered offerings of securities, including debt securities, common stock, and preferred stock, on short notice, subject to market conditions. Access to sufficient capital from the public market is not assured. We also have a $2.5 billion revolving credit facility and commercial paper program described below.
•Debt
Revolving Credit Facility and Commercial Paper
In June 2021, we entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. We have the capacity to initially borrow up to $2.5 billion under the Credit Agreement. Upon the closing of the proposed combination transactions with WarnerMedia, the available commitments may be increased by $3.5 billion, to an aggregate amount not to exceed $6 billion. The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. We may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by Discovery, Inc. and Scripps Networks Interactive, Inc., and will also be guaranteed by the holding company of the WarnerMedia business upon the closing of the proposed combination transactions.
The Credit Agreement will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods. The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of June 30, 2021, DCL was in compliance with all covenants and there were no events of default under the Credit Facility.
Additionally, the Company's commercial paper program is supported by the Credit Facility. Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is reduced by any outstanding borrowings under the commercial paper program.
As of June 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.
•Investments
We received proceeds of $348 million during the six months ended June 30, 2021 from the sales and maturities of investments.
Uses of Cash
Our primary uses of cash include the creation and acquisition of new content, business acquisitions, repurchases of our capital stock, income taxes, personnel costs, costs to develop and market discovery+, principal and interest payments on our outstanding senior notes, and funding for various equity method and other investments.
•Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content. Our investment in content has increased as we acquire and develop new content for discovery+. Contractual commitments to acquire content have increased less than 10% as set forth in "Commitments and Off-Balance Sheet Arrangements" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Form 10-K.
•Debt
Senior Notes
In July 2021, we issued notices for the redemption in full of all $168 million aggregate principal amount outstanding of our 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of our 3.500% Senior Notes due June 2022 (the "2022 Notes"). The 2022 Notes were redeemed on July 31, 2021 for an aggregate redemption price of $235 million, plus accrued interest. The redemption included $5 million for premium over par on the 2022 Notes and resulted in a loss on extinguishment of debt of $6 million.
In February 2021, we issued a notice for the redemption in full of all $335 million aggregate principal amount outstanding of our 4.375% Senior Notes due June 2021 (the “2021 Notes”). The 2021 Notes were redeemed in March 2021 for an aggregate redemption price of $339 million, plus accrued interest. The redemption included $3 million for premium over par and resulted in a loss on extinguishment of debt of $3 million.
In addition, we have $357 million of senior notes coming due in March 2022.
•Capital Expenditures and Investments in Next Generation Initiatives
We effected capital expenditures of $167 million during the six months ended June 30, 2021, including amounts capitalized to support our next generation platforms, such as discovery+. In addition, we expect to continue to incur significant costs to develop and market discovery+ in the future.
•Investments and Business Combinations
Our uses of cash have included investments in equity method investments and equity investments without readily determinable fair value. (See Note 3 to the accompanying consolidated financial statements.) We provide funding to our investees from time to time. During the six months ended June 30, 2021, we contributed $105 million for investments in and advances to our investees.
•Redeemable Noncontrolling Interest and Noncontrolling Interest
Due to business combinations, we also have redeemable equity balances of $357 million, which may require the use of cash in the event holders of noncontrolling interests put their interests to us, which may be exercised in 2021. Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $213 million and $202 million for the six months ended June 30, 2021 and 2020, respectively.
•Common Stock Repurchases
Historically, we have funded our stock repurchases through a combination of cash on hand, cash generated by operations, and the issuance of debt. In February 2020, our Board of Directors authorized additional stock repurchases of up to $2 billion upon completion of our existing $1 billion authorization announced in May 2019. Under the new stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors. (See Note 9 to the accompanying consolidated financial statements.) During the six months ended June 30, 2021, we did not repurchase any of our common stock.
•Income Taxes and Interest
We expect to continue to make payments for income taxes and interest on our outstanding senior notes. During the six months ended June 30, 2021, we made cash payments of $249 million and $337 million for income taxes and interest on our outstanding debt, respectively.
Cash Flows
The following table presents changes in cash and cash equivalents (in millions). | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2021 | | 2020 |
Cash, cash equivalents, and restricted cash, beginning of period | | $ | 2,122 | | | $ | 1,552 | |
Cash provided by operating activities | | 1,103 | | | 1,326 | |
Cash provided by (used in) investing activities | | 196 | | | (154) | |
Cash used in financing activities | | (538) | | | (998) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (49) | | | 12 | |
Net change in cash, cash equivalents, and restricted cash | | 712 | | | 186 | |
Cash, cash equivalents, and restricted cash, end of period | | $ | 2,834 | | | $ | 1,738 | |
Operating Activities
Cash provided by operating activities was $1.1 billion and $1.3 billion during the six months ended June 30, 2021 and 2020, respectively. The decrease in cash provided by operating activities was primarily attributable to a negative fluctuation in working capital activity, partially offset by an increase in net income excluding non-cash items.
Investing Activities
Cash provided by (used in) investing activities was $196 million and $(154) million during the six months ended June 30, 2021 and 2020, respectively. The increase in cash provided by investing activities was primarily attributable to proceeds received from the sales and maturities of investments and a reduction in purchases of property and equipment during the six months ended June 30, 2021.
Financing Activities
Cash used in financing activities was $538 million and $998 million during the six months ended June 30, 2021 and 2020, respectively. The decrease in cash used in financing activities was primarily attributable to a reduction in repurchases of stock during the six months ended June 30, 2021.
Capital Resources
As of June 30, 2021, capital resources were comprised of the following (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2021 |
| | Total Capacity | | Outstanding Letters of Credit | | Outstanding Indebtedness | | Unused Capacity |
Cash and cash equivalents | | $ | 2,834 | | | $ | — | | | $ | — | | | $ | 2,834 | |
Revolving credit facility and commercial paper program | | 2,500 | | | — | | | — | | | 2,500 | |
Senior notes (a) | | 15,484 | | | — | | | 15,484 | | | — | |
Total | | $ | 20,818 | | | $ | — | | | $ | 15,484 | | | $ | 5,334 | |
| | | | | | | | |
(a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of June 30, 2021 had interest rates that ranged from 1.90% to 6.35% and will mature between 2022 and 2055. |
We expect that our cash balance, cash generated from operations and availability under the Credit Agreement will be sufficient to fund our cash needs for the next twelve months. Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios.
As of June 30, 2021, we held $434 million of our $2.8 billion of cash and cash equivalents in our foreign subsidiaries. The 2017 Tax Act features a participation exemption regime with current taxation of certain foreign income and imposes a mandatory repatriation toll tax on unremitted foreign earnings. Notwithstanding the U.S. taxation of these amounts, we intend to continue to reinvest these funds outside of the U.S. Our current plans do not demonstrate a need to repatriate them to the U.S. However, if these funds are needed in the U.S., we would be required to accrue and pay non-U.S. taxes to repatriate them. The determination of the amount of unrecognized deferred income tax liability with respect to these undistributed foreign earnings is not practicable.
Summarized Guarantor Financial Information
Basis of Presentation
Each of the Company, DCL, Discovery Communications Holding LLC (“DCH”), and/or Scripps Networks has the ability to conduct registered offerings of debt securities under the Company’s shelf registration statement. As of June 30, 2021 and December 31, 2020, all of the Company’s outstanding registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company and guaranteed by the Company and Scripps Networks, except for $32 million of senior notes outstanding as of June 30, 2021 that have been issued by Scripps Networks and are not guaranteed. (See Note 7.) DCL primarily includes the Discovery Channel and TLC networks in the U.S. DCL is a wholly owned subsidiary of DCH. The Company wholly owns DCH through a 33 1/3% direct ownership interest and a 66 2/3% indirect ownership interest through Discovery Holding Company (“DHC”), a wholly owned subsidiary of the Company. Scripps Networks is 100% owned by the Company.
The tables below present the summarized financial information as combined for Discovery, Inc. (the “Parent”), Scripps Networks, and DCL (collectively, the “Obligors”). All guarantees of DCL's senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes. DCH currently is not an issuer or guarantor of any securities and therefore is not included in the summarized financial information included herein.
Note Guarantees issued by Scripps Networks or any subsidiary of the Parent that in the future issues a Note Guarantee (each, a “Subsidiary Guarantor”) may be released and discharged (i) concurrently with any direct or indirect sale or disposition of such Subsidiary Guarantor or any interest therein, (ii) at any time that such Subsidiary Guarantor is released from all of its obligations under its guarantee of payment by DCL, (iii) upon the merger or consolidation of any Subsidiary Guarantor with and into DCL or the Parent or another Subsidiary Guarantor, or upon the liquidation of such Subsidiary Guarantor and (iv) other customary events constituting a discharge of the Obligors’ obligations.
Summarized Financial Information
The Company has included the accompanying summarized combined financial information of the Obligors after the elimination of intercompany transactions and balances among the Obligors and the elimination of equity in earnings from and investments in any subsidiary of the Parent that is a non-guarantor (in millions). | | | | | | | | | | | | | | |
| | June 30, 2021 | | December 31, 2020 |
Current assets | | $ | 3,390 | | | $ | 2,308 | |
Non-guarantor intercompany trade receivables, net | | $ | 185 | | | $ | 217 | |
Noncurrent assets | | $ | 5,997 | | | $ | 5,905 | |
Current liabilities | | $ | 1,131 | | | $ | 915 | |
Noncurrent liabilities | | $ | 15,863 | | | $ | 16,500 | |
| | | | | | | | | | |
| | Six months ended June 30, 2021 | | |
Revenues | | $ | 1,054 | | | |
Operating income | | $ | 578 | | | |
Net income | | $ | 286 | | | |
Net income available to Discovery, Inc. | | $ | 275 | | | |
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we enter into commitments for the purchase of goods or services that require us to make payments or provide funding in the event certain circumstances occur. The nature of our contractual commitments is evolving with the launch and our support of discovery+. Total contractual commitments have increased less than 10% as set forth in "Commitments and Off-Balance Sheet Arrangements" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we enter into transactions with related parties, primarily the Liberty Group and our equity method investees. (See Note 15 to the accompanying consolidated financial statements.)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed since December 31, 2020. For a discussion of each of our critical accounting estimates listed below, including information and analysis of estimates and assumptions involved in their application, see "Critical Accounting Policies and Estimates" included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K:
•Uncertain tax positions;
•Goodwill and intangible assets;
•Content rights;
•Consolidation; and
•Revenue recognition
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, and anticipated sources and uses of capital and our proposed acquisition of Scripps.transaction to combine our business with AT&T's WarnerMedia business. Words such as “anticipates,“anticipate,” “estimates,“assume,” “expects,“believe,” “projects,“continue,” “intends,“estimate,” “plans,“expect,” “believes,“forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among other terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
•the occurrence of any event, change or other circumstance that could give rise to the termination of, or prevent or delay our ability to consummate, our proposed transaction to combine with WarnerMedia;
•the effects of the announcement, pendency or completion of our proposed transaction to combine with WarnerMedia on our ongoing business operations;
•changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, subscription video on demand, (“SVOD”), internet protocol television, mobile personal devices and personal tablets and their impact on television advertising revenue;
•continued consolidation of distribution customers and production studios;
•a failure to secure affiliate agreements or the renewal of such agreements on less favorable terms;
•rapid technological changes;
•the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
•general economic and business conditions; conditions, including the impact of the ongoing COVID-19 pandemic;
•industry trends, including the timing of, and spending on, feature film, television and television commercial production;
•spending on domestic and foreign television advertising;
•disagreements with our distributors or other business partners over contract interpretation;
•fluctuations in foreign currency exchange rates, and political unrest and regulatory changes in international markets, from events including Brexit; any proposed or adopted regulatory changes that impact the operations of our international media properties and/or modify the terms under which we offer our services and operate in international markets;
•market demand for foreign first-run and existing content libraries;
•the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
•uncertainties inherent in the development of new business lines and business strategies;
•uncertainties regarding the financial performance of our equity method investees; investments in unconsolidated entities;
•our ability to complete, integrate, maintain and obtain the anticipated benefits and synergies from our proposed business combinations and acquisitions, including our proposed acquisition of Scripps,transaction to combine with WarnerMedia, on a timely basis or at all;
•uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies; technologies, and the success of our new discovery+ streaming product;
•future financial performance, including availability, terms, and deployment of capital;
•the ability of suppliers and vendors to deliver products, equipment, software, and services;
•our ability to achieve the efficiencies, savings and other benefits anticipated from our cost-reduction initiative; initiatives;
•the outcome of any pending or threatened litigation;
•availability of qualified personnel;
•the possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union;
•changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and data privacy regulations and adverse outcomes from regulatory proceedings;
•changes in income taxes due to regulatory changes such as U.S. tax reform, or changes in our corporate structure;
•changes in the nature of key strategic relationships with partners, distributors and equity method investee partners;
•competitor responses to our products and services and the products and services of the entities in which we have interests;
•threatened or actual cyber-attacks and cybersecurity breaches;
•threatened or actual terrorist attacks and military action;
•our significant level of debt;
•reduced access to capital markets or significant increases in costs to borrow; and
•a reduction of advertising revenue associated with unexpected reductions in the number of subscribers.
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. For additional risk factors, refer to Item 1A, “Risk Factors,” in the 2016our 2020 Annual Report on Form 10-K.10-K and Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
BUSINESS OVERVIEW
We are a global media company that provides content across multiple distribution platforms, including pay-TV, FTA and broadcast television, authenticated applications, digital distribution arrangements and content licensing agreements. Our portfolio of networks includes prominent television brands such as Discovery Channel, our most widely distributed global brand, TLC, Animal Planet, Investigation Discovery ("ID") and Velocity (known as Turbo outside of the U.S.) and Eurosport, a leading sports entertainment pay-TV programmer across Europe and Asia. We also develop and sell curriculum-based education products and services and operate a production studio.
Our objectives are to invest in content for our networks to build viewership, optimize distribution revenue, capture advertising sales, and create or reposition branded channels and businesses that can sustain long-term growth and occupy a desired content niche with strong consumer appeal. Our strategy is to maximize the distribution, ratings and profit potential of each of our branded networks. In addition to growing distribution and advertising revenues for our branded networks, we are extending content distribution across new platforms, including brand-aligned websites, on-line streaming, mobile devices, VOD and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue. Audience ratings are a key driver in generating advertising revenue and creating demand on the part of cable television operators, direct-to-home ("DTH") satellite operators, telecommunication service providers, and other content distributors, who deliver our content to their customers.
Our content spans genres including survival, exploration, sports, lifestyle, general entertainment, heroes, adventure, crime and investigation, health and kids. We have an extensive library of high-definition content and own rights to much of our content and footage, which enables us to exploit our library to launch brands and services into new markets quickly. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms.
Although the Company utilizes certain brands and content globally, we classify our operations in two reportable segments: U.S. Networks, consisting principally of domestic television network brands, and International Networks, consisting primarily of international television network brands. In addition, Education and Other consists principally of curriculum-based product and service offerings and the production studio. Our segment presentation aligns with our management structure and the financial information management uses to make strategic and operating decisions, such as the allocation of resources and business performance assessments.
Scripps Networks Interactive, Inc.
On July 31, 2017, Discovery announced that it had entered into an agreement and plan of merger (the "Merger Agreement") for Discovery to acquire Scripps in a cash-and-stock transaction (the "Scripps acquisition"). The estimated merger consideration for the acquisition totals $11.5 billion, including cash of $8.4 billion and stock of $3.1 billion based on stock prices as of October 20, 2017. In addition, the Company will assume Scripps' net debt of approximately $2.7 billion. The transaction is expected to close by early 2018.
Scripps shareholders will receive $63.00 per share in cash and a number of shares of Discovery's Series C common stock that is determined in accordance with a formula and subject to a collar based on the volume weighted average price of the Company's Series C common stock. The formula is based on the volume weighted average price of Discovery's Series C common stock over the 15 trading days ending on the third trading day prior to closing (the “Average Discovery Price”). Scripps shareholders will receive 1.2096 shares of Discovery's Series C common stock if the Average Discovery Price is below $22.32, and 0.9408 shares of Discovery's Series C common stock if the Average Discovery Price is above $28.70. The intent of the range was to provide Scripps shareholders with $27.00 of value per share in Discovery Series C common stock; if the Average Discovery Price is greater than or equal to $22.32 but less than or equal to $28.70, Scripps shareholders will receive a proportional number of shares between 1.2096 and 0.9408. If the Average Discovery Price is below $25.51, Discovery has the option to pay additional cash instead of issuing more shares above the 1.0584 conversation ratio required at $25.51. The cash payment is equal to the product of the additional shares required under the collar formula multiplied by the Average Discovery Price; for example, if the Average Discovery Price were $22.32 with a conversion ratio of 1.2096, the Company could offer shares at the 1.0584 ratio and pay for the difference associated with the incremental shares in cash. Outstanding employee equity awards or share-based awards that vest upon the change of control will be acquired with a similar combination of cash and shares of Discovery Series C common stock pursuant to terms specified in the Merger Agreement. Therefore, the merger consideration will fluctuate based upon changes in the share price of Discovery Series C common stock and the number of Scripps common shares, stock options, and other equity-based awards outstanding on the closing date. Discovery will also pay certain transaction costs incurred by Scripps, which will be recorded as a component of the opening balance sheet. The post-closing impact of the formula was intended to result in, Scripps’ shareholders owning approximately 20% of Discovery’s fully diluted common shares and Discovery’s shareholders owning approximately 80%. The Company will utilize debt (see Note 6) and cash on hand to finance the cash portion of the transaction. The transaction is subject to approval by Discovery and Scripps’ shareholders, regulatory approvals and other customary closing conditions.
John C. Malone, Advance/Newhouse and members of the Scripps family have entered into voting agreements to vote in favor of the transactions (the “Advance/Newhouse Voting Agreement”). In addition, Advance/Newhouse has provided its consent, in its capacity as the holder of Discovery’s outstanding shares of Series A preferred stock, for Discovery to enter into the Merger Agreement and consummate the merger. In connection with this consent, Discovery and Advance/Newhouse entered into an exchange agreement pursuant to which Advance/Newhouse exchanged all of its shares of Series A and Series C preferred stock of Discovery for shares of newly designated Series A-1 and Series C-1 preferred stock of Discovery. The exchange transaction will not change the aggregate number of shares of Discovery’s Series A common stock and Series C common stock that are beneficially owned by Advance/Newhouse or change voting rights or liquidation preferences afforded to Advance/Newhouse. The $35 million
impact of the modification has been recorded as a component of selling, general and administrative expense. (See Note 9 and Note 12). All of Discovery's direct costs of the Scripps acquisition will be reflected as a component of selling, general and administrative expense in the consolidated statements of operations.
On September 21, 2017, DCL issued a series of senior notes to partially fund the acquisition of Scripps totaling $6.8 billion. With the exception of the senior notes which mature in 2019, the senior notes contain a special mandatory redemption clause requiring the Company to redeem the notes for a price equal to 101% of the principal amount plus any accrued and unpaid interest on the senior notes in the event that the Scripps acquisition has not closed prior to August 30, 2018. While the Company expects to complete the acquisition by the required date, unanticipated developments could delay or prevent the acquisition. As such, the Company cannot ensure that it will complete the acquisition by August 30, 2018. (See Note 6).
U.S. Networks
U.S. Networks generated revenues of $2,542 million and Adjusted OIBDA of $1,548 million during the nine months ended September 30, 2017, which represented 51% and 82% of our total consolidated revenues and Adjusted OIBDA, respectively. Our U.S. Networks segment owns and operates ten national television networks, including fully distributed television networks such as Discovery Channel, TLC and Animal Planet. In addition, this segment holds an equity method investment interest in OWN and a cost method investment in Group Nine Media described below.
U.S. Networks generates revenues from fees charged to distributors of our television networks’ first run content, which include cable, DTH satellite and telecommunication service providers, referred to as affiliate fees; fees from distributors for licensed content and content to equity method investee networks, referred to as other distribution revenue; fees from advertising sold on our television networks and digital products, which include our GO suite of applications and our virtual reality product, Discovery VR; fees from providing sales representation, network distribution services; and revenue from licensing our brands for consumer products.
Typically, our television networks are aired pursuant to multi-year carriage agreements that provide for the level of carriage that our networks will receive and for annual graduated rate increases. Carriage of our networks depends on package inclusion, such as whether networks are on the more widely distributed, broader packages or lesser-distributed, specialized packages, also referred to as digital tiers. We provide authenticated U.S. TV Everywhere products that are available to certain subscribers and connect viewers through GO applications with live and on-demand access to award-winning shows and series from nine U.S. networks in the Discovery portfolio: Discovery Channel, TLC, Animal Planet, ID, Science Channel, Velocity, Destination America, American Heroes Channel and Discovery Life.
Advertising revenue is generated across multiple platforms and is based on the price received for available advertising spots and is dependent upon a number of factors including the number of subscribers to our channels, viewership demographics, the popularity of our programming, our ability to sell commercial time over a portfolio of channels and leverage multiple platforms to connect advertisers to target audiences. In the U.S., advertising time is sold in the upfront and scatter markets. In the upfront market, advertisers buy advertising time for upcoming seasons and, by committing to purchase in advance, lock in the advertising rates they will pay for the upcoming year. Many upfront advertising commitments include options whereby advertisers may reduce purchase commitments. In the scatter market, advertisers buy advertising closer to the time when the commercials will be run, which often results in a pricing premium compared to the upfront rates. The mix of upfront and scatter market advertising time sold is based upon the economic conditions at the time that upfront sales take place, impacting the sell-out levels management is willing or able to obtain. The demand in the scatter market then impacts the pricing achieved for our remaining advertising inventory. Scatter market pricing can vary from upfront pricing and can be volatile.
During the nine months ended September 30, 2017, distribution, advertising and other revenues were 48%, 50% and 2%, respectively, of total revenues for this segment.
On September 25, 2017, the Company contributed its linear cable network focused on cars and motor sports, Velocity, to a new joint venture ("VTEN"), with GoldenTree Asset Management L.P. ("GoldenTree"). GoldenTree's contributions to VTEN included businesses from The Enthusiast Network, Inc. ("TEN"), primarily MotorTrend.com, Motor Trend YouTube channel and the Motor Trend OnDemand OTT service. The joint venture will establish a portfolio of digital content, social groups and live events and original content focused on the automotive audience. In exchange for their contributions, Discovery and GoldenTree received 67.5% and 32.5% ownership of the new joint venture, respectively.
On December 2, 2016, the Company acquired a 39% minority interest in Group Nine Media, a joint venture with Thrillist Media Group, NowThis Media, and TheDodo.com. Group Nine Media is a millennial-focused, digital-first enterprise that seeks to create a dynamic publishing platform and content creation engine across the unique brands of the contributing investors. In exchange for our interest in the new venture, we contributed $100 million and certain digital businesses, comprising our digital network Seeker and production studio SourceFed. We recorded a pre-tax gain of $50 million upon disposition of Seeker and SourceFed Studios in connection with the transaction in the fourth quarter of 2016. (See Note 2 to the accompanying consolidated
financial statements.) The investment is accounted for under the cost method. (See Note 3 to the accompanying consolidated financial statements.)
International Networks
International Networks generated revenues of $2,354 million and Adjusted OIBDA of $610 million during the nine months ended September 30, 2017, which represented 47% and 32% of our total consolidated revenues and Adjusted OIBDA, respectively. Our International Networks segment principally consists of national and pan-regional television networks and brands that are delivered across multiple distribution platforms. This segment generates revenue from operations in virtually every pay-TV market in the world through an infrastructure that includes operational centers in London, Warsaw, Milan, Singapore and Miami. Global brands include Discovery Channel, Animal Planet, TLC, ID, Science Channel and Turbo (known as Velocity in the U.S.), along with brands exclusive to International Networks, including Eurosport, Real Time, DMAX and Discovery Kids. As of September 30, 2017, International Networks operated over 400 unique distribution feeds in over 40 languages with channel feeds customized according to language needs and advertising sales opportunities. International Networks also has FTA networks in Europe and the Middle East and broadcast networks in Denmark, Norway and Sweden, and continues to pursue further international expansion. FTA networks generate a significant portion of International Network's revenue. The penetration and growth rates of television services vary across countries and territories depending on numerous factors including the dominance of different television platforms in local markets. While pay-TV services have greater penetration in certain markets, FTA or broadcast television is dominant in others. International Networks has a large international distribution platform for its 37 networks, with as many as 14 networks distributed in any particular country or territory across approximately 220 countries and territories around the world. International Networks pursues distribution across all television and other delivery platforms based on the specific dynamics of local markets and relevant commercial agreements. Effective January 1, 2017, we realigned our International Networks management reporting structure into the following regions: the Nordics; the U.K.; Southern Europe; Central and Eastern Europe, the Middle East, and Africa (“CEEMEA”), which was expanded to include Belgium, the Netherlands, and Luxembourg; Latin America; and Asia-Pacific. Previously, International Networks’ regional operations reporting structure was segregated into the following regions: Northern Europe, which included primarily the Nordics and U.K.; Southern Europe; CEEMEA; Latin America; and Asia-Pacific. This realignment did not impact our consolidated financial statements other than to change the regions in which we describe our operating results for the International Networks segment.
Similar to U.S. Networks, a significant source of revenue for International Networks relates to fees charged to operators who distribute our linear networks. Such operators primarily include cable and DTH satellite service providers, internet protocol television ("IPTV") and over-the-top operators (“OTT”). International television markets vary in their stages of development. Some markets, such as the U.K., are more advanced digital television markets, while others remain in the analog environment with varying degrees of investment from operators to expand channel capacity or convert to digital technologies. Common practice in international markets results in long-term contractual distribution relationships with terms generally shorter than similar customers in the U.S. Distribution revenue for our International Networks segment is largely dependent on the number of subscribers that receive our networks or content, the rates negotiated in the distributor agreements, and the market demand for the content that we provide.
The other significant source of revenue for International Networks relates to advertising sold on our television networks and across other distribution platforms, similar to U.S. Networks. Advertising revenue is dependent upon a number of factors, including the development of pay and FTA television markets, the number of subscribers to and viewers of our channels, viewership demographics, the popularity of our programming, and our ability to sell commercial time over all media platforms. In certain markets, our advertising sales business operates with in-house sales teams, while we rely on external sales representation services in other markets.
During the nine months ended September 30, 2017, distribution, advertising and other revenues were 59%, 39% and 2%, respectively, of total net revenues for this segment. For the nine months ended September 30, 2017, FTA or broadcast networks generated 54% of International Networks' advertising revenue and pay-TV networks generated 46% of International Networks' advertising revenue.
International Networks’ largest cost is content expense for localized programming disseminated via our 400 unique distribution feeds. While our International Networks segment maximizes the use of programming from U.S. Networks, we also develop local programming that is tailored to individual market preferences and license the rights to air films, television series and sporting events from third parties. International Networks amortizes the cost of capitalized content rights based on the proportion of current estimated revenue relative to the estimated remaining total lifetime revenue, which results in either an accelerated method or a straight-line method over the estimated useful lives of the content of up to five years. Content acquired from U.S. Networks and content developed locally airing on the same network is amortized similarly, as amortization rates vary by network. More than half of International Networks' content is amortized using an accelerated amortization method, while the remainder is
amortized on a straight-line basis. The costs for multi-year sports programming arrangements are expensed when the event is broadcast based on the estimated relative value of each component of the arrangement.
While the International Networks and U.S. Networks have similarities with respect to the nature of operations, the generation of revenue and the categories of expense, the International Networks have lower segment margins due to lower economies of scale from being in over 220 markets requiring additional cost for localization to satisfy market variations. The International Networks also include sports and FTA broadcast channels, which drive higher costs from sports rights and production and investment in broad entertainment programming for broadcast networks.
On June 24, 2016, we acquired a 27.5% interest in Mega TV, a FTA channel in Chile owned by Bethia Comunicaciones, for $53 million, which we account for using the equity method.
On June 23, 2016, the U.K. held a referendum in which voters approved an exit from the European Union (“E.U.”), commonly referred to as “Brexit.” Consequently, on March 29, 2017, the U.K. government officially notified the E.U. of its intention to leave the E.U. This started a negotiation process of two years between the U.K. and the E.U. that ends on March 29, 2019, when the U.K. will no longer be an E.U. Member State. The negotiations, which are ongoing, will determine the terms under which the U.K. will leave the E.U.; the principles of a new trading relationship between the U.K. and the E.U.; and a transitional agreement to cover the period between the U.K.’s official departure on March 29, 2019 and the formalization of the U.K.'s new trading relationship with the E.U. It is expected that after “Brexit,” the U.K. will no longer have access to the E.U.’s single market for goods and services, including broadcast services. As much remains unclear, we continue to evaluate the potential impact to our distribution and licensing agreements, foreign currency exchange rates, the legal and regulatory landscape, our business and our employees. In this changing environment, we continue to monitor the potential effects and evaluate options to adequately manage and mitigate any adverse impacts.
On June 30, 2015, we sold our radio businesses in the Nordics to Bauer for total consideration, net of cash disposed, of €72 million ($80 million), which included €54 million ($61 million) in cash and €18 million ($19 million) of contingent consideration paid on April 1, 2016. The cumulative gain on the disposal of the radio business is $1 million. Based on a change in estimate of the fair value of contingent consideration, we recorded a pre-tax gain of $13 million for the three months ended March 31, 2016. For the year ended December 31, 2015, we recorded an estimated loss on disposal of $12 million using then available projected results. We determined that the disposal did not meet the definition of a discontinued operation because it does not represent a strategic shift that has a significant impact on our operations and consolidated financial results. (See Note 2 to the accompanying consolidated financial statements.)
Education and Other
Education and Other generated revenues of $113 million during the nine months ended September 30, 2017, which represented 3% of our consolidated revenues. Education is comprised of curriculum-based product and service offerings and generates revenues primarily from subscriptions charged to K-12 schools for access to an online suite of curriculum-based VOD tools, professional development services, digital textbooks and, to a lesser extent, student assessments and publication of hardcopy curriculum-based content. Other is comprised of our wholly-owned production studio, which provides services to our U.S. Networks and International Networks segments at cost.
On April 28, 2017, the Company sold Raw and Betty, its production studios, to All3Media. All3Media is a U.K. based television, film and digital production and distribution company. (See Note 3 to the accompanying consolidated financial statements.) The Company owns 50% of All3Media and accounts for its investment in All3Media under the equity method of accounting. (See Note 2 to the accompanying consolidated financial statements.)
RESULTS OF OPERATIONS
Consolidated Results of Operations
The table below presents our consolidated results of operations (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenues: | | | | | | | | | | | | |
Distribution | | $ | 881 |
| | $ | 806 |
| | 9 | % | | $ | 2,593 |
| | $ | 2,420 |
| | 7 | % |
Advertising | | 705 |
| | 670 |
| | 5 | % | | 2,197 |
| | 2,170 |
| | 1 | % |
Other | | 65 |
| | 80 |
| | (19 | )% | | 219 |
| | 235 |
| | (7 | )% |
Total revenues | | 1,651 |
| | 1,556 |
| | 6 | % | | 5,009 |
| | 4,825 |
| | 4 | % |
Costs of revenues, excluding depreciation and amortization | | 670 |
| | 592 |
| | 13 | % | | 1,911 |
| | 1,787 |
| | 7 | % |
Selling, general and administrative | | 457 |
| | 419 |
| | 9 | % | | 1,261 |
| | 1,227 |
| | 3 | % |
Depreciation and amortization | | 80 |
| | 80 |
| | — | % | | 240 |
| | 239 |
| | — | % |
Restructuring and other charges | | 11 |
| | 7 |
| | 57 | % | | 43 |
| | 52 |
| | (17 | )% |
Loss (gain) on disposition | | — |
| | — |
| | NM |
| | 4 |
| | (13 | ) | | NM |
|
Total costs and expenses | | 1,218 |
| | 1,098 |
| | 11 | % | | 3,459 |
| | 3,292 |
| | 5 | % |
Operating income | | 433 |
| | 458 |
| | (5 | )% | | 1,550 |
| | 1,533 |
| | 1 | % |
Interest expense | | (136 | ) | | (91 | ) | | 49 | % | | (318 | ) | | (267 | ) | | 19 | % |
Loss on extinguishment of debt | | — |
| | — |
| | — | % | | (54 | ) | | — |
| | NM |
|
(Loss) income from equity investees, net | | (27 | ) | | 3 |
| | NM |
| | (122 | ) | | (28 | ) | | NM |
|
Other expense, net | | (106 | ) | | (49 | ) | | NM |
| | (143 | ) | | (27 | ) | | NM |
|
Income before income taxes | | 164 |
| | 321 |
| | (49 | )% | | 913 |
| | 1,211 |
| | (25 | )% |
Income tax benefit (expense) | | 59 |
| | (96 | ) | | NM |
| | (89 | ) | | (302 | ) | | (71 | )% |
Net income | | 223 |
| | 225 |
| | (1 | )% | | 824 |
| | 909 |
| | (9 | )% |
Net income attributable to noncontrolling interests | | — |
| | — |
| | NM |
| | — |
| | (1 | ) | | NM |
|
Net income attributable to redeemable noncontrolling interests | | (5 | ) | | (6 | ) | | (17 | )% | | (17 | ) | | (18 | ) | | (6 | )% |
Net income available to Discovery Communications, Inc. | | $ | 218 |
| | $ | 219 |
| | — | % | | $ | 807 |
| | $ | 890 |
| | (9 | )% |
NM - Not meaningful
Revenues
Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from SVOD content licensing and other emerging forms of digital distribution. Distribution revenue increased 9% and 7% for the three and nine months ended September 30, 2017, respectively. Distribution revenue increased 6% and 5% for the three and nine months ended September 30, 2017, respectively, at our U.S. Networks segment. Excluding the impact of foreign currency fluctuations, distribution revenue increased 9% for the three and nine months ended September 30, 2017, at our International Networks segment. U.S. Networks distribution revenue increases were driven by increases in affiliate fee rates and increases in SVOD revenue, particularly in the third quarter, partially offset by a decline in affiliate subscribers. Total portfolio subscribers declined 5% for the three and nine months ended September 30, 2017, while subscribers to our fully distributed networks declined 3% for the same periods. SVOD revenue can fluctuate period-to-period due to the timing of content deliveries. International Networks' distribution revenue increases were mostly due to increases in contractual rates in Europe following further investment in sports content, and increases in rates in Latin America, primarily due to the continued development of the pay-TV markets in Latin America, partially offset by lower subscribers in Latin America and decreases in contractual rates in Asia Pacific.
Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, market demand, the mix of sales of commercial time between the upfront and scatter markets, and economic conditions. These factors impact the pricing and volume of our advertising inventory. Advertising revenue increased 5%
and 1% for the three and nine months ended September 30, 2017, respectively. Excluding the impact of the Group Nine Transaction and foreign currency fluctuations, advertising revenue increased 4% and 2%, for the three and nine months ended September 30, 2017, respectively. For the three months ended September 30, 2017, U.S. Networks increased 4% primarily due to pricing increases and continued monetization of our GO platform, partially offset by lower audience delivery due to continued universe declines, and International Networks increased 5% mostly due to increases in ratings in Southern Europe and ratings and pricing in Latin America and CEEMEA. For the nine months ended September 30, 2017, U.S. Networks increased 2% primarily due to pricing increases and continued monetization of our GO platform, partially offset by lower audience delivery and, International Networks increased 3% primarily due to pricing in CEEMEA, ratings in Southern Europe, and ratings and volume in Latin America, partially offset by lower ratings in Asia Pacific.
Other revenue decreased compared with the prior year, primarily as a result of the sale of the Raw and Betty production studios.
Costs of Revenues
Costs of revenue increased 13% and 7% for the three and nine months ended September 30, 2017, respectively. Excluding the impact of the Group Nine Transaction and foreign currency fluctuations, costs of revenue increased 10% and 8% for the three and nine months ended September 30, 2017, respectively. The increase for the three months ended September 30, 2017 was primarily attributable to increased spending for content, particularly for Shark Week, at our U.S. Networks segment, which aired in the third quarter of 2017 compared to the second quarter of 2016 and Manhunt: Unabomber which also aired in the third quarter 2017, as well as increased spending for sports rights and associated production costs at our International Networks segment. The increase for the nine months ended September 30, 2017 was mostly attributable to increased spending on content at our International Networks segment, particularly sports rights and associated production costs. Content amortization was $485 million and $424 million for the three months ended September 30, 2017 and 2016, respectively. Content amortization was $1,386 million and $1,279 million for the nine months ended September 30, 2017 and 2016, respectively.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees. Selling, general and administrative expenses increased 9% and 3% for the three and nine months ended September 30, 2017, respectively. Excluding the impact of the Group Nine Transaction and foreign currency fluctuations, selling, general and administrative expenses increased 9% and 5% for the three and nine months ended September 30, 2017. The increases were primarily due to transactions costs for the Scripps acquisition and integration costs of $62 million, including the $35 million charge associated with the modification of Advance/Newhouse's preferred stock. (See Note 9 to the accompanying consolidated financial statements.)
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization was consistent for the three and nine months ended September 30, 2017, compared with the prior year periods as capital spending over the last twelve months was consistent with the prior year periods impacting the three and nine months ended September 30, 2016.
Restructuring and Other Charges
Restructuring and other charges increased slightly by $4 million and decreased $9 million for the three and nine months ended September 30, 2017, respectively. The decrease for the nine months ended September 30, 2017 was primarily due to higher personnel-related termination costs for voluntary and involuntary severance actions in the prior year. (See Note 17 to the accompanying consolidated financial statements.)
Loss (Gain) on Disposition
We recorded a $4 million loss for the nine months ended September 30, 2017 due to the sale of the Raw and Betty production studios on April 28, 2017, compared with a gain of $13 million for the nine months ended September 30, 2016 due to the disposition of our radio businesses in the Nordics. (See Note 2 to the accompanying consolidated financial statements.)
Interest Expense
Interest expense increased $45 million and $51 million for the three and nine months ended September 30, 2017, respectively. The increases were primarily due to costs incurred for the unsecured bridge loan commitment for the Scripps
acquisition, as well as interest accrued on the senior notes issued on September 21, 2017. (See Note 6 to the accompanying consolidated financial statements.)
Loss on Extinguishment of Debt
On March 13, 2017, we issued new senior notes in an aggregate principal amount of $650 million and used the proceeds to fund the repurchase of $600 million of combined aggregate principal of our existing senior notes through a cash tender offer that also closed on March 13, 2017. As a result, we recognized a $54 million loss on extinguishment of debt, which included $50 million for premiums to par value, $2 million of non-cash write-offs of unamortized deferred financing costs, $1 million for the write-off of the original issue discount of these senior notes and $1 million accrued for other third-party fees. (See Note 6 to the accompanying consolidated financial statements.)
(Loss) income from equity investees, net
Losses from our equity method investees increased $30 million and $94 million for the three and nine months ended September 30, 2017, respectively, primarily due to losses from investments in limited liability companies that sponsor renewable energy projects related to solar energy, partially offset by decreases in losses at All3Media and increases in earnings at OWN. (See Note 3 to the accompanying consolidated financial statements.)
Other Expense, net
The table below presents the details of other expense, net (in millions).
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
Foreign currency (losses) gains, net | | $ | (27 | ) | | $ | 15 |
| | $ | (62 | ) | | $ | 52 |
|
Losses on derivative instruments | | (77 | ) | | (1 | ) | | (79 | ) | | (16 | ) |
Other-than-temporary impairment of AFS investments | | — |
| | (62 | ) | | — |
| | (62 | ) |
Other expense, net | | (2 | ) | | (1 | ) | | (2 | ) | | (1 | ) |
Total other expense, net | | $ | (106 | ) | | $ | (49 | ) | | $ | (143 | ) | | $ | (27 | ) |
Other expense, net increased $57 million and $116 million for the three and nine months ended September 30, 2017, respectively. We recorded foreign currency losses during 2017 compared to foreign currency gains during 2016, mostly due to exchange rate changes on the U.S. dollar compared with the British pound that impacted foreign currency monetary assets. Increases in losses from derivative instruments primarily resulted from losses of $98 million on interest rate contracts used to economically hedge the pricing for the issuance of a portion of the dollar-denominated senior notes, which were settled on September 21, 2017. The interest rate contracts did not receive hedging designation. The losses were partially offset by gains of $17 million on previously settled interest rate contracts for which the hedged issuance of debt is considered remote following the issuance of the senior notes on September 21, 2017. (See Note 6 and Note 7 to the accompanying consolidated financial statements.)
Income Tax Expense
The following table reconciles the Company's effective income tax rate to the U.S. federal statutory income tax rate of 35%.
|
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
U.S. federal statutory income tax rate | | 35 | % | | 35 | % | | 35 | % | | 35 | % |
State and local income taxes, net of federal tax benefit | | 2 | % | | 1 | % | | 2 | % | | (4 | )% |
Effect of foreign operations | | (21 | )% | | (5 | )% | | (8 | )% | | (4 | )% |
Domestic production activity deductions | | (5 | )% | | (1 | )% | | (4 | )% | | (3 | )% |
Change in uncertain tax positions | | — | % | | — | % | | — | % | | 1 | % |
Renewable energy investments tax credits | | (50 | )% | | — | % | | (16 | )% | | — | % |
Preferred stock modification | | 5 | % | | — | % | | 1 | % | | — | % |
Other, net | | (2 | )% | | — | % | | — | % | | — | % |
Effective income tax rate | | (36 | )% | | 30 | % | | 10 | % | | 25 | % |
Income tax benefit was $59 million and income tax expense was $89 million, and the effective income tax benefit was 36% and expense was 10% for the three and nine months ended September 30, 2017, respectively. Income tax expense was $96 million and $302 million, and the effective income tax rates were 30% and 25% for the three and nine months ended September 30, 2016, respectively. During 2017, the decrease in the effective tax rate was primarily attributable to the investment tax credits that we receive related to our renewable energy investments, and to a lesser extent, taxation of income among multiple foreign jurisdictions. The impact to the effective tax rate for these items is more pronounced than expected due to lower than anticipated net income as a result of costs associated with the Scripps acquisition (see Note 2 to the accompanying consolidating financial statements). In 2016, we had a favorable resolution of multi-year state tax positions that resulted in a reduction of reserves related to uncertain tax positions that did not recur in 2017.
Segment Results of Operations
We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) mark-to-market share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, and (vi) certain inter-segment eliminations related to production studios. Additionally, beginning with the quarter ended September 30, 2017, Adjusted OIBDA also excludes material incremental third-party transaction costs directly related to the Scripps acquisition and planned integration. We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We exclude mark-to-market share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions and Scripps acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. We also exclude the depreciation of fixed assets and amortization of intangible assets as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. As of January 1, 2017, the Company no longer excludes amortization of deferred launch incentives in calculating total Adjusted OIBDA as this expense is not material. For the three and nine months ended September 30, 2016, deferred launch incentives of $3 million and $10 million, respectively, were not reflected as an adjustment to the calculation of total Adjusted OIBDA in order to conform to the current presentation.
Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with GAAP.
Additional financial information for our reportable segments is set forth in Note 16 to the accompanying consolidated financial statements.
The table below presents the calculation of total Adjusted OIBDA (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenue: | | | | | | | | | | | | |
U.S. Networks | | $ | 823 |
| | $ | 793 |
| | 4 | % | | $ | 2,542 |
| | $ | 2,473 |
| | 3 | % |
International Networks | | 796 |
| | 720 |
| | 11 | % | | 2,354 |
| | 2,221 |
| | 6 | % |
Education and Other | | 32 |
| | 43 |
| | (26 | )% | | 113 |
| | 133 |
| | (15 | )% |
Corporate and inter-segment eliminations | | — |
| | — |
| | NM |
| | — |
| | (2 | ) | | NM |
|
Total revenue | | 1,651 |
| | 1,556 |
| | 6 | % | | 5,009 |
| | 4,825 |
| | 4 | % |
Costs of revenues, excluding depreciation and amortization | | (670 | ) | | (592 | ) | | 13 | % | | (1,911 | ) | | (1,787 | ) | | 7 | % |
Selling, general and administrative(a) | | (406 | ) | | (405 | ) | | — | % | | (1,203 | ) | | (1,203 | ) | | — | % |
Adjusted OIBDA | | $ | 575 |
| | $ | 559 |
| | 3 | % | | $ | 1,895 |
| | $ | 1,835 |
| | 3 | % |
(a) Selling, general and administrative expenses exclude mark-to-market share-based compensation and third-party transaction costs directly related to the Scripps acquisition and planned integration.
The table below presents our reconciliation of consolidated net income available to Discovery Communications, Inc. to total Adjusted OIBDA and Adjusted OIBDA by segment (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Net income available to Discovery Communications, Inc. | | $ | 218 |
| | $ | 219 |
| | — | % | | $ | 807 |
| | $ | 890 |
| | (9 | )% |
Net income attributable to redeemable noncontrolling interests | | 5 |
| | 6 |
| | (17 | )% | | 17 |
| | 18 |
| | (6 | )% |
Net income attributable to noncontrolling interests | | — |
| | — |
| | NM |
| | — |
| | 1 |
| | NM |
|
Income tax (benefit) expense | | (59 | ) | | 96 |
| | NM |
| | 89 |
| | 302 |
| | (71 | )% |
Other expense (income), net | | 106 |
| | 49 |
| | NM |
| | 143 |
| | 27 |
| | NM |
|
Loss (income) from equity investees, net | | 27 |
| | (3 | ) | | NM |
| | 122 |
| | 28 |
| | NM |
|
Loss on extinguishment of debt | | — |
| | — |
| | NM |
| | 54 |
| | — |
| | NM |
|
Interest expense | | 136 |
| | 91 |
| | 49 | % | | 318 |
| | 267 |
| | 19 | % |
Operating income | | 433 |
| | 458 |
| | (5 | )% | | 1,550 |
| | 1,533 |
| | 1 | % |
Loss (gain) on disposition | | — |
| | — |
| | NM |
| | 4 |
| | (13 | ) | | NM |
|
Restructuring and other charges | | 11 |
| | 7 |
| | 57 | % | | 43 |
| | 52 |
| | (17 | )% |
Depreciation and amortization | | 80 |
| | 80 |
| | — | % | | 240 |
| | 239 |
| | — | % |
Mark-to-market share-based compensation | | (11 | ) | | 14 |
| | NM |
| | (4 | ) | | 24 |
| | NM |
|
Scripps transaction and integration costs | | 62 |
| | — |
| | NM |
| | 62 |
| | — |
| | NM |
|
Total Adjusted OIBDA | | $ | 575 |
| | $ | 559 |
| | 3 | % | | $ | 1,895 |
| | $ | 1,835 |
| | 3 | % |
| | | |
| | | | | | | | |
Adjusted OIBDA: | | | | | | | | | | | |
|
|
U.S. Networks | | $ | 480 |
| | $ | 458 |
| | 5 | % | | $ | 1,548 |
| | $ | 1,475 |
| | 5 | % |
International Networks | | 180 |
| | 180 |
| | — | % | | 610 |
| | 607 |
| | — | % |
Education and Other | | — |
| | (1 | ) | | NM |
| | (1 | ) | | (5 | ) | | 80 | % |
Corporate and inter-segment eliminations | | (85 | ) | | (78 | ) | | 9 | % | | (262 | ) | | (242 | ) | | 8 | % |
Total Adjusted OIBDA | | $ | 575 |
| | $ | 559 |
| | 3 | % | | $ | 1,895 |
| | $ | 1,835 |
| | 3 | % |
U.S. Networks
The table below presents, for our U.S. Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenues: | | | | | | | | | | | | |
Distribution | | $ | 402 |
| | $ | 381 |
| | 6 | % | | $ | 1,210 |
| | $ | 1,157 |
| | 5 | % |
Advertising | | 407 |
| | 396 |
| | 3 | % | | 1,284 |
| | 1,269 |
| | 1 | % |
Other | | 14 |
| | 16 |
| | (13 | )% | | 48 |
| | 47 |
| | 2 | % |
Total revenues | | 823 |
| | 793 |
| | 4 | % | | 2,542 |
| | 2,473 |
| | 3 | % |
Costs of revenues, excluding depreciation and amortization | | (226 | ) | | (214 | ) | | 6 | % | | (652 | ) | | (652 | ) | | — | % |
Selling, general and administrative | | (117 | ) | | (121 | ) | | (3 | )% | | (342 | ) | | (346 | ) | | (1 | )% |
Adjusted OIBDA | | 480 |
| | 458 |
| | 5 | % | | 1,548 |
| | 1,475 |
| | 5 | % |
Depreciation and amortization | | (7 | ) | | (7 | ) | | — | % | | (21 | ) | | (19 | ) | | 11 | % |
Restructuring and other charges | | (2 | ) | | (2 | ) | | — | % | | (6 | ) | | (10 | ) | | (40 | )% |
Inter-segment eliminations | | (2 | ) | | (4 | ) | | (50 | )% | | (10 | ) | | (9 | ) | | 11 | % |
Operating income | | $ | 469 |
| | $ | 445 |
| | 5 | % | | $ | 1,511 |
| | $ | 1,437 |
| | 5 | % |
Revenues
Distribution revenue, which consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from SVOD content licensing and other emerging forms of digital distribution, increased 6% and 5% for the three and nine months ended September 30, 2017, respectively. The increases were driven by increases in affiliate fee rates and increases in SVOD revenue, particularly in the third quarter, partially offset by a decline in affiliate subscribers. Total portfolio subscribers declined 5% for the three and nine months ended September 30, 2017, while subscribers to our fully distributed networks declined 3% for the same periods. SVOD revenue can fluctuate period-to-period due to the timing of content deliveries.
Advertising revenue for the three and nine months ended September 30, 2017 increased 3% and 1%, respectively. Excluding the impact of the Group Nine Transaction, advertising revenue increased 4% and 2% for the three and nine months ended September 30, 2017. The increases were primarily due to pricing increases and continued monetization of our GO platform, partially offset by lower audience delivery due to continued universe declines.
Other revenue for the three and nine months ended September 30, 2017 remained consistent with the prior year.
Costs of Revenues
Costs of revenues for the three and nine months ended September 30, 2017 increased 6% and remained consistent with the prior year, respectively. Excluding the impact of the Group Nine Transaction, costs of revenue increased 7% and 1% for the three and nine months ended September 30, 2017, respectively. The increase for the three months ended September 30, 2017 was primarily attributable to increased spending for content on our networks, specifically related to Shark Week, which aired in the third quarter of 2017 compared to the second quarter of 2016, and Manhunt: Unabomber which also aired in the third quarter of 2017. Content amortization was $190 million and $177 million for the three months ended September 30, 2017 and 2016, respectively. Content amortization was $544 million and $539 million for the nine months ended September 30, 2017 and 2016, respectively.
Selling, General and Administrative
Selling, general and administrative expenses decreased 3% and 1% for the three and nine months ended September 30, 2017, respectively. Excluding the impact of the Group Nine Transaction, selling, general and administrative expenses remained consistent and increased 2% for the three and nine months ended September 30, 2017, respectively. During the three and nine months ended September 30, 2017 there was increased spending on viewer research, offset by decreases in personnel and marketing costs.
Adjusted OIBDA
Adjusted OIBDA for the three and nine months ended September 30, 2017 increased 5%. The increase for the three months ended September 30, 2017 was mostly due to increases in distribution and advertising revenue, partially offset by increases in costs of revenue. The increase for the nine months ended September 30, 2017 was mostly due to increases in distribution revenue.
International Networks
The following table presents, for our International Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenues: | | | | | | | | | | | | |
Distribution | | $ | 479 |
| | $ | 425 |
| | 13 | % | | $ | 1,383 |
| | $ | 1,263 |
| | 10 | % |
Advertising | | 298 |
| | 273 |
| | 9 | % | | 913 |
| | 900 |
| | 1 | % |
Other | | 19 |
| | 22 |
| | (14 | )% | | 58 |
| | 58 |
| | — | % |
Total revenues | | 796 |
| | 720 |
| | 11 | % | | 2,354 |
| | 2,221 |
| | 6 | % |
Costs of revenues, excluding depreciation and amortization | | (433 | ) | | (360 | ) | | 20 | % | | (1,214 | ) | | (1,076 | ) | | 13 | % |
Selling, general and administrative | | (183 | ) | | (180 | ) | | 2 | % | | (530 | ) | | (538 | ) | | (1 | )% |
Adjusted OIBDA | | 180 |
| | 180 |
| | — | % | | 610 |
| | 607 |
| | — | % |
Depreciation and amortization | | (56 | ) | | (55 | ) | | 2 | % | | (165 | ) | | (165 | ) | | — | % |
Restructuring and other charges | | (7 | ) | | (5 | ) | | 40 | % | | (28 | ) | | (25 | ) | | 12 | % |
Gain on disposition | | — |
| | — |
| | NM |
| | — |
| | 13 |
| | NM |
|
Inter-segment eliminations | | — |
| | — |
| | NM |
| | — |
| | (2 | ) | | NM |
|
Operating income | | $ | 117 |
| | $ | 120 |
| | (3 | )% | | $ | 417 |
| | $ | 428 |
| | (3 | )% |
Revenues
Distribution revenue for the three and nine months ended September 30, 2017 increased 13% and 10%, respectively. Excluding the impact of foreign currency fluctuations, distribution revenue increased 9% for the three and nine months ended September 30, 2017. The increases were mostly due to increases in contractual rates in Europe following further investment in sports content, and increases in rates in Latin America, primarily due to the continued development of the pay-TV markets in that region, partially offset by lower subscribers in Latin America and decreases in contractual rates in Asia Pacific.
Advertising revenue for the three and nine months ended September 30, 2017 increased 9% and 1%, respectively. Excluding the impact of foreign currency fluctuations, advertising revenue increased 5% and 3% for the three and nine months ended September 30, 2017, respectively. The increase for the three and nine months ended September 30, 2017 was due to increases in ratings in Southern Europe and ratings and pricing in Latin America and CEEMEA in equivalent amounts. The increase for the nine months ended September 30, 2017 was partially offset by declines in ad sales due to lower ratings in Asia Pacific.
Other revenue for the three and nine months ended September 30, 2017 remained consistent with the prior year.
Costs of Revenues
Costs of revenues for the three and nine months ended September 30, 2017 increased 20% and 13%, respectively. Excluding the impact of foreign currency fluctuations, costs of revenues increased 14% and 13% for the three and nine months ended September 30, 2017, respectively. The increases were mostly attributable to increased spending on content, particularly sports rights and associated production costs. Content amortization was $292 million and $241 million for the three months ended September 30, 2017 and 2016, respectively. Content amortization was $834 million and $714 million for the nine months ended September 30, 2017 and 2016, respectively.
Selling, General and Administrative
Selling, general and administrative expenses for the three and nine months ended September 30, 2017 increased 2% and decreased 1%, respectively. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses decreased 2% and remained consistent when compared with the prior year for the three and nine months ended September 30, 2017, respectively.
Adjusted OIBDA
Adjusted OIBDA remained consistent when compared with the prior year for the three and nine months ended September 30, 2017. Excluding the impact of foreign currency fluctuations, Adjusted OIBDA increased 1% and decreased 1% for the three and nine months ended September 30, 2017, respectively, as increases in distribution and advertising revenues were offset by increases in costs of revenues, related to content expense.
Education and Other
The following table presents, for our Education and Other segments, revenues, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions). |
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenues | | $ | 32 |
| | $ | 43 |
| | (26 | )% | | $ | 113 |
| | $ | 133 |
| | (15 | )% |
Costs of revenues, excluding depreciation and amortization | | (11 | ) | | (19 | ) | | (42 | )% | | (44 | ) | | (60 | ) | | (27 | )% |
Selling, general and administrative | | (21 | ) | | (25 | ) | | (16 | )% | | (70 | ) | | (78 | ) | | (10 | )% |
Adjusted OIBDA | | — |
| | (1 | ) | | NM |
| | (1 | ) | | (5 | ) | | (80 | )% |
Depreciation and amortization | | (2 | ) | | (3 | ) | | (33 | )% | | (4 | ) | | (6 | ) | | (33 | )% |
Restructuring and other charges | | (2 | ) | | — |
| | NM |
| | (3 | ) | | (3 | ) | | — | % |
Loss on disposition | | — |
| | — |
| | NM |
| | (4 | ) | | — |
| | NM |
|
Inter-segment eliminations | | 2 |
| | 4 |
| | (50 | )% | | 10 |
| | 11 |
| | (9 | )% |
Operating income | | $ | (2 | ) | | $ | — |
| | NM |
| | $ | (2 | ) | | $ | (3 | ) | | (33 | )% |
Adjusted OIBDA for the three and nine months ended September 30, 2017 increased $1 million and $4 million, respectively. The increases were mostly due to a reduction in expenses partially offset by a reduction in revenues as a result of the sale of the Raw and Betty production studios.
Corporate and Inter-segment Eliminations
The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating loss (in millions).
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | | | Nine Months Ended September 30, | | |
| | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
Revenues | | $ | — |
| | $ | — |
| | NM |
| | $ | — |
| | $ | (2 | ) | | NM |
|
Costs of revenues, excluding depreciation and amortization | | — |
| | 1 |
| | NM |
| | (1 | ) | | 1 |
| | NM |
|
Selling, general and administrative | | (85 | ) | | (79 | ) | | 8 | % | | (261 | ) | | (241 | ) | | 8 | % |
Adjusted OIBDA | | (85 | ) | | (78 | ) | | 9 | % | | (262 | ) | | (242 | ) | | 8 | % |
Mark-to-market share-based compensation | | 11 |
| | (14 | ) | | NM |
| | 4 |
| | (24 | ) | | NM |
|
Depreciation and amortization | | (15 | ) | | (15 | ) | | — | % | | (50 | ) | | (49 | ) | | 2 | % |
Restructuring and other charges | | — |
| | — |
| | NM |
| | (6 | ) | | (14 | ) | | (57 | )% |
Scripps transaction and integration costs | | (62 | ) | | — |
| | NM |
| | (62 | ) | | — |
| | NM |
|
Operating loss | | $ | (151 | ) | | $ | (107 | ) | | 41 | % | | $ | (376 | ) | | $ | (329 | ) | | 14 | % |
Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation and transaction and integration costs related to the Scripps acquisition.
Adjusted OIBDA decreased 9% and 8% for the three and nine months ended September 30, 2017, respectively, primarily due to increased personnel and legal costs.
Items Impacting Comparability
The impact of exchange rates on our business is an important factor in understanding period to period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis (ex-FX), in addition to results reported in accordance with GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with GAAP.
The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2017 Baseline Rate”), and the prior year amounts translated at the same 2017 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies. Selling, general and administrative expense, as presented below, excludes mark-to-market based compensation and Scripps transaction and integration costs due to their impact on comparability between periods.
The impact of foreign currency on the comparability of our consolidated results is as follows (dollar amounts in millions):
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 | | % Change (Reported) | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Distribution | | $ | 881 |
| | $ | 806 |
| | 9 | % | | 7 | % |
Advertising | | 705 |
| | 670 |
| | 5 | % | | 4 | % |
Other | | 65 |
| | 80 |
| | (19 | )% | | (16 | )% |
Total revenues | | 1,651 |
| | 1,556 |
| | 6 | % | | 4 | % |
Costs of revenue, excluding depreciation and amortization | | 670 |
| | 592 |
| | 13 | % | | 10 | % |
Selling, general and administrative expense | | 406 |
| | 405 |
| | — | % | | (1 | )% |
Adjusted OIBDA | | $ | 575 |
| | $ | 559 |
| | 3 | % | | 3 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 | | % Change (Reported) | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Distribution | | $ | 2,593 |
| | $ | 2,420 |
| | 7 | % | | 7 | % |
Advertising | | 2,197 |
| | 2,170 |
| | 1 | % | | 2 | % |
Other | | 219 |
| | 235 |
| | (7 | )% | | (3 | )% |
Total revenues | | 5,009 |
| | 4,825 |
| | 4 | % | | 4 | % |
Costs of revenue, excluding depreciation and amortization | | 1,911 |
| | 1,787 |
| | 7 | % | | 7 | % |
Selling, general and administrative expense | | 1,203 |
| | 1,203 |
| | — | % | | 1 | % |
Adjusted OIBDA | | $ | 1,895 |
| | $ | 1,835 |
| | 3 | % | | 3 | % |
The impact of foreign currency on the comparability of our financial results for International Networks for the three and nine months ended September 30, 2017 is as follows (dollar amounts in millions).
|
| | | | | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 | | % Change (Reported) | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Distribution | | $ | 479 |
| | $ | 425 |
| | 13 | % | | 9 | % |
Advertising | | 298 |
| | 273 |
| | 9 | % | | 5 | % |
Other | | 19 |
| | 22 |
| | (14 | )% | | (14 | )% |
Total revenues | | 796 |
| | 720 |
| | 11 | % | | 7 | % |
Costs of revenue, excluding depreciation and amortization | | 433 |
| | 360 |
| | 20 | % | | 14 | % |
Selling, general and administrative expenses | | 183 |
| | 180 |
| | 2 | % | | (2 | )% |
Adjusted OIBDA | | $ | 180 |
| | $ | 180 |
| | — | % | | 1 | % |
|
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 | | % Change (Reported) | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Distribution | | $ | 1,383 |
| | $ | 1,263 |
| | 10 | % | | 9 | % |
Advertising | | 913 |
| | 900 |
| | 1 | % | | 3 | % |
Other | | 58 |
| | 58 |
| | — | % | | — | % |
Total revenues | | 2,354 |
| | 2,221 |
| | 6 | % | | 6 | % |
Costs of revenue, excluding depreciation and amortization | | 1,214 |
| | 1,076 |
| | 13 | % | | 13 | % |
Selling, general and administrative expenses | | 530 |
| | 538 |
| | (1 | )% | | — | % |
Adjusted OIBDA | | $ | 610 |
| | $ | 607 |
| | — | % | | (1 | )% |
FINANCIAL CONDITION
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the nine months ended September 30, 2017, we funded our working capital needs primarily through cash flows from operations. As of September 30, 2017, we had $6,994 million of cash and cash equivalents on hand. We maintain an effective Registration Statement on Form S-3 that allows us to conduct registered offerings of securities, including debt securities, common stock and preferred stock. Access to sufficient capital from the public market is not assured.
Debt
Debt Incurred for the Scripps Acquisition
In August and September 2017, the Company entered into $2 billion of term loan credit facilities and issued $6.8 billion of senior notes to fund a portion of the Scripps acquisition. Using exchange rates as of September 30, 2017, the senior notes had a weighted average effective interest rate of 3.9% without including the impact of debt issuance costs. On September 21, 2017, DCL issued $500 million principal amount of 2.200% senior notes due 2019, $1.20 billion principal amount of 2.950% senior notes due 2023, $1.70 billion principal amount of 3.950% senior notes due 2028, $1.25 billion principal amount of 5.000% senior notes due 2037, and $1.25 billion principal amount of 5.200% senior notes due 2047 (together, the "Senior Fixed Rate Notes"). In addition to the Senior Fixed Rate Notes, the Company issued $400 million principal amount of floating rate senior notes due 2019 (the "Senior Floating Rate Notes" and together with the Senior Fixed Rate Notes, the "USD Notes"). Interest on the Senior Fixed Rate Notes is payable on March 20 and September 20 of each year, beginning March 20, 2018. Interest on the Senior Floating Rate Notes is payable on March 20, June 20, September 20 and December 20 of each year, beginning December 20, 2017. On September 21, 2017, DCL issued £400 million principal amount of 2.500% senior notes due 2024 (the "Sterling Notes"). Interest on the Sterling Notes is payable on September 20 of each year, beginning September 20, 2018. The proceeds received by DCL from the USD Notes and
the Sterling Notes were net of a $11 million issuance discount and $57 million of debt issuance costs. The USD Notes and Sterling Notes are fully and unconditionally guaranteed by the Company. Some of these proceeds have been invested in short-term investments until the closing of the acquisition. Approximately $5.9 billion is subject to repayment by the Company to satisfy provisions related to the special mandatory redemption provision attached to certain USD Notes and Sterling Notes issued by the Company. The special mandatory redemption provision requires the Company to redeem the notes for a price equal to 101% of the principal amount plus any accrued and unpaid interest on the applicable USD Notes and Sterling Notes, following a termination of the Scripps Merger Agreement or if the merger does not close prior to August 30, 2018. The $5.9 billion principal amount of senior notes subject to the special mandatory redemption provision will be classified as noncurrent until either of the contingent events which would trigger the redemption has occurred. As of September 30, 2017, neither of the contingent events have occurred and therefore these senior notes are classified as noncurrent.
On August 11, 2017, Discovery Communications, LLC ("DCL"), a wholly-owned subsidiary of the Company, entered into a 3-year delayed draw tranche and a 5-year delayed draw tranche unsecured term loan credit facility (the "Term Loans"), each with a principal amount of up to $1 billion. The term of each delayed draw loan begins when Discovery borrows the funds to finance a portion of the Scripps acquisition. The Term Loans' interest rates are based, at the Company's option, on either adjusted LIBOR plus a margin, or an alternate base rate plus a margin. The Company will pay a commitment fee of 20 basis points per annum for each loan, based on its current credit rating, beginning September 28, 2017 until either the funding of the loans or the termination of the Scripps acquisition. As of September 30, 2017, the Company has not yet borrowed on the term loan credit facilities.
Existing Senior Notes
On March 13, 2017, DCL issued $450 million principal amount of 3.80% senior notes due March 13, 2024 (the "2017 USD Notes") and an additional $200 million principal amount of its existing 4.90% senior notes due March 11, 2026 (the "2016 USD Notes").
All of DCL's outstanding senior notes are fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Discovery and contain certain covenants, events of default and other customary provisions.
Revolving Credit Facility
We have access to a $2.5 billion revolving credit facility, as amended on August 11, 2017. (See Note 6 to the accompanying consolidated financial statements). Borrowing capacity under this agreement is reduced by the outstanding borrowings under our commercial paper program. As of September 30, 2017, the Company had outstanding borrowings under the revolving credit facility of $425 million at a weighted average interest rate of 2.53%. The revolving credit facility agreement provides for a maturity date of August 11, 2022 and the option for up to two additional 364-day renewal periods. All obligations of DCL and the other borrowers under the revolving credit facility are unsecured and are fully and unconditionally guaranteed by Discovery. Borrowings may be used for general corporate purposes.
The credit agreement governing the revolving credit facility (the “Credit Agreement”) contains customary representations, warranties and events of default, as well as affirmative and negative covenants, including limitations on liens, investments, indebtedness, dispositions, affiliate transactions, dividends and restricted payments. DCL, its subsidiaries and Discovery are also subject to a limitation on mergers, liquidation and disposals of all or substantially all of their assets. The Credit Agreement, as amended on August 11, 2017, continues to require DCL to maintain a consolidated interest coverage ratio (as defined in the Credit Agreement) of no less than 3:00 to 1:00 and now requires a consolidated leverage ratio of financial covenant of 5.50 to 1.00, with step-downs to 5.00 to 1.00 in the first year after the closing and 4.50 to 1.00 in the second year after the closing. As of September 30, 2017, Discovery, DCL and the other borrowers were in compliance with all covenants and there were no events of default under the Credit Agreement.
Commercial Paper
Under our commercial paper program and subject to market conditions, DCL may issue unsecured commercial paper notes guaranteed by the Company from time to time up to an aggregate principal amount outstanding at any given time of $1.0 billion. The maturities of these notes vary but may not exceed 397 days. The notes may be issued at a discount or at par, and interest rates vary based on market conditions and the credit ratings assigned to the notes at the time of issuance. As of September 30, 2017, we had no commercial paper borrowings outstanding. Borrowings under the commercial paper program reduce the borrowing capacity under the revolving credit facility arrangement referenced above.
We repay our senior notes, revolving credit facility and commercial paper as required, and accordingly these sources of cash also require use of our cash.
Notes Receivable
We have an outstanding note receivable from OWN, our equity method investee, which totals $283 million including accrued interest. During the nine months ended September 30, 2017, the Company received net repayments on the note receivable of $39 million. Borrowings are scheduled for repayment four years after the borrowing date to the extent that OWN has excess cash to repay the borrowings then due.
Cash Settlement of Common Stock Repurchase Contract
We elected to settle our outstanding prepaid common stock repurchase contract in cash during the nine months ended September 30, 2017, resulting in the receipt of $58 million. The cash received was inclusive of a $1 million premium over the $57 million up-front cash payment made in 2016 and was determined by the market price of our Series C common stock during the settlement period in March 2017. (See Note 9 to the accompanying consolidated financial statements.)
Uses of Cash
Our primary uses of cash include the creation and acquisition of new content, business acquisitions, repurchases of our capital stock, income taxes, personnel costs, principal and interest on our outstanding senior notes, and funding for various equity method and other investments.
Investments and Business Combinations
Scripps Acquisition
On July 31, 2017, Discovery announced that it had entered into an agreement and plan of merger for Discovery to acquire Scripps in a cash-and-stock transaction. The estimated merger consideration for the acquisition totals $11.5 billion, including cash of $8.4 billion and stock of $3.1 billion based on stock prices as of October 20, 2017. In addition, the Company will assume Scripps' net debt of approximately $2.7 billion. The transaction is expected to close by early 2018.
Scripps shareholders will receive $63.00 per share in cash and a number of shares of Discovery's Series C common stock that is determined in accordance with a formula and subject to a collar based on the volume weighted average price of the Company's Series C common stock. The formula is based on the volume weighted average price of Discovery's Series C common stock over the 15 trading days ending on the third trading day prior to closing (the “Average Discovery Price”). Scripps shareholders will receive 1.2096 shares of Discovery's Series C common stock if the Average Discovery Price is below $22.32, and 0.9408 shares of Discovery's Series C common stock if the Average Discovery Price is above $28.70. The intent of the range was to provide Scripps shareholders with $27.00 of value per share in Discovery Series C common stock; if the Average Discovery Price is greater than or equal to $22.32 but less than or equal to $28.70, Scripps shareholders will receive a proportional number of shares between 1.2096 and 0.9408. If the Average Discovery Price is below $25.51, Discovery has the option to pay additional cash instead of issuing more shares above the 1.0584 conversation ratio required at $25.51. The cash payment is equal to the product of the additional shares required under the collar formula multiplied by the Average Discovery Price; for example, if the Average Discovery Price were $22.32 with a conversion ratio of 1.2096, the Company could offer shares at the 1.0584 ratio and pay for the difference associated with the incremental shares in cash. Outstanding employee equity awards or share-based awards that vest upon the change of control will be acquired with a similar combination of cash and shares of Discovery Series C common stock pursuant to terms specified in the Merger Agreement. Therefore, the merger consideration will fluctuate based upon changes in the share price of Discovery Series C common stock and the number of Scripps common shares, stock options, and other equity-based awards outstanding on the closing date. Discovery will also pay certain transaction costs incurred by Scripps, which will be recorded as a component of the opening balance sheet. The post-closing impact of the formula was intended to result in, Scripps’ shareholders owning approximately 20% of Discovery’s fully diluted common shares and Discovery’s shareholders owning approximately 80%. The Company will utilize previously issued debt proceeds (see Note 6) and cash on hand to finance the cash portion of the transaction. The transaction is subject to approvals and other customary closing conditions.
On July 30, 2017, the Company obtained a commitment letter from a financial institution for a $9.6 billion unsecured bridge term loan facility that could have been used to complete the Scripps acquisition. No amounts were drawn under the bridge loan commitment and the commitment was terminated on September 21, 2017, following the execution of the Term Loans, issuance of the USD Notes and issuance of the Sterling Notes. The Company incurred $40 million of debt issuance costs related to the bridge term loan facility.
Other Investments and Business Combinations
Our uses of cash have included investment in equity method investments, AFS securities, cost method investments (see Note 3 to the accompanying consolidated financial statements) and business combinations. During the nine months ended
September 30, 2017, the Company invested $300 million in limited liability companies that sponsor renewable energy projects related to solar energy. The Company has $42 million of future funding commitments for these investments as of September 30, 2017. We provide funding to our equity method investees from time to time. During the nine months ended September 30, 2017, the Company acquired other equity method investments, largely to enhance the Company's digital distribution strategies, particularly for Eurosport Player, and made additional contributions to existing equity method investments totaling $68 million.
As of September 30, 2017, we have outstanding advances to and a note receivable from OWN, our equity method investee, which totals $283 million including interest. On June 16, 2017, Harpo delivered its put notice for up to $100 million in value of its OWN membership interests to the Company. Harpo may withdraw its put exercise notice during the valuation process, which has been extended until December 15, 2017. Harpo and Discovery are following a series of protocols specified in the joint venture agreement to determine an agreed upon fair value for the put. The number of common units subject to the put exercise represents the proportion of common units held by Harpo that equate to the fair value of the Harpo put purchase price. As of September 30, 2017, the Company has not recorded a liability in connection with the exercise of Harpo's put as the valuation has not been finalized and Harpo may withdraw its put exercise notice. (See Note 3 to the accompanying consolidated financial statements).
Our cost method investments as of September 30, 2017 primarily include a 39% minority interest in Group Nine Media for $182 million. The Company also has investments in an educational website, an electric car racing series and certain investments to enhance our digital distribution strategies. For the nine months ended September 30, 2017, we invested $21 million in various cost method investments.
Due to business combinations, we also have redeemable equity balances of $360 million, which may require the use of cash in the event holders of noncontrolling interests put their interests to the Company. (See Note 8 to the accompanying consolidated financial statements).
Repayment of Debt
We used the net proceeds from our issuance of the 2017 USD Notes and 2016 USD Notes to fund the purchase of $600 million of combined aggregate principal amount of our then-outstanding senior notes through a cash tender offer made on March 13, 2017. We recognized a pretax loss on extinguishment of debt of $54 million, which included $50 million for premiums to par value, $2 million of noncash write-offs of unamortized deferred financing costs, $1 million for the repayment of the original issue discount from our senior notes and $1 million in other third-party fees.
Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content. Additional information regarding contractual commitments to acquire content is set forth in “Commitments and Off-Balance Sheet Arrangements” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2016 Form 10-K.
Common Stock Repurchase Program
Under the stock repurchase program, management is authorized to purchase shares of the Company's common stock from time to time through open market purchases or privately negotiated transactions at prevailing market prices or pursuant to one or more accelerated stock repurchase or other derivative arrangements as permitted by securities laws and other legal requirements and subject to stock price, business and market conditions and other factors. As of September 30, 2017, the Company had repurchased 3 million and 164 million shares of our Series A and Series C common stock over the life of the program for the aggregate purchase price of $171 million and $6.6 billion, respectively. Over the life of the program, authorization under the stock repurchase program has totaled $7.5 billion. The Company's authorization under the program expired on October 8, 2017. We have been funding our stock repurchases through a combination of cash on hand, cash generated by operations and the issuance of debt. In the future, we may also choose to fund our stock repurchase program through borrowings under our revolving credit facility and future financing transactions.
Preferred Stock Conversion and Repurchase
Prior to the Exchange Agreement with Advance/Newhouse entered into on July 30, 2017, we had an agreement with Advance/Newhouse to repurchase, on a quarterly basis, a number of shares of Series C-1 convertible preferred stock convertible into Series C common stock purchased under the Company’s stock repurchase program during the then most recently completed fiscal quarter. The price paid per share was calculated as 99% of the average price paid for the Series C common shares repurchased by the Company during the applicable fiscal quarter multiplied by the Series C conversion rate. The Advance/Newhouse repurchases are made outside of the Company’s publicly announced stock repurchase program. The Advance/Newhouse repurchase agreement was amended on August 7, 2017 to conform the terms of the previous agreement, as detailed above, to the conversion ratio of the newly issued Series C-1 convertible preferred stock. During the nine months ended September 30, 2017, we converted and retired 2.3 million shares of our Series C convertible preferred stock under the
preferred stock conversion and repurchase arrangement for an aggregate purchase price of $120 million. During the three months ended September 30, 2017 we repurchased 0.2 million shares of Series C-1 convertible preferred stock, following the Exchange Agreement with Advance/Newhouse, for a purchase price of $102 million. The aggregate purchase price paid during the nine months ended September 30, 2017, including Series C convertible preferred stock and Series C-1 convertible preferred stock, was $222 million (See Note 9 to the accompanying consolidated financial statements.)
Income Taxes and Interest
We expect to continue to make payments for income taxes and interest on our outstanding senior notes. During the nine months ended September 30, 2017, we made cash payments of $232 million and $236 million for income taxes and interest on our outstanding debt, respectively.
Restructuring and Other
Our uses of cash include restructuring costs related to management changes and cost reduction efforts, including employee terminations, intended to enable us to more efficiently operate in a leaner and more directed cost structure and invest in growth initiatives, including digital services and content creation. As of September 30, 2017, we have restructuring liabilities of $27 million related to employee terminations. (See Note 17 to the accompanying consolidated financial statements).
Share-Based Compensation
We expect to continue to make payments for vested cash-settled share-based awards. Actual amounts expensed and payable for cash-settled awards are dependent on future fair value calculations which are primarily affected by changes in our stock price or changes in the number of awards outstanding. During the nine months ended September 30, 2017, we paid $1 million for cash-settled share-based awards. As of September 30, 2017, liabilities totaled $43 million for outstanding liability-classified share-based compensation awards, of which $12 million was classified as current. (See Note 10 to the accompanying consolidated financial statements.)
Cash Flows
The following table presents changes in cash and cash equivalents (in millions).
|
| | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
Cash and cash equivalents, beginning of period | | $ | 300 |
| | $ | 390 |
|
Cash provided by operating activities | | 1,167 |
| | 834 |
|
Cash used in investing activities | | (523 | ) | | (54 | ) |
Cash provided by (used in) financing activities | | 5,983 |
| | (975 | ) |
Effect of exchange rate changes on cash and cash equivalents | | 67 |
| | 29 |
|
Net change in cash and cash equivalents | | 6,694 |
| | (166 | ) |
Cash and cash equivalents, end of period | | $ | 6,994 |
| | $ | 224 |
|
Operating Activities
Cash provided by operating activities increased $333 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The increase was attributable to a $195 million decrease in cash paid for taxes, improved operating results and a decrease in the net negative effect of foreign currency, offset by declines in working capital, primarily due to changes in accounts receivable. The decrease in cash paid for taxes, net, for the nine months ended September 30, 2017 is mostly due to the tax impact from the Company's investments in limited liability companies that sponsor renewable energy projects related to solar energy (see Note 3 and Note 13 to the accompanying consolidated financial statements).
Investing Activities
Cash flows used in investing activities increased $469 million for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The increase was primarily attributable to an increase in payments for investments of $316 million, including $300 million in renewable energy projects and payments for derivative instruments of $98 million that did not receive hedge accounting, but economically hedged pricing risk for the senior notes issued September 21, 2017.
Financing Activities
Cash flows provided by financing activities increased $7.0 billion for the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016. The increase was primarily attributable to proceeds from the issuance of
senior notes which will be used to finance the Scripps Acquisition (see Note 6) and a decrease in repurchases of stock of $521 million, offset by an increase in principal repayments of debt.
Capital Resources
As of September 30, 2017, capital resources were comprised of the following (in millions).
|
| | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Total Capacity | | Outstanding Letters of Credit | | Outstanding Indebtedness | | Unused Capacity |
Cash and cash equivalents | | $ | 6,994 |
| | $ | — |
| | $ | — |
| | $ | 6,994 |
|
Revolving credit facility | | 2,500 |
| | 1 |
| | 425 |
| | 2,074 |
|
Senior notes(a) | | 14,246 |
| | — |
| | 14,246 |
| | — |
|
Total | | $ | 23,740 |
| | $ | 1 |
| | $ | 14,671 |
| | $ | 9,068 |
|
(a) Interest on the senior notes is paid annually, semi-annually or quarterly. Our senior notes outstanding as of September 30, 2017 had interest rates that ranged from 1.90% to 6.35% and will mature between 2019 and 2047.
We expect that our cash balance, cash generated from operations and availability under our revolving credit agreement will be sufficient to fund our cash needs for the next twelve months, including any potential required payments related to the special mandatory redemption provision associated with certain senior notes issued on September 21, 2017. Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios.
As of September 30, 2017, we held $89 million of our $6,994 million of cash and cash equivalents in our foreign subsidiaries. We intend to permanently reinvest these funds outside of the U.S. Our current plans do not demonstrate a need to repatriate them to the U.S. However, if these funds are needed in the U.S., we would be required to accrue and pay U.S. taxes to repatriate them. The determination of the amount of unrecognized U.S. deferred income tax liability with respect to these undistributed foreign earnings is not practicable.
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we enter into commitments for the purchase of goods or services that require us to make payments or provide funding in the event certain circumstances occur. (See Note 15 to the accompanying consolidated financial statements.)
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we enter into transactions with related parties, primarily Liberty Global, Liberty Broadband, our equity method investees and minority partners of our consolidated subsidiaries. (See Note 14 to the accompanying consolidated financial statements.) From time to time, we also enter into equity-related transactions and repurchases with Advance/Newhouse. (See Note 9 to the accompanying consolidated financial statements.)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed since December 31, 2016. For a discussion of each of our critical accounting policies listed below, including information and analysis of estimates and assumptions involved in their application, and other significant accounting policies, see Note 2 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in the 2016 Form 10-K:
•Revenue recognition;
•Goodwill and intangible assets;
•Income taxes;
•Content rights;
•Share-based compensation; and
•Equity and cost method investments.
NEW ACCOUNTING AND REPORTING PRONOUNCEMENTS
We adopted certain new accounting and reporting standards during the nine months ended September 30, 2017. (See Note 1 to the accompanying consolidated financial statements.)
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about our existing market risk are set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the 20162020 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2016.2020.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of SeptemberJune 30, 2017.2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of SeptemberJune 30, 2017,2021, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.effective.
Changes in Internal Control Over Financial Reporting
During the three months ended SeptemberJune 30, 2017,2021, there were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In the normal course of business, we experience routine claims and legal proceedings. It is the opinion of our management, based on information available at this time, that none of the current claims and proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Scripps Acquisition
With regards to our pending acquisition of Scripps, Discovery and Scripps could be subject to litigation related to any failure to complete the transaction or related to any enforcement proceeding commenced against Discovery and Scripps to perform their respective obligations under the Merger Agreement. If the transaction is not completed, these risks may materialize and may adversely affect Discovery’s and Scripps’ businesses, financial condition, financial results and stock prices. Additionally, three securities lawsuits related See Note 16 to the proposed merger have been filed by purported Scripps shareholders. A putative class action lawsuit captioned Inzlicht-Sprei v. Scripps Networks Interactive, et al. (Case No. 3:17-cv-00420), which we refer to as the “Inzlicht-Sprei action”, was filed in the United States District Court for the Eastern District of Tennessee on September 20, 2017. A putative class action lawsuit captioned Berg v. Scripps Networks Interactive, et al. (Case No. 2:17-cv-848), which we refer to as the “Berg action”, and a lawsuit captioned Wagner v. Scripps Networks Interactive, et al. (Case No. 2:17-cv-859), which we refer to as the “Wagner action”, were filed in the United States District Court for the Southern District of Ohio on September 27, 2017 and September 29, 2017, respectively. We refer to the Inzlicht-Sprei action, Berg action and Wagner action collectively as the “actions”. The actions name as defendants Scripps, the members of the Scripps board, and in the Berg action only, Discovery and Merger Sub, and allege that the defendants filed a materially incomplete and misleading Form S-4 in violation of Sections 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9. The Wagner action seeks to enjoin the shareholder vote on the proposed merger, and all of the actions seek to enjoin the defendants from proceeding with or consummating the proposed merger or, in theaccompanying consolidated financial statements.
event the merger is consummated, request that the court issue an order rescinding the merger and/or awarding rescissory damages. Additionally, the Inzlicht-Sprei action seeks that the Court direct the defendants to account for alleged damages, and all the actions seek attorneys’ and expert fees and expenses. On October 12, 2017, the plaintiff in the Inzlicht-Sprei action filed a notice of voluntary dismissal without prejudice. The time for the defendants to move or answer has not yet expired in any of the actions.
ITEM 1A. Risk Factors
Disclosure aboutInvestors should carefully review and consider the information regarding certain factors that could materially affect our existingbusiness, results of operations, financial condition and cash flows as set forth under Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, and as supplemented by the updated and additional risk factors described below. Additional risks and uncertainties not presently known to us or that we currently believe not to be material may also adversely impact our business, results of operations, financial position and cash flows.
Risk Factors Related to the Combination of Discovery and AT&T’s WarnerMedia Business
On May 17, 2021, the Company, our wholly owned subsidiary Drake Subsidiary, Inc., AT&T Inc. (“AT&T”) and AT&T’s wholly owned subsidiary Magallanes, Inc. entered into definitive agreements pursuant to which and subject to the terms and conditions therein (1) AT&T will transfer the business, operations and activities that constitute the WarnerMedia segment of AT&T, subject to certain exceptions (the “WarnerMedia Business”) to Magallanes, Inc. (such transfer, the “Separation”), (2) AT&T will distribute to its stockholders the issued and outstanding shares of common stock of Magallanes, Inc. held by AT&T (such distribution, the “Distribution”) and (3) Drake Subsidiary, Inc. will merge with and into Magallanes, Inc. with Magallanes, Inc. as the surviving entity and wholly owned subsidiary of the Company (such merger, the “Merger” and the Separation, Distribution and Merger collectively, the “Combination”).
The pendency of the proposed Combination may cause disruption in our business.
The definitive agreement and plan of merger (the “Merger Agreement”) related to the Combination restricts us from taking specified actions without AT&T’s consent until the Combination is set forthcompleted or the Merger Agreement is terminated, including making certain significant acquisitions or investments, entering into certain new lines of business, incurring certain indebtedness in Item 1A, “Risk Factors,”excess of certain thresholds, making non-ordinary course capital expenditures, amending or modifying certain material contracts, divesting certain assets (including certain intellectual property rights), and making certain non-ordinary course changes to personnel and employee compensation. These restrictions and others more fully described in the 2016 Form 10-K. Our risk factorsMerger Agreement may affect our ability to execute our business strategies and attain our financial and other goals and may impact our financial condition, results of operations and cash flows.
The pendency of the proposed Combination could cause disruptions to our business or business relationships, which could have not changed materially since December 31, 2016, exceptan adverse impact on our results of operations. Parties with which we have business relationships, including distributors, advertisers and content providers, may be uncertain as to the future of such relationships and may delay or defer certain business decisions, seek alternative relationships with third parties or seek to alter their present business relationships with us. Parties with whom we otherwise may have sought to establish business relationships may seek alternative relationships with third parties.
The pursuit of the Combination and the preparation for the following:
DCLintegration of the WarnerMedia Business is not obligatedexpected to place a significant burden on our management and internal resources. The diversion of management’s attention away from day-to-day business concerns and any difficulties encountered in the net proceedstransition and integration process could adversely affect our financial results.
We have incurred and will continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the Combination. We may also incur unanticipated costs in the integration of the offeringWarnerMedia Business with the business of Discovery. The substantial majority of these costs will be non-recurring expenses relating to the Combination, and many of these costs are payable regardless of whether or not the Combination is consummated. We also could be subject to litigation related to the proposed Combination, which could prevent or delay the consummation of the senior notesCombination and result in escrow priorsignificant costs and expenses.
Failure to complete the Combination in a timely manner or at all could negatively impact the market price of our common stock, as well as our future business and our financial condition, results of operations and cash flows.
We currently anticipate the Combination will be completed in mid-2022, but the Combination cannot be completed until conditions to closing are satisfied or (if permissible under applicable law) waived. The Combination is subject to numerous closing conditions, including approval by Discovery’s stockholders, receipt of certain regulatory approvals, AT&T’s receipt of a private letter ruling from the Internal Revenue Service regarding the qualification of the Distribution and certain related transactions for tax-free treatment under the Internal Revenue Code and AT&T's receipt of a special cash payment in accordance with the terms of the Separation and Distribution Agreement by and among Discovery, AT&T and Magallanes, Inc.
The satisfaction of the required conditions could delay the completion of the Scripps acquisition and,Combination for a significant period of time or prevent it from occurring. Further, there can be no assurance that the conditions to the closing of the Combination will be satisfied or waived or that the Combination will be completed.
If the Combination is not completed in a timely manner or at all, our ongoing business may be adversely affected as a result, follows:
•we may not be able to redeemexperience negative reactions from the 2023 notes, 2028 notes, 2037 notesfinancial markets, and 2047 notes upon a special mandatory redemption.
We are not obligated to place the net proceeds of the offering of the senior notes in escrow priorour stock price could decline to the completion ofextent that the Scripps acquisition or to provide a security interest in those proceeds, andcurrent market price reflects an assumption that the indenture governing the senior notes imposes no other restrictions on our use of these proceeds during that time. Accordingly, the source of funds for any redemption of the Senior Fixed Rate Notes or Sterling Notes upon a special mandatory redemption wouldCombination will be the proceeds that completed;
•we have voluntarily retainedmay experience negative reactions from employees, customers, suppliers or other sources of liquidity, including available cash, borrowings, sales of assets or sales of equity. We may not be able to satisfy our obligation to redeem these senior notes upon a special mandatory redemption, because third parties;
•we may not have sufficient financial resourcesbe subject to pay the aggregate redemption price on such senior notes. Our failure to redeem these senior notes as required under the indenture would result in a default under the indenture,litigation, which could result in defaultssignificant costs and expenses;
•management’s focus may have been diverted from day-to-day business operations and pursuing other opportunities that could have been beneficial to Discovery; and
•our costs of pursuing the Combination may be higher than anticipated.
In addition to the above risks, we may be required, under certain circumstances, to pay AT&T a termination fee equal to $720 million and/or to reimburse or indemnify AT&T for certain of its expenses. If the Combination is not consummated, there can be no assurance that these risks will not materialize and will not materially adversely affect our stock price, business, financial condition, results of operations or cash flows.
In order to complete the Combination, Discovery and AT&T must obtain certain governmental approvals, and if such approvals are not granted or are granted with conditions, completion of the Combination may be jeopardized or the anticipated benefits of the Combination could be reduced.
Although Discovery and AT&T have agreed to use reasonable best efforts, subject to certain limitations, to make certain governmental filings and obtain the required governmental approvals or expiration or earlier termination of relevant waiting periods, as the case may be, there can be no assurance that the relevant waiting periods will expire or be terminated or that the relevant approvals will be obtained. As a condition to approving the Combination, these governmental authorities may impose conditions, terms, obligations or restrictions or require divestitures or place restrictions on the conduct of our business after completion of the Combination. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions and that such conditions, terms, obligations or restrictions will not have the effect of delaying or preventing completion of the Combination or imposing additional material costs on or materially limiting the revenues of the combined company following the Combination, or otherwise adversely affecting, including to a material extent, our businesses and results of operations after completion of the Combination. If we or the WarnerMedia Business are required to divest assets or businesses, there can be no assurance that we will be able to negotiate such divestitures expeditiously or on favorable terms or that the governmental authorities will approve the terms of such divestitures. We can provide no assurance that these conditions, terms, obligations or restrictions will not result in the abandonment of the Combination.
Although we expect that the Combination will result in synergies and other benefits to us, we may not realize those benefits because of difficulties related to integration, the achievement of such synergies, and other challenges.
Discovery and the WarnerMedia Business have operated and, until completion of the Combination, will continue to operate, independently, and there can be no assurances that our businesses can be combined in a manner that allows for the achievement of substantial benefits. If we are not able to successfully integrate the WarnerMedia Business with ours or pursue our direct-to-consumer strategy successfully, including coordinating our streaming services for global customers, the anticipated benefits, including synergies, of the Combination may not be realized fully or may take longer than expected to be realized. Specifically, the following issues, among others, must be addressed in combining the operations of Discovery and the WarnerMedia Business in order to realize the anticipated benefits of the Combination:
•combining the businesses of Discovery and the WarnerMedia Business in a manner that permits us to achieve the synergies anticipated to result from the Combination, the failure of which would result in the anticipated benefits of the Combination not being realized in the time frame currently anticipated or at all;
•maintaining existing agreements with customers, distributors, providers, talent and vendors and avoiding delays in entering into new agreements with prospective customers, distributors, providers, talent and vendors;
•combining certain of the businesses’ corporate functions;
•determining whether and how to address possible differences in corporate cultures and management philosophies;
•integrating the businesses’ administrative and information technology infrastructure;
•integrating employees and attracting and retaining key personnel, including talent;
•managing the expanded operations of a significantly larger and more complex company;
•coordinating the businesses’ direct-to-consumer streaming services for global customers; and
•resolving potential unknown liabilities, adverse consequences and unforeseen increased expenses associated with the Combination.
Even if the operations of our business and the business of the WarnerMedia Business are integrated successfully, the full benefits of the Combination may not be realized, including, among others, the synergies that are expected. These benefits may not be achieved within the anticipated time frame or at all. Additional unanticipated costs may also be incurred in the integration of our business and the business of the WarnerMedia Business. Further, it is possible that there could be loss of key Discovery or WarnerMedia Business employees, loss of customers, disruption of either or both of Discovery’s or WarnerMedia Business’ ongoing businesses or unexpected issues, higher than expected costs and an overall post-completion process that takes longer than originally anticipated. All of these factors could materially adversely affect our stock price, business, financial condition, results of operations or cash flows.
Our consolidated indebtedness will increase substantially following completion of the Combination. This increased level of indebtedness could adversely affect us, including by decreasing our business flexibility.
Our consolidated indebtedness as of June 30, 2021 was approximately $15.5 billion. Upon completion of the Combination, we expect to assume or incur up to $43.0 billion of additional debt, including existing debt of the existing WarnerMedia Business, debt that may be issued by Magallanes, Inc. to AT&T and debt that Magallanes, Inc. may incur to fund a special cash payment to AT&T. In addition, subject to certain conditions, availability under our revolving credit facility will increase from $2.5 billion to $6.0 billion. The increased indebtedness could have the effect of, among other things, reducing our flexibility to respond to changing business and economic conditions, increasing our subsidiaries’ other debt agreementsvulnerability to general adverse economic and have material adverse consequences for usindustry conditions and the holders of the senior notes. In addition,limiting our ability to redeemobtain additional financing in the senior notesfuture. In addition, the amount of cash required to pay interest on our indebtedness levels will increase following completion of the Combination, and thus the demands on our cash resources will be greater than prior to the Combination. The increased levels of indebtedness following completion of the Combination could also reduce funds available for cashcapital expenditures, share repurchases, investments, mergers and acquisitions, and other activities and may create competitive disadvantages for us relative to other companies with lower debt levels.
Following consummation of the Combination, our corporate or debt-specific credit rating could be downgraded, which may increase our borrowing costs or give rise to a need to refinance existing indebtedness. If a ratings downgrade occurs, we may need to refinance existing debt or be subject to higher borrowing costs and more restrictive covenants when we incur new debt in the future, which could reduce profitability and diminish operational flexibility.
Risk Factors Related to our International Operations
We are subject to risks related to our international operations.
We have operations through which we distribute programming outside the United States. As a result, our business is subject to certain risks inherent in international business, many of which are beyond our control. These risks include:
•laws and policies affecting trade and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;
•changes in local regulatory requirements, including restrictions on content, imposition of local content quotas and restrictions or prohibitions on foreign ownership;
•our ability to obtain the appropriate licenses and other regulatory approvals we need to broadcast content in foreign countries;
•differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property;
•significant fluctuations in foreign currency value;
•currency exchange controls;
•the instability of foreign economies and governments;
•war and acts of terrorism;
•anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations;
•foreign privacy and data protection laws and regulation and changes in these laws; and
•shifting consumer preferences regarding the viewing of video programming.
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition, operating results, liquidity and prospects. Acts of terrorism, hostilities, or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could adversely affect our results of operations. Furthermore, some foreign markets where we and our partners operate may be limitedmore adversely affected by lawcurrent economic conditions than the U.S. We also may incur substantial expense as a result of changes, including the imposition of new restrictions, in the existing economic or political environment in the regions where we do business.This is of particular concern in Poland, where we operate TVN, a key component of our international business, and where the government currently has under consideration, and may adopt in the future, new regulations that would prohibit non-European Union ownership of Polish licensed free-to-air and pay-TV channels.If such regulations are adopted, it could impact the ownership structure and licensing of TVN, and could, directly or indirectly, affect the operations of our Polish media properties and/or modify the terms under which we offer our services and operate in that market.
General Risks
Domestic and foreign laws and regulations could adversely impact our operating results.
Programming services like ours, and the distributors of our services, including cable operators, satellite operators and other agreements relatingmulti-channel video programming distributors, are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the FCC, as well as by state and local governments, in ways that affect the daily conduct of our video content business. See the discussion under “Business – Regulatory Matters” that appears in our Annual Report on Form 10-K for the year ended December 31, 2020. The U.S. Congress, the FCC and the courts currently have under consideration, and may adopt or interpret in the future, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operations of our U.S. media properties or modify the terms under which we offer our services and operate.
Similarly, the foreign jurisdictions in which our networks are offered have, in varying degrees, laws and regulations governing our businesses. Programming businesses are subject to regulation on a country-by-country basis. Changes in regulations imposed by foreign governments could also adversely affect our indebtedness outstanding atbusiness, results of operations and ability to expand our operations beyond their current scope. The Polish government currently has under consideration, and may adopt in the time.future, new regulations that would prohibit non-European Union ownership of Polish licensed free-to-air and pay-TV channels. If such regulations are adopted, it could impact the ownership structure and licensing of TVN, which is a key component of our international business, and could, directly or indirectly, affect the operations of our Polish media properties and/or modify the terms under which we offer our services and operate in that market.
ITEM 2. Unregistered SalesThe market price of Equity Securities and Use of Proceeds
The following table presents information about our repurchases of common stock has been highly volatile and may continue to be volatile due to circumstances beyond our control.
The market price of our common stock has fluctuated, and may continue to fluctuate, widely, due to many factors, some of which may be beyond our control. These factors include, without limitation:
•large stockholders exiting their position in our common stock;
•an increase or decrease in the short interest in our common stock;
•comments by securities analysts or other third parties, including blogs, articles, message boards, and social and other media;
•actual or anticipated fluctuations in our financial and operating results;
•risks and uncertainties associated with the ongoing COVID-19 pandemic;
•development and provision of programming for new television and telecommunications technologies and the success of our new discovery+ streaming product;
•spending on domestic and foreign television advertising;
•changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, subscription video on demand, internet protocol television, mobile personal devices, and personal tablets and their impact on television advertising revenue;
•fluctuations in foreign currency exchange rates;
•public perception of us, our competitors, or industry; and
•overall general market fluctuations.
Stock markets in general and our stock price in particular have recently experienced extreme price and volume fluctuations that were made through openhave been unrelated or disproportionate to the operating performance of those companies and our company. For example, on March 26, 2021, our Series A common stock experienced an intra-day trading high of $58.21 per share and a low of $34.60 per share while our Series C common stock experienced an intra-day trading high of $51.36 and a low of $30.99 per share. In addition, from July 1, 2020 to June 30, 2021, the closing price of our Series A common stock and our Series C common stock on the Nasdaq ranged from as low as $19.25 and $17.25 to as high as $77.27 and $66.00, respectively, and daily trading volume ranged from approximately 1.8 million and 0.6 million shares to 106.1 million and 45.7 million shares, respectively. During this time, we have not experienced any material changes in our financial condition or results of operations that would explain such price volatility or trading volume. In particular, sales of large blocks of our Series A common stock and Series C common stock on and after March 26, 2021, reportedly conducted by financial institutions unwinding hedge positions associated with margin calls against Archegos Management put pressure on the supply and demand for our common stock, further influencing volatility in its market transactions duringprice. These market fluctuations and trading activities have caused and may in the three months ended September 30, 2017.future cause the market price and demand for our common stock to fluctuate substantially, which may negatively affect the price and liquidity of our common stock.
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Period | | Total Number of Series C Shares Purchased | | Average Price Paid per Share: Series C (a) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(b)(c) | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs(a)(b) |
July 1, 2017 - July 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | 764,615,880 |
|
August 1, 2017 - August 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | 764,615,880 |
|
September 1, 2017 - September 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 764,615,880 |
|
Total | | — |
| | $ | — |
| | — |
| | $ | 764,615,880 |
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(a) The amounts do not give effect to any fees, commissions or other costs associated with repurchases of shares.
(b) Under the stock repurchase program, management is authorized to purchase shares of the Company's common stock from time to time through open market purchases or privately negotiated transactions at prevailing prices or pursuant to one or more accelerated stock repurchase agreements or other derivative arrangements as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors. As of September 30, 2017, the total amount authorized under the stock repurchase program was $7.5 billion. The Company's authorization under the program expired on October 8, 2017. There were no repurchases of our Series A and B common stock during the three months ended September 30, 2017. The Company first announced its stock repurchase program on August 3, 2010.
(c) Prior to the Exchange Agreement with Advance/Newhouse entered into on July 30, 2017, we had an agreement with Advance/Newhouse to repurchase from Advance/Newhouse, on a quarterly basis, a number of its shares of Series C convertible preferred stock based on the number of shares of Series C common stock purchased under our stock repurchase program during the then most recently completed fiscal quarter. The repurchase settlement with Advance/Newhouse with respect to shares of Series C common stock repurchased in the quarter ended June 30, 2017 occurred after the Exchange and, as such, was a repurchase of the newly issued Series C-1 convertible preferred stock. The total repurchase price paid of $102 million was the same amount we would have paid under the previous repurchase agreement with Advance/Newhouse, as determined and disclosed by the Company in the previous quarter. The number of shares repurchased of 0.2 million reflects the post-Exchange repurchase of Series C-1 convertible preferred stock and therefore the number of preferred shares repurchased differs from the number of shares of Series C convertible preferred stock we previously disclosed. The Advance/Newhouse repurchase agreement was amended on August 7, 2017 to conform the terms of the previous agreement to the conversion ratio of the newly issued Series C-1 convertible preferred stock. There are no planned repurchases of Series C common stock for the fourth quarter of 2017.
ITEM 6. Exhibits.
Description |
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2.1 | | |
Exhibit No. | | Description |
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2.1 | | Agreement and Plan of Merger, dated as of July 30, 2017,May 17, 2021, by and among Discovery, Communications, Inc., Skylight Merger Sub,AT&T Inc., Magallanes, Inc. and Scripps Networks Interactive,Drake Subsidiary, Inc. (incorporated by reference to Exhibit 2.1 to the Form 8-K filed on July 31, 2017May 20, 2021 (SEC File No. 001-34177))
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3.12.2 | |
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3.210.1 | | CertificateVoting Agreement, dated as of Designation of Series C-1 Convertible Participating Preferred Stock, par value $0.01 per shareMay 17, 2021, by and among Discovery, Inc., AT&T Inc., Magallanes, Inc., John C. Malone, John C. Malone 1995 Revocable Trust, Malone Discovery 2021 Charitable Remainder Unitrust and Malone CHUB 2017 Charitable Remainder Unitrust (incorporated by reference to Exhibit 3.210.1 to the Form 8-K filed on August 7, 2017May 20, 2021 (SEC File No. 001-34177))
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4.110.2 | | Amendment No. 2 to RightsVoting Agreement, dated as of July 30, 2017,May 17, 2021, by and betweenamong Discovery Communications, Inc., AT&T Inc., Magallanes, Inc., Advance/Newhouse Programming Partnership and Computershare Trust Company, N.A., as rights agentAdvance/Newhouse Partnership (incorporated by reference to Exhibit 4.110.2 to the Form 8-K filed on July 31, 2017May 20, 2021 (SEC File No. 001-34177)) |
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4.210.3 | | |
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10.4 | | |
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10.5 | | |
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10.6 | | |
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10.7 | | |
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10.8 | | Credit Agreement, dated as of August 11, 2017,June 9, 2021, among Discovery Communications, LLC (“DCL”), certain wholly-owned subsidiaries of DCL, Discovery, Communications, Inc., as Facility Guarantor, Scripps Networks Interactive, Inc., as subsidiary guarantor, the lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent (filed herewith) |
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4.3 | | Term Loan Credit Agreement, dated as of August 11, 2017, among Discovery Communications, LLC, as the Company, Discovery Communications, Inc., as the Facility Guarantor, the lenders party hereto, Goldman Sachs Bank USA, as Administrative Agent (filed herewith) |
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4.4 | | Eleventh Supplemental Indenture, dated as of September 21, 2017, among Discovery Communications, LLC, Discovery Communications, Inc.administrative agent, swing line lender and U.S. Bank National Association, as TrusteeL/C issuer. (incorporated by reference to Exhibit 4.1 to the Form 8-K filed on September 21, 2017June 10, 2021 (SEC File No. 001-34177))
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4.510.9 | |
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4.6 | | Thirteenth Supplemental Indenture, dated as of September 21, 2017, among Discovery Communications, LLC, Discovery Communications, Inc., Elavon Financial Service DAC, UK Branch, as London Paying Agent, and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 21, 2017 (SEC File No. 001-34177))
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10.1 | | VotingCredit Agreement, dated as of July 30, 2017, by and2021, among Discovery Communications, LLC, Discovery, Inc., Scripps Networks Interactive, Inc., Discovery Communications, Inc.certain lenders party thereto and John C. Malone (incorporated by reference to Exhibit 10.1 to the Form 8-K filed on July 31, 2017 (SEC File No. 001-34177))
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10.2 | |
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10.322 | |
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10.431.1 | |
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10.5 | |
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10.6 | | |
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10.7 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document (filed herewith)† - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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101.SCH | | Inline XBRL Taxonomy Extension Schema Document (filed herewith)† |
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101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)† |
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101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)† |
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101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)† |
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101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)† |
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104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) |
* Indicates management contract or compensatory plan, contract or arrangement.
†Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of SeptemberJune 30, 20172021 and December 31, 2016,2020, (ii) Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, (iii) Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, (iv) Consolidated Statements of Cash
Flows for the ninesix months ended SeptemberJune 30, 20172021 and 2016,2020, (v) Consolidated Statement of Equity for the ninethree and six months ended SeptemberJune 30, 2017,2021 and 2020, and (vi) Notes to Consolidated Financial Statements.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | | DISCOVERY, COMMUNICATIONS, INC. (Registrant) |
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Date: November 2, 2017August 3, 2021 | | | | By: | | /s/ David M. Zaslav |
| | | | | | David M. Zaslav |
| | | | | | President and Chief Executive Officer |
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Date: November 2, 2017 | | | | By: | | /s/ Gunnar Wiedenfels |
| | | | | | Gunnar Wiedenfels |
| | | | | | Chief Financial Officer |
EXHIBIT INDEX
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Exhibit No.Date: August 3, 2021 | | Description |
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2.1 | By: |
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3.1 | |
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3.2 | |
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4.1 | |
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4.2 | | Amendment No. 1 to Amended and Restated Credit Agreement, dated as of August 11, 2017, among Discovery Communications, LLC (“DCL”), certain wholly-owned subsidiaries of DCL, Discovery Communications, Inc., as Facility Guarantor, the lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent (filed herewith)
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4.3 | | Term Loan Credit Agreement, dated as of August 11, 2017, among Discovery Communications, LLC, as the Company, Discovery Communications, Inc., as the Facility Guarantor, the lenders party hereto, Goldman Sachs Bank USA, as Administrative Agent (filed herewith)
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4.4 | |
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4.5 | |
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4.6 | | Thirteenth Supplemental Indenture, dated as of September 21, 2017, among Discovery Communications, LLC, Discovery Communications, Inc., Elavon Financial Service DAC, UK Branch, as London Paying Agent, and U.S. Bank National Association, as Trustee (incorporated by reference to Exhibit 4.3 to the Form 8-K filed on September 21, 2017 (SEC File No. 001-34177))
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10.1 | |
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10.2 | |
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/s/ Gunnar Wiedenfels |
| | | | | | Gunnar Wiedenfels |
10.3 | |
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10.4 | |
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10.5 | |
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10.6 | | |
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10.7 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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32.2 | | |
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101.INS | | XBRL Instance Document (filed herewith)†
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101.SCH | | XBRL Taxonomy Extension Schema Document (filed herewith)†
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)†
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)†
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (filed herewith)†
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)†
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†Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016, (v) Consolidated Statement of Equity for the nine months ended September 30, 2017, and (vi) Notes to Consolidated Financial Statements.