UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31,June 30, 2022
OR | | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-34177
Warner Bros. Discovery, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
Delaware | | | 35-2333914 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
| |
230 Park Avenue South | | | 10003 |
New York, New York | | | (Zip Code) |
(Address of principal executive offices) | | | |
(212) 548-5555
(Registrant’s telephone number, including area code)
Discovery, Inc.N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of Each Class | Trading Symbols | Name of Each Exchange on Which Registered |
Series A Common Stock | WBD | The Nasdaq Global Select Market |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | | | |
Large accelerated filer | ý | Accelerated filer | ¨ |
Non-accelerated filer | o | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Total number of shares outstanding of each class of the Registrant’s common stock as of April 18,July 21, 2022:
| | | | | |
Series A Common Stock, par value $0.01 per share | 2,426,844,4052,427,592,861 | |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in millions, except per share amounts) | | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | Revenues: | | | | | Revenues: | | | | | | | |
Advertising | Advertising | $ | 1,482 | | | $ | 1,415 | | | Advertising | $ | 2,721 | | | $ | 1,634 | | | $ | 4,197 | | | $ | 3,043 | |
Distribution | Distribution | 1,422 | | | 1,310 | | | Distribution | 4,838 | | | 1,312 | | | 6,190 | | | 2,570 | |
Content | | Content | 2,064 | | | 100 | | | 2,387 | | | 212 | |
Other | Other | 255 | | | 67 | | | Other | 204 | | | 16 | | | 212 | | | 29 | |
Total revenues | Total revenues | 3,159 | | | 2,792 | | | Total revenues | 9,827 | | | 3,062 | | | 12,986 | | | 5,854 | |
Costs and expenses: | Costs and expenses: | | | | | Costs and expenses: | | | | | | | |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | 1,236 | | | 969 | | | Costs of revenues, excluding depreciation and amortization | 6,625 | | | 1,055 | | | 7,861 | | | 2,024 | |
Selling, general and administrative | Selling, general and administrative | 1,040 | | | 1,051 | | | Selling, general and administrative | 3,538 | | | 952 | | | 4,578 | | | 2,003 | |
Depreciation and amortization | Depreciation and amortization | 525 | | | 361 | | | Depreciation and amortization | 2,266 | | | 341 | | | 2,791 | | | 702 | |
| Restructuring and other charges | Restructuring and other charges | 5 | | | 15 | | | Restructuring and other charges | 1,033 | | | 7 | | | 1,038 | | | 22 | |
| Loss (gain) on disposition | | Loss (gain) on disposition | 4 | | | (72) | | | 4 | | | (72) | |
Total costs and expenses | Total costs and expenses | 2,806 | | | 2,396 | | | Total costs and expenses | 13,466 | | | 2,283 | | | 16,272 | | | 4,679 | |
Operating income | 353 | | | 396 | | | |
Operating (loss) income | | Operating (loss) income | (3,639) | | | 779 | | | (3,286) | | | 1,175 | |
Interest expense, net | Interest expense, net | (153) | | | (163) | | | Interest expense, net | (511) | | | (157) | | | (664) | | | (320) | |
| Loss from equity investees, net | Loss from equity investees, net | (14) | | | (4) | | | Loss from equity investees, net | (43) | | | (7) | | | (57) | | | (11) | |
Other income, net | 490 | | | 68 | | | |
Income before income taxes | 676 | | | 297 | | | |
Income tax expense | (201) | | | (106) | | | |
Net income | 475 | | | 191 | | | |
Other (expense) income, net | | Other (expense) income, net | (51) | | | 105 | | | 439 | | | 173 | |
(Loss) income before income taxes | | (Loss) income before income taxes | (4,244) | | | 720 | | | (3,568) | | | 1,017 | |
Income tax benefit (expense) | | Income tax benefit (expense) | 836 | | | (2) | | | 635 | | | (108) | |
Net (loss) income | | Net (loss) income | (3,408) | | | 718 | | | (2,933) | | | 909 | |
Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | (16) | | | (46) | | | Net income attributable to noncontrolling interests | (7) | | | (38) | | | (23) | | | (84) | |
Net income attributable to redeemable noncontrolling interests | Net income attributable to redeemable noncontrolling interests | (3) | | | (5) | | | Net income attributable to redeemable noncontrolling interests | (3) | | | (8) | | | (6) | | | (13) | |
Net income available to Warner Bros. Discovery, Inc. | $ | 456 | | | $ | 140 | | | |
Net income per share allocated to Warner Bros. Discovery, Inc. Series A common stockholders: | | | | | |
Net (loss) income available to Warner Bros. Discovery, Inc. | | Net (loss) income available to Warner Bros. Discovery, Inc. | $ | (3,418) | | | $ | 672 | | | $ | (2,962) | | | $ | 812 | |
Net (loss) income per share allocated to Warner Bros. Discovery, Inc. Series A common stockholders: | | Net (loss) income per share allocated to Warner Bros. Discovery, Inc. Series A common stockholders: | | | | | | | |
Basic | Basic | $ | 0.69 | | | $ | 0.21 | | | Basic | $ | (1.50) | | | $ | 1.02 | | | $ | (2.09) | | | $ | 1.23 | |
Diluted | Diluted | $ | 0.69 | | | $ | 0.21 | | | Diluted | $ | (1.50) | | | $ | 1.01 | | | $ | (2.09) | | | $ | 1.22 | |
Weighted average shares outstanding: | Weighted average shares outstanding: | | | Weighted average shares outstanding: | |
Basic | Basic | 591 | | | 585 | | | Basic | 2,286 | | | 589 | | | 1,443 | | | 587 | |
Diluted | Diluted | 665 | | | 667 | | | Diluted | 2,286 | | | 664 | | | 1,443 | | | 666 | |
| The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited; in millions)
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Net income | | $ | 475 | | | $ | 191 | | | | | |
Other comprehensive income (loss) adjustments, net of tax: | | | | | | | | |
Currency translation | | (99) | | | (167) | | | | | |
| | | | | | | | |
Derivatives | | (18) | | | 237 | | | | | |
Comprehensive income | | 358 | | | 261 | | | | | |
Comprehensive income attributable to noncontrolling interests | | (16) | | | (46) | | | | | |
Comprehensive income attributable to redeemable noncontrolling interests | | (3) | | | (5) | | | | | |
Comprehensive income attributable to Warner Bros. Discovery, Inc. | | $ | 339 | | | $ | 210 | | | | | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net (loss) income | | $ | (3,408) | | | $ | 718 | | | $ | (2,933) | | | $ | 909 | |
Other comprehensive (loss) income adjustments, net of tax: | | | | | | | | |
Currency translation | | (488) | | | 108 | | | (587) | | | (59) | |
| | | | | | | | |
Derivatives | | (18) | | | (112) | | | (36) | | | 125 | |
Comprehensive (loss) income | | (3,914) | | | 714 | | | (3,556) | | | 975 | |
Comprehensive income attributable to noncontrolling interests | | (7) | | | (38) | | | (23) | | | (84) | |
Comprehensive income attributable to redeemable noncontrolling interests | | (3) | | | (8) | | | (6) | | | (13) | |
Comprehensive (loss) income attributable to Warner Bros. Discovery, Inc. | | $ | (3,924) | | | $ | 668 | | | $ | (3,585) | | | $ | 878 | |
| | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
| | | March 31, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 4,162 | | | $ | 3,905 | | Cash and cash equivalents | $ | 2,575 | | | $ | 3,905 | |
Receivables, net | Receivables, net | 2,426 | | | 2,446 | | Receivables, net | 7,049 | | | 2,446 | |
Content rights and prepaid license fees, net | 143 | | | 245 | | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 442 | | | 668 | | Prepaid expenses and other current assets | 5,825 | | | 913 | |
Total current assets | Total current assets | 7,173 | | | 7,264 | | Total current assets | 15,449 | | | 7,264 | |
Noncurrent content rights, net | 3,866 | | | 3,832 | | |
Film and television content rights and games, net | | Film and television content rights and games, net | 30,120 | | | 3,832 | |
Property and equipment, net | Property and equipment, net | 1,328 | | | 1,336 | | Property and equipment, net | 5,597 | | | 1,336 | |
| Goodwill | Goodwill | 12,872 | | | 12,912 | | Goodwill | 34,273 | | | 12,912 | |
Intangible assets, net | Intangible assets, net | 5,873 | | | 6,317 | | Intangible assets, net | 48,724 | | | 6,317 | |
| Other noncurrent assets | Other noncurrent assets | 2,687 | | | 2,766 | | Other noncurrent assets | 8,077 | | | 2,766 | |
Total assets | Total assets | $ | 33,799 | | | $ | 34,427 | | Total assets | $ | 142,240 | | | $ | 34,427 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 521 | | | $ | 412 | | Accounts payable | $ | 1,397 | | | $ | 412 | |
Accrued liabilities | Accrued liabilities | 1,966 | | | 2,230 | | Accrued liabilities | 10,279 | | | 2,230 | |
| Deferred revenues | Deferred revenues | 281 | | | 478 | | Deferred revenues | 1,663 | | | 478 | |
Current portion of debt | Current portion of debt | 794 | | | 339 | | Current portion of debt | 1,097 | | | 339 | |
Total current liabilities | Total current liabilities | 3,562 | | | 3,459 | | Total current liabilities | 14,436 | | | 3,459 | |
Noncurrent portion of debt | Noncurrent portion of debt | 13,605 | | | 14,420 | | Noncurrent portion of debt | 51,388 | | | 14,420 | |
Deferred income taxes | Deferred income taxes | 1,112 | | | 1,225 | | Deferred income taxes | 13,666 | | | 1,225 | |
Other noncurrent liabilities | Other noncurrent liabilities | 1,958 | | | 1,927 | | Other noncurrent liabilities | 9,803 | | | 1,927 | |
Total liabilities | Total liabilities | 20,237 | | | 21,031 | | Total liabilities | 89,293 | | | 21,031 | |
Commitments and contingencies (See Note 16) | 0 | | 0 | |
Commitments and contingencies (See Note 19) | | Commitments and contingencies (See Note 19) | 0 | | 0 |
Redeemable noncontrolling interests | Redeemable noncontrolling interests | 335 | | | 363 | | Redeemable noncontrolling interests | 328 | | | 363 | |
Equity: | | |
| Warner Bros. Discovery, Inc. stockholders’ equity: | Warner Bros. Discovery, Inc. stockholders’ equity: | | Warner Bros. Discovery, Inc. stockholders’ equity: | |
Series A-1 convertible preferred stock: $0.01 par value; 8 shares authorized, issued and outstanding | — | | | — | | |
Series C-1 convertible preferred stock: $0.01 par value; 6 shares authorized; 4 shares issued and outstanding | — | | | — | | |
Series A common stock: $0.01 par value; 1,700 shares authorized; 173 and 170 shares issued; and 172 and 169 shares outstanding | 2 | | | 2 | | |
Series B convertible common stock: $0.01 par value; 100 shares authorized; 7 shares issued and outstanding | — | | | — | | |
Series C common stock: $0.01 par value; 2,000 shares authorized; 559 shares issued; and 330 shares outstanding | 5 | | | 5 | | |
Series A common stock: $0.01 par value; 10,800 and 0 shares authorized; 2,658 and 0 shares issued; and 2,428 and 0 shares outstanding | | Series A common stock: $0.01 par value; 10,800 and 0 shares authorized; 2,658 and 0 shares issued; and 2,428 and 0 shares outstanding | 27 | | | — | |
Preferred stock: $0.01 par value; 1,200 and 0 shares authorized, 0 shares issued and outstanding | | Preferred stock: $0.01 par value; 1,200 and 0 shares authorized, 0 shares issued and outstanding | — | | | — | |
| Discovery Series A-1 convertible preferred stock: $0.01 par value; 0 and 8 shares authorized, issued and outstanding | | Discovery Series A-1 convertible preferred stock: $0.01 par value; 0 and 8 shares authorized, issued and outstanding | — | | | — | |
Discovery Series C-1 convertible preferred stock: $0.01 par value; 0 and 6 shares authorized; 0 and 4 shares issued and outstanding | | Discovery Series C-1 convertible preferred stock: $0.01 par value; 0 and 6 shares authorized; 0 and 4 shares issued and outstanding | — | | | — | |
Discovery Series A common stock: $0.01 par value; 0 and 1,700 shares authorized; 0 and 170 shares issued; and 0 and 169 shares outstanding | | Discovery Series A common stock: $0.01 par value; 0 and 1,700 shares authorized; 0 and 170 shares issued; and 0 and 169 shares outstanding | — | | | 2 | |
Discovery Series B convertible common stock: $0.01 par value; 0 and 100 shares authorized; 0 and 7 shares issued and outstanding | | Discovery Series B convertible common stock: $0.01 par value; 0 and 100 shares authorized; 0 and 7 shares issued and outstanding | — | | | — | |
Discovery Series C common stock: $0.01 par value; 0 and 2,000 shares authorized; 0 and 559 shares issued; and 0 and 330 shares outstanding | | Discovery Series C common stock: $0.01 par value; 0 and 2,000 shares authorized; 0 and 559 shares issued; and 0 and 330 shares outstanding | — | | | 5 | |
Additional paid-in capital | Additional paid-in capital | 11,120 | | | 11,086 | | Additional paid-in capital | 54,439 | | | 11,086 | |
Treasury stock, at cost: 230 shares | (8,244) | | | (8,244) | | |
Treasury stock, at cost: 230 and 230 shares | | Treasury stock, at cost: 230 and 230 shares | (8,244) | | | (8,244) | |
Retained earnings | Retained earnings | 10,033 | | | 9,580 | | Retained earnings | 6,614 | | | 9,580 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (947) | | | (830) | | Accumulated other comprehensive loss | (1,453) | | | (830) | |
Total Warner Bros. Discovery, Inc. stockholders' equity | Total Warner Bros. Discovery, Inc. stockholders' equity | 11,969 | | | 11,599 | | Total Warner Bros. Discovery, Inc. stockholders' equity | 51,383 | | | 11,599 | |
Noncontrolling interests | Noncontrolling interests | 1,258 | | | 1,434 | | Noncontrolling interests | 1,236 | | | 1,434 | |
Total equity | Total equity | 13,227 | | | 13,033 | | Total equity | 52,619 | | | 13,033 | |
Total liabilities and equity | Total liabilities and equity | $ | 33,799 | | | $ | 34,427 | | Total liabilities and equity | $ | 142,240 | | | $ | 34,427 | |
| The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
| | | Three Months Ended March 31, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Operating Activities | Operating Activities | | | | Operating Activities | | | |
Net income | $ | 475 | | | $ | 191 | | |
Net (loss) income | | Net (loss) income | $ | (2,933) | | | $ | 909 | |
Adjustments to reconcile net income to cash provided by operating activities: | Adjustments to reconcile net income to cash provided by operating activities: | | Adjustments to reconcile net income to cash provided by operating activities: | |
Content rights amortization and impairment | Content rights amortization and impairment | 973 | | | 743 | | Content rights amortization and impairment | 6,591 | | | 1,516 | |
Depreciation and amortization | Depreciation and amortization | 525 | | | 361 | | Depreciation and amortization | 2,791 | | | 702 | |
Deferred income taxes | Deferred income taxes | (118) | | | (108) | | Deferred income taxes | (915) | | | (242) | |
Preferred stock conversion premium | | Preferred stock conversion premium | 789 | | | — | |
Share-based compensation expense | Share-based compensation expense | 60 | | | 64 | | Share-based compensation expense | 210 | | | 95 | |
| Gain on disposition | | Gain on disposition | 4 | | | (72) | |
Equity in losses of equity method investee companies and cash distributions | Equity in losses of equity method investee companies and cash distributions | 21 | | | 12 | | Equity in losses of equity method investee companies and cash distributions | 91 | | | 38 | |
Gain on sale of investments | Gain on sale of investments | — | | | (21) | | Gain on sale of investments | (132) | | | (20) | |
| Gain from derivative instruments, net | Gain from derivative instruments, net | (514) | | | (1) | | Gain from derivative instruments, net | (496) | | | — | |
Other, net | Other, net | 33 | | | (3) | | Other, net | 60 | | | (100) | |
Changes in operating assets and liabilities, net of acquisitions and dispositions: | Changes in operating assets and liabilities, net of acquisitions and dispositions: | | Changes in operating assets and liabilities, net of acquisitions and dispositions: | |
Receivables, net | Receivables, net | (5) | | | 41 | | Receivables, net | (444) | | | (141) | |
Content rights and payables, net | (993) | | | (926) | | |
Film and television content rights, games and payables, net | | Film and television content rights, games and payables, net | (4,653) | | | (1,701) | |
Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | (124) | | | (110) | | Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | 8 | | | 41 | |
Foreign currency, prepaid expenses and other assets, net | Foreign currency, prepaid expenses and other assets, net | (10) | | | 26 | | Foreign currency, prepaid expenses and other assets, net | 363 | | | 78 | |
Cash provided by operating activities | Cash provided by operating activities | 323 | | | 269 | | Cash provided by operating activities | 1,334 | | | 1,103 | |
Investing Activities | Investing Activities | | Investing Activities | |
Purchases of property and equipment | Purchases of property and equipment | (85) | | | (90) | | Purchases of property and equipment | (307) | | | (167) | |
Cash acquired from business acquisition | | Cash acquired from business acquisition | 2,419 | | | — | |
Proceeds from sales and maturities of investments | Proceeds from sales and maturities of investments | — | | | 274 | | Proceeds from sales and maturities of investments | 139 | | | 348 | |
Investments in and advances to equity investments | Investments in and advances to equity investments | (42) | | | (55) | | Investments in and advances to equity investments | (109) | | | (105) | |
Proceeds from derivative instruments, net | Proceeds from derivative instruments, net | 639 | | | 29 | | Proceeds from derivative instruments, net | 720 | | | — | |
| Other investing activities, net | Other investing activities, net | 17 | | | (2) | | Other investing activities, net | 18 | | | 120 | |
Cash provided by investing activities | Cash provided by investing activities | 529 | | | 156 | | Cash provided by investing activities | 2,880 | | | 196 | |
Financing Activities | Financing Activities | | Financing Activities | |
Principal repayments of term loans | | Principal repayments of term loans | (3,500) | | | — | |
Principal repayments of debt, including premiums to par value | Principal repayments of debt, including premiums to par value | (327) | | | (339) | | Principal repayments of debt, including premiums to par value | (327) | | | (339) | |
| Distributions to noncontrolling interests and redeemable noncontrolling interests | Distributions to noncontrolling interests and redeemable noncontrolling interests | (224) | | | (183) | | Distributions to noncontrolling interests and redeemable noncontrolling interests | (264) | | | (213) | |
Purchase of redeemable noncontrolling interests | | Purchase of redeemable noncontrolling interests | — | | | (31) | |
| Borrowings under commercial paper program | | Borrowings under commercial paper program | 90 | | | — | |
Repayments under commercial paper program | | Repayments under commercial paper program | (90) | | | — | |
| Other financing activities, net | Other financing activities, net | (36) | | | 53 | | Other financing activities, net | (66) | | | 45 | |
Cash used in financing activities | Cash used in financing activities | (587) | | | (469) | | Cash used in financing activities | (4,157) | | | (538) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (5) | | | (70) | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (66) | | | (49) | |
Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | 260 | | | (114) | | Net change in cash, cash equivalents, and restricted cash | (9) | | | 712 | |
Cash, cash equivalents, and restricted cash, beginning of period | Cash, cash equivalents, and restricted cash, beginning of period | 3,905 | | 2,122 | | Cash, cash equivalents, and restricted cash, beginning of period | 3,905 | | 2,122 | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | $ | 4,165 | | | $ | 2,008 | | Cash, cash equivalents, and restricted cash, end of period | $ | 3,896 | | | $ | 2,834 | |
| The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. | | The accompanying notes are an integral part of these consolidated financial statements. | |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
| | | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Warner Bros. Discovery, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Equity | | | Discovery, Inc. Preferred Stock | | Discovery, Inc. Common Stock | | Warner Bros. Discovery, Inc. Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Warner Bros. Discovery, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Par Value | Shares | | Par Value | | Shares | | Par Value | Shares | | Par Value | Shares | | Par Value | |
December 31, 2021 | December 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 11,086 | | | $ | (8,244) | | | $ | 9,580 | | | $ | (830) | | | $ | 11,599 | | | $ | 1,434 | | | $ | 13,033 | | December 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | — | | | $ | — | | | $ | 11,086 | | | $ | (8,244) | | | $ | 9,580 | | | $ | (830) | | | $ | 11,599 | | | $ | 1,434 | | | $ | 13,033 | |
| Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 456 | | | — | | | 456 | | | 16 | | | 472 | | Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 456 | | | — | | | 456 | | | 16 | | | 472 | |
Other comprehensive loss | Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (117) | | | (117) | | | — | | | (117) | | Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (117) | | | (117) | | | — | | | (117) | |
Share-based compensation | Share-based compensation | | — | | | — | | | — | | | — | | | 53 | | | — | | | — | | | — | | | 53 | | | — | | | 53 | | Share-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 53 | | | — | | | — | | | — | | | 53 | | | — | | | 53 | |
| Tax settlements associated with share-based plans | Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | — | | | (38) | | | — | | | (38) | | Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | — | | | (38) | | | — | | | (38) | |
Dividends paid to noncontrolling interests | Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (192) | | | (192) | | Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (192) | | | (192) | |
Issuance of stock in connection with share-based plans | Issuance of stock in connection with share-based plans | | — | | | — | | | 3 | | | — | | | 19 | | | — | | | — | | | — | | | 19 | | | — | | | 19 | | Issuance of stock in connection with share-based plans | | — | | | — | | | 3 | | | — | | | — | | | — | | | 19 | | | — | | | — | | | — | | | 19 | | | — | | | 19 | |
Redeemable noncontrolling interest adjustments to redemption value | Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | | | — | | | (3) | | Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | | | — | | | (3) | |
| March 31, 2022 | March 31, 2022 | | 12 | | | $ | — | | | 739 | | | $ | 7 | | | $ | 11,120 | | | $ | (8,244) | | | $ | 10,033 | | | $ | (947) | | | $ | 11,969 | | | $ | 1,258 | | | $ | 13,227 | | March 31, 2022 | | 12 | | | $ | — | | | 739 | | | $ | 7 | | | — | | | $ | — | | | $ | 11,120 | | | $ | (8,244) | | | $ | 10,033 | | | $ | (947) | | | $ | 11,969 | | | $ | 1,258 | | | $ | 13,227 | |
| Net (loss) income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | Net (loss) income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,418) | | | — | | | (3,418) | | | 7 | | | (3,411) | |
Other comprehensive loss | | Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (506) | | | (506) | | | — | | | (506) | |
Share-based compensation | | Share-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 143 | | | — | | | — | | | — | | | 143 | | | — | | | 143 | |
| Conversion and issuance of common stock and noncontrolling interest in connection with the acquisition of the WarnerMedia Business | | Conversion and issuance of common stock and noncontrolling interest in connection with the acquisition of the WarnerMedia Business | | (12) | | | — | | | (739) | | | (7) | | | 2,658 | | | 27 | | | 43,173 | | | — | | | — | | | — | | | 43,193 | | | 2 | | | 43,195 | |
| Dividends paid to noncontrolling interests | | Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (31) | | | (31) | |
Issuance of stock in connection with share-based plans | | Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
Redeemable noncontrolling interest adjustments to redemption value | | Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
| June 30, 2022 | | June 30, 2022 | | — | | | $ | — | | | — | | | $ | — | | | 2,658 | | | $ | 27 | | | $ | 54,439 | | | $ | (8,244) | | | $ | 6,614 | | | $ | (1,453) | | | $ | 51,383 | | | $ | 1,236 | | | $ | 52,619 | |
| | The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
| | | Preferred Stock | | Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Warner Bros. Discovery, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Equity | | Discovery, Inc. Preferred Stock | | Discovery, Inc. Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Warner Bros. Discovery, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Par Value | | Shares | | Par Value | | | Shares | | Par Value | | Shares | | Par Value | |
December 31, 2020 | December 31, 2020 | | 13 | | | $ | — | | | 717 | | | $ | 7 | | | $ | 10,809 | | | $ | (8,244) | | | $ | 8,543 | | | $ | (651) | | | $ | 10,464 | | | $ | 1,536 | | | $ | 12,000 | | December 31, 2020 | | 13 | | | $ | — | | | 717 | | | $ | 7 | | | $ | 10,809 | | | $ | (8,244) | | | $ | 8,543 | | | $ | (651) | | | $ | 10,464 | | | $ | 1,536 | | | $ | 12,000 | |
| Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 140 | | | — | | | 140 | | | 46 | | | 186 | | Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 140 | | | — | | | 140 | | | 46 | | | 186 | |
Other comprehensive income | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 70 | | | 70 | | | — | | | 70 | | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 70 | | | 70 | | | — | | | 70 | |
Share-based compensation | Share-based compensation | | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | — | | | 32 | | | — | | | 32 | | Share-based compensation | | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | — | | | 32 | | | — | | | 32 | |
| Preferred stock conversion | Preferred stock conversion | | (1) | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | Preferred stock conversion | | (1) | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Tax settlements associated with share-based compensation | Tax settlements associated with share-based compensation | | — | | | — | | | — | | | — | | | (68) | | | — | | | — | | | — | | | (68) | | | — | | | (68) | | Tax settlements associated with share-based compensation | | — | | | — | | | — | | | — | | | (68) | | | — | | | — | | | — | | | (68) | | | — | | | (68) | |
Dividends paid to noncontrolling interest | Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (178) | | | (178) | | Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (178) | | | (178) | |
Issuance of stock in connection with share-based plans | Issuance of stock in connection with share-based plans | | — | | | — | | | 8 | | | — | | | 186 | | | — | | | — | | | — | | | 186 | | | — | | | 186 | | Issuance of stock in connection with share-based plans | | — | | | — | | | 8 | | | — | | | 186 | | | — | | | — | | | — | | | 186 | | | — | | | 186 | |
Redeemable noncontrolling interest adjustment to redemptions value | Redeemable noncontrolling interest adjustment to redemptions value | | — | | | — | | | — | | | — | | | (8) | | | — | | | (1) | | | — | | | (9) | | | — | | | (9) | | Redeemable noncontrolling interest adjustment to redemptions value | | — | | | — | | | — | | | — | | | (8) | | | — | | | (1) | | | — | | | (9) | | | — | | | (9) | |
| March 31, 2021 | March 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 10,951 | | | $ | (8,244) | | | $ | 8,682 | | | $ | (581) | | | $ | 10,815 | | | $ | 1,404 | | | $ | 12,219 | | March 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 10,951 | | | $ | (8,244) | | | $ | 8,682 | | | $ | (581) | | | $ | 10,815 | | | $ | 1,404 | | | $ | 12,219 | |
| Net income available to Discovery, Inc. and attributable to noncontrolling interests | | Net income available to Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 672 | | | — | | | 672 | | | 38 | | | 710 | |
Other comprehensive income | | Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | | | — | | | (4) | |
Share-based compensation | | Share-based compensation | | — | | | — | | | — | | | — | | | 41 | | | — | | | — | | | — | | | 41 | | | — | | | 41 | |
| Tax settlements associated with share-based plans | | Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Dividends paid to noncontrolling interests | | Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | (29) | |
Issuance of stock in connection with share-based plans | | Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Redeemable noncontrolling interest adjustments to redemption value | | Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | — | | | 6 | | | — | | | 6 | |
| June 30, 2021 | | June 30, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 11,000 | | | $ | (8,244) | | | $ | 9,360 | | | $ | (585) | | | $ | 11,538 | | | $ | 1,413 | | | $ | 12,951 | |
| | The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. | The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On April 8, 2022, Discovery, Inc. (“Discovery”), a global media company that provides content across multiple distribution platforms including linear, free-to-air and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer (“DTC”) subscription products, completed its merger (the “Merger”) with the WarnerMedia business of AT&T, Inc. (the “WarnerMedia Business”) and changed its name from “Discovery, Inc.” to “WarnerWarner Bros. Discovery, Inc.” (“Warner Bros. Discovery”, “WBD”, the “Company”, “we”, “us” or “our”). On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market under the trading symbol WBD.
Warner Bros. Discovery is a leading global media and entertainment company that creates and distributes the world’s most differentiated and complete portfolio of content and brands across television, film and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.
Merger with the WarnerMedia Business of AT&T
On April 8, 2022 (the “Closing Date”), Discovery, Inc. (“Discovery”) completed its merger (the “Merger”) with the WarnerMedia business (the “WarnerMedia Business”, “WM Business” or “WM”) of AT&T Inc. (“AT&T”) and changed its name to “Warner Bros. Discovery, Inc.”. On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market (the “Nasdaq”) under the trading symbol WBD.
The Merger was executed through a Reverse Morris Trust type transaction, under which the WarnerMedia BusinessWM was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. (See Note 19.3.) In connection withPrior to the Merger, AT&T receivedWarnerMedia Holdings, Inc. distributed $40.5 billion to AT&T (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia'sWM's retention of certain debt, anddebt. Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. In August 2022, the Company and AT&T finalized the post-closing working capital settlement process, pursuant to section 1.3 of the Separation and Distribution Agreement, which will result in the Company receiving a $1.2 billion payment from AT&T in the third quarter of 2022, which is recorded in prepaid expenses and other current assets on the consolidated balance sheets at June 30, 2022. AT&T shareholders received shares of WBD Series A common stock (“WBD common stock”) in the distribution representing 71% of the combined company and the Company's pre-Merger shareholders will continuecontinued to own 29% of the combined company, in each case on a fully diluted basis.
Discovery was deemed to be the accounting acquirer of the WarnerMediaWM Business for accounting purposes under U.S. generally accepted accounting principles (“U.S. GAAP”); therefore, Discovery is considered WBD’s predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD’s historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WarnerMediaWM Business and current and future results will not be comparable to historical results.
Segments
In conjunction with the Merger, the Company reevaluated and changed its segment presentation during the quarter ended June 30, 2022.Accordingly, beginning in the quarter ended June 30, 2022, and for all periods presented, we are reporting results based on the following segments:
Studios - Our Studios segment primarily consists of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/DTC services, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical and digital), related consumer products and themed experience licensing, and interactive gaming.
Networks - Our Networks segment primarily consists of our domestic and international television networks.
Direct-to-consumer (“DTC”) - Our DTC segment primarily consists of our premium pay TV and digital content services.
Impact of COVID-19
The Company continues to closely monitor the ongoing impact of COVID-19 on all aspects of its business and geographies, including the impact on its customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties. Certain key sources of revenue for the WarnerMedia Business,Studios segment, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The nature and full extent of COVID-19’s effects on our operations and results isare 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 variants or surges of COVID-19, vaccine distribution and efficacy and other actions to contain the virus or treat its impact, among others. The consolidated financial statements reflect management’s 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.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries in which a controlling interest is maintained, including variable interest entities ("VIE"(“VIE”) for which the Company is the primary beneficiary. Intercompany accounts and transactions between consolidated entities have been eliminated.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Unaudited Interim Financial Statements
These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates.
Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, estimated credit losses, content rights, leases, depreciation and amortization, business combinations, share-based compensation, income taxes, other financial instruments, contingencies, estimated defined benefit plan liabilities, and the determination of whether the Company should consolidate certain entities.
Summary of Significant Accounting Policies
There have been no changes to the Company's significant accounting policies described in the 2021 Form 10-K, other than updates to policies as a result of the Merger as described below.
Film and Television Content Rights
The Company groups its film and television content rights by monetization strategy. For films and television programs predominantly monetized individually, the amount of capitalized film and television production costs and the amount of participations and residuals to be recognized as expense in a particular period are determined using the individual film forecast method. Under this method, the amortization of capitalized costs and the accrual of participations and residuals are based on the proportion of the film’s or television program’s revenues recognized for such period to the film’s or television program’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s or television program’s remaining life cycle).
The process of estimating ultimate revenues requires us to make a series of judgments related to future revenue-generating activities associated with a particular film. Prior to the theatrical release of a film, our estimates are based on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings), international distribution plans and the expected number of theaters in which the film will be released. Subsequent to release, ultimate revenues are updated to reflect initial performance, which is often predictive of future performance. For a film or television program that is predominantly monetized on its own but also monetized with other films and/or programs (such as our DTC or linear services), we make a reasonable estimate of the value attributable to the film or program’s exploitation while monetized with other films/programs and expense such costs as the film or television program is exhibited. For theatrical films, the period over which ultimate revenues from all applicable sources and exhibition windows are estimated does not exceed 10 years from the date of the film’s initial release. For television programs, the ultimate period does not exceed 10 years from delivery of the first episode, or, if still in production, five years from delivery of the most recent episode, if later. Ultimates for produced content monetized on an individual basis are reviewed and updated (as applicable) on a quarterly basis; any adjustments are applied prospectively as of the beginning of the fiscal year of the change.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For programs monetized as a group, including licensed programming, the Company’s film groups are generally aligned along the Company’s networks and digital content offerings, except for certain international territories wherein content assets are shared across the various networks in the territory and therefore, the territory is the film group. Amortization expense for each period is generally based on the revenue forecast model, which approximates the proportion that estimated distribution and advertising revenues for the current period represent in relation to the estimated remaining total lifetime revenues. Digital content and premium pay TV amortization for each period is recognized based on estimated viewing patterns as there are generally no direct revenues to associate to the individual content assets and therefore number of views is most representative of the use of the title. Licensed rights to film and television programming are typically amortized over the useful life of the program’s license period on a straight-line basis (or per-play basis, if greater, for certain programming on our ad-supported networks), or accelerated basis for licensed original programs.
Quarterly, the Company prepares analyses to support its content amortization expense. Critical assumptions used in determining content amortization for programming predominately monetized as a group include: (i) the grouping of content with similar characteristics, (ii) the application of a quantitative revenue forecast model or viewership model based on the adequacy of historical data, (iii) determining the appropriate historical periods to utilize and the relative weighting of those historical periods in the forecast model, and (iv) incorporating secondary streams. The Company then considers the appropriate application of the quantitative assessment given forecasted content use, expected content investment and market trends. Content use and future revenues may differ from estimates based on changes in expectations related to market acceptance, network affiliate fee rates, advertising demand, the number of cable and satellite television subscribers receiving the Company’s networks, the number of subscribers to its digital services, and program usage. Accordingly, the Company continually reviews its estimates and planned usage and revises its assumptions if necessary. Any material adjustments from the Company’s review of the amortization rates for assets in film groups are applied prospectively in the period of the change.
Unamortized film costs are tested for impairment whenever events or changes in circumstances indicate that the fair value of a film (or television program) predominately monetized on its own, or a film group, may be less than its unamortized costs. In addition, a change in the predominant monetization strategy is considered a triggering event for impairment testing before a title is accounted for as part of a film group. If the carrying value of an individual feature film or television program, or film group, exceeds the estimated fair value, an impairment charge will be recorded in the amount of the difference. For content that is predominately monetized individually, we utilize estimates including ultimate revenues and additional costs to be incurred (including exploitation and participation costs), in order to determine whether the carrying value of a film or television program is impaired.
Game development costs are expensed as incurred before the applicable games reach technological feasibility, or for online hosted arrangements, before the preliminary project phase is complete and it is probable the project will be completed and the software will be used to perform the function intended. Upon release, the capitalized game development costs are amortized based on the proportion of the game’s revenues recognized for such period to the game’s total current and anticipated revenues. Unamortized capitalized game production and development costs are stated at the lower of cost, less accumulated amortization, or net realizable value and reported in “Film and television content rights and games, net” on the consolidated balance sheets.
Inventory
Inventory is comprised primarily of DVDs, Blu-ray Discs and game units and is stated at the lower of cost or net realizable value in prepaid expenses and other current assets on the consolidated balance sheets. Cost is determined using the average cost method for the majority of our inventory, with the remaining inventory valued using the standard cost method, which approximates average cost. Returned goods included in inventory are valued at estimated realizable value, but not in excess of cost. The Company periodically reviews its inventory for excess and obsolete inventory. The Company's inventory consisted of the following (in millions).
| | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | | | |
Raw materials | | $ | 6 | | | $ | — | | | | |
Work in process | | 6 | | | — | | | | |
Finished goods | | 127 | | | 1 | | | | |
Total inventory | | $ | 139 | | | $ | 1 | | | | |
| |
| | | | | | | |
|
Defined Benefit Plan
The Company maintains a defined benefit pension plan covering certain employees. Defined benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future expenses and obligations.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accounting and Reporting Pronouncements Adopted
LIBOR
In March 2020, the FASBFinancial Accounting Standards Board (“FASB”) issued guidance providing optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedging relationships, and other transactions associated with the expected market transition away from the London Interbank Offered Rate (LIBOR) and other interbank offered rates to alternative reference rates. The guidance is for March 12, 2020 through December 31, 2022 and may not be applied to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The Company applied the relevant provisions of the guidance to hedge relationships that were subsequently terminated in the first quarter of 2022.
Convertible Instruments
In August 2020, the FASB issued guidance simplifying the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This guidance amends the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, requires the use of the if-converted method for calculating earnings per share for convertible instruments, and makes targeted improvements to the disclosures for convertible instruments and related earnings per share guidance. The Company adopted the guidance effective January 1, 2022, and there was no material impact on its consolidated financial statements.
Accounting and Reporting Pronouncements Not Adopted
Government Assistance
In November 2021, the FASB issued guidance requiring disclosure for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other guidance. The annual disclosures include terms and conditions, accounting treatment and impacted financial statement lines reflecting the impact of the transactions. The guidance is effective for annual periods beginning after December 15, 2021. The Company is currently assessing the impact this guidance will have on its consolidated financial statements and related disclosures.
NOTE 2. EQUITY AND EARNINGS PER SHARE
Common Stock Issued in Connection with the WarnerMedia Merger
In connection with the Merger, each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, and Discovery Series C common stock, was reclassified and automatically converted into 1 share of WBD common stock, and each issued and outstanding share of Discovery Series A-1 convertible preferred stock (“Series A-1 Preferred Stock”) and Series C-1 convertible preferred stock was reclassified and automatically converted into 13.1135 and 19.3648 shares of WBD common stock, respectively.
The Merger required the consent of Advance/Newhouse Programming Partnership under Discovery's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock. In connection with Advance/Newhouse Programming Partnership’s entry into the consent agreement and related forfeiture of the significant rights attached to the Series A-1 Preferred Stock in the reclassification of the shares of Series A-1 Preferred Stock into common stock, it received an increase to the number of shares of common stock of the Company into which the Series A-1 Preferred Stock converted. The impact of the issuance of such additional shares of common stock was $789 million and was recorded as a transaction expense in selling, general and administrative expense upon the closing of the Merger.
On April 8, 2022, the Company issued 1.7 billion shares of WBD Series A common stock as consideration paid for the acquisition of WM. (See Note 3).
Earnings Per Share
All share and per share amounts have been retrospectively adjusted to reflect the reclassification and automatic conversion into WBD common stock, except for Series A-1 Preferred Stock, which has not been recast because the conversion of Series A-1 Preferred Stock into WBD common stock in connection with the Merger was considered a discrete event and treated prospectively.
The table below sets forth the Company's calculated earnings per share. Earnings per share amounts may not recalculate due to rounding.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | |
Net (loss) income | $ | (3,408) | | | $ | 718 | | | $ | (2,933) | | | $ | 909 | |
Less: | | | | | | | |
Allocation of undistributed income to Series A-1 convertible preferred stock | — | | | (72) | | | (49) | | | (87) | |
Net income attributable to noncontrolling interests | (7) | | | (38) | | | (23) | | | (84) | |
Net income attributable to redeemable noncontrolling interests | (3) | | | (8) | | | (6) | | | (13) | |
| | | | | | | |
Net (loss) income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for basic and diluted net income per share | $ | (3,418) | | | $ | 600 | | | $ | (3,011) | | | $ | 725 | |
| | | | | | | |
Add: | | | | | | | |
Allocation of undistributed income to Series A-1 convertible preferred stockholders | $ | — | | | $ | 72 | | | $ | — | | | $ | 87 | |
Net (loss) income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for diluted net income per share | $ | (3,418) | | | $ | 672 | | | $ | (3,011) | | | $ | 812 | |
| | | | | | | |
Denominator — weighted average: | | | | | | | |
Common shares outstanding — basic | 2,286 | | | 589 | | | 1,443 | | | 587 | |
Impact of assumed preferred stock conversion | — | | | 71 | | | — | | | 71 | |
Dilutive effect of share-based awards | — | | | 4 | | | — | | | 8 | |
Common shares outstanding — diluted | 2,286 | | | 664 | | | 1,443 | | | 666 | |
| | | | | | | |
Basic net (loss) income per share allocated to common stockholders | $ | (1.50) | | | $ | 1.02 | | | $ | (2.09) | | | $ | 1.23 | |
Diluted net (loss) income per share allocated to common stockholders | $ | (1.50) | | | $ | 1.01 | | | $ | (2.09) | | | $ | 1.22 | |
The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Anti-dilutive share-based awards | | 57 | | | 16 | | | 45 | | | 6 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
NOTE 3. ACQUISITIONS AND DISPOSITIONS
Acquisitions
WarnerMedia
On April 8, 2022, the Company completed its Merger with the WarnerMedia Business of AT&T. The Merger was executed through a Reverse Morris Trust type transaction, under which WM was distributed to AT&T’s shareholders via a pro-rata distribution, and immediately thereafter, combined with Discovery. Discovery was deemed to be the accounting acquirer of WM.
The Merger combined WM’s content library of popular and valuable intellectual property with Discovery’s global footprint, collection of local-language content and deep regional expertise across more than 220 countries and territories. The Company expects this broad, worldwide portfolio of brands, coupled with its DTC potential and the attractiveness of the combined assets, to result in increased market penetration globally. The Merger is also expected to create significant cost synergies for the Company.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Purchase Price
The following table summarizes the components of the aggregate purchase consideration paid to acquire WM (in millions) and is subject to adjustments.
| | | | | | | | |
Fair value of WBD common stock issued to AT&T shareholders (1) | | $ | 42,309 | |
Estimated fair value of share-based compensation awards attributable to pre-combination services (2) | | 94 | |
Settlement of preexisting relationships (3) | | (27) | |
Preliminary purchase consideration | | $ | 42,376 | |
| | |
|
(1)The fair value of WBD common stock issued to AT&T shareholders represents approximately 1,732 million shares of the Company’s common stock multiplied by the closing share price for Discovery Series A common stock of $24.43 on the Nasdaq on the Closing Date. The number of shares of WBD common stock issued in the Merger was determined based on the number of fully diluted shares of Discovery, Inc. common stock immediately prior to the closing of the Merger, multiplied by the quotient of 71%/29%.
(2)This amount represents the value of AT&T restricted stock unit awards that were not vested and were replaced by WBD restricted stock unit awards with similar terms and conditions as the original AT&T awards. The conversion was based on the ratio of the volume-weighted average per share closing price of AT&T common stock on the 10 trading days prior to the Closing Date and the volume-weighted average per share closing price of WBD common stock on the 10 trading days following the Closing Date. The fair value of replacement equity-based awards attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger. See Note 14 for additional information.
(3)The amount represents the effective settlement of outstanding payables and receivables between the Company and WM. No gain or loss was recognized upon settlement as amounts were determined to be reflective of fair market value.
Balances reflect rounding of dollar and share amounts to millions, which may result in differences for recalculated standalone amounts compared with the amounts presented above.
Preliminary Purchase Price Allocation
The Company applied the acquisition method of accounting to WM, whereby the excess of the fair value of the purchase price paid over the fair value of identifiable net assets acquired and liabilities assumed was allocated to goodwill. Goodwill reflects the assembled workforce of WM as well as revenue enhancements, cost savings and operating synergies that are expected to result from the Merger. The goodwill recorded as part of the Merger has been provisionally allocated to the Studios, Networks and DTC reportable segments in the amount of $8,912 million, $7,016 million and $5,585 million, respectively, and is not deductible for tax purposes.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The purchase price allocation is preliminary and subject to change. The Company is still evaluating the fair value of film and television library, intangible assets, and income taxes, in addition to ensuring all other assets and liabilities and contingencies have been identified and recorded. The Company has estimated the preliminary fair value of assets acquired and liabilities assumed based on information currently available and will continue to adjust those estimates as additional information pertaining to events or circumstances present at the Closing Date becomes available during the measurement period. The Company will reflect measurement period adjustments, if any, in the period in which the adjustments occur, and the Company will finalize its accounting for the Merger within one year of the Closing Date. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed, and a reconciliation to total consideration transferred is presented in the table below (in millions).
| | | | | | | | | | | | |
| | Preliminary April 8, 2022 | | | | |
Cash | | $ | 2,419 | | | | | |
Accounts receivable | | 4,224 | | | | | |
Other current assets | | 4,619 | | | | | |
Film and television library | | 28,729 | | | | | |
Property and equipment | | 4,260 | | | | | |
Goodwill | | 21,513 | | | | | |
Intangible assets | | 44,889 | | | | | |
Other noncurrent assets | | 5,206 | | | | | |
Current liabilities | | (10,544) | | | | | |
Debt assumed | | (41,671) | | | | | |
Deferred income taxes | | (13,264) | | | | | |
Other noncurrent liabilities | | (8,004) | | | | | |
Total consideration paid | | $ | 42,376 | | | | | |
| | | | | | |
|
The fair values of the assets acquired, and liabilities assumed were preliminarily determined using the income, cost, and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market, such as discounted cash flow analyses, and thus represent a Level 3 measurement. Significant inputs used in the discounted cash flow analyses and other areas of judgment include (i) historical and projected financial information, (ii) discount rates used to present value future cash flows, (iii) royalty rates, (iv) number of renewals for affiliate contracts, (v) synergies, including cost savings, (vi) tax rates, (vii) economic useful life of assets, and (viii) attrition rates, as relevant, that market participants would consider when estimating fair values. The following are the preliminary fair value approaches followed:
| | | | | | | | |
Category | | Valuation Method |
Trade names | | Relief from royalty method of the income approach |
Film and TV content library | | Multi-period excess earnings method of the income approach; net book value |
Affiliate contracts | | Multi-period excess earnings method of the income approach |
Franchises | | Multi-period excess earnings method of the income approach |
Other intangible assets | | Multi-period excess earnings method of the income approach |
Licensed content | | Net book value method |
Licensed sports rights | | Differential method, a form of the incremental income approach |
In-place advertising networks | | With-or-without method, a form of the income approach |
Subscriber relationships | | Replacement cost method of the cost approach |
Real estate, property and equipment | | Cost approach or the income approach, which estimates the value of property based on the income it generates or the market approach, which determines values based on comparable assets purchased under similar conditions |
Current and noncurrent debt assumed comprising existing debt of WM, the Term Loan, and the Notes | | Quoted prices for identical or similar securities in active markets |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The table below presents a summary of intangible assets acquired, exclusive of content assets, and the weighted average useful life of these assets.
| | | | | | | | | | | | | | | | | |
| | Fair Value | | Weighted Average Useful Life in Years | | | |
Trade names | | $ | 21,084 | | | 25 | | | |
Affiliate, advertising and subscriber relationships | | 14,700 | | | 6 | | | |
Franchises | | 7,900 | | | 35 | | | |
Other intangible assets | | 1,205 | | | | | | |
Total intangible assets acquired | | $ | 44,889 | | | | | | |
| |
| | | | | | | |
|
The Company incurred transaction-related costs of $194 million and $281 million for the three and six months ended June 30, 2022, respectively. These costs were associated with legal and professional services and were recognized as operating expenses on the consolidated statement of operations. Additionally, the expense related to the issuance of additional shares of common stock in connection with the conversion of Advance/Newhouse Programming's Series A-1 Preferred Stock was $789 million and was recorded as a transaction expense in selling, general and administrative expense upon the closing of the Merger. (See Note 2.)
As a result of the Merger, WM's assets, liabilities, and operations were included in the Company's consolidated financial statements from the Closing Date. The following table presents WM revenue and earnings as reported within the consolidated financial statements (in millions).
| | | | | | | | | | |
| | Three and Six Months Ended June 30, 2022 | | |
Revenues: | | | | |
Advertising | | $ | 1,163 | | | |
Distribution | | 3,526 | | | |
Content | | 2,835 | | | |
Other | | 208 | | | |
Total revenues | | $ | 7,732 | | | |
Net loss available to Warner Bros. Discovery, Inc. | | $ | (2,911) | | | |
| | | | |
|
Pro Forma Combined Financial Information
The following unaudited pro forma combined financial information presents the combined results of the Company and WM as if the Merger had been completed on January 1, 2021. The unaudited pro forma combined financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the Merger had occurred on January 1, 2021, nor is it indicative of future results. The following table presents the Company's pro forma combined revenues and net income (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Revenues | | $ | 10,823 | | | $ | 11,211 | | | $ | 22,264 | | | $ | 21,933 | |
Net loss available to Warner Bros. Discovery, Inc. | | (2,151) | | | (341) | | | (2,437) | | | (1,912) | |
| | | | | | | | |
| | | | | | | | |
The unaudited pro forma combined financial information includes, where applicable, adjustments for (i) additional costs of revenues from the fair value step up of film and television library, (ii) additional amortization expense related to acquired intangible assets, (iii) additional depreciation expense from the fair value of property and equipment, (iv) transaction costs and other one-time non-recurring costs, (v) additional interest expense for borrowings related to the Merger and amortization associated with fair value adjustments of debt assumed, (vi) changes to align accounting policies, (vii) elimination of intercompany activity, and (viii) associated tax-related impacts of adjustments. These pro forma adjustments are based on available information as of the date hereof and upon assumptions that the Company believes are reasonable to reflect the impact of the Merger with WM on the Company's historical financial information on a supplemental pro forma basis. Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined business.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Dispositions
Great American CountryIn April 2022, the Company completed the sale of its minority interest in Discovery Education for a sale price of $138 million and recorded a gain of $133 million.
In June 2021, the Company completed the sale of its Great American Country network to Hicks Equity Partners for a sale price of $90 million and recorded a gain of $76 million.
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Networks | | International Networks | | Studios | Networks | | DTC | | Total |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
December 31, 2021 | | $ | 10,813 | | | $ | 2,099 | | | $ | — | | $ | — | | | $ | — | | | $ | 12,912 | |
Segment recast (See Note 20) | | (10,813) | | | (2,059) | | | — | | 10,555 | | | 2,317 | | | — | |
Acquisitions (See Note 3) | | — | | | — | | | 8,912 | | 7,016 | | | 5,585 | | | 21,513 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Foreign currency translation and other | | — | | | (40) | | | — | | (92) | | | (20) | | | (152) | |
June 30, 2022 | | $ | — | | | $ | — | | | $ | 8,912 | | $ | 17,479 | | | $ | 7,882 | | | $ | 34,273 | |
The carrying amount of goodwill at the Networks segment included accumulated impairments of $1.6 billion as of June 30, 2022 and December 31, 2021. The carrying amount of goodwill at the Studios and DTC segments did not include any accumulated impairments as of June 30, 2022 and December 31, 2021.
Intangible Assets
Finite-lived intangible assets consisted of the following (in millions, except years).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Weighted Average Amortization Period (Years) | | June 30, 2022 | | December 31, 2021 |
Gross | | Accumulated Amortization | | Net | | Gross | | Accumulated Amortization | | Net |
Intangible assets subject to amortization: | | | | | | | | | | | | | |
Trademarks and trade names | 32 | | $ | 22,918 | | | $ | (1,064) | | | $ | 21,854 | | | $ | 1,716 | | | $ | (858) | | | $ | 858 | |
Customer relationships | 8 | | 24,029 | | | (6,307) | | | 17,722 | | | 9,433 | | | (4,303) | | | 5,130 | |
Franchises | 35 | | 7,900 | | | (51) | | | 7,849 | | | — | | | — | | | — | |
Character rights | 14 | | 995 | | | (16) | | | 979 | | | — | | | — | | | — | |
Other | 6 | | 569 | | | (249) | | | 320 | | | 395 | | | (227) | | | 168 | |
Total | | | $ | 56,411 | | | $ | (7,687) | | | $ | 48,724 | | | $ | 11,544 | | | $ | (5,388) | | | $ | 6,156 | |
Amortization expense relating to finite-lived intangible assets was $2,004 million and $268 million for the three months ended June 30, 2022 and 2021, respectively, and $2,439 million and $548 million for the six months ended June 30, 2022 and 2021, respectively.
Amortization expense relating to intangible assets subject to amortization for each of the next five years and thereafter is estimated to be as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
Amortization expense | | $ | 3,790 | | | $ | 6,497 | | | $ | 4,976 | | | $ | 3,600 | | | $ | 2,590 | | | $ | 27,271 | |
Indefinite-lived intangible assets not subject to amortization (in millions):
| | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | | |
Trademarks | | $ | — | | | $ | 161 | | | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Impairment Analysis
During the second quarter of 2022, the Company performed a qualitative goodwill impairment assessment for all reporting units in conjunction with the change in its segment presentation, and determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values; therefore, no quantitative goodwill impairment analysis was performed.
NOTE 5. RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges by reportable segments and corporate were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Studios | | $ | 200 | | | $ | — | | | $ | 200 | | | $ | — | |
Networks | | 308 | | | 7 | | | 312 | | | 21 | |
DTC | | 475 | | | — | | | 475 | | | 1 | |
Corporate | | 50 | | | — | | | 51 | | | — | |
Total restructuring and other charges | | $ | 1,033 | | | $ | 7 | | | $ | 1,038 | | | $ | 22 | |
Restructuring charges include content impairments of $496 million, employee terminations of $208 million, and content development write-offs of $329 million for the three months ended June 30, 2022. Content impairments and development write-offs resulted from a global strategic review of content following the Merger. Employee terminations relate to cost reduction efforts and management changes. These charges resulted from activities to integrate WM and establish an efficient cost structure.
Changes in restructuring and other liabilities recorded in accrued liabilities by major category and by reportable segment and corporate were as follows (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Networks | | International Networks | | Studios | | Networks | | DTC | | Corporate | | Total |
December 31, 2021 | | $ | 4 | | | $ | 13 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 19 | |
Segment recast (See Note 20) | | (4) | | | (13) | | | — | | | 15 | | | — | | | 2 | | | — | |
Acquisitions (See Note 3) | | — | | | — | | | 40 | | | — | | | 14 | | | 55 | | | 109 | |
| | | | | | | | | | | | | | |
Employee termination accruals, net | | — | | | — | | | 54 | | | 16 | | | 13 | | | 126 | | | 209 | |
| | | | | | | | | | | | | | |
Cash paid | | — | | | — | | | (10) | | | (6) | | | (3) | | | (15) | | | (34) | |
June 30, 2022 | | $ | — | | | $ | — | | | $ | 84 | | | $ | 25 | | | $ | 24 | | | $ | 170 | | | $ | 303 | |
NOTE 6. REVENUES
The following table presents the Company’s revenues disaggregated by revenue source (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Studios | | Networks | | DTC | | Corporate | | Total |
Revenues: | | | | | | | | | |
Advertising | $ | 10 | | | $ | 2,624 | | | $ | 96 | | | $ | (9) | | | $ | 2,721 | |
Distribution | 4 | | | 2,841 | | | 1,993 | | | — | | | 4,838 | |
Content | 2,636 | | | 220 | | | 132 | | | (924) | | | 2,064 | |
Other | 146 | | | 57 | | | 4 | | | (3) | | | 204 | |
Total | $ | 2,796 | | | $ | 5,742 | | | $ | 2,225 | | | $ | (936) | | | $ | 9,827 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Three Months Ended June 30, 2021 |
| | | | | | | | | | | Studios | | Networks | | DTC | | Corporate | | Total |
Revenues: | | | | | | | | | | | | | | | | | | | |
Advertising | | | | | | | | | | | $ | — | | | $ | 1,601 | | | $ | 33 | | | $ | — | | | $ | 1,634 | |
Distribution | | | | | | | | | | | — | | | 1,132 | | | 180 | | | — | | | 1,312 | |
Content | | | | | | | | | | | 2 | | | 96 | | | 2 | | | — | | | 100 | |
Other | | | | | | | | | | | — | | | 15 | | | 1 | | | — | | | 16 | |
Total | | | | | | | | | | | $ | 2 | | | $ | 2,844 | | | $ | 216 | | | $ | — | | | $ | 3,062 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Studios | | Networks | | DTC | | Corporate | | Total |
Revenues: | | | | | | | | | |
Advertising | $ | 10 | | | $ | 4,054 | | | $ | 142 | | | $ | (9) | | | $ | 4,197 | |
Distribution | 4 | | | 3,961 | | | 2,225 | | | — | | | 6,190 | |
Content | 2,641 | | | 536 | | | 134 | | | (924) | | | 2,387 | |
Other | 146 | | | 64 | | | 5 | | | (3) | | | 212 | |
Total | $ | 2,801 | | | $ | 8,615 | | | $ | 2,506 | | | $ | (936) | | | $ | 12,986 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Studios | | Networks | | DTC | | Corporate | | Total |
Revenues: | | | | | | | | | |
Advertising | $ | — | | | $ | 2,993 | | | $ | 50 | | | $ | — | | | $ | 3,043 | |
Distribution | — | | | 2,281 | | | 289 | | | — | | | 2,570 | |
Content | 7 | | | 202 | | | 3 | | | — | | | 212 | |
Other | — | | | 28 | | | 1 | | | — | | | 29 | |
Total | $ | 7 | | | $ | 5,504 | | | $ | 343 | | | $ | — | | | $ | 5,854 | |
Reserves for Credit Losses
Reserves for accounts receivable reflect expected credit losses, which are estimated based on historical experience, as well as current and expected economic conditions and industry trends. The allowance for credit losses was $138 million at June 30, 2022 and $54 million at December 31, 2021. The increase was primarily attributable to the acquisition of existing WM receivables in the Merger with WM. The corresponding expense for the expected credit losses is reflected in selling, general and administrative expenses.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of the Company's right to bill and receive consideration and that right is conditioned upon something other than the passage of time. A contract liability, such as deferred revenue, is recorded when the Company has recorded billings in conjunction with its contractual right or when cash is received in advance of the Company's performance.
The following table presents contract assets and liabilities on the consolidated balance sheets (in millions).
| | | | | | | | | | | | | | | | | | | | |
Category | | Balance Sheet Location | | June 30, 2022 | | December 31, 2021 |
Contract Assets | | Prepaid expenses and other current assets | | $ | 12 | | | $ | — | |
Contract Assets | | Other noncurrent assets | | 26 | | | — | |
Contract Liabilities | | Deferred revenues | | 1,663 | | | 478 | |
Contract Liabilities | | Other noncurrent liabilities | | 242 | | | 95 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The change in deferred revenue for the six months ended June 30, 2022 primarily reflects an increase of $1,476 million related to the Merger and cash payments received for which the performance obligation was not satisfied prior to the end of the period, partially offset by $347 million of revenues recognized that were included in the deferred revenue balance at December 31, 2021. Revenue recognized for the six months ended June 30, 2021 related to the deferred revenue balance at December 31, 2020 was $162 million.
Transaction Price Allocated to Remaining Performance Obligations
Most of the Company's distribution contracts are licenses of functional intellectual property where revenue is derived from royalty-based arrangements, for which the guidance allows the application of a practical expedient to record revenues as a function of royalties earned to date instead of estimating incremental royalty contract revenue. Accordingly, in these instances revenue is recognized based upon the royalties earned to date. However, there are certain other distribution arrangements that are fixed price or contain minimum guarantees that extend beyond one year. The Company recognizes revenue for fixed fee distribution contracts on a monthly basis based on minimum monthly fees; by calculating one twelfth of annual license fees specified in its distribution contracts; or based on the pro-rata fees earned calculated on the license fees specified in the distribution contract. The transaction price allocated to remaining performance obligations within these fixed price or minimum guarantee distribution revenue contracts was $2.7 billion as of June 30, 2022 and is expected to be recognized over the next seven years.
The Company's content licensing contracts and sports sublicensing deals are licenses of functional intellectual property. The transaction price allocated to remaining performance obligations on these contracts was $5.2 billion as of June 30, 2022 and is expected to be recognized over the next seven years.
The Company's brand licensing contracts are licenses of symbolic intellectual property. The transaction price allocated to remaining performance obligations on these contracts was $2.3 billion as of June 30, 2022 and is expected to be recognized over the next 21 years.
The Company's advertising contracts are principally generated from the sale of advertising campaigns comprised of multiple commercial units. In contracts with guaranteed impressions, we have identified the overall advertising campaign as the performance obligation to be satisfied over time, and impressions delivered against the satisfaction of our guarantee as the measure of progress. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $595 million as of June 30, 2022 and is expected to be recognized over the next three years.
The value of unsatisfied performance obligations disclosed above does not include: (i) contracts involving variable consideration for which revenues are recognized in accordance with the sales or usage-based royalty exception, and (ii) contracts with an original expected length of one year or less, such as most advertising contracts; however for content licensing revenues, including revenues associated with the licensing of theatrical and television product for television and streaming services, the Company has included all contracts regardless of duration.
NOTE 7. SALES OF RECEIVABLES
Revolving Receivables Program
The Company has a revolving agreement to transfer up to $6,000 million of certain receivables through its bankruptcy-remote subsidiary Warner Bros. Discovery Receivables Funding, LLC to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred. The Company services sold receivables for a fee and pays fees to the financial institution in connection with this revolving agreement. This agreement is subject to renewal on an annual basis and the transfer limit may be expanded from time to time. As customers pay their balances the Company’s available capacity under this revolving agreement increases and typically the Company transfers additional receivables into the program. Our bankruptcy-remote consolidated subsidiary held $1,287 million of cash and $1,838 millionof pledged receivables as of June 30, 2022 in connection with this revolving agreement. The gross value of the proceeds received results in derecognition of receivables and the obligations assumed are recorded at fair value. The obligation is subsequently adjusted for changes in estimated expected credit losses and interest rates, which are considered Level 3 fair value measurements since the inputs are unobservable. For the three and six months ended June 30, 2022, the Company has recognized a $41 million net loss in selling, general and administrative expense from the revolving receivables program in the consolidated statements of operations. The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $5,700 million as of June 30, 2022.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table presents a summary of receivables sold (in millions).
| | | | | | | |
| Three Months Ended June 30, 2022 | | |
Gross receivables sold/cash proceeds received | $ | 3,205 | | | |
Collections reinvested under revolving agreement | (3,505) | | | |
Net cash proceeds received | $ | (300) | | | |
Net receivables sold | $ | 3,198 | | | |
Obligations recorded | $ | 98 | | | |
The following table presents a summary of the amounts transferred or pledged (in millions):
| | | | | | | |
| June 30, 2022 | | |
Gross receivables pledged as collateral | $ | 1,838 | | | |
Restricted cash pledged as collateral | $ | 1,287 | | | |
Balance sheet classification: | | | |
| | | |
Receivables, net | $ | 1,629 | | | |
Prepaid expenses and other current assets | $ | 1,287 | | | |
| | | |
Other noncurrent assets | $ | 209 | | | |
Accounts Receivable Factoring
The Company has a factoring agreement to sell certain of its non-U.S. trade accounts receivable on a non-recourse basis to a third-party financial institution. The Company accounts for these transactions as sales in accordance with ASC 860, "Transfers and Servicing", when its continuing involvement subsequent to the transfer is limited to providing certain servicing and collection actions on behalf of the purchaser of the designated trade accounts receivable. Proceeds from amounts factored are recorded as an increase to cash and cash equivalents and a reduction to receivables, net in the consolidated balance sheets. Cash received is also reflected as cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring arrangements were $103 million as of June 30, 2022. The impact to the consolidated statements of operations was immaterial for the three and six months ended June 30, 2022. This accounts receivable factoring agreement is separate and distinct from the revolving receivables program.
WARNER BROS. DISCOVERY, INC.
(formerly knownNOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8. CONTENT RIGHTS
For purposes of amortization and impairment, the capitalized content costs are grouped based on their predominant monetization strategy: individually or as Discovery, Inc.)a group. The table below presents the components of content rights (in millions).
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
Theatrical film production costs: | | | | | | |
Released, less amortization | | $ | 3,120 | | | $ | — | | | $ | 3,120 | |
Completed and not released | | 318 | | | — | | | 318 | |
In production | | 1,865 | | | — | | | 1,865 | |
Development and pre-production | | 144 | | | — | | | 144 | |
| | | | | | |
Television production costs: | | | | | | |
Released, less amortization | | 1,585 | | | 7,010 | | | 8,595 | |
Completed and not released | | 649 | | | 733 | | | 1,382 | |
In production | | 490 | | | 3,711 | | | 4,201 | |
Development and pre-production | | 37 | | | 19 | | | 56 | |
Total theatrical film and television production costs | | $ | 8,208 | | | $ | 11,473 | | | $ | 19,681 | |
| | | | | | |
Programming and game costs: | | | | | | |
Programming costs, less amortization (a) | | | | | | 10,288 | |
Game development costs, less amortization | | | | | | 656 | |
Total film and television content rights and games | | | | | | 30,625 | |
Less: Current content rights and prepaid license fees, net | | | | | | (505) | |
Total noncurrent film and television content rights and games, net | | | | | | $ | 30,120 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
Theatrical film production costs: | | | | | | |
Released, less amortization | | $ | — | | | $ | — | | | $ | — | |
Completed and not released | | — | | | — | | | — | |
In production | | — | | | — | | | — | |
Development and pre-production | | — | | | — | | | — | |
| | | | | | |
Television production costs: | | | | | | |
Released, less amortization | | 9 | | | 2,432 | | | 2,441 | |
Completed and not released | | — | | | — | | | — | |
In production | | — | | | 770 | | | 770 | |
Development and pre-production | | — | | | 17 | | | 17 | |
Total theatrical film and television production costs | | $ | 9 | | | $ | 3,219 | | | 3,228 | |
| | | | | | |
Programming and game costs: | | | | | | |
Programming costs, less amortization (a) | | | | | | 849 | |
Game development costs, less amortization | | | | | | — | |
Total film and television content rights | | | | | | 4,077 | |
Less: Current content rights and prepaid license fees, net | | | | | | (245) | |
Total noncurrent film and television content rights, net | | | | | | $ | 3,832 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | |
(a) Includes the costs of licensed programming rights, including payments that have been made prior to the related rights being received (primarily for sports). |
Content expense consisted of the following (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Monetized individually | | | | | | | | |
Content amortization | | $ | 1,927 | | | $ | 25 | | | $ | 2,177 | | | $ | 49 | |
| | | | | | | | |
Content impairments | | 94 | | | — | | | 94 | | | — | |
Total content expense monetized individually | | $ | 2,021 | | | $ | 25 | | | $ | 2,271 | | | $ | 49 | |
| | | | | | | | |
Monetized as a group | | | | | | | | |
Content amortization | | $ | 3,189 | | | $ | 747 | | | $ | 3,908 | | | $ | 1,466 | |
| | | | | | | | |
Content impairments | | 408 | | | 1 | | | 412 | | | 1 | |
Total content expense monetized as a group | | $ | 3,597 | | | $ | 748 | | | $ | 4,320 | | | $ | 1,467 | |
Total content expense | | $ | 5,618 | | | $ | 773 | | | $ | 6,591 | | | $ | 1,516 | |
Content expense includes amortization, impairments, and development expense and is generally a component of costs of revenues on the consolidated statements of operations. Content impairments for the three and six months ended June 30, 2022 of $496 million and $501 million, respectively, and content development write-offs of $329 million for the three and six months ended June 30, 2022 were due to the abandonment of certain content categories in connection with the strategic realignment of content following the Merger and are reflected in restructuring and other charges in the Studios, Networks and DTC segments. No content impairments were recorded as a component of restructuring and other charges for the three and six months ended June 30, 2021.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3.9. INVESTMENTS
The Company’s equity investments consisted of the following, net of investments recorded in other noncurrent liabilities (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
Category | | Balance Sheet Location | | Ownership | | March 31, 2022 | | December 31, 2021 |
Equity method investments: | | | | | | | | |
nC+ | | Other noncurrent assets | | 32% | | $ | 150 | | | $ | 151 | |
All3Media | | Other noncurrent assets | | 50% | | 105 | | | 78 | |
Discovery Solar Ventures, LLC (a) | | Other noncurrent assets | | N/A | | 72 | | | 75 | |
Other | | Other noncurrent assets | | | | 227 | | | 237 | |
Total equity method investments | | | | | | 554 | | | 541 | |
| | | | | | | | |
Investments with readily determinable fair values: | | | | | | | | |
Lionsgate Entertainment Corp. | | Other noncurrent assets | | | | 78 | | | 80 | |
Sharecare | | Prepaid expenses and other current assets | | | | 22 | | | 40 | |
Total investments with readily determinable fair values | | | | | | 100 | | | 120 | |
| | | | | | | | |
Equity investments without readily determinable fair values: | | | | | | | | |
Vox Media (b) | | Other noncurrent assets | | 8% | | 171 | | | 191 | |
| | | | | | | | |
Formula E (c) | | Other noncurrent assets | | 28% | | 83 | | | 83 | |
Philo | | Other noncurrent assets | | 19% | | 50 | | | 50 | |
Other | | Other noncurrent assets | | | | 171 | | | 172 | |
Total equity investments without readily determinable fair values | | | | | | 475 | | | 496 | |
Total investments | | | | | | $ | 1,129 | | | $ | 1,157 | |
| | | | | | | | |
(a) Discovery Solar Ventures, LLC invests in limited liability companies that sponsor renewable energy projects related to solar energy. These investments are considered VIEs of the Company and are accounted for under the equity method of accounting using the Hypothetical Liquidation at Book Value methodology for allocating earnings. |
| | | | | | | | |
(b) Overall ownership percentage for Vox Media is calculated on an outstanding shares basis. The amount shown as of December 31, 2021 includes a $20 million note receivable balance presented within prepaid expenses and other current assets on the Company's consolidated balance sheets. During the three months ended March 31, 2022, the note receivable was settled. Group Nine Media and Vox Media merged during the three months ended March 31, 2022, changing the Company's ownership percentage from 25% to 8% post-merger. The Company reduced its liquidation preference for an additional ownership percentage in Vox Media. |
| | | | | | | | |
(c) Ownership percentage for Formula E includes holdings accounted for as an equity method investment and holdings accounted for as an equity investment without a readily determinable fair value. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Category | | Balance Sheet Location | | Ownership | | June 30, 2022 | | December 31, 2021 |
Equity method investments: | | | | | | | | |
The Chernin Group (TCG) 2.0-A, LP | | Other noncurrent assets | | 44% | | $ | 352 | | | $ | — | |
nC+ | | Other noncurrent assets | | 32% | | 129 | | | 151 | |
Other | | Other noncurrent assets | | | | 683 | | | 390 | |
Total equity method investments | | | | | | 1,164 | | | 541 | |
| | | | | | | | |
| | | | | | | | |
Investments with readily determinable fair values | | Other noncurrent assets | | | | 45 | | | 80 | |
Investments with readily determinable fair values | | Prepaid expenses and other current assets | | | | 14 | | | 40 | |
Total investments with readily determinable fair values | | | | | | 59 | | | 120 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Investments without readily determinable fair values | | Other noncurrent assets | | | | 637 | | | 496 | |
Total investments | | | | | | $ | 1,860 | | | $ | 1,157 | |
| | | | | | | | |
|
| | | | | | | | |
|
| | | | | | | | |
|
Equity Method Investments
Investments in equity method investees are those for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary. Thebeneficiary or the entity is not a VIE and the Company had impairmentdoes not have a controlling financial interest. In conjunction with the Merger, the Company acquired $671 million of equity method investments. Impairment losses are recorded in loss from equity investees, net on the consolidated statements of $11 million for the three months ended March 31, 2022, because the change in value was considered other-than-temporary. The Company had no impairmentoperations. Impairment losses for the three and six months ended March 31, 2021.June 30, 2022 were not material.
With the exception of nC+, the carrying values of the Company’s equity method investments are consistent with its ownership in the underlying net assets of the investees. For nC+, there is a basis difference of $32 million, which is attributable to finite-lived intangible assets with a remaining life of 6 years and is included in the carrying value of nC+. Earnings from nC+ were reduced by the amortization of these intangibles of $2 million and $3 million for the three months ended March 31, 2022 and 2021, respectively.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Certain of the Company's other equity method investments are VIEs, for which the Company is not the primary beneficiary. As of March 31,June 30, 2022, the Company’s maximum exposure for all of its unconsolidated VIEs, including the investment carrying values and unfunded contractual commitments made on behalf of VIEs, was approximately $169$810 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $105$772 million as of March 31,June 30, 2022 and $126 million as of December 31, 2021. The Company recognized its portionVIE gains and losses are recorded in loss from equity investees, net on the consolidated statements of VIE operating results with net losses of $17 millionoperations, and $8 millionwere not material for the three and six months ended March 31,June 30, 2022 and 2021, respectively.2021.
Investments with Readily Determinable Fair Value
Investments in entities or other securities in which the Company has no control or significant influence, is not the primary beneficiary, and have a readily determinable fair value are classified as equity investments with readily determinable fair value. The investments are measured at fair value based on a quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs (Level 1). Gains and losses are recorded in other (expense) income, net on the consolidated statements of operations.
The gains and losses related to the Company's investments with readily determinable fair values for the three and six months ended March 31,June 30, 2022 and 2021 are summarized in the table below (in millions).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Net gains (losses) recognized during the period on equity securities | | $ | (20) | | | $ | 33 | | | | | |
Less: Net gains recognized on equity securities sold | | — | | | 16 | | | | | |
Unrealized gains (losses) recognized during reporting period on equity securities still held at the reporting date | | $ | (20) | | | $ | 17 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net (losses) gains recognized during the period on equity securities | | $ | (41) | | | $ | 29 | | | $ | (61) | | | $ | 62 | |
Less: Net gains recognized on equity securities sold | | — | | | — | | | — | | | 16 | |
Unrealized (losses) gains recognized during reporting period on equity securities still held at the reporting date | | $ | (41) | | | $ | 29 | | | $ | (61) | | | $ | 46 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Equity investments without readily determinable fair values assessed under the measurement alternative
Equity investments without readily determinable fair value include ownership rights that either (i) do not meet the definition of in-substance common stock or (ii) do not provide the Company with control or significant influence and these investments do not have readily determinable fair values.
In conjunction with the Merger, the Company acquired$156 million in equity method investments without readily determinable fair values. During the threesix months ended March 31,June 30, 2022, the Company did not investin any material equity investments without readily determinable fair values and concluded that its other equity investments without readily determinable fair values hadthere were no indicators that a change in fair value had taken place. As of March 31,June 30, 2022, the Company had recorded cumulative upward adjustments of $9 million and cumulative impairments of $88 million for its equity investments without readily determinable fair values.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4. FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories: | | | | | | | | |
Level 1 | – | Quoted prices for identical instruments in active markets. |
Level 2 | – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
Level 3 | – | Valuations derived from techniques in which one or more significant inputs are unobservable. |
The tables below present assets and liabilities measured at fair value on a recurring basis (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | March 31, 2022 |
Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | |
Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 525 | | | $ | — | | | $ | 525 | |
| | | | | | | | | | |
Equity securities: | | | | | | | | | | |
Money market funds | | Cash and cash equivalents | | 550 | | | — | | | — | | | 550 | |
| | | | | | | | | | |
Mutual funds | | Prepaid expenses and other current assets | | 26 | | | — | | | — | | | 26 | |
Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 1 | | | — | | | 1 | |
Mutual funds | | Other noncurrent assets | | 196 | | | — | | | — | | | 196 | |
Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 30 | | | — | | | 30 | |
Total | | | | $ | 772 | | | $ | 556 | | | $ | — | | | $ | 1,328 | |
Liabilities | | | | | | | | | | |
Deferred compensation plan | | Accrued liabilities | | $ | 36 | | | $ | — | | | $ | — | | | $ | 36 | |
Deferred compensation plan | | Other noncurrent liabilities | | 217 | | | — | | | — | | | 217 | |
Total | | | | $ | 253 | | | $ | — | | | $ | — | | | $ | 253 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 |
Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | |
Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 426 | | | $ | — | | | $ | 426 | |
| | | | | | | | | | |
Equity securities: | | | | | | | | | | |
Money market funds | | Cash and cash equivalents | | 425 | | | — | | | — | | | 425 | |
| | | | | | | | | | |
Mutual funds | | Prepaid expenses and other current assets | | 12 | | | — | | | — | | | 12 | |
Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 1 | | | — | | | 1 | |
Mutual funds | | Other noncurrent assets | | 215 | | | — | | | — | | | 215 | |
Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 32 | | | — | | | 32 | |
Total | | | | $ | 652 | | | $ | 459 | | | $ | — | | | $ | 1,111 | |
Liabilities | | | | | | | | | | |
Deferred compensation plan | | Accrued Liabilities | | $ | 21 | | | $ | — | | | $ | — | | | $ | 21 | |
Deferred compensation plan | | Other noncurrent liabilities | | 238 | | | — | | | — | | | 238 | |
Total | | | | $ | 259 | | | $ | — | | | $ | — | | | $ | 259 | |
| | | | | | | | | | |
|
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Equity securities include money market funds, time deposits, investments in mutual funds held in separate trusts, which are owned as part of the Company's supplemental retirement plans, and company-owned life insurance contracts. The fair value of Level 1 equity securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. Changes in the fair value of the investments are offset by changes in the fair value of the deferred compensation obligation. Company-owned life insurance contracts are recorded at their cash surrender value, which approximates fair value (Level 2).
In addition to the financial instruments listed in the tables above, the Company has other financial instruments, including cash deposits, accounts receivable, accounts payable, and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of March 31, 2022 and December 31, 2021. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over-the-counter markets, considered Level 2 inputs, was $14.9 billion and $17.2 billion as of March 31, 2022 and December 31, 2021, respectively.
The Company's derivative financial instruments are discussed in Note 8 and its investments with readily determinable fair value are discussed in Note 3.
NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions).
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Produced content rights: | | | | |
Completed | | $ | 10,900 | | | $ | 10,404 | |
In-production | | 722 | | | 696 | |
Coproduced content rights: | | | | |
Completed | | 1,032 | | | 1,003 | |
In-production | | 71 | | | 91 | |
Licensed content rights: | | | | |
Acquired | | 1,116 | | | 1,213 | |
Prepaid | | 238 | | | 251 | |
Content rights, at cost | | 14,079 | | | 13,658 | |
Accumulated amortization | | (10,070) | | | (9,581) | |
Total content rights, net | | 4,009 | | | 4,077 | |
Current portion | | (143) | | | (245) | |
Noncurrent portion | | $ | 3,866 | | | $ | 3,832 | |
| | | | |
|
Content expense consisted of the following (in millions).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Content amortization | | $ | 969 | | | $ | 743 | | | | | |
Other production charges | | 113 | | | 80 | | | | | |
Content impairments | | 4 | | | — | | | | | |
Total content expense | | $ | 1,086 | | | $ | 823 | | | | | |
Content expense is generally a component of costs of revenue on the consolidated statements of operations. Content impairments of $4 million are reflected in restructuring and other charges for the three months ended March 31, 2022.
As of March 31, 2022, the Company expects to amortize approximately 57%, 26% and 13% of its produced and co-produced content, excluding content in-production, and 49%, 22% and 11% of its licensed content rights in the next three twelve-month operating cycles ending March 31, 2022, 2023 and 2024, respectively.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6. GOODWILL
The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows (in millions). | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Networks | | International Networks | | | | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
December 31, 2021 | | $ | 10,813 | | | $ | 2,099 | | | | | $ | 12,912 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Foreign currency translation and other | | — | | | (40) | | | | | (40) | |
March 31, 2022 | | $ | 10,813 | | | $ | 2,059 | | | | | $ | 12,872 | |
The carrying amount of goodwill at the U.S. Networks segment included accumulated impairments of $20 million as of March 31, 2022 and December 31, 2021. The carrying amount of goodwill at the International Networks segment included accumulated impairments of $1.6 billion as of March 31, 2022 and December 31, 2021.
Impairment Analysis
During the fourth quarter of 2021, the Company performed a qualitative goodwill impairment assessment for all reporting units and it determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values, therefore, no quantitative goodwill impairment analysis was performed.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7.10. DEBT
The table below presents the components of outstanding debt (in millions). | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
2.375% Senior Notes, euro denominated, annual interest, due March 2022 | | $ | — | | | $ | 339 | |
2.950% Senior Notes, semi-annual interest, due March 2023 | | 796 | | | 796 | |
3.250% Senior Notes, semi-annual interest, due April 2023 | | 192 | | | 192 | |
3.800% Senior Notes, semi-annual interest, due March 2024 | | 450 | | | 450 | |
2.500% Senior Notes, sterling denominated, annual interest, due September 2024 | | 527 | | | 540 | |
3.900% Senior Notes, semi-annual interest, due November 2024 | | 497 | | | 497 | |
3.450% Senior Notes, semi-annual interest, due March 2025 | | 300 | | | 300 | |
3.950% Senior Notes, semi-annual interest, due June 2025 | | 500 | | | 500 | |
4.900% Senior Notes, semi-annual interest, due March 2026 | | 700 | | | 700 | |
1.900% Senior Notes, euro denominated, annual interest, due March 2027 | | 667 | | | 678 | |
3.950% Senior Notes, semi-annual interest, due March 2028 | | 1,700 | | | 1,700 | |
4.125% Senior Notes, semi-annual interest, due May 2029 | | 750 | | | 750 | |
3.625% Senior Notes, semi-annual interest, due May 2030 | | 1,000 | | | 1,000 | |
5.000% Senior Notes, semi-annual interest, due September 2037 | | 548 | | | 548 | |
6.350% Senior Notes, semi-annual interest, due June 2040 | | 664 | | | 664 | |
4.950% Senior Notes, semi-annual interest, due May 2042 | | 285 | | | 285 | |
4.875% Senior Notes, semi-annual interest, due April 2043 | | 516 | | | 516 | |
5.200% Senior Notes, semi-annual interest, due September 2047 | | 1,250 | | | 1,250 | |
5.300% Senior Notes, semi-annual interest, due May 2049 | | 750 | | | 750 | |
4.650% Senior Notes, semi-annual interest, due May 2050 | | 1,000 | | | 1,000 | |
4.000% Senior Notes, semi-annual interest, due September 2055 | | 1,732 | | | 1,732 | |
| | | | |
| | | | |
| | | | |
Total debt | | 14,824 | | | 15,187 | |
Unamortized discount, premium and debt issuance costs, net (a) | | (425) | | | (428) | |
Debt, net of unamortized discount, premium and debt issuance costs | | 14,399 | | | 14,759 | |
Current portion of debt | | (794) | | | (339) | |
Noncurrent portion of debt | | $ | 13,605 | | | $ | 14,420 | |
(a) Current portion | | | | | | | | | | | | | | | | | | | | | |
| | Weighted-Average Interest Rate as of June 30, 2022 | | June 30, 2022 | | December 31, 2021 | |
Term loans with maturities of 3 years or less | | 2.32 | % | | $ | 6,500 | | | $ | — | | |
Floating rate senior notes with maturities of 5 years or less | | 2.31 | % | | 500 | | | — | | |
Senior notes with maturities of 5 years or less | | 3.60 | % | | 13,742 | | | 4,314 | | |
Senior notes with maturities between 5 and 10 years | | 4.25 | % | | 10,373 | | | 4,128 | | |
Senior notes with maturities greater than 10 years | | 5.11 | % | | 21,644 | | | 6,745 | | |
Total debt | | 0 | | 52,759 | | | 15,187 | | |
Unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net | | | | (274) | | | (428) | | |
Debt, net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, | | | | 52,485 | | | 14,759 | | |
Current portion of debt | | | | (1,097) | | | (339) | | |
Noncurrent portion of debt | | | | $ | 51,388 | | | $ | 14,420 | | |
During the three months ended June 30, 2022, the Company repaid $3.5 billion of unamortized discount, premium,aggregate principal amount outstanding of its term loans due October 2023 and debt issuance costs, net is not material.April 2025. The Company also assumed $41.5 billion of senior notes (at par value) and term loans during the Merger.
.Senior Notes
During the three months ended March 31, 2022, the Company repaid in full at maturity $327 million aggregate principal amount outstanding of its 2.375% Euro Denominated Senior Notes due March 2022.
In the third quarter of 2021, the Company redeemed in full $168 million aggregate principal amount outstanding of its 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of its 3.500% Senior Notes due June 2022. In the first quarter of 2021, the Company redeemed in full $335 million aggregate principal amount outstanding of its 4.375% Senior Notes due June 2021.
The redemptions during 2022 and 2021 resulted in an immaterial loss on extinguishment of debt.
As of March 31,June 30, 2022, all senior notes are fully and unconditionally guaranteed by the Company, and Scripps Networks Interactive, Inc. ("Scripps Networks"), Discovery Communications, LLC ("DCL") (to the extent it is not the primary obligor on such senior notes), and WarnerMedia Holdings, Inc. (to the extent it is not the primary obligor on such senior notes), except for $1.5 billion of senior notes of the remaininglegacy WarnerMedia Business assumed by the Company in connection with the Merger and $23 million of un-exchanged senior notes issued by Scripps Networks. Additionally, the term loans of WarnerMedia Holdings, Inc., made under the $10 billion term loan credit agreement (the "Term Loan Credit Agreement"), are fully and unconditionally guaranteed by the Company, Scripps Networks, senior notes.and DCL.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revolving Credit Facility and Commercial Paper Programs
In June 2021, Discovery Communications, LLC ("DCL")DCL entered into a multicurrency revolving credit agreement (the "Credit Agreement"“Revolving Credit Agreement”), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. Following the Merger, DCL has the capacity to initially borrow up to $2.5$6.0 billion under the Revolving Credit Agreement. Following the closing of the Merger and subject to certain conditions, the available commitments increased by $3.5 billion, to an aggregate amount not to exceed $6 billionAgreement (the “Credit Facility”). The Revolving Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. DCL may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Revolving Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks, and following the closing of the Merger, WarnerMedia Holdings, Inc., which was originally named Magallanes, Inc. The Credit Facility will be available on a revolving basis until June 2026, with an option for up to 2 additional 364-day renewal periods subject to the lenders' consent. The Revolving Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of March 31, 2022, 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 effectively reduced by any outstanding borrowings under the commercial paper program.
As of March 31,June 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.
Credit Agreement Financial Covenants
The Revolving Credit Agreement includesand Term Loan Credit Agreement (together, the “Credit Agreements”) include financial covenants that require the Company to maintain a minimum consolidated interest coverage ratio of 3.00 to 1.00 and a maximum adjusted consolidated leverage ratio of 4.50 to 1.00, which increased to 5.75 to 1.00 following the closing of the Merger, with step-downs to 5.00 to 1.00 and 4.50 to 1.00 on the first and second anniversaries of the closing, respectively. As of June 30, 2022, DCL and WarnerMedia Holdings, Inc. were in compliance with all covenants and there were no events of default under the Credit Agreements.
NOTE 11. LEASES
The Company has operating and finance leases for transponders, office space, studio facilities, and other equipment. Our leases have remaining lease terms of up to 15 years, some of which include options to extend the leases for up to 10 years. Most leases are not cancelable prior to their expiration. In conjunction with the Merger, the Company acquired $2,493 million and $47 million of operating and finance lease right-of-use assets, respectively.
The components of lease cost were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating lease cost | $ | 116 | | | $ | 26 | | | $ | 138 | | | $ | 53 | |
| | | | | | | |
Finance lease cost: | | | | | | | |
Amortization of right-of-use assets | $ | 20 | | | $ | 14 | | | $ | 37 | | | $ | 28 | |
Interest on lease liabilities | 2 | | | 2 | | | 4 | | | 4 | |
Total finance lease cost | $ | 22 | | | $ | 16 | | | $ | 41 | | | $ | 32 | |
| | | | | | | |
Variable lease cost | $ | 6 | | | $ | 1 | | | $ | 7 | | | $ | 4 | |
Total lease cost | $ | 144 | | | $ | 43 | | | $ | 186 | | | $ | 89 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental cash flow information related to leases was as follows (in millions): | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2022 | | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | (142) | | | $ | (56) | |
Operating cash flows from finance leases | $ | (7) | | | $ | (4) | |
Financing cash flows from finance leases | $ | (39) | | | $ | (33) | |
| | | |
Right-of-use assets obtained in exchange for lease obligations: | | | |
Operating leases | $ | 7 | | | $ | 7 | |
Finance leases | $ | 23 | | | $ | 59 | |
Supplemental balance sheet information related to leases was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | |
Category | | Location on Balance Sheet | | June 30, 2022 | | December 31, 2021 | | |
Operating Leases | | | | | | | | |
Operating lease right-of-use assets | | Other noncurrent assets | | $ | 2,918 | | | $ | 535 | | | |
| | | | | | | | |
Operating lease liabilities (current) | | Accrued liabilities | | $ | 335 | | | $ | 62 | | | |
Operating lease liabilities (noncurrent) | | Other noncurrent liabilities | | 2,678 | | | 567 | | | |
Total operating lease liabilities | | | | $ | 3,013 | | | $ | 629 | | | |
| | | | | | | | |
Finance Leases | | | | | | | | |
Finance lease right-of-use assets | | Property and equipment, net | | $ | 275 | | | $ | 249 | | | |
| | | | | | | | |
Finance lease liabilities (current) | | Accrued liabilities | | $ | 78 | | | $ | 58 | | | |
Finance lease liabilities (noncurrent) | | Other noncurrent liabilities | | 206 | | | 197 | | | |
Total finance lease liabilities | | | | $ | 284 | | | $ | 255 | | | |
| | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | | |
Weighted average remaining lease term (in years): | | | | | | |
Operating leases | | 11 | | 12 | | |
Finance leases | | 5 | | 5 | | |
| | | | | | |
Weighted average discount rate: | | | | | | |
Operating leases | | 3.83 | % | | 2.94 | % | | |
Finance leases | | 3.13 | % | | 3.57 | % | | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Maturities of lease liabilities as of June 30, 2022 were as follows (in millions): | | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
2022 (excluding the two quarters ended June 30, 2022) | | $ | 260 | | | $ | 79 | |
2023 | | 425 | | | 75 | |
2024 | | 373 | | | 57 | |
2025 | | 319 | | | 37 | |
2026 | | 289 | | | 26 | |
Thereafter | | 2,070 | | | 34 | |
Total lease payments | | 3,736 | | | 308 | |
Less: Imputed interest | | (723) | | | (24) | |
Total | | $ | 3,013 | | | $ | 284 | |
As of June 30, 2022, the Company has additional leases that have not yet commenced with total minimum lease payments of $1,175 million, primarily related to facility leases. The remaining leases will commence between 2022 and 2023, have lease terms of 3 to 27 years, and include options to extend the terms for up to 10 additional years.
NOTE 8.12. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign currency exchange rates and interest rates. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
Cash Flow Hedges
On January 1, 2022, the Company discontinued hedge accounting for certain forward starting interest rate swap contracts with a total notional value of $2 billion. The Company previously recognized a gain of $33 million in accumulated other comprehensive loss that will be amortized as an adjustment to interest expense, net over the respective terms of future issuances of debt. Subsequently, the Company unwound and settled the contracts and received cash of $122 million, including an $89 million realized gain for changes in fair market value between the dedesignation date and settlement date that was recognized in other (expense) income, net in the consolidated statements of operations.
In connection with the Merger, the Company acquired 2 cash flow hedging programs to mitigate foreign currency risk including $922 million notional of production expense hedges and $776 million notional of production rebate hedges. These cash flow hedging programs are carried at fair market value using the spot method, with fair market value changes recorded in other comprehensive income until the production airs. Excluded components of the fair market value, including forward points, are included in current earnings.
Net Investment Hedges
During the three months ended March 31, 2022, the Company unwound and settled certain fixed-to-fixed cross-currency swaps with a total notional value of $705 million associated with the Company's Euro functional subsidiaries. The Company recognized a realized gain of $10 million related to the excluded component of the hedge relationship in other (expense) income, net in the consolidated statements of operations, and recognized a gain of $6 million in accumulated other comprehensive loss.
Also during the three months ended March 31, 2022, the Company executed cross currency swaps with a notional value of $664 million with expiration dates in 2025 to replace the aforementioned swaps that matured.
During the three months ended June 30, 2022, the Company unwound and settled certain cross-currency swaps with a total notional value of $2 billion and recorded a gain of $78 million.
In connection with the Merger, the company also acquired $173 million of Euro denominated debt that is designated as a net investment hedge with all fair market value changes accounted for as currency translation adjustments.
No Hedging Designation
During the three months ended March 31, 2022, the Company dedesignated, unwound and settled forward starting interest rate swap contracts with a total notional value of $5.0 billion, swaption collars with a total notional value of $2.5 billion, and purchase payer swaptions with a total notional value of $7.5 billion. The Company received cash of $474 million upon settlement, including $142 million in premiums paid at execution during 2021, resulting in a gain of $332 million that was recognized in other (expense) income, net in the consolidated statements of operations.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Also during the three months ended March 31, 2022, the Company executed and subsequently settled treasury locks with a total notional value of $14.5 billion. The Company received cash of $90 million upon settlement, resulting in a gain of $90 million that was recognized in other (expense) income, net in the consolidated statements of operations.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Finally, during the three months ended March 31, 2022, the Company unwound and settled a foreign exchange forward contract with a notional value of $375 million associated with the Company's Euro denominated debt that was paid in full at maturity. The Company recognized a loss of $48 million in other (expense) income, net in the consolidated statements of operations.
The company acquired $322 million of economic hedges to mitigate foreign currency risk for production expenses that are not designated for hedge accounting. The fair market value changes of these derivatives are expensed to other (expense) income, net.
The following table summarizes the impact of derivative financial instruments on the Company's consolidated balance sheets (in millions). There were no amounts eligible to be offset under master netting agreements as of March 31,June 30, 2022 and December 31, 2021. The fair value of the Company's derivative financial instruments was determined using a market-based approach (Level 2).
| | | March 31, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
| | | Fair Value | | | Fair Value | | | Fair Value | | | Fair Value |
| | Notional | | Prepaid expenses and other current assets | | Other non- current assets | | Accounts payable and accrued liabilities | | Other non- current liabilities | | Notional | | Prepaid expenses and other current assets | | Other non- current assets | | Accounts payable and accrued liabilities | | Other non- current liabilities | | Notional | | Prepaid expenses and other current assets | | Other non- current assets | | Accounts payable and accrued liabilities | | Other non- current liabilities | | Notional | | Prepaid expenses and other current assets | | Other non- current assets | | Accounts payable and accrued liabilities | | Other non- current liabilities |
Cash flow hedges: | Cash flow hedges: | | | | | | | | | | | | | | | | | | | | Cash flow hedges: | | | | | | | | | | | | | | | | | | | |
Foreign exchange | Foreign exchange | $ | 752 | | | $ | 6 | | | $ | — | | | $ | 11 | | | $ | 1 | | | $ | 777 | | | $ | 14 | | | $ | — | | | $ | 2 | | | $ | — | | Foreign exchange | $ | 2,196 | | | $ | 31 | | | $ | 54 | | | $ | 80 | | | $ | 15 | | | $ | 777 | | | $ | 14 | | | $ | — | | | $ | 2 | | | $ | — | |
Interest rate swaps | Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 2,000 | | | 44 | | | — | | | 11 | | | — | | Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 2,000 | | | 44 | | | — | | | 11 | | | — | |
Net investment hedges: (a) | Net investment hedges: (a) | | Net investment hedges: (a) | |
Cross-currency swaps | Cross-currency swaps | 3,437 | | | 31 | | | 53 | | | 1 | | | 76 | | | 3,512 | | | 54 | | | 61 | | | 20 | | | 76 | | Cross-currency swaps | 1,620 | | | 16 | | | 29 | | | — | | | 59 | | | 3,512 | | | 54 | | | 61 | | | 20 | | | 76 | |
| No hedging designation: | No hedging designation: | | No hedging designation: | |
Foreign exchange | Foreign exchange | 673 | | | — | | | — | | | — | | | 68 | | | 1,020 | | | — | | | — | | | 34 | | | 66 | | Foreign exchange | 806 | | | 4 | | | 1 | | | — | | | 98 | | | 1,020 | | | — | | | — | | | 34 | | | 66 | |
Interest rate swaps | Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 15,000 | | | 126 | | | 28 | | | 9 | | | 5 | | Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 15,000 | | | 126 | | | 28 | | | 9 | | | 5 | |
Cross-currency swaps | Cross-currency swaps | 139 | | | 3 | | | — | | | — | | | 4 | | | 139 | | | 3 | | | — | | | — | | | 5 | | Cross-currency swaps | 139 | | | 3 | | | 2 | | | — | | | — | | | 139 | | | 3 | | | — | | | — | | | 5 | |
| Total | Total | | $ | 40 | | | $ | 53 | | | $ | 12 | | | $ | 149 | | | $ | 241 | | | $ | 89 | | | $ | 76 | | | $ | 152 | | Total | | $ | 54 | | | $ | 86 | | | $ | 80 | | | $ | 172 | | | $ | 241 | | | $ | 89 | | | $ | 76 | | | $ | 152 | |
(a) Excludes £400 million of sterling notes ($527486 million equivalent at March 31,June 30, 2022) and €164 million of euro-denominated notes ($173 million equivalent at June 30, 2022) designated as a net investment hedge.hedges. (See Note 7.10.)
The following table presents the pre-tax impact of derivatives designated as cash flow hedges on income and other comprehensive income (loss) (in millions).
| | | | Three Months Ended March 31, | | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | | | 2022 | | 2021 | | 2022 | | 2021 |
Gains (losses) recognized in accumulated other comprehensive loss: | Gains (losses) recognized in accumulated other comprehensive loss: | | | | | | Gains (losses) recognized in accumulated other comprehensive loss: | | | | | | | | |
Foreign exchange - derivative adjustments | Foreign exchange - derivative adjustments | | $ | (13) | | | $ | 37 | | | Foreign exchange - derivative adjustments | | $ | (7) | | | $ | (7) | | | $ | (20) | | | $ | 30 | |
Interest rate - derivative adjustments | Interest rate - derivative adjustments | | — | | | 260 | | | Interest rate - derivative adjustments | | — | | | (134) | | | — | | | 126 | |
Gains (losses) reclassified into income from accumulated other comprehensive loss: | Gains (losses) reclassified into income from accumulated other comprehensive loss: | | | Gains (losses) reclassified into income from accumulated other comprehensive loss: | |
Foreign exchange - advertising revenue | Foreign exchange - advertising revenue | | 1 | | | — | | | Foreign exchange - advertising revenue | | — | | | — | | | 1 | | | — | |
Foreign exchange - distribution revenue | Foreign exchange - distribution revenue | | 4 | | | (3) | | | Foreign exchange - distribution revenue | | (2) | | | 2 | | | 2 | | | (1) | |
Foreign exchange - costs of revenues | Foreign exchange - costs of revenues | | 1 | | | — | | | Foreign exchange - costs of revenues | | 18 | | | — | | | 19 | | | — | |
Interest rate - interest expense, net | | Interest rate - interest expense, net | | (1) | | | (1) | | | (1) | | | (1) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
If current fair values of designated cash flow hedges as of March 31,June 30, 2022 remained static over the next twelve months, the Company would reclassify $7$5 million of net deferred losses from accumulated other comprehensive loss into income in the next twelve months. The maximum length of time the Company is hedging exposure to the variability in future cash flows is 33 years.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table presents the pre-tax impact of derivatives designated as net investment hedges on other comprehensive income (loss) (in millions). Other than amounts excluded from effectiveness testing, there were no other gains (losses) reclassified from accumulated other comprehensive loss to income during the three and six months ended March 31,June 30, 2022 and 2021. | | | Three Months Ended March 31, | | Three Months Ended June 30, |
| | Amount of gain (loss) recognized in AOCI | | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in AOCI | | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
Cross currency swaps | Cross currency swaps | | $ | 19 | | | $ | 52 | | | Interest expense, net | | $ | 15 | | | $ | 10 | | Cross currency swaps | | $ | 52 | | | $ | (5) | | | Interest expense, net | | $ | 7 | | | $ | 11 | |
| Euro-denominated notes (foreign denominated debt) | | Euro-denominated notes (foreign denominated debt) | | 6 | | | — | | | N/A | | — | | | — | |
Sterling notes (foreign denominated debt) | Sterling notes (foreign denominated debt) | | 13 | | | (5) | | | N/A | | — | | | — | | Sterling notes (foreign denominated debt) | | 41 | | | (3) | | | N/A | | — | | | — | |
Total | Total | | $ | 32 | | | $ | 47 | | | $ | 15 | | | $ | 10 | | Total | | $ | 99 | | | $ | (8) | | | $ | 7 | | | $ | 11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | Amount of gain (loss) recognized in AOCI | | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) |
| | 2022 | | 2021 | | | 2022 | | 2021 |
Cross currency swaps | | $ | 71 | | | $ | 47 | | | Interest expense, net | | $ | 22 | | | $ | 21 | |
| | | | | | | | | | |
| | | | | | | | | | |
Euro denominated notes (foreign denominated debt) | | 6 | | | — | | | N/A | | — | | | — | |
Sterling notes (foreign denominated debt) | | 54 | | | (8) | | | N/A | | — | | | — | |
Total | | $ | 131 | | | $ | 39 | | | | | $ | 22 | | | $ | 21 | |
The following table presents the pretax gains (losses) on derivatives not designated as hedges and recognized in other (expense) income, net in the consolidated statements of operations (in millions).
| | | Three Months Ended March 31, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | | 2022 | | 2021 | | 2022 | | 2021 |
Interest rate swaps | Interest rate swaps | | $ | 512 | | | $ | — | | | Interest rate swaps | | $ | — | | | $ | — | | | $ | 512 | | | $ | — | |
Cross-currency swaps | Cross-currency swaps | | — | | | 5 | | | Cross-currency swaps | | 7 | | | 1 | | | 7 | | | 6 | |
| Foreign exchange derivatives | Foreign exchange derivatives | | (15) | | | (25) | | | Foreign exchange derivatives | | (31) | | | (2) | | | (46) | | | (27) | |
Total in other income, net | | $ | 497 | | | $ | (20) | | | |
Total in other (expense) income, net | | Total in other (expense) income, net | | $ | (24) | | | $ | (1) | | | $ | 473 | | | $ | (21) | |
NOTE 9. EQUITY13. FAIR VALUE MEASUREMENTS
AsFair value is defined as the amount that would be received for selling an asset or paid to transfer a result ofliability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the Merger, each share of Discovery, Inc.'s issued, and outstanding common stock and preferred stock was reclassified and automatically converted to shares of Warner Bros. Discovery common stock (as further described in Note 19 below).
Repurchase Programs
In February 2020, the Company's Board of Directors authorized additional stock repurchases of up to $2 billion upon completion of its existing $1 billion repurchase authorization announced in May 2019. Under the 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.
All common stock repurchases, including prepaid common stock repurchase contracts, have been made through open market transactions and have been recorded as treasury stock on the consolidated balance sheet. Over the life of the Company's repurchase programs and as of March 31, 2022, the Company had repurchased 3 million and 229 million shares of its historical Series A and Series C common stock, respectively, for an aggregate purchase price of $171 million and $8.2 billion, respectively. There were no stock repurchases during thefollowing three months ended March 31, 2022 or 2021.
Preferred Stock
During the three months ended March 31, 2021, Advance Newhouse Programming Partnership converted 0.6 million of its Series C-1 convertible preferred stock into 11.0 million shares of Series C common stock.categories: | | | | | | | | |
Level 1 | – | Quoted prices for identical instruments in active markets. |
Level 2 | – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
Level 3 | – | Valuations derived from techniques in which one or more significant inputs are unobservable. |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Other Comprehensive Income (Loss) Adjustments
The tabletables below presentspresent assets and liabilities measured at fair value on a recurring basis (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2022 |
Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | |
Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 39 | | | $ | — | | | $ | 39 | |
| | | | | | | | | | |
Equity securities: | | | | | | | | | | |
Money market fund | | Cash and cash equivalents | | 2 | | | — | | | — | | | 2 | |
| | | | | | | | | | |
Mutual funds | | Prepaid expenses and other current assets | | 26 | | | — | | | — | | | 26 | |
| | | | | | | | | | |
Mutual funds | | Other noncurrent assets | | 231 | | | — | | | — | | | 231 | |
Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 100 | | | — | | | 100 | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | | | $ | 259 | | | $ | 139 | | | $ | — | | | $ | 398 | |
Liabilities | | | | | | | | | | |
Deferred compensation plan | | Accrued liabilities | | $ | 52 | | | $ | — | | | $ | — | | | $ | 52 | |
Deferred compensation plan | | Other noncurrent liabilities | | 615 | | | — | | | — | | | 615 | |
Total | | | | $ | 667 | | | $ | — | | | $ | — | | | $ | 667 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 |
Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | |
Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 426 | | | $ | — | | | $ | 426 | |
| | | | | | | | | | |
Equity securities: | | | | | | | | | | |
Money market funds | | Cash and cash equivalents | | 425 | | | — | | | — | | | 425 | |
| | | | | | | | | | |
Mutual funds | | Prepaid expenses and other current assets | | 12 | | | — | | | — | | | 12 | |
Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 1 | | | — | | | 1 | |
Mutual funds | | Other noncurrent assets | | 215 | | | — | | | — | | | 215 | |
Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 32 | | | — | | | 32 | |
Total | | | | $ | 652 | | | $ | 459 | | | $ | — | | | $ | 1,111 | |
Liabilities | | | | | | | | | | |
Deferred compensation plan | | Accrued Liabilities | | $ | 21 | | | $ | — | | | $ | — | | | $ | 21 | |
Deferred compensation plan | | Other noncurrent liabilities | | 238 | | | — | | | — | | | 238 | |
Total | | | | $ | 259 | | | $ | — | | | $ | — | | | $ | 259 | |
| | | | | | | | | | |
|
Equity securities include money market funds, time deposits, investments in mutual funds held in separate trusts, which are owned as part of the
tax effectsCompany's supplemental retirement plans, and company-owned life insurance contracts. The fair value of Level 1 equity securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. The fair value of the deferred compensation plan liability was determined based on the fair value of the related
to each component of other comprehensive income (loss) and reclassifications madeinvestments elected by employees. Changes in the
consolidated statementsfair value of
operations (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 | | Three Months Ended March 31, 2021 |
|
Pretax | | Tax benefit (expense) | |
Net-of-tax | |
Pretax | | Tax benefit (expense) | |
Net-of-tax |
Currency translation adjustments: | | | | | | | | | | | |
Unrealized gains (losses): | | | | | | | | | | | |
Foreign currency | $ | (105) | | | $ | — | | | $ | (105) | | | $ | (230) | | | $ | 16 | | | $ | (214) | |
Net investment hedges | 22 | | | (14) | | | 8 | | | 42 | | | 5 | | | 47 | |
Reclassifications: | | | | | | | | | | | |
Gain on disposition | (2) | | | — | | | (2) | | | — | | | — | | | — | |
Total currency translation adjustments | (85) | | | (14) | | | (99) | | | (188) | | | 21 | | | (167) | |
| | | | | | | | | | | |
Derivative adjustments: | | | | | | | | | | | |
Unrealized gains (losses) | (13) | | | 1 | | | (12) | | | 297 | | | (62) | | | 235 | |
Reclassifications from other comprehensive income to net income | (6) | | | — | | | (6) | | | 3 | | | (1) | | | 2 | |
Total derivative adjustments | (19) | | | 1 | | | (18) | | | 300 | | | (63) | | | 237 | |
Other comprehensive income (loss) adjustments | $ | (104) | | | $ | (13) | | | $ | (117) | | | $ | 112 | | | $ | (42) | | | $ | 70 | |
Accumulated Other Comprehensive Loss
The table below presents the investments are recorded in other (expense) income, net and changes in the componentsdeferred compensation liability are recorded in selling, general and administrative expense. Company-owned life insurance contracts are recorded at their cash surrender value, which approximates fair value (Level 2).
In addition to the financial instruments listed in the tables above, the Company has other financial instruments, including cash deposits, accounts receivable, accounts payable, term loans, and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of
accumulated other comprehensive loss, netJune 30, 2022 and December 31, 2021. The estimated fair value of
taxes (in millions). | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2022 |
| Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | $ | (845) | | | $ | 28 | | | $ | (13) | | | $ | (830) | |
Other comprehensive income (loss) before reclassifications | (97) | | | (12) | | | — | | | (109) | |
Reclassifications from accumulated other comprehensive loss to net income | (2) | | | (6) | | | — | | | (8) | |
Other comprehensive income (loss) | (99) | | | (18) | | | — | | | (117) | |
| | | | | | | |
| | | | | | | |
Ending balance | $ | (944) | | | $ | 10 | | | $ | (13) | | | $ | (947) | |
the Company’s outstanding senior notes using quoted prices from over-the-counter markets, considered Level 2 inputs, was $42.1 billion and $17.2 billion as of June 30, 2022 and December 31, 2021, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2021 |
| Currency Translation | | | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | $ | (555) | | | | | $ | (81) | | | $ | (15) | | | $ | (651) | |
Other comprehensive income (loss) before reclassifications | (167) | | | | | 235 | | | — | | | 68 | |
Reclassifications from accumulated other comprehensive loss to net income | — | | | | | 2 | | | — | | | 2 | |
| | | | | | | | | |
Other comprehensive income (loss) | (167) | | | | | 237 | | | — | | | 70 | |
| | | | | | | | | |
Ending balance | $ | (722) | | | | | $ | 156 | | | $ | (15) | | | $ | (581) | |
The Company's derivative financial instruments are discussed in Note 12, its investments with readily determinable fair value are discussed in Note 9, and the obligation for its revolving receivable program is discussed in Note 7.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 10. REVENUES AND ACCOUNTS RECEIVABLE
Disaggregated Revenue
The following table presents the Company’s revenues disaggregated by revenue source (in millions). Management uses these categories of revenue to evaluate the performance of its businesses and to assess its financial results and forecasts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, |
| 2022 | | 2021 |
| U.S. Networks | | International Networks | | Corporate, inter-segment eliminations, and other | | Total | | U.S. Networks | | International Networks | | Corporate, inter-segment eliminations, and other | | Total |
Revenues: | | | | | | | | | | | | | | | |
Advertising | $ | 1,025 | | | $ | 457 | | | $ | — | | | $ | 1,482 | | | $ | 980 | | | $ | 435 | | | $ | — | | | $ | 1,415 | |
Distribution | 886 | | | 536 | | | — | | | 1,422 | | | 796 | | | 514 | | | — | | | 1,310 | |
Other | 21 | | | 236 | | | (2) | | | 255 | | | 30 | | | 38 | | | (1) | | | 67 | |
Total | $ | 1,932 | | | $ | 1,229 | | | $ | (2) | | | $ | 3,159 | | | $ | 1,806 | | | $ | 987 | | | $ | (1) | | | $ | 2,792 | |
Accounts Receivable and Credit Losses
Receivables include amounts currently due from customers and are presented net of an estimate for lifetime expected credit losses. Allowance for credit losses is measured using historical loss rates for the respective risk categories and incorporating forward-looking estimates. To assess collectability, the Company analyzes market trends, economic conditions, the aging of receivables and customer specific risks, and records a provision for estimated credit losses expected over the lifetime of receivables. The corresponding expense for the expected credit losses is reflected in selling, general and administrative expenses.
The Company’s accounts receivable balances and the related credit losses arise primarily from distribution and advertising revenue. The Company monitors ongoing credit exposure through active review of customers’ financial conditions, aging of receivable balances, historical collection trends, and expectations about relevant future events that may significantly affect collectability. The allowance for credit losses increased from $54 million at December 31, 2021 to $61 million at March 31, 2022. The activity in the allowance for credit losses for the three months ended March 31, 2022 was not material.
Contract Liability
A contract liability, such as deferred revenue, is recorded when cash is received in advance of the Company's performance. Total deferred revenues, including both current and noncurrent, were $401 million and $573 million at March 31, 2022 and December 31, 2021, respectively. Noncurrent deferred revenue is a component of other noncurrent liabilities on the consolidated balance sheets. The change in deferred revenue for the three months ended March 31, 2022 was primarily due to revenue recognized during the period, of which $295 million was included in the deferred revenue balance at December 31, 2021, partially offset by cash payments received for which the performance obligation was not satisfied prior to the end of the period. Revenue recognized for the three months ended March 31, 2021 related to the deferred revenue balance at December 31, 2020 was $99 million.
Transaction Price Allocated to Remaining Performance Obligations
Most of the Company's distribution contracts are licenses of functional intellectual property where revenue is derived from royalty-based arrangements, for which the guidance allows the application of a practical expedient to record revenues as a function of royalties earned to date instead of estimating incremental royalty contract revenue. Accordingly, in these instances revenue is recognized based upon the royalties earned to date. However, there are certain other distribution arrangements that are fixed price or contain minimum guarantees that extend beyond one year. The Company recognizes revenue for fixed fee distribution contracts on a monthly basis based on minimum monthly fees; by calculating one twelfth of annual license fees specified in its distribution contracts; or based on the pro-rata fees earned calculated on the license fees specified in the distribution contract. The transaction price allocated to remaining performance obligations within these fixed price or minimum guarantee distribution revenue contracts was $1.4 billion as of March 31, 2022 and is expected to be recognized over the next five years.
The Company's content licensing contracts and sports sublicensing deals are licenses of functional intellectual property. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $606 million as of March 31, 2022 and is expected to be recognized over the next five years.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company's brand licensing contracts are licenses of symbolic intellectual property. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $84 million as of March 31, 2022 and is expected to be recognized over the next eleven years.
The value of unsatisfied performance obligations disclosed above does not include: (i) contracts involving variable consideration for which revenues are recognized in accordance with the usage-based royalty exception, and (ii) contracts with an original expected length of one year or less, such as advertising contracts.
NOTE 11. SHARE-BASED COMPENSATION
The Company has various incentive plans under which performance-based restricted stock units ("PRSUs"), service-based restricted stock units ("RSUs"), stock options, and stock appreciation rights ("SARs") have been issued.
The table below presents the components of share-based compensation expense (in millions), which is recorded in selling, general and administrative expense in the consolidated statements of operations. | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
PRSUs | | $ | 3 | | | $ | 19 | | | | | |
RSUs | | 38 | | | 22 | | | | | |
Stock options | | 18 | | | 10 | | | | | |
SARs | | 1 | | | 13 | | | | | |
Total share-based compensation expense | | $ | 60 | | | $ | 64 | | | | | |
Tax benefit recognized | | $ | 9 | | | $ | 8 | | | | | |
The Company recorded total liabilities for cash-settled and other liability-settled share-based compensation awards of $7 million and $22 million as of March 31, 2022 and December 31, 2021, respectively. The current portion of the liability for cash-settled and other liability-settled awards was $5 million and $17 million as of March 31, 2022 and December 31, 2021, respectively.
The table below presents awards granted (in millions, except weighted-average grant price). | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | Awards | | Weighted-Average Grant Price |
Awards granted: | | | | |
PRSUs | | 0.4 | | | $ | 24.92 | |
RSUs | | 6.9 | | | $ | 28.11 | |
Stock options | | 0.4 | | | $ | 32.90 | |
| | | | |
The table below presents unrecognized compensation cost related to non-vested share-based awards and the weighted-average amortization period over which these expenses will be recognized as of March 31, 2022 (in millions, except years). | | | | | | | | | | | | | | |
| | Unrecognized Compensation Cost | | Weighted-Average Amortization Period (years) |
PRSUs | | $ | 10 | | | 0.8 |
RSUs | | 388 | | | 2.3 |
Stock options | | 212 | | | 3.5 |
| | | | |
Total unrecognized compensation cost | | $ | 610 | | | |
Of the $388 million of unrecognized compensation cost related to RSUs, $44 million is related to cash-settled RSUs. Stock-settled RSUs are expected to be recognized over a weighted-average period of 2.3 years and cash-settled RSUs are expected to be recognized over a weighted-average period of 2.4 years.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 12. INCOME TAXES
Income tax expense was $201 million and $106 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in the three months ended March 31, 2022 was primarily attributable to an increase in pre-tax book income. Income tax expense for the three months ended March 31, 2022 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations and state and local income taxes.
The Company's reserves for uncertain tax positions as of March 31, 2022 and December 31, 2021 totaled $510 million and $420 million, respectively. It is reasonably possible that the total amount of unrecognized tax benefits related to certain of the Company's uncertain tax positions could decrease by as much as $93 million within the next twelve months as a result of ongoing audits, lapses of statutes of limitations or regulatory developments.
As of March 31, 2022 and December 31, 2021, the Company had accrued approximately $58 million and $60 million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
NOTE 13. EARNINGS PER SHARE
All share and per share amounts have been retrospectively adjusted to reflect the reclassification and automatic conversion of each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, Discovery Series C common stock, into one share of Warner Bros. Discovery common stock, and each issued and outstanding share of Discovery Series C-1 preferred stock was reclassified and automatically converted into 19.3648 shares of Warner Bros. Discovery common stock. Discovery Series A-1 preferred stock and per share data has not been recast because the conversion to Warner Bros. Discovery common stock in connection with the Merger was considered a discrete event and treated prospectively.
The table below sets forth the Company's calculated earnings per share. Earnings per share amounts may not recalculate due to rounding.
| | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
Numerator: | | | | | | | |
Net income | $ | 475 | | | $ | 191 | | | | | |
| | | | | | | |
Less: | | | | | | | |
Allocation of undistributed income to Series A-1 convertible preferred stock | (49) | | | (15) | | | | | |
Net income attributable to noncontrolling interests | (16) | | | (46) | | | | | |
Net income attributable to redeemable noncontrolling interests | (3) | | | (5) | | | | | |
| | | | | | | |
Net income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for basic net income per share | $ | 407 | | | $ | 125 | | | | | |
| | | | | | | |
Add: | | | | | | | |
Allocation of undistributed income to Series A-1 convertible preferred stockholders | 49 | | | 15 | | | | | |
Net income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for diluted net income per share | $ | 456 | | | $ | 140 | | | | | |
| | | | | | | |
Denominator — weighted average: | | | | | | | |
Common shares outstanding — basic | 591 | | | 585 | | | | | |
Impact of assumed preferred stock conversion | 71 | | | 71 | | | | | |
Dilutive effect of share-based awards | 3 | | | 11 | | | | | |
Common shares outstanding — diluted | 665 | | | 667 | | | | | |
| | | | | | | |
Basic net income per share allocated to common stockholders | $ | 0.69 | | | $ | 0.21 | | | | | |
Diluted net income per share allocated to common stockholders | $ | 0.69 | | | $ | 0.21 | | | | | |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Anti-dilutive share-based awards | | 33 | | | 1 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
NOTE 14. SHARE-BASED COMPENSATION
The Company has various incentive plans under which performance-based restricted stock units ("PRSUs"), service-based restricted stock units ("RSUs"), stock options, and stock appreciation rights ("SARs") have been issued. In connection with the Merger, AT&T RSUs subject to time based vesting held by WM employees were replaced with WBD RSUs granted on comparable terms upon closing of the Merger, increasing RSU expense, grants and unrecognized compensation expense for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021.
The table below presents the components of share-based compensation expense (in millions), which is recorded in selling, general and administrative expense in the consolidated statements of operations. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
PRSUs | | $ | (1) | | | $ | (7) | | | $ | 2 | | | $ | 12 | |
RSUs | | $ | 128 | | | $ | 29 | | | $ | 166 | | | $ | 51 | |
Stock options | | $ | 23 | | | $ | 16 | | | $ | 41 | | | $ | 26 | |
SARs | | $ | — | | | $ | (7) | | | $ | 1 | | | $ | 6 | |
Total share-based compensation expense | | $ | 150 | | | $ | 31 | | | $ | 210 | | | $ | 95 | |
Tax benefit recognized | | $ | 31 | | | $ | 7 | | | $ | 40 | | | $ | 15 | |
The table below presents awards granted (in millions, except weighted-average grant price). | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
| | Awards | | Weighted-Average Grant Price |
Awards granted: | | | | |
PRSUs | | 0.4 | | | $ | 28.11 | |
RSUs | | 30.1 | | | $ | 24.75 | |
Stock options | | 0.4 | | | $ | 32.90 | |
| | | | |
The table below presents unrecognized compensation cost related to non-vested share-based awards and the weighted-average amortization period over which these expenses will be recognized as of June 30, 2022 (in millions, except years). | | | | | | | | | | | | | | |
| | Unrecognized Compensation Cost | | Weighted-Average Amortization Period (years) |
PRSUs | | $ | 3 | | | 0.5 |
RSUs | | 696 | | | 2.3 |
Stock options | | 188 | | | 3.8 |
| | | | |
Total unrecognized compensation cost | | $ | 887 | | | |
Of the $696 million of unrecognized compensation cost related to RSUs, $41 million is related to cash-settled RSUs. Stock-settled RSUs are expected to be recognized over a weighted-average period of 2.4 years and cash-settled RSUs are expected to be recognized over a weighted-average period of 2.2 years.
NOTE 15. INCOME TAXES
The income tax balances as of June 30, 2022 are inclusive of the WM Business as a result of the Merger. Income tax benefit was $836 million and $635 million for the three and six months ended June 30, 2022, respectively, and income tax expense was $2 million and $108 million for the three and six months ended June 30, 2021, respectively. The decrease in the three months ended June 30, 2022 was primarily attributable to a decrease in pre-tax book income, partially offset by an unfavorable tax adjustment related to the preferred stock conversion transaction expensediscussed in Note 2, which was not deductible for tax purposes, and a deferred tax benefit of $162 million recorded in the three months ended June 30, 2021 as a result of the UK Finance Act 2021 that was enacted in June 2021.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Income tax benefit for the three and six months ended June 30, 2022 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, which included taxation and allocation of income and losses among multiple foreign jurisdictions, state and local income taxes, and the non-tax deductible preferred stock conversion transaction expense discussed above.
On April 8, 2022, the Company completed its merger with the WM business. In connection with the merger, the Company entered into a tax matters agreement (“TMA”) with AT&T. Pursuant to the TMA, the Company is responsible for tax liabilities related to the periods prior to AT&T's ownership of the business (June 14, 2018), and AT&T is responsible for tax liabilities related to the period for which they owned the business (June 15, 2018 through April 8, 2022).The Company is fully indemnified by AT&T for any tax liabilities arising for the period June 15, 2018 through April 8, 2022. As of June 30, 2022, the Company has recorded reserves for uncertain tax positions and the associated interest and penalties payable related to WM of $860 million and $187 million, respectively, through purchase accounting. Indemnification receivables of $286 million were also recorded during the three months ended June 30, 2022.
With respect to uncertain tax positions related to jurisdictions that have joint and several liability among members of the AT&T tax filing group during the AT&T ownership period, the Company recognizes only the amount they expect to pay to the taxing authorities after considering the contractual indemnification agreement with AT&T and AT&T’s ability to settle any disputed positions with the taxing authorities. As of June 30, 2022, the Company has not recorded any liabilities for uncertain tax positions or indemnification receivables related to matters that were attributable to jurisdictions that have joint and several liability among members of the AT&T filing group since AT&T was determined to be the primary obligor.
As of June 30, 2022 and December 31, 2021, the Company's reserves for uncertain tax positions totaled $1,386 million and $420 million, respectively. The increase in the reserve for uncertain tax positions at June 30, 2022 is primarily attributable to the Merger. It is reasonably possible that the total amount of unrecognized tax benefits related to certain of the Company's uncertain tax positions could decrease by as much as $256 million within the next twelve months as a result of ongoing audits, lapses of statutes of limitations or regulatory developments.
As of June 30, 2022 and December 31, 2021, the Company had accrued approximately $258 million and $60 million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The increase in the accrual for interest and penalties payable at June 30, 2022 is primarily attributable to the Merger. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
NOTE 16. BENEFIT PLANS
The Company has a defined benefit pension plan that covers certain U.S.-based employees and a non-qualified unfunded Supplemental Executive Retirement Plan that provides defined pension benefits to eligible executives. In connection with the Merger, the Company also assumed 4 additional U.S. nonqualified pension plans that are noncontributory and unfunded and several non-U.S. pension plans. The 4 U.S. plans consist of the Time Warner Excess Benefit Plan (the “Excess plan”), the Retirement Accumulation Plan (“RAP”), the Supplemental Executive Retirement Plan (“SERP”) and the Wealth Accumulation Plan (“WAP”) (together, the “U.S. Nonqualified Plans”). The U.S. Nonqualified Plans were closed to new entrants during 2010. The Excess plan and RAP are both frozen to new benefit accruals. SERP and WAP only have retirees remaining. The pension formula for the Excess plan captured pay above compensation limits or benefit limits. RAP is a cash balance type formula and now provides only interest credits.
The Company also holds net assets and net liabilities on behalf of other U.S. and non-U.S. pension plans. The plan provisions vary by plan and by country. Some of these plans are unfunded and all are noncontributory.
Obligations and Funded Status
For all of the acquired defined benefit pension plans, the benefit obligation is the projected benefit obligation, the actuarial present value, as of our April 8, 2022 measurement date, of all benefits attributed by the pension benefit formula to employee service rendered to that date. The amount of benefits to be paid depends on a number of future events incorporated into the pension benefit formula, including estimates of the average life of employees and their beneficiaries and average years of service rendered. It is measured based on assumptions concerning future interest rates and future employee compensation levels, as applicable.
The unfunded status of the acquired U.S. Nonqualified Plans as of April 8, 2022 was a liability of $278 million. The unfunded status represents a pension benefit obligation of $278 million, with no plan assets. The funded status of the acquired non-U.S. pension plans as of April 8, 2022 was a net asset of $146 million. The funded status represents a pension benefit obligation of $659 million less the fair value of the plan assets of $805 million.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Total assets (liabilities) recognized for all acquired pension plans on our consolidated balance sheets were as follows (in millions).
| | | | | | | |
| April 8, 2022 | | |
Plan assets, net | $ | 200 | | | |
Current portion of employee benefit obligation | (27) | | | |
Noncurrent portion of employee benefit obligation | (305) | | | |
Net amount recognized | $ | (132) | | | |
Net Periodic Pension Cost
The service cost component of net periodic pension cost is recorded in operating expenses in the consolidated statements of operations, while the remaining components are recorded in other (expense) income, net. Net periodic pension cost was not material for the three and six months ended June 30, 2022 and 2021.
Assumptions
In determining the projected benefit obligation and the net pension and postretirement benefit cost for the acquired plans, the Company used the following significant weighted-average assumptions.
| | | | | | | | | | | | | | | | | | |
| | | | April 8, 2022 |
| | | | | | U.S. Nonqualified Plans | | Non-U.S. Pension Plans |
Discount rate | | | | | | 3.89 | % | | 2.51 | % |
Long-term rate of return on plan assets | | | | | | N/A | | 1.61 | % |
Rate of compensation increases | | | | | | N/A | | 5.82 | % |
NOTE 17. SUPPLEMENTAL DISCLOSURES
The following tables present supplemental information related to the consolidated financial statements (in millions).
Accrued Liabilities
Accrued liabilities consisted of the following (in millions): | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Accrued participation and residuals | $ | 3,007 | | | $ | — | |
Accrued production | 1,461 | | | 4 | |
Content rights payable | 1,453 | | | 772 | |
Accrued payroll and related benefits | 1,432 | | | 533 | |
Other accrued liabilities | 2,926 | | | 921 | |
Total accrued expenses and other current liabilities | $ | 10,279 | | | $ | 2,230 | |
Other (Expense) Income, net | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| | | | | | | | |
Foreign currency gain, net | | $ | 11 | | | $ | 52 | | | | | |
Gains (losses) on derivative instruments, net | | 497 | | | (20) | | | | | |
Gain on sale of investment with readily determinable fair value | | — | | | 16 | | | | | |
Change in the value of investments with readily determinable fair value | | (20) | | | 17 | | | | | |
Gain on sale of equity method investments | | — | | | 5 | | | | | |
| | | | | | | | |
Loss on extinguishment of debt | | — | | | (3) | | | | | |
Interest income | | 2 | | | 1 | | | | | |
| | | | | | | | |
| | | | | | | | |
Total other income, net | | $ | 490 | | | $ | 68 | | | | | |
Supplemental Cash Flow Information | | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
Cash paid for taxes, net | | $ | 97 | | | $ | 100 | |
Cash paid for interest, net | | 186 | | | 188 | |
Non-cash investing and financing activities: | | | | |
| | | | |
| | | | |
Accrued purchases of property and equipment | | 26 | | | 23 | |
Assets acquired under finance lease and other arrangements | | 13 | | | 12 | |
Cash, Cash Equivalents, and Restricted Cash | | | | | | | | | | | | | | | | | | |
| | | | | | March 31, 2022 | | December 31, 2021 |
Cash and cash equivalents | | | | | | $ | 4,162 | | | $ | 3,905 | |
Restricted cash - other current assets | | | | | | 3 | | | — | |
Total cash, cash equivalents, and restricted cash | | | | | | $ | 4,165 | | | $ | 3,905 | |
| | | | | | | | |
|
NOTE 15. RELATED PARTY TRANSACTIONS
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 (collectively the “Liberty Group”). The Company’s Board of Directors includes Dr. Malone, who is Chairman of the Board of Liberty Global and beneficially owns approximately 30% of the aggregate voting power with respect to the election of directors of Liberty Global. Dr. Malone is also Chairman of the Board of Liberty Broadband and beneficially owns approximately 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, or minority partners of consolidated subsidiaries. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | |
Foreign currency (losses) gain, net | $ | (81) | | | $ | (5) | | | $ | (70) | | | $ | 47 | |
(Losses) gains on derivative instruments, net | (24) | | | (1) | | | 473 | | | (21) | |
| | | | | | | |
Change in the value of investments with readily determinable fair value | (70) | | | 29 | | | (90) | | | 46 | |
Gain on sale of equity method investments | 133 | | | (1) | | | 133 | | | 4 | |
| | | | | | | |
Change in fair value of equity investments without readily determinable fair value | — | | | 81 | | | — | | | 81 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other (expense) income, net | (9) | | | 2 | | | (7) | | | 16 | |
Total other (expense) income, net | $ | (51) | | | $ | 105 | | | $ | 439 | | | $ | 173 | |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental Cash Flow Information | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2022 | | 2021 |
Cash paid for taxes, net | | $ | 442 | | | $ | 249 | |
Cash paid for interest, net | | 390 | | | 337 | |
Non-cash investing and financing activities: | | | | |
Equity issued for the acquisition of WarnerMedia | | 42,309 | | | — | |
| | | | |
Accrued purchases of property and equipment | | 47 | | | 32 | |
Assets acquired under finance lease and other arrangements | | 27 | | | 50 | |
Cash, Cash Equivalents, and Restricted Cash | | | | | | | | | | | | | | | | | | |
| | | | | | June 30, 2022 | | December 31, 2021 |
Cash and cash equivalents | | | | | | $ | 2,575 | | | $ | 3,905 | |
Restricted cash - recorded in prepaid expenses and other current assets (1) | | | | | | 1,321 | | | — | |
Total cash, cash equivalents, and restricted cash | | | | | | $ | 3,896 | | | $ | 3,905 | |
| | | | | | | | |
(1) Restricted cash primarily includes cash posted as collateral related to the Company’s revolving receivables program. (See Note 7.) |
| | | | | | | | |
|
Other Comprehensive Income (Loss) Adjustments
The table below presents the tax effects related to each component of other comprehensive income (loss) and reclassifications made in the consolidated statements of operations (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
|
Pretax | | Tax benefit (expense) | |
Net-of-tax | |
Pretax | | Tax benefit (expense) | |
Net-of-tax |
Currency translation adjustments: | | | | | | | | | | | |
Unrealized gains (losses): | | | | | | | | | | | |
Foreign currency | $ | (560) | | | $ | 2 | | | $ | (558) | | | $ | 121 | | | $ | (2) | | | $ | 119 | |
Net investment hedges | 97 | | | (27) | | | 70 | | | (13) | | | 2 | | | (11) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Total currency translation adjustments | (463) | | | (25) | | | (488) | | | 108 | | | — | | | 108 | |
| | | | | | | | | | | |
Derivative adjustments: | | | | | | | | | | | |
Unrealized (losses) gains | (7) | | | — | | | (7) | | | (141) | | | 29 | | | (112) | |
Reclassifications from other comprehensive income to net income | (15) | | | 4 | | | (11) | | | (1) | | | 1 | | | — | |
Total derivative adjustments | (22) | | | 4 | | | (18) | | | (142) | | | 30 | | | (112) | |
Other comprehensive (loss) income adjustments | $ | (485) | | | $ | (21) | | | $ | (506) | | | $ | (34) | | | $ | 30 | | | $ | (4) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
| Pretax | | Tax benefit (expense) | | Net-of-tax | | Pretax | | Tax benefit | | Net-of-tax |
Currency translation adjustments: | | | | | | | | | | | |
Unrealized (losses) gains: | | | | | | | | | | | |
Foreign currency | $ | (665) | | | $ | 2 | | | $ | (663) | | | $ | (109) | | | $ | 14 | | | $ | (95) | |
Net investment hedges | 119 | | | (41) | | | 78 | | | 29 | | | 7 | | | 36 | |
Reclassifications: | | | | | | | | | | | |
Loss on disposition | (2) | | | — | | | (2) | | | — | | | — | | | — | |
Total currency translation adjustments | (548) | | | (39) | | | (587) | | | (80) | | | 21 | | | (59) | |
| | | | | | | | | | | |
Derivative adjustments: | | | | | | | | | | | |
Unrealized (losses) gains | (20) | | | 1 | | | (19) | | | 156 | | | (33) | | | 123 | |
Reclassifications from other comprehensive income to net income | (21) | | | 4 | | | (17) | | | 2 | | | — | | | 2 | |
Total derivative adjustments | (41) | | | 5 | | | (36) | | | 158 | | | (33) | | | 125 | |
Other comprehensive (loss) income adjustments | $ | (589) | | | $ | (34) | | | $ | (623) | | | $ | 78 | | | $ | (12) | | | $ | 66 | |
Accumulated Other Comprehensive Loss
The table below presents a summarythe changes in the components of the transactions with related partiesaccumulated other comprehensive loss, net of taxes (in millions). | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Revenues and service charges: | | | | | | | | |
Liberty Group | | $ | 158 | | | $ | 175 | | | | | |
Equity method investees | | 58 | | | 56 | | | | | |
Other | | 33 | | | 27 | | | | | |
Total revenues and service charges | | $ | 249 | | | $ | 258 | | | | | |
Expenses | | $ | (76) | | | $ | (57) | | | | | |
Distributions to noncontrolling interests and redeemable noncontrolling interests | | $ | (224) | | | $ | (183) | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
| Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | $ | (944) | | | $ | 10 | | | $ | (13) | | | $ | (947) | |
Other comprehensive income (loss) before reclassifications | (488) | | | (7) | | | — | | | (495) | |
Reclassifications from accumulated other comprehensive loss to net income | — | | | (11) | | | — | | | (11) | |
Other comprehensive income (loss) | (488) | | | (18) | | | — | | | (506) | |
| | | | | | | |
| | | | | | | |
Ending balance | $ | (1,432) | | | $ | (8) | | | $ | (13) | | | $ | (1,453) | |
The table below presents receivables due from and payables due to related parties (in millions).
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Receivables | | $ | 167 | | | $ | 172 | |
Payables | | $ | 32 | | | $ | 23 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
| Currency Translation | | | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | $ | (722) | | | | | $ | 156 | | | $ | (15) | | | $ | (581) | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other comprehensive income (loss) | 108 | | | | | (112) | | | — | | | (4) | |
| | | | | | | | | |
Ending balance | $ | (614) | | | | | $ | 44 | | | $ | (15) | | | $ | (585) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | $ | (845) | | | $ | 28 | | | $ | (13) | | | $ | (830) | |
Other comprehensive (loss) before reclassifications | (585) | | | (19) | | | — | | | (604) | |
Reclassifications from accumulated other comprehensive loss to net income | (2) | | | (17) | | | — | | | (19) | |
| | | | | | | |
Other comprehensive (loss) | (587) | | | (36) | | | — | | | (623) | |
| | | | | | | |
Ending balance | $ | (1,432) | | | $ | (8) | | | $ | (13) | | | $ | (1,453) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
| Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | $ | (555) | | | $ | (81) | | | $ | (15) | | | $ | (651) | |
Other comprehensive (loss) income before reclassifications | (59) | | | 123 | | | — | | | 64 | |
Reclassifications from accumulated other comprehensive loss to net income | — | | | 2 | | | — | | | 2 | |
Other comprehensive (loss) income | (59) | | | 125 | | | — | | | 66 | |
Ending balance | $ | (614) | | | $ | 44 | | | $ | (15) | | | $ | (585) | |
NOTE 16.18. RELATED PARTY TRANSACTIONS
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 (collectively the “Liberty Group”). The Company’s Board of Directors includes Dr. Malone, who is Chairman of the Board of Liberty Global and beneficially owns approximately 30% of the aggregate voting power with respect to the election of directors of Liberty Global. Dr. Malone is also Chairman of the Board of Liberty Broadband and beneficially owns approximately 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, or minority partners of consolidated subsidiaries.
The table below presents a summary of the transactions with related parties (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Revenues and service charges: | | | | | | | | |
Liberty Group | | $ | 535 | | | $ | 165 | | | $ | 693 | | | $ | 340 | |
Equity method investees | | 179 | | | 68 | | | 237 | | | 124 | |
Other | | 156 | | | 24 | | | 189 | | | 51 | |
Total revenues and service charges | | $ | 870 | | | $ | 257 | | | $ | 1,119 | | | $ | 515 | |
Expenses | | $ | (166) | | | $ | (57) | | | $ | (242) | | | $ | (114) | |
Distributions to noncontrolling interests and redeemable noncontrolling interests | | $ | (40) | | | $ | (30) | | | $ | (264) | | | $ | (213) | |
| | | | | | | | |
|
The table below presents receivables due from and payables due to related parties (in millions). | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Receivables | | $ | 821 | | | $ | 172 | |
Payables | | $ | 38 | | | $ | 23 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 19. COMMITMENTS AND CONTINGENCIES
Commitments
In the normal course of business, the Company enters into various commitments, which primarily include programming, film licensing, talent arrangements and other agreements, operating and finance leases (see Note 11), arrangements to purchase various goods and services, long-term debt (see Note 10) and future funding commitments to equity method investees (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Long-Term Debt | | |
Year Ending December 31, | | Content | | Other Purchase Obligations | | Pension and Other Employee Obligations | | Principal | | Interest | | Total |
2022 (remaining six months) | | $ | 5,658 | | | $ | 1,148 | | | $ | 321 | | | $ | — | | | $ | 1,133 | | | $ | 8,260 | |
2023 | | 6,468 | | | 932 | | | 463 | | | 1,349 | | | 2,243 | | | 11,455 | |
2024 | | 5,223 | | | 463 | | | 225 | | | 4,271 | | | 2,159 | | | 12,341 | |
2025 | | 3,807 | | | 289 | | | 100 | | | 9,647 | | | 1,863 | | | 15,706 | |
2026 | | 2,512 | | | 105 | | | 67 | | | 790 | | | 1,729 | | | 5,203 | |
Thereafter | | 10,880 | | | 101 | | | 232 | | | 36,702 | | | 27,487 | | | 75,402 | |
Total | | $ | 34,548 | | | $ | 3,038 | | | $ | 1,408 | | | $ | 52,759 | | | $ | 36,614 | | | $ | 128,367 | |
Content purchase obligations include commitments and liabilities associated with third-party producers and sports associations for content that airs on our television networks. Production contracts generally require purchase of a specified number of episodes, and/or payments over the term of the license, and include both programs that have been delivered and are available for airing and programs that have not yet been produced or sporting events that have not yet taken place. If the content is ultimately never produced, our commitments expire without obligation. The commitments disclosed above exclude content liabilities recognized on the consolidated balance sheets.
Other purchase obligations include agreements with certain vendors and suppliers for the purchase of goods and services whereby the underlying agreements are enforceable, legally binding and specify all significant terms. Significant purchase obligations include transmission services, television rating services, marketing commitments and research, equipment purchases, and information technology and other services. Some of these contracts do not require the purchase of fixed or minimum quantities and generally may be terminated with a 30-day to 60-day advance notice without penalty, and are not included in the table above past the 30-day to 60-day advance notice period.
Other purchase obligations also include future funding commitments to equity method investees. Although the Company had funding commitments to equity method investees as of June 30, 2022, the Company may also provide uncommitted additional funding to its equity method investments in the future. (See Note 9.)
Pension and other employee obligations include payments to meet minimum funding requirements of our pension plans in 2022, estimated benefit payments for our SERP that exceed plan assets, and employment agreements primarily with creative talent for the WM broadcast networks. Payments for the SERP have been estimated over a ten-year period. While benefit payments under these plans are expected to continue beyond 2031, we believe it is not practicable to estimate payments beyond this period. (See Note 16.)
Six Flags Guarantee
In connection with WM’s former investment in the Six Flags (as defined below) theme parks located in Georgia and Texas (collectively, the “Parks”), in 1997, certain subsidiaries of the Company agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including, annual payments made to the Parks or to the limited partners and additional obligations at the end of the respective terms for the Partnerships in 2027 and 2028 (the “Guaranteed Obligations”). The aggregate gross undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) are $544 million. To date, no payments have been made by us pursuant to the Six Flags Guarantee.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Six Flags Entertainment Corporation (formerly known as Six Flags, Inc. and Premier Parks Inc.) (“Six Flags”), which has the controlling interest in the Parks, has agreed, pursuant to a subordinated indemnity agreement (the “Subordinated Indemnity Agreement”), to guarantee the performance of the Guaranteed Obligations when due and to indemnify the Company, among others, if the Six Flags Guarantee is called upon. If Six Flags defaults on its indemnification obligations, we have the right to acquire control of the managing partner of the Parks. Six Flags’ obligations to us are further secured by its interest in all limited partnership units held by Six Flags.
Based on our evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, the Company is unable to predict the loss, if any, that may be incurred under the Guaranteed Obligations, and no liability for the arrangements has been recognized as of June 30, 2022. Because of the specific circumstances surrounding the arrangements, and the fact that no active or observable market exists for this type of financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.
Contingencies
Other Contingent Commitments
Other contingent commitments primarily include contingent payments for post-production term advance obligations on certain co-financing arrangements, as well as operating lease commitment guarantees, letters of credit, bank guarantees and surety bonds, which generally support performance and payments for a wide range of global contingent and firm obligations, including insurance, litigation appeals, real estate leases and other operational needs.
The Company's other contingent commitments at June 30, 2022 were $258 million, with $251 million estimated due in 2026. For other contingent commitments where payment obligations are outside our control, the timing of amounts represents the earliest period in which the payment could be requested. For the remaining other contingent commitments, the timing of amounts presented represents when the maximum contingent commitment will expire but does not mean that we expect to incur an obligation to make any payments within that time period. In addition, these amounts do not reflect the effects of any indemnification rights we might possess.
Put Rights
The Company has granted put rights to non-controlling interest holders in certain consolidated subsidiaries.
Legal Matters
From time to time, in the normal course of its operations, the Company is subject to various litigation matters and claims, including claims related to employees, vendors, other business partners or patent issues. However, a determination as to the amount of the accrual required for such contingencies is highly subjective and requires judgment about future events. Although the outcome of these matters cannot be predicted with certainty and the impact of the final resolution of these matters on the Company's results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these matters will have a material adverse effect on the Company's future consolidated financial position, future results of operations or cash flows.
NOTE 17. REPORTABLE SEGMENTS
The Company’s operating segments are determined based on: (i) financial information reviewed by its chief operating decision maker, the Chief Executive Officer ("CEO"), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. The Company expects to reevaluate its segment presentation and reportable segments following the Merger during the quarter ending June 30, 2022.
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.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company evaluates the operating performance of its 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. The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. The Company believes Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes 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. The Company also excludes 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 summarized financial information for each of the Company's reportable segments and corporate, inter-segment eliminations, and other (in millions).
Revenues | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
U.S. Networks | | $ | 1,932 | | | $ | 1,806 | | | | | |
International Networks | | 1,229 | | | 987 | | | | | |
Corporate, inter-segment eliminations and other | | (2) | | | (1) | | | | | |
Total revenues | | $ | 3,159 | | | $ | 2,792 | | | | | |
Adjusted OIBDA | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
U.S. Networks | | $ | 1,025 | | | $ | 823 | | | | | |
International Networks | | 161 | | | 151 | | | | | |
Corporate, inter-segment eliminations and other | | (159) | | | (137) | | | | | |
Adjusted OIBDA | | $ | 1,027 | | | $ | 837 | | | | | |
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Reconciliation of Net Income available to Warner Bros. Discovery, Inc. to Adjusted OIBDA | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Net income available to Warner Bros. Discovery, Inc. | | $ | 456 | | | $ | 140 | | | | | |
Net income attributable to redeemable noncontrolling interests | | 3 | | | 5 | | | | | |
Net income attributable to noncontrolling interests | | 16 | | | 46 | | | | | |
Income tax expense | | 201 | | | 106 | | | | | |
Income before income taxes | | 676 | | | 297 | | | | | |
Other income, net | | (490) | | | (68) | | | | | |
Loss from equity investees, net | | 14 | | | 4 | | | | | |
| | | | | | | | |
Interest expense, net | | 153 | | | 163 | | | | | |
Operating income | | 353 | | | 396 | | | | | |
| | | | | | | | |
Restructuring and other charges | | 5 | | | 15 | | | | | |
| | | | | | | | |
Depreciation and amortization | | 525 | | | 361 | | | | | |
Employee share-based compensation | | 57 | | | 61 | | | | | |
Transaction and integration costs | | 87 | | | 4 | | | | | |
| | | | | | | | |
Adjusted OIBDA | | $ | 1,027 | | | $ | 837 | | | | | |
NOTE 18. RESTRUCTURING AND OTHER CHARGES20. REPORTABLE SEGMENTS
RestructuringThe Company’s operating segments are determined based on: (i) financial information reviewed by its chief operating decision maker, the Chief Executive Officer (“CEO”), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. In conjunction with the Merger, the Company reevaluated and changed its segment presentation and reportable segments during the quarter ended June 30, 2022. As of June 30, 2022, we classified our operations in 3 reportable segments: Studios, primarily consisting of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/DTC services, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical and digital), related consumer products and themed experience licensing, and interactive gaming; Networks, consisting primarily of our domestic and international television networks; and DTC, consisting primarily of our premium pay TV and digital content services. Goodwill was reallocated to the new segments based on relative fair value. Prior periods have been recast to conform to the current period presentation.
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 licenses. The Company records inter-segment transactions of content licenses at the gross amount. Prior year amounts have been recast to reflect the current presentation. The Company does not report assets by segment because it is not used to allocate resources or evaluate segment performance.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company evaluates the operating performance of its operating segments based on financial measures such as revenues and Adjusted EBITDA. Adjusted EBITDA is defined as operating income excluding:
•employee share-based compensation;
•depreciation and amortization;
•restructuring, facility consolidation, and other charges;
•certain impairment charges;
•gains and losses on business and asset dispositions;
•certain inter-segment eliminations;
• third-party transaction and integration costs;
•amortization of purchase accounting fair value step-up for content;
•amortization of capitalized interest for content; and
•other items impacting comparability.
The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. The Company believes Adjusted EBITDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes employee share-based compensation, restructuring and other charges, bycertain impairment charges, gains and losses on business and asset dispositions, and transaction and integration costs from the calculation of Adjusted EBITDA due to their impact on comparability between periods. The Company also excludes the depreciation of fixed assets and amortization of intangible assets, amortization of purchase accounting fair value step-up for content, and amortization of capitalized interest for content, 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 EBITDA 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 summarized financial information for each of the Company's reportable segments and corporate, and inter-segment eliminations and other were as follows (in millions).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| | | | | | | | |
International Networks | | $ | 4 | | | $ | 15 | | | | | |
Corporate, inter-segment eliminations, and other | | 1 | | | — | | | | | |
Total restructuring and other charges | | $ | 5 | | | $ | 15 | | | | | |
Revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Studios | | $ | 2,796 | | | $ | 2 | | | $ | 2,801 | | | $ | 7 | | | | | |
Networks | | 5,742 | | | 2,844 | | | 8,615 | | | 5,504 | | | | | |
DTC | | 2,225 | | | 216 | | | 2,506 | | | 343 | | | | | |
Corporate | | 13 | | | — | | | 13 | | | — | | | | | |
Inter-segment eliminations | | (949) | | | — | | | (949) | | | — | | | | | |
Total revenues | | $ | 9,827 | | | $ | 3,062 | | | $ | 12,986 | | | $ | 5,854 | | | | | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Changes in restructuring and other liabilities recorded in accrued liabilities by major category and by reportable segment and corporate, inter-segment eliminations, and other were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Networks | | International Networks | | Corporate, inter-segment eliminations, and other | | Total |
December 31, 2021 | | $ | 4 | | | $ | 13 | | | $ | 2 | | | $ | 19 | |
| | | | | | | | |
Employee termination accruals, net | | — | | | (1) | | | — | | | (1) | |
| | | | | | | | |
Cash paid | | — | | | 1 | | | — | | | 1 | |
March 31, 2022 | | $ | 4 | | | $ | 13 | | | $ | 2 | | | $ | 19 | |
Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Studios | | $ | 239 | | | $ | 2 | | | $ | 242 | | | $ | 4 | | | | | |
Networks | | 2,262 | | | 1,538 | | | 3,617 | | | 2,947 | | | | | |
DTC | | (518) | | | (329) | | | (745) | | | (819) | | | | | |
Corporate | | (305) | | | (94) | | | (409) | | | (178) | | | | | |
Inter-segment eliminations | | (14) | | | — | | | (14) | | | — | | | | | |
Adjusted EBITDA | | $ | 1,664 | | | $ | 1,117 | | | $ | 2,691 | | | $ | 1,954 | | | | | |
Reconciliation of Net (Loss) Income available to Warner Bros. Discovery, Inc. to Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Net (loss) income available to Warner Bros. Discovery, Inc. | | $ | (3,418) | | | $ | 672 | | | $ | (2,962) | | | $ | 812 | | | | | |
Net income attributable to redeemable noncontrolling interests | | 3 | | | 8 | | | 6 | | | 13 | | | | | |
Net income attributable to noncontrolling interests | | 7 | | | 38 | | | 23 | | | 84 | | | | | |
Income tax (benefit) expense | | (836) | | | 2 | | | (635) | | | 108 | | | | | |
(Loss) income before income taxes | | (4,244) | | | 720 | | | (3,568) | | | 1,017 | | | | | |
Other expense (income), net | | 51 | | | (105) | | | (439) | | | (173) | | | | | |
Loss from equity investees, net | | 43 | | | 7 | | | 57 | | | 11 | | | | | |
| | | | | | | | | | | | |
Interest expense, net | | 511 | | | 157 | | | 664 | | | 320 | | | | | |
Operating (loss) income | | (3,639) | | | 779 | | | (3,286) | | | 1,175 | | | | | |
Loss (gain) on disposition | | 4 | | | (72) | | | 4 | | | (72) | | | | | |
Restructuring and other charges | | 1,033 | | | 7 | | | 1,038 | | | 22 | | | | | |
| | | | | | | | | | | | |
Depreciation and amortization | | 2,266 | | | 341 | | | 2,791 | | | 702 | | | | | |
Employee share-based compensation | | 147 | | | 27 | | | 204 | | | 88 | | | | | |
Transaction and integration costs | | 983 | | | 35 | | | 1,070 | | | 39 | | | | | |
Amortization of fair value step-up for content | | 870 | | | — | | | 870 | | | — | | | | | |
| | | | | | | | | | | | |
Adjusted EBITDA | | $ | 1,664 | | | $ | 1,117 | | | $ | 2,691 | | | $ | 1,954 | | | | | |
NOTE 19.21. SUBSEQUENT EVENTS
Merger with the WarnerMedia Business of AT&T
On April 8,During July and August 2022, the Company completed its Merger with the WarnerMedia Business repaid $1.3 billionof AT&T, Inc. The Merger was executed through a Reverse Morris Trust type transaction, under which the WarnerMedia Business was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. In connection with the Merger, AT&T received $40.5 billion (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia's retention of certain debt, and Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. AT&T shareholders received WBD stock in the distribution representing 71% of the combined company and the Company's shareholders will continue to own 29% of the combined company, in each case on a fully diluted basis.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Immediately prior to the consummation of the Merger, each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, and Discovery Series C common stock, was reclassified and automatically converted into 1 share of WBD common stock, and each issued and outstanding share of Discovery Series C-1 preferred stock was reclassified and automatically converted into 19.3648 shares of WBD common stock. For earnings per share purposes, all share and per share amounts of the aforesaid share classes have been retroactively adjusted for all periods presented to give effect to this reclassification and conversion. Additionally, each issued and outstanding share of Discovery Series A-1 preferred stock was reclassified and automatically converted into 13.1135 shares of WBD common stock. Discovery Series A-1 preferred stock and earnings per share data has not been recast because the conversion to WBD common stock in connection with the Merger was considered a discrete event and treated prospectively. Other than earnings per share presentation, the reclassification and conversion of all share classes to WBD common stock will be adjusted in the period the transaction took place.
Discovery was deemed to be the accounting acquirer of the WarnerMedia Business for accounting purposes under U.S. GAAP. In identifying Discovery as the accounting acquirer, Discovery’s conclusion was based primarily upon the following facts: (1) Discovery initiated the Merger, was the legal acquirer of Magallanes, Inc., ("Spinco"), and transferred equity consideration to Spinco stockholders, (2) AT&T received $40.5 billion of consideration as part of its disposition of the WarnerMedia Business, (3) the current Chief Executive Officer of Discovery will continue as Chief Executive Officer of WBD for a substantial period of time after the Merger and was primarily responsible for appointing the rest of the executive management team of WBD, and the current Chief Financial Officer of Discovery will serve as Chief Financial Officer of WBD, (4) no stockholder or group of stockholders will hold a controlling interest in WBD after the completion of the Merger and a key Discovery stockholder has the largest minority interest in WBD, and (5) AT&T has no input on the strategic direction and management of WBD after the completion of the Merger. The above facts were deemed to outweigh the fact that the holders of shares of Spinco common stock that received shares of WBD common stock in the Merger in the aggregate own a majority of WBD common stock on a fully diluted basis and associated voting rights after the Merger.
As the accounting acquirer, Discovery is considered WBD's predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD's historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WarnerMedia Business and future results will not be comparable to historical results.
The Merger required the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock. In connection with Advance/Newhouse Programming Partnership’s entry into the consent agreement and related forfeiture of the significant rights attached to the Series A-1 Preferred Stock in the reclassification of the shares of Series A-1 Preferred Stock into common stock, it received an increase to the number of shares of common stock of the Company into which the Series A-1 Preferred Stock converted. The impact of the issuance of such additional shares of common stock was $789 million and was recorded as a transaction expense upon the closing of the Merger.
Discovery and WarnerMedia employee share-based awards, issued and outstanding immediately prior to the Merger, were converted into equity-based awards on comparable terms and conditions with respect to shares of WBD stock. 70% of Chief Executive Officer David M. Zaslav's unvested stock options vested upon closing of the Merger according to the terms of his amended and restated employment agreement. The remaining 30% of such options will remain outstanding and continue to vest as provided by the prior employment agreement.
In anticipation of the Merger, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan (the "Term Loan") and issued $30 billion aggregate principal amount outstanding of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transaction and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan or the Credit Facility, and will rank equally with all of the Company's other unsecured senior debt.
Due to the limited time between the transaction date and the Company's filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial accounting for the business combination is incomplete and the Company is not yet able to disclose the provisional amounts to be recognized as of the acquisition date for assets acquired and liabilities assumed. The Company expects to provide preliminary purchase price allocation information in the Quarterly Report on Form 10-Q for the quarter ending June 30, 2022.
Dispositions
Inits term loan due April 2025. Additionally, during August 2022, the Company completed the saleissued $300 million of a minority interest for a sale price of $138 million and recorded a gain of $133 million.
commercial paper.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
CNN+
In AprilAugust 2022, the Company, announced that CNN+ will cease operations effective April 30, 2022,DCL, Scripps Networks, and it is evaluatingWMH entered into Amendment 2 to DCL Revolving Credit Agreement and Amendment 1 to WMH Term Loan Credit Agreement to amend the impact this will have on its consolidated financial statements.definition of “Consolidated EBITDA” to add back certain cash restructuring costs, charges or expenses subject to a cap equal to 15% of Consolidated EBITDA (prior to giving effect to such add-back).
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 our businesses, current developments, results of operations, cash flows and financial condition. Additional context can also be found in our 2021 Annual Report on Form 10-K.10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
BUSINESS OVERVIEW
On April 8, 2022, Discovery, Inc. (“Discovery”), a global media company that provides content across multiple distribution platforms including linear, free-to-air and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer (“DTC”) subscription products, (the “Discovery Business”), completed its merger (the “Merger”"Merger") with the WarnerMedia business (the “WarnerMedia Business”, “WM Business”, or “WM”) of AT&T Inc. (“the WarnerMedia Business”AT&T”) and changed its name from “Discovery, Inc.” to “Warner Bros. Discovery, Inc.” ("Warner Bros. Discovery", “WBD”, the “Company”, “we”, “us”, or “our”). On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market (the “Nasdaq”) under the trading symbol WBD. (See Note 3 to the accompanying consolidated financial statements.)
Warner Bros. Discovery is a leading global media and entertainment company that creates and distributes the world’s most differentiated and complete portfolio of content and brands across television, film and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Warner Bros. Discovery,” “the Company,” “we,” “us,” or “our” refer to Discovery, Inc. as a standalone company prior to April 8, 2022, the date we completedconjunction with the Merger, with the WarnerMedia Business,Company reevaluated and onchanged its segment presentation and after April 8, 2022 refer toreportable segments for the combined company as a result of the Merger.
In 2021, we launched discovery+, our aggregated DTC product, in the U.S. across several streaming platforms and entered into a partnership with Verizon. Since launch, discovery+ has expanded internationally including in the U.K., Canada, the Philippines, Brazil, Italy, and India.quarter ending June 30, 2022. As of March 31, 2022, we had 24 million total paid DTC subscribers.1 discovery+ currently has an extensive content library including original series and documentaries. The service is available with ads or on an ad-free tier, providing us with dual revenue streams.
Although we utilize certain brands and content globally, as of March 31,June 30, 2022, we classified our operations in twothree reportable segments: U.S.
Studios, consisting primarily of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/DTC services, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical and digital), related consumer products and themed experience licensing, and interactive gaming;
Networks, consisting principally of our domestic and international television networksnetworks; and
DTC, consisting primarily of our premium pay TV and digital content services, and International Networks, consisting primarily of international television networks and digital content services.
Our segment presentation aligned 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. We expectPrior periods have been recast to reevaluate our segment presentation and reportable segments followingconform to the Merger during the quarter ending June 30, 2022.current period presentation.
During the three months ended March 31, 2022, we exited our operations in Russia and removed all of our channels and services from the market. We do not expect these actions will have a material effect on our consolidated financial statements.
Merger with the WarnerMedia Business of AT&T
On April 8, 2022, the Company completed its Merger with the WarnerMedia Business of AT&T, Inc. The Merger was executed through a Reverse Morris Trust type transaction, under which the WarnerMedia Business was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. In connection with the Merger, AT&T received $40.5 billion (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia's retention of certain debt, and Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. AT&T shareholders received WBD stock in the distribution representing 71% of the combined company and the Company's shareholders will continue to own 29% of the combined company, in each case on a fully diluted basis.
1We define a DTC 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 for 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 subscription is only counted if it is on a paying status, and excludes users on free trials. At the end of each quarter, the subscription count includes the actual number of users that rolled to pay up to seven days immediately following quarter end.Our quarterly subscriber count continues to include Ukraine subscribers to discovery+ who are temporarily receiving the service for free, the total of which is not material. .
Immediately prior to the consummation of the Merger, each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, and Discovery Series C common stock, was reclassified and automatically converted into one share of WBD common stock, and each issued and outstanding share of Discovery Series C-1 preferred stock was reclassified and automatically converted into 19.3648 shares of WBD common stock. For earnings per share purposes, all share and per share amounts of the aforesaid share classes have been retroactively adjusted for all periods presented to give effect to this reclassification and conversion. Additionally, each issued and outstanding share of Discovery Series A-1 preferred stock was reclassified and automatically converted into 13.1135 shares of WBD common stock. Discovery Series A-1 preferred stock and earnings per share data has not been recast because the conversion to WBD common stock in connection with the Merger was considered a discrete event and treated prospectively. Other than earnings per share presentation, the reclassification and conversion of all share classes to WBD common stock will be adjusted in the period the transaction took place.
Discovery was deemed to be the accounting acquirer of the WarnerMedia Business for accounting purposes under U.S. GAAP. In identifying Discovery as the accounting acquirer, Discovery’s conclusion was based primarily upon the following facts: (1) Discovery initiated the Merger, was the legal acquirer of Magallanes, Inc., ("Spinco"), and transferred equity consideration to Spinco stockholders, (2) AT&T received $40.5 billion of consideration as part of its disposition of the WarnerMedia Business, (3) the current Chief Executive Officer of Discovery will continue as Chief Executive Officer of WBD for a substantial period of time after the Merger and was primarily responsible for appointing the rest of the executive management team of WBD, and the current Chief Financial Officer of Discovery will serve as Chief Financial Officer of WBD, (4) no stockholder or group of stockholders will hold a controlling interest in WBD after the completion of the Merger and a key Discovery stockholder has the largest minority interest in WBD, and (5) AT&T has no input on the strategic direction and management of WBD after the completion of the Merger. The above facts were deemed to outweigh the fact that the holders of shares of Spinco common stock that received shares of WBD common stock in the Merger in the aggregate own a majority of WBD common stock on a fully diluted basis and associated voting rights after the Merger.
As the accounting acquirer, Discovery is considered WBD's predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD's historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WarnerMedia Business and future results will not be comparable to historical results.
The Merger required the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock. In connection with Advance/Newhouse Programming Partnership’s entry into the consent agreement and related forfeiture of the significant rights attached to the Series A-1 Preferred Stock in the reclassification of the shares of Series A-1 Preferred Stock into common stock, it received an increase to the number of shares of common stock of the Company into which the Series A-1 Preferred Stock converted. The impact of the issuance of such additional shares of common stock was $789 million and was recorded as a transaction expense upon the closing of the Merger.
Discovery and WarnerMedia employee share-based awards, issued and outstanding immediately prior to the Merger, were converted into equity-based awards on comparable terms and conditions with respect to shares of WBD stock. 70% of Chief Executive Officer David M. Zaslav's unvested stock options vested upon closing of the Merger according to the terms of his amended and restated employment agreement. The remaining 30% of such options will remain outstanding and continue to vest as provided by the prior employment agreement.
In anticipation of the Merger, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan (the "Term Loan") and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transaction and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan or the Credit Facility, and will rank equally with all of the Company's other unsecured senior debt.
Due to the limited time between the transaction date and the Company's filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial accounting for the business combination is incomplete and the Company is not yet able to disclose the provisional amounts to be recognized as of the acquisition date for assets acquired and liabilities assumed. The Company expects to provide preliminary purchase price allocation information in the Quarterly Report on Form 10-Q for the quarter ending June 30, 2022.
Impact of COVID-19
We continue to closely monitor the ongoing 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. Certain key sources of revenue for the WarnerMedia Business,WM, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.
The nature and full extent of COVID-19’s effects on our operations and results isare 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 variants or surges of COVID-19, vaccine distribution and efficacy and other actions to contain the virus or treat its impact, among others. Our consolidated financial statements reflect management’s 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
ExceptThe discussion below compares our actual and pro forma combined results, as expressly stated,if the financial conditionMerger occurred on January 1, 2021, for the three and six months ended June 30, 2022 to the three and six months ended June 30, 2021. Management believes reviewing our pro forma combined operating results in addition to actual operating results is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance of our businesses. Our combined Studios, Networks, DTC, Corporate, and inter-segment eliminations pro forma information is based on the historical operating results of the respective segments and includes adjustments in accordance with Article 11 of Regulation S-X to illustrate the effects of the Merger as if it had occurred on January 1, 2021. The unaudited pro forma combined results include, where applicable, adjustments for (i) additional costs of revenues from the fair value step up of film and television library, (ii) additional amortization expense related to acquired intangible assets, (iii) additional depreciation expense from the fair value of property and equipment, (iv) adjustments for transaction costs and other one-time non-recurring costs, (v) changes to align accounting policies, and (vi) adjustments to eliminate intercompany activity.
Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined business. Pro forma amounts are not necessarily indicative of what our results would have been had we operated the combined businesses since January 1, 2021 and should not be taken as indicative of the Company's future consolidated results of operations.
Actual amounts for the three and six months ended June 30, 2022 include results of operations discussed throughout Item 2, “Management’s Discussionfor Discovery for the entire period and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q are those of Warner Bros. Discovery, Inc. and its consolidated subsidiaries priorWM for the period subsequent to the Merger.completion of the Merger on April 8, 2022.
Foreign Exchange Impacting Comparability
TheIn addition to the Merger, 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"(“ex-FX”), in addition to results reported in accordance with U.S. GAAPgenerally accepted accounting principles (“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 “2022 Baseline Rate”), and the prior year amounts translated at the same 2022 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 March 31, | | | | |
| | 2022 | | 2021 | | % Change | | % Change (ex-FX) |
Revenues: | | | | | | | | |
Advertising | | $ | 1,482 | | | $ | 1,415 | | | 5 | % | | 7 | % |
Distribution | | 1,422 | | | 1,310 | | | 9 | % | | 10 | % |
Other | | 255 | | | 67 | | | NM | | NM |
Total revenues | | 3,159 | | | 2,792 | | | 13 | % | | 15 | % |
Costs of revenues, excluding depreciation and amortization | | 1,236 | | | 969 | | | 28 | % | | 31 | % |
Selling, general and administrative | | 1,040 | | | 1,051 | | | (1) | % | | — | % |
Depreciation and amortization | | 525 | | | 361 | | | 45 | % | | 48 | % |
| | | | | | | | |
Restructuring and other charges | | 5 | | | 15 | | | (67) | % | | (64) | % |
| | | | | | | | |
Total costs and expenses | | 2,806 | | | 2,396 | | | 17 | % | | 20 | % |
Operating income | | 353 | | | 396 | | | (11) | % | | (12) | % |
Interest expense, net | | (153) | | | (163) | | | (6) | % | | |
| | | | | | | | |
Loss from equity investees, net | | (14) | | | (4) | | | NM | | |
Other income, net | | 490 | | | 68 | | | NM | | |
Income before income taxes | | 676 | | | 297 | | | NM | | |
Income tax expense | | (201) | | | (106) | | | 90 | % | | |
Net income | | 475 | | | 191 | | | NM | | |
Net income attributable to noncontrolling interests | | (16) | | | (46) | | | (65) | % | | |
Net income attributable to redeemable noncontrolling interests | | (3) | | | (5) | | | (40) | % | | |
Net income available to Warner Bros. Discovery, Inc. | | $ | 456 | | | $ | 140 | | | NM | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 2,721 | | $ | 178 | | $ | 2,899 | | | $ | 1,634 | | $ | 1,191 | | $ | 2,825 | | | | 67 | % | 3 | % | 5 | % |
Distribution | | 4,838 | | 343 | | 5,181 | | | 1,312 | | 3,956 | | 5,268 | | | | NM | (2) | % | — | % |
Content | | 2,064 | | 446 | | 2,510 | | | 100 | | 2,842 | | 2,942 | | | | NM | (15) | % | (12) | % |
Other | | 204 | | 29 | | 233 | | | 16 | | 160 | | 176 | | | | NM | 32 | % | 32 | % |
Total revenues | | 9,827 | | 996 | | 10,823 | | | 3,062 | | 8,149 | | 11,211 | | | | NM | (3) | % | (1) | % |
Costs of revenues, excluding depreciation and amortization | | 6,625 | | 667 | | 7,292 | | | 1,055 | | 5,619 | | 6,674 | | | | NM | 9 | % | 12 | % |
Selling, general and administrative | | 3,538 | | (553) | | 2,985 | | | 952 | | 1,865 | | 2,817 | | | | NM | 6 | % | 8 | % |
Depreciation and amortization | | 2,266 | | (425) | | 1,841 | | | 341 | | 1,725 | | 2,066 | | | | NM | (11) | % | (10) | % |
| | | | | | | | | | | | | |
Restructuring and other charges | | 1,033 | | (89) | | 944 | | | 7 | | — | | 7 | | | | NM | NM | NM |
Loss (gain) on disposition | | 4 | | — | | 4 | | | (72) | | — | | (72) | | | | NM | NM | NM |
Total costs and expenses | | 13,466 | | (400) | | 13,066 | | | 2,283 | | 9,209 | | 11,492 | | | | NM | 14 | % | NM |
Operating (loss) income | | (3,639) | | 1,396 | | (2,243) | | | 779 | | (1,060) | | (281) | | | | NM | NM | NM |
Interest expense, net | | (511) | | | | | (157) | | | | | | NM | | |
| | | | | | | | | | | | | |
Loss from equity investees, net | | (43) | | | | | (7) | | | | | | NM | | |
Other (expense) income, net | | (51) | | | | | 105 | | | | | | NM | | |
(Loss) income before income taxes | | (4,244) | | | | | 720 | | | | | | NM | | |
Income tax benefit (expense) | | 836 | | | | | (2) | | | | | | NM | | |
Net (loss) income | | (3,408) | | | | | 718 | | | | | | NM | | |
Net income attributable to noncontrolling interests | | (7) | | | | | (38) | | | | | | (82) | % | | |
Net income attributable to redeemable noncontrolling interests | | (3) | | | | | (8) | | | | | | (63) | % | | |
Net (loss) income available to Warner Bros. Discovery, Inc. | | $ | (3,418) | | | | | $ | 672 | | | | | | NM | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
NM - Not meaningful
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 4,197 | | $ | 1,412 | | $ | 5,609 | | | $ | 3,043 | | $ | 2,442 | | $ | 5,485 | | | | 38 | % | 2 | % | 4 | % |
Distribution | | 6,190 | | 4,339 | | 10,529 | | | 2,570 | | 7,782 | | 10,352 | | | | NM | 2 | % | 3 | % |
Content | | 2,387 | | 3,297 | | 5,684 | | | 212 | | 5,565 | | 5,777 | | | | NM | (2) | % | 1 | % |
Other | | 212 | | 230 | | 442 | | | 29 | | 290 | | 319 | | | | NM | 39 | % | 39 | % |
Total revenues | | 12,986 | | 9,278 | | 22,264 | | | 5,854 | | 16,079 | | 21,933 | | | | NM | 2 | % | 3 | % |
Costs of revenues, excluding depreciation and amortization | | 7,861 | | 5,940 | | 13,801 | | | 2,024 | | 10,908 | | 12,932 | | | | NM | 7 | % | 8 | % |
Selling, general and administrative | | 4,578 | | 1,733 | | 6,311 | | | 2,003 | | 4,504 | | 6,507 | | | | NM | (3) | % | (2) | % |
Depreciation and amortization | | 2,791 | | 987 | | 3,778 | | | 702 | | 3,522 | | 4,224 | | | | NM | (11) | % | (10) | % |
| | | | | | | | | | | | | |
Restructuring and other charges | | 1,038 | | (90) | | 948 | | | 22 | | 91 | | 113 | | | | NM | NM | NM |
Loss (gain) on disposition | | 4 | | — | | 4 | | | (72) | | — | | (72) | | | | NM | NM | NM |
Total costs and expenses | | 16,272 | | 8,570 | | 24,842 | | | 4,679 | | 19,025 | | 23,704 | | | | NM | 5 | % | NM |
Operating (loss) income | | (3,286) | | 708 | | (2,578) | | | 1,175 | | (2,946) | | (1,771) | | | | NM | 46 | % | NM |
Interest expense, net | | (664) | | | | | (320) | | | | | | NM | | |
| | | | | | | | | | | | | |
Loss from equity investees, net | | (57) | | | | | (11) | | | | | | NM | | |
Other income (expense), net | | 439 | | | | | 173 | | | | | | NM | | |
(Loss) Income before income taxes | | (3,568) | | | | | 1,017 | | | | | | NM | | |
Income tax benefit (expense) | | 635 | | | | | (108) | | | | | | NM | | |
Net (loss) income | | (2,933) | | | | | 909 | | | | | | NM | | |
Net income attributable to noncontrolling interests | | (23) | | | | | (84) | | | | | | (73) | % | | |
Net income attributable to redeemable noncontrolling interests | | (6) | | | | | (13) | | | | | | (54) | % | | |
Net (loss) income available to Warner Bros. Discovery, Inc. | | $ | (2,962) | | | | | $ | 812 | | | | | | NM | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
The discussion through operating income below is on a pro forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenue, selling, general and administrative expenses and adjusted EBITDA are substantially attributable to the Merger.
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 5% and 4% for the three and six months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, advertising revenue increased 7% for the three months ended March 31,June 30, 2022, respectively. The increase for the three months ended March 31, 2022 wasrespectively, primarily attributable to an increaseincreased sports advertising in the U.S., the launch of the HBO Max ad-supported tier product in June 2021, and subscriber growth at U.S. Networks due to higher pricing and the continued monetization of content offerings on our next generation initiatives,discovery+ ad-lite tier, partially offset by secular declineslower news, kids, and general entertainment performance in the pay-TV ecosystem, and to a lesser extent, lower overall ratings.U.S.
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 9%was flat for the three months ended March 31, 2022. ExcludingJune 30, 2022 and increased 3% for the impact of foreign currency fluctuations,six months ended June 30, 2022, respectively. While distribution revenue increased 10%was flat for the three months ended March 31, 2022.June 30, 2022, a decline in linear subscribers in the U.S. and lower contractual affiliate rates in some European markets were largely offset by an increase in U.S. contractual affiliate rates. The increase for the six months ended June 30, 2022 was primarily attributable to global retail DTC subscriber gains at discovery+ and HBO Max, partially offset by lower domestic wholesale DTC subscribers at HBO Max due to the Amazon Channels expiration in September 2021.
Content revenue consists primarily of licensing feature films for initial theatrical exhibition, and licensing television programs for initial television broadcast or streaming; additionally, film and television content is licensed through distribution channels including international free-to-air, basic and premium pay television, television syndication, and further streaming services. Content revenue also includes home entertainment sales and rentals of film and television products (physical and digital, including premium video-on-demand, transactional video-on-demand and electronic sell-through), interactive entertainment sales (physical and digital) across various platforms, and consumer products and themed experience licensing.
Content revenue decreased 12% and increased 1% for the three and six months ended June 30, 2022, respectively. The decrease for the three months ended March 31,June 30, 2022 wasis primarily attributable to anthe proportion of inter-segment licensing increasing as a percentage of total content revenue. The increase at U.S. Networks duefor the six months ended June 30, 2022 is primarily attributable to the growthhigher third party international licensing of discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers.sports rights.
Other revenue increased $188 million32% and 39% for the three and six months ended March 31, 2022. ExcludingJune 30, 2022, respectively, primarily attributable to increased studio operations revenues from the impactreopening of foreign currency fluctuations, other revenue increased $193 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increase for the three months ended March 31, 2022 was primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.Warner Bros. Studio Tour London.
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 filmproduction costs, participation costs, exploitation costs, and productionexploitation costs.
CostsCost of revenues increased 28%12% and 8% for the three and six months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, cost of revenues increased 31% for the three months ended March 31, 2022. The increase for the three months ended March 31,June 30, 2022, wasrespectively, primarily attributable to costs related to the Olympics at International Networksincreased investments in DTC programming expenses, higher games and highertheatrical content amortization at U.S. Networks.expenses, and sports rights.
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 8% and decreased 1%2% for the three and six months ended June 30, 2022, respectively. Selling, general, and administrative expenses increased for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses was flat for the three months ended March 31, 2022. The decrease for the three months ended March 31,June 30, 2022, was primarily attributable to lower marketing-related expenses at U.S. Networks for discovery+ due to its launch in January 2021, partially offset by an increase inincreased third-party transaction and integration costs related to the Merger at corporate, inter-segment eliminations, and other.share-based compensation. Selling, general, and administrative expenses decreased for the six months ended June 30, 2022, primarily attributable to lower marketing-related expenses.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization increased 45% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, depreciationdecreased $214 million and amortization increased 48% for the three months ended March 31, 2022. The increase for the three months ended March 31, 2022 was$429 million, respectively, primarily attributable to a change in amortization method from the straight-line method to the sum of the yearsyears' digits method for acquired customer relationships that was effective October 1, 2021.some of the WM assets acquired.
Restructuring and Other Charges
Restructuring and other charges were $5increased $937 million and $836 million for the three and six months ended March 31,June 30, 2022, respectively, primarily attributable to content impairments from a global strategic review of content and employee terminations related to cost reduction efforts and management changes as compareda result of the Merger. (See Note 5 to $15the accompanying consolidated financial statements.)
Loss (Gain) on Disposition
Gain on disposition was $72 million for the three and six months ended March 31, 2021. RestructuringJune 30, 2021, and other chargeswas primarily include employee relocation, termination costs, and content impairments duringattributable to the three months ended March 31, 2022 and 2021.sale of our Great American Country network. (See Note 183 to the accompanying consolidated financial statements.)
Interest Expense, net
Interest expense, net decreased 6%increased $354 million and $344 million for the three and six months ended March 31,June 30, 2022, comparedrespectively, primarily attributable to assumed debt as a result of the prior year period.Merger. (See Note 710 and Note 812 to the accompanying consolidated financial statements.)
Loss From Equity Investees, net
We reported losses from our equity method investees of $14$43 million and$57 million for the three and six months ended March 31,June 30, 2022, as compared to losses of $4$7 million and $11 million for the three and six months ended March 31, 2021.June 30, 2021,respectively. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 39 to the accompanying consolidated financial statements.)
Other (Expense) Income, net
The table below presents the details of other (expense) income, net (in millions).
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| | | | | | | | |
Foreign currency gain, net | | $ | 11 | | | $ | 52 | | | | | |
Gains (losses) on derivative instruments, net | | 497 | | | (20) | | | | | |
Gain on sale of investment with readily determinable fair value | | — | | | 16 | | | | | |
Change in the value of investments with readily determinable fair value | | (20) | | | 17 | | | | | |
Gain on sale of equity method investments | | — | | | 5 | | | | | |
| | | | | | | | |
Loss on extinguishment of debt | | — | | | (3) | | | | | |
Interest income | | 2 | | | 1 | | | | | |
| | | | | | | | |
| | | | | | | | |
Total other income, net | | $ | 490 | | | $ | 68 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Foreign currency (losses) gain, net | | $ | (81) | | | $ | (5) | | | $ | (70) | | | $ | 47 | |
(Losses) gains on derivative instruments, net | | (24) | | | (1) | | | 473 | | | (21) | |
| | | | | | | | |
Change in the value of investments with readily determinable fair value | | (70) | | | 29 | | | (90) | | | 46 | |
Gain on sale of equity method investments | | 133 | | | (1) | | | 133 | | | 4 | |
Change in fair value of equity investments without readily determinable fair value | | — | | | 81 | | | — | | | 81 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Other (expense) income, net | | (9) | | | 2 | | | (7) | | | 16 | |
Total other (expense) income, net | | $ | (51) | | | $ | 105 | | | $ | 439 | | | $ | 173 | |
Income Tax ExpenseBenefit (Expense)
Income tax expensebenefit was $201$836 million and $106$635 million for the three and six months ended March 31,June 30, 2022, respectively, and March 31,income tax expense was $2 million and $108 million for the three and six months ended June 30, 2021, respectively. The increasedecrease in the three months ended March 31,June 30, 2022 was primarily attributable to an increasea decrease in the pre-tax book income. IncomeThe decrease is partially offset by the unfavorable tax adjustment related to the preferred stock conversion transaction expense fordiscussed in Note 2 recorded in the three months ended March 31,June 30, 2022 that was not deductible for tax purposes and a deferred tax benefit of $162 million recorded in the three months ended June 30, 2021 as a result of the UK Finance Act 2021 that was enacted in June 2021.
Income tax benefit for the three and six months ended June 30, 2022 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, which included taxation and allocation of income and losses among multiple foreign jurisdictions, state and local income taxes.taxes, and the non-tax deductible preferred stock conversion transaction expense discussed above.
Segment Results of Operations
We evaluateThe Company evaluates the operating performance of ourits operating segments based on financial measures such as revenues and Adjusted OIBDA.EBITDA. Adjusted OIBDAEBITDA is defined as operating income excluding: (i)
•employee share-based compensation, (ii) compensation;
•depreciation and amortization, (iii) amortization;
•restructuring, facility consolidation, and other charges, (iv) charges;
•certain impairment charges, (v) charges;
•gains and losses on business and asset dispositions, (vi) dispositions;
•certain inter-segment eliminations related to production studios, (vii)eliminations;
• third-party transaction and integration costs,costs;
•amortization of purchase accounting fair value step-up for content;
•amortization of capitalized interest for content; and (viii)
•other items impacting comparability. We use
The Company uses this measure to assess the operating results and performance of ourits segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believeThe Company believes Adjusted OIBDAEBITDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We excludeThe Company excludes employee share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisitiontransaction and integration costs from the calculation of Adjusted OIBDAEBITDA due to their impact on comparability between periods. WeThe Company also excludeexcludes the depreciation of fixed assets and amortization of intangible assets, amortization of purchase accounting fair value step-up for content, and amortization of capitalized interest for content, 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 OIBDAEBITDA 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 table below presents our reconciliation of consolidated net income available to Warner Bros. Discovery, Inc. to Adjusted OIBDAEBITDA and Adjusted OIBDAEBITDA by segment (in millions). | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | % Change |
Net income available to Warner Bros. Discovery, Inc. | | $ | 456 | | | $ | 140 | | | NM |
Net income attributable to redeemable noncontrolling interests | | 3 | | | 5 | | | (40) | % |
Net income attributable to noncontrolling interests | | 16 | | | 46 | | | (65) | % |
Income tax expense | | 201 | | | 106 | | | 90 | % |
Income before income taxes | | 676 | | | 297 | | | NM |
Other income, net | | (490) | | | (68) | | | NM |
Loss from equity investees, net | | 14 | | | 4 | | | NM |
| | | | | | |
Interest expense, net | | 153 | | | 163 | | | (6) | % |
Operating income | | 353 | | | 396 | | | (11) | % |
| | | | | | |
Restructuring and other charges | | 5 | | | 15 | | | (67) | % |
| | | | | | |
Depreciation and amortization | | 525 | | | 361 | | | 45 | % |
Employee share-based compensation | | 57 | | | 61 | | | (7) | % |
Transaction and integration costs | | 87 | | | 4 | | | NM |
| | | | | | |
Adjusted OIBDA | | $ | 1,027 | | | $ | 837 | | | 23 | % |
| | | | | | |
Adjusted OIBDA | | | | | | |
U.S. Networks | | $ | 1,025 | | | $ | 823 | | | 25 | % |
International Networks | | 161 | | | 151 | | | 7 | % |
Corporate, inter-segment eliminations, and other | | (159) | | | (137) | | | (16) | % |
Adjusted OIBDA | | $ | 1,027 | | | $ | 837 | | | 23 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | |
| | 2022 | | 2021 | | % Change |
Net (loss) income available to Warner Bros. Discovery, Inc. | | $ | (3,418) | | | $ | 672 | | | NM |
Net income attributable to redeemable noncontrolling interests | | 3 | | | 8 | | | (63) | % |
Net income attributable to noncontrolling interests | | 7 | | | 38 | | | (82) | % |
Income tax (benefit) expense | | (836) | | | 2 | | | NM |
(Loss) income before income taxes | | (4,244) | | | 720 | | | NM |
Other expense (income), net | | 51 | | | (105) | | | NM |
Loss from equity investees, net | | 43 | | | 7 | | | NM |
| | | | | | |
Interest expense, net | | 511 | | | 157 | | | NM |
Operating (loss) income | | (3,639) | | | 779 | | | NM |
Loss (gain) on disposition | | 4 | | | (72) | | | NM |
Restructuring and other charges | | 1,033 | | | 7 | | | NM |
| | | | | | |
Depreciation and amortization | | 2,266 | | | 341 | | | NM |
Employee share-based compensation | | 147 | | | 27 | | | NM |
Transaction and integration costs | | 983 | | | 35 | | | NM |
| | | | | | |
Amortization of fair value step-up for content | | 870 | | | — | | | NM |
| | | | | | |
Adjusted EBITDA | | $ | 1,664 | | | $ | 1,117 | | | 49 | % |
| | | | | | |
Adjusted EBITDA | | | | | | |
Studios | | $ | 239 | | | $ | 2 | | | NM |
Networks | | 2,262 | | | 1,538 | | | 47 | % |
DTC | | (518) | | | (329) | | | 57 | % |
Corporate | | (305) | | | (94) | | | NM |
Inter-segment eliminations | | (14) | | | — | | | NM |
Adjusted EBITDA | | $ | 1,664 | | | $ | 1,117 | | | 49 | % |
| | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | % Change |
Net (loss) income available to Warner Bros. Discovery, Inc. | | $ | (2,962) | | | $ | 812 | | | NM |
Net income attributable to redeemable noncontrolling interests | | 6 | | | 13 | | | (54) | % |
Net income attributable to noncontrolling interests | | 23 | | | 84 | | | (73) | % |
Income tax (benefit) expense | | (635) | | | 108 | | | NM |
(Loss) income before income taxes | | (3,568) | | | 1,017 | | | NM |
Other (income) expense, net | | (439) | | | (173) | | | NM |
Loss from equity investees, net | | 57 | | | 11 | | | NM |
| | | | | | |
Interest expense, net | | 664 | | | 320 | | | NM |
Operating (loss) income | | (3,286) | | | 1,175 | | | NM |
Loss (gain) on disposition | | 4 | | | (72) | | | NM |
Restructuring and other charges | | 1,038 | | | 22 | | | NM |
| | | | | | |
Depreciation and amortization | | 2,791 | | | 702 | | | NM |
Employee share-based compensation | | 204 | | | 88 | | | NM |
Transaction and integration costs | | 1,070 | | | 39 | | | NM |
| | | | | | |
Amortization of fair value step-up for content | | 870 | | | — | | | NM |
| | | | | | |
Adjusted EBITDA | | $ | 2,691 | | | $ | 1,954 | | | 38 | % |
| | | | | | |
Adjusted EBITDA | | | | | | |
Studios | | $ | 242 | | | $ | 4 | | | NM |
Networks | | 3,617 | | | 2,947 | | | 23 | % |
DTC | | (745) | | | (819) | | | (9) | % |
Corporate | | (409) | | | (178) | | | NM |
Inter-segment eliminations | | (14) | | | — | | | NM |
Adjusted EBITDA | | $ | 2,691 | | | $ | 1,954 | | | 38 | % |
The table below presents the calculation of Adjusted OIBDAEBITDA (in millions).
| | | | Three Months Ended March 31, | | | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | |
| | | 2022 | | 2021 | | % Change | | | | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | | | | | |
U.S. Networks | | $ | 1,932 | | | $ | 1,806 | | | 7 | % | | |
International Networks | | 1,229 | | | 987 | | | 25 | % | | |
Corporate, inter-segment eliminations, and other | | (2) | | | (1) | | | NM | | |
Studios | | Studios | | $ | 2,796 | | | $ | 2 | | | NM | | $ | 2,801 | | | $ | 7 | | | NM |
Networks | | Networks | | 5,742 | | | 2,844 | | | NM | | 8,615 | | | 5,504 | | | 57 | % |
DTC | | DTC | | 2,225 | | | 216 | | | NM | | 2,506 | | | 343 | | | NM |
Corporate | | Corporate | | 13 | | | — | | | NM | | 13 | | | — | | | NM |
Inter-segment eliminations | | Inter-segment eliminations | | (949) | | | — | | | NM | | (949) | | | — | | | NM |
Total revenues | Total revenues | | 3,159 | | | 2,792 | | | 13 | % | | Total revenues | | 9,827 | | | 3,062 | | | NM | | 12,986 | | | 5,854 | | | NM |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 1,236 | | | 969 | | | 28 | % | | Costs of revenues, excluding depreciation and amortization | | 5,755 | | | 1,055 | | | NM | | 6,991 | | | 2,024 | | | NM |
Selling, general and administrative (a) | Selling, general and administrative (a) | | 896 | | | 986 | | | (9) | % | | Selling, general and administrative (a) | | 2,408 | | | 890 | | | NM | | 3,304 | | | 1,876 | | | 76 | % |
Adjusted OIBDA | | $ | 1,027 | | | $ | 837 | | | 23 | % | | |
Adjusted EBITDA | | Adjusted EBITDA | | $ | 1,664 | | | $ | 1,117 | | | 49 | % | | $ | 2,691 | | | $ | 1,954 | | | 38 | % |
| (a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs. | (a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs. | (a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs. |
U.S. Networks Studios Segment
The table below presents,following tables present, for our U.S. NetworksStudio segment, revenues by type, certain operating expenses, Adjusted OIBDAEBITDA and a reconciliation of Adjusted OIBDAEBITDA to operating income (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
| | 2022 | | 2021 | | % Change | | | | | | |
Revenues: | | | | | | | | | | | | |
Advertising | | $ | 1,025 | | | $ | 980 | | | 5 | % | | | | | | |
Distribution | | 886 | | | 796 | | | 11 | % | | | | | | |
Other | | 21 | | | 30 | | | (30) | % | | | | | | |
Total revenues | | 1,932 | | | 1,806 | | | 7 | % | | | | | | |
Costs of revenues, excluding depreciation and amortization | | 489 | | | 428 | | | 14 | % | | | | | | |
Selling, general and administrative | | 418 | | | 555 | | | (25) | % | | | | | | |
Adjusted OIBDA | | $ | 1,025 | | | $ | 823 | | | 25 | % | | | | | | |
Depreciation and amortization | | 385 | | | 224 | | | | | | | | | |
| | | | | | | | | | | | |
Transaction and integration costs | | 1 | | | — | | | | | | | | | |
Inter-segment eliminations | | 12 | | | — | | | | | | | | | |
Operating income | | $ | 627 | | | $ | 599 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 10 | | $ | — | | $ | 10 | | | $ | — | | $ | 27 | | $ | 27 | | | | NM | (63) | % | (63) | % |
Distribution | | 4 | | 1 | | 5 | | | — | | 5 | | 5 | | | | NM | — | % | — | % |
Content | | 2,636 | | 551 | | 3,187 | | | 2 | | 3,195 | | 3,197 | | | | NM | — | % | 3 | % |
Other | | 146 | | 16 | | 162 | | | — | | 104 | | 104 | | | | NM | 56 | % | 56 | % |
Total revenues | | 2,796 | | 568 | | 3,364 | | | 2 | | 3,331 | | 3,333 | | | | NM | 1 | % | 4 | % |
Costs of revenues, excluding depreciation and amortization | | 2,006 | | 328 | | 2,334 | | | — | | 2,244 | | 2,244 | | | | NM | 4 | % | 6 | % |
Selling, general and administrative | | 551 | | 70 | | 621 | | | — | | 650 | | 650 | | | | NM | (4) | % | (2) | % |
Adjusted EBITDA | | 239 | | 170 | | 409 | | | 2 | | 437 | | 439 | | | | NM | (7) | % | — | % |
Depreciation and amortization | | 158 | | (21) | | 137 | | | — | | 172 | | 172 | | | | | | |
Employee share-based compensation | | — | | 1 | | 1 | | | — | | 11 | | 11 | | | | | | |
| | | | | | | | | | | | | |
Restructuring and other charges | | 200 | | (38) | | 162 | | | — | | — | | — | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Amortization of fair value step-up for content | | 563 | | (238) | | 325 | | | — | | 380 | | 380 | | | | | | |
Operating (loss) income | | $ | (682) | | $ | 466 | | $ | (216) | | | $ | 2 | | $ | (126) | | $ | (124) | | | | | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 10 | | $ | 9 | | $ | 19 | | | $ | — | | $ | 48 | | $ | 48 | | | | NM | (60) | % | (60) | % |
Distribution | | 4 | | 6 | | 10 | | | — | | 8 | | 8 | | | | NM | 25 | % | 25 | % |
Content | | 2,641 | | 3,898 | | 6,539 | | | 7 | | 6,259 | | 6,266 | | | | NM | 4 | % | 7 | % |
Other | | 146 | | 154 | | 300 | | | — | | 185 | | 185 | | | | NM | 62 | % | 62 | % |
Total revenues | | 2,801 | | 4,067 | | 6,868 | | | 7 | | 6,500 | | 6,507 | | | | NM | 6 | % | 8 | % |
Costs of revenues, excluding depreciation and amortization | | 2,007 | | 2,392 | | 4,399 | | | 2 | | 4,334 | | 4,336 | | | | NM | 1 | % | 3 | % |
Selling, general and administrative | | 552 | | 698 | | 1,250 | | | 1 | | 1,301 | | 1,302 | | | | NM | (4) | % | (2) | % |
Adjusted EBITDA | | 242 | | 977 | | 1,219 | | | 4 | | 865 | | 869 | | | | NM | 40 | % | 46 | % |
Depreciation and amortization | | 158 | | 115 | | 273 | | | — | | 345 | | 345 | | | | | | |
Employee share-based compensation | | — | | 26 | | 26 | | | — | | 61 | | 61 | | | | | | |
| | | | | | | | | | | | | |
Restructuring and other charges | | 200 | | (38) | | 162 | | | — | | 38 | | 38 | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Amortization of fair value step-up for content | | 563 | | 106 | | $ | 669 | | | — | | 1,032 | | 1,032 | | | | | | |
Operating (loss) income | | $ | (679) | | $ | 768 | | $ | 89 | | | $ | 4 | | $ | (611) | | $ | (607) | | | | | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
The discussion below is on a pro forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenue, selling, general and administrative expenses and adjusted EBITDA are substantially attributable to the Merger.
Revenues
AdvertisingContent revenue increased 5%3% and 7% for the three and six months ended June 30, 2022, respectively. The increase for the three months ended March 31,June 30, 2022 compared to the prior year period. The increase was primarily attributable to higher pricing andgames revenue with the continued monetizationrelease of content offerings on our next generation initiatives,LEGO Star Wars - The Skywalker Saga, partially offset by secular declineslower TV licensing, home entertainment and theatrical rental revenue. The decrease in the pay-TV ecosystem, and to a lesser extent, lower overall ratings.
Distribution revenue increased 11% for the three months ended March 31, 2022, compared to the prior year period. The increaseTV licensing was primarily attributable to the growth of discovery+ and an increase in contractual affiliate rates,lower TV production revenue, partially offset by a declinethe timing of new series availabilities. Theatrical performance was unfavorably impacted by the timing of releases, and home entertainment across theatrical and television product was lower due to strong COVID-induced demand in linear subscribers. Total subscribers to our linear networks at March 31, 2022 were 8% lower than at March 31, 2021, while subscribers to our fully distributed linear networks were 4% lower than the prior year. Excludingyear quarter.
The increase for the impactsix months ended June 30, 2022 was primarily attributable to higher theatrical film rental revenue and TV licensing revenue, partly offset by lower home entertainment revenue. Theatrical performance was favorably impacted by performance of The Batman, which was released in the salefirst quarter of our Great American Country linear network, total subscribers2022. The increase in TV licensing revenue was primarily attributable to our linear networks at March 31, 2022 were 4%timing of availabilities across theatrical and television product, partially offset by lower than at March 31, 2021.TV production revenue.
Other revenues decreased $9 millionrevenue increased 56% and 62% for the three and six months ended March 31,June 30, 2022, comparedrespectively. The increase for the three and six months ended June 30, 2022 was primarily attributable to increased studio operations revenues from the prior year period.reopening of Warner Bros. Studio Tour London.
Costs of Revenues
Costs of revenues increased 14%6% and 3% for the three and six months ended March 31,June 30, 2022, compared to prior year.respectively. The increase for the three and six months ended June 30, 2022 was primarily attributable to higher games and theatrical content amortization at discovery+, which launched in January 2021, and our linear networks.
Content expense, was $418 million and $364 millionpartially offset by lower content expense for the three months ended March 31, 2022 and 2021, respectively.television products.
Selling, General and Administrative
Selling, general and administrative expenses decreased 25%2% for the three and six months ended March 31,June 30, 2022, compared torespectively. The decrease for the prior year period. The decreasethree and six months ended June 30, 2022 was primarily attributable to lower marketing-relatedmarketing expenses for discovery+ due to its launch in January 2021.fewer theatrical releases, partially offset by higher bad debt expense.
Adjusted OIBDAEBITDA
Adjusted OIBDAEBITDA was flat and increased 25%46% for the three and six months ended March 31,June 30, 2022, compared to the prior year period.respectively.
International
Networks Segment
The following tables present,table below presents, for our International Networks segment, revenues by type, certain operating expenses, Adjusted OIBDAEBITDA and a reconciliation of Adjusted OIBDAEBITDA to operating income (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | | | | | |
| | 2022 | | 2021 | | % Change | | % Change (ex-FX) | | | | | | | | |
Revenues: | | | | | | | | | | | | | | | | |
Advertising | | $ | 457 | | | $ | 435 | | | 5 | % | | 11 | % | | | | | | | | |
Distribution | | 536 | | | 514 | | | 4 | % | | 8 | % | | | | | | | | |
Other | | 236 | | | 38 | | | NM | | NM | | | | | | | | |
Total revenues | | 1,229 | | | 987 | | | 25 | % | | 30 | % | | | | | | | | |
Costs of revenues, excluding depreciation and amortization | | 751 | | | 543 | | | 38 | % | | 45 | % | | | | | | | | |
Selling, general and administrative | | 317 | | | 293 | | | 8 | % | | 14 | % | | | | | | | | |
Adjusted OIBDA | | 161 | | | 151 | | | 7 | % | | 9 | % | | | | | | | | |
Depreciation and amortization | | 101 | | | 104 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Restructuring and other charges | | 4 | | | 15 | | | | | | | | | | | | | |
Transaction and integration costs | | 1 | | | 4 | | | | | | | | | | | | | |
Inter-segment eliminations | | (7) | | | — | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Operating income | | $ | 62 | | | $ | 28 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 2,624 | | $ | 178 | | $ | 2,802 | | | $ | 1,601 | | $ | 1,195 | | $ | 2,796 | | | | 64 | % | — | % | 2 | % |
Distribution | | 2,841 | | 171 | | 3,012 | | | 1,132 | | 1,955 | | 3,087 | | | | NM | (2) | % | (1) | % |
Content | | 220 | | 21 | | 241 | | | 96 | | 123 | | 219 | | | | NM | 10 | % | 11 | % |
Other | | 57 | | 9 | | 66 | | | 15 | | 47 | | 62 | | | | NM | 6 | % | 6 | % |
Total revenues | | 5,742 | | 379 | | 6,121 | | | 2,844 | | 3,320 | | 6,164 | | | | NM | (1) | % | 1 | % |
Costs of revenues, excluding depreciation and amortization | | 2,767 | | 253 | | 3,020 | | | 874 | | 1,848 | | 2,722 | | | | NM | 11 | % | 14 | % |
Selling, general and administrative | | 713 | | 31 | | 744 | | | 432 | | 328 | | 760 | | | | 65 | % | (2) | % | — | % |
Adjusted EBITDA | | 2,262 | | 95 | | 2,357 | | | 1,538 | | 1,144 | | 2,682 | | | | 47 | % | (12) | % | (11) | % |
Depreciation and amortization | | 1,482 | | (283) | | 1,199 | | | 262 | | 1,061 | | 1,323 | | | | | | |
Employee share-based compensation | | — | | — | | — | | | — | | 8 | | 8 | | | | | | |
Restructuring and other charges | | 308 | | (5) | | 303 | | | 7 | | — | | 7 | | | | | | |
Transaction and integration costs | | 1 | | — | | 1 | | | — | | — | | — | | | | | | |
Amortization of fair value step-up for content | | 1 | | 293 | | 294 | | | — | | 280 | | 280 | | | | | | |
Inter-segment eliminations | | (2) | | — | | (2) | | | — | | — | | — | | | | | | |
Loss on disposition | | — | | — | | — | | | (72) | | — | | (72) | | | | | | |
Operating income | | $ | 472 | | $ | 90 | | $ | 562 | | | $ | 1,341 | | $ | (205) | | $ | 1,136 | | | | | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 4,054 | | $ | 1,380 | | $ | 5,434 | | | $ | 2,993 | | $ | 2,449 | | $ | 5,442 | | | | 35 | % | — | % | 2 | % |
Distribution | | 3,961 | | 2,183 | | 6,144 | | | 2,281 | | 3,968 | | 6,249 | | | | 74 | % | (2) | % | — | % |
Content | | 536 | | 220 | | 756 | | | 202 | | 324 | | 526 | | | | NM | 44 | % | 46 | % |
Other | | 64 | | 55 | | 119 | | | 28 | | 80 | | 108 | | | | NM | 10 | % | 10 | % |
Total revenues | | 8,615 | | 3,838 | | 12,453 | | | 5,504 | | 6,821 | | 12,325 | | | | 57 | % | 1 | % | 3 | % |
Costs of revenues, excluding depreciation and amortization | | 3,822 | | 2,102 | | 5,924 | | | 1,691 | | 3,547 | | 5,238 | | | | NM | 13 | % | 15 | % |
Selling, general and administrative | | 1,176 | | 352 | | 1,528 | | | 866 | | 664 | | 1,530 | | | | 36 | % | — | % | 2 | % |
Adjusted EBITDA | | 3,617 | | 1,384 | | 5,001 | | | 2,947 | | 2,610 | | 5,557 | | | | 23 | % | (10) | % | (10) | % |
Depreciation and amortization | | 1,887 | | 594 | | 2,481 | | | 534 | | 2,173 | | 2,707 | | | | | | |
Employee share-based compensation | | — | | 9 | | 9 | | | — | | 17 | | 17 | | | | | | |
Restructuring and other charges | | 312 | | (5) | | 307 | | | 21 | | 5 | | 26 | | | | | | |
Transaction and integration costs | | — | | — | | — | | | 4 | | — | | 4 | | | | | | |
Amortization of fair value step-up for content | | 1 | | 419 | | 420 | | | — | | 401 | | 401 | | | | | | |
Inter-segment eliminations | | (2) | | — | | (2) | | | — | | — | | — | | | | | | |
Loss on disposition | | — | | — | | — | | | (72) | | — | | (72) | | | | | | |
Operating income | | $ | 1,419 | | $ | 367 | | $ | 1,786 | | | $ | 2,460 | | $ | 14 | | $ | 2,474 | | | | | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
The discussion below is on a pro forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenue, selling, general and administrative expenses and adjusted EBITDA are substantially attributable to the Merger.
Revenues
Advertising revenue increased 5% 2%for the three and six months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, advertising revenue increased 11% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases wereJune 30, 2022, primarily attributable to increased sports advertising in the broadcast of the Winter Olympics across Europe.
Distribution revenue increased 4% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, distribution revenue increased 8% for the three months ended March 31, 2022. 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+U.S., partially offset by lower news, kids, and general entertainment in the U.S. International networks were, in part, impacted by the sale of Chilevisión in September 2021.
Distribution revenue decreased 1% and was flat for the three and six months ended June 30, 2022, respectively, primarily attributable to a decline in linear subscribers in the U.S. and lower contractual affiliate rates in some European markets.markets, partially offset by an increase in U.S. contractual affiliate rates.
OtherContent revenue increased $198 million11% and 46%for the three and six months ended June 30, 2022, respectively. The increase for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, other revenue increased $203 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases wereJune 30, 2022 was primarily attributable to sublicensinghigher inter-segment licensing of Olympicsdigital content. The increase for the six months ended June 30, 2022 was primarily attributable to higher third party international licensing of sports rights, mainly related to Olympic sports rights to broadcast networks throughout Europe.
Other revenue increased 6% and 10% for the three and six months ended June 30, 2022, respectively.
Costs of Revenues
CostsCost of revenues increased 38%14% and 15% for the three and six months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, costs of revenues increased 45%June 30, 2022, respectively. The increase for the three and six months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases wereJune 30, 2022 was primarily attributable to costs related to the Olympics.higher sports rights and content expense.
Content expense, excluding the impact of foreign currency fluctuations, was $559 million and $368 million for the three months ended March 31, 2022 and 2021, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 8%were flat for the three months ended March 31, 2022. ExcludingJune 30, 2022, as higher marketing expenses were offset by cost synergies, and increased 2% for the impactsix months ended June 30, 2022, primarily attributable to higher marketing offset by cost synergies.
Adjusted EBITDA
Adjusted EBITDA decreased 11% and 10% for the three and six months ended June 30, 2022, respectively.
DTC Segment
The following tables present, for our DTC segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of foreign currency fluctuations,Adjusted EBITDA to operating income (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 96 | | $ | 1 | | $ | 97 | | | $ | 33 | | $ | 4 | | $ | 37 | | | | NM | NM | NM |
Distribution | | 1,993 | | 171 | | 2,164 | | | 180 | | 1,996 | | 2,176 | | | | NM | (1) | % | 1 | % |
Content | | 132 | | 11 | | 143 | | | 2 | | 134 | | 136 | | | | NM | 5 | % | 5 | % |
Other | | 4 | | 2 | | 6 | | | 1 | | 2 | | 3 | | | | NM | NM | NM |
Total revenues | | 2,225 | | 185 | | 2,410 | | | 216 | | 2,136 | | 2,352 | | | | NM | 2 | % | 4 | % |
Costs of revenues, excluding depreciation and amortization | | 1,902 | | 165 | | 2,067 | | | 183 | | 1,396 | | 1,579 | | | | NM | 31 | % | 33 | % |
Selling, general and administrative | | 841 | | 62 | | 903 | | | 362 | | 646 | | 1,008 | | | | NM | (10) | % | (10) | % |
Adjusted EBITDA | | (518) | | (42) | | (560) | | | (329) | | 94 | | (235) | | | | (57) | % | NM | NM |
Depreciation and amortization | | 554 | | (107) | | 447 | | | 54 | | 445 | | 499 | | | | | | |
Employee share-based compensation | | — | | (1) | | (1) | | | — | | 3 | | 3 | | | | | | |
| | | | | | | | | | | | | |
Restructuring and other charges | | 475 | | (3) | | 472 | | | — | | 1 | | 1 | | | | | | |
| | | | | | | | | | | | | |
Amortization of fair value step-up for content | | 65 | | (23) | | 42 | | | — | | 48 | | 48 | | | | | | |
Inter-segment eliminations | | 10 | | — | | 10 | | | — | | — | | — | | | | | | |
Loss on disposition | | 4 | | — | | 4 | | | — | | — | | — | | | | | | |
Operating loss | | $ | (1,626) | | $ | 92 | | $ | (1,534) | | | $ | (383) | | $ | (403) | | $ | (786) | | | | | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Advertising | | $ | 142 | | $ | 36 | | $ | 178 | | | $ | 50 | | $ | 6 | | $ | 56 | | | | NM | NM | NM |
Distribution | | 2,225 | | 2,150 | | 4,375 | | | 289 | | 3,806 | | 4,095 | | | | NM | 7 | % | 8 | % |
Content | | 134 | | 230 | | 364 | | | 3 | | 245 | | 248 | | | | NM | 47 | % | 47 | % |
Other | | 5 | | 3 | | 8 | | | 1 | | 8 | | 9 | | | | NM | (11) | % | (11) | % |
Total revenues | | 2,506 | | 2,419 | | 4,925 | | | 343 | | 4,065 | | 4,408 | | | | NM | 12 | % | 13 | % |
Costs of revenues, excluding depreciation and amortization | | 2,082 | | 1,881 | | 3,963 | | | 335 | | 2,667 | | 3,002 | | | | NM | 32 | % | 34 | % |
Selling, general and administrative | | 1,169 | | 909 | | 2,078 | | | 827 | | 1,258 | | 2,085 | | | | 41 | % | — | % | — | % |
Adjusted EBITDA | | (745) | | (371) | | (1,116) | | | (819) | | 140 | | (679) | | | | 9 | % | (64) | % | (67) | % |
Depreciation and amortization | | 650 | | 267 | | 917 | | | 121 | | 910 | | 1,031 | | | | | | |
Employee share-based compensation | | — | | — | | — | | | — | | 8 | | 8 | | | | | | |
| | | | | | | | | | | | | |
Restructuring and other charges | | 475 | | (3) | | 472 | | | 1 | | 4 | | 5 | | | | | | |
Transaction and integration costs | | 1 | | — | | 1 | | | — | | — | | — | | | | | | |
Amortization of fair value step-up for content | | 65 | | 20 | | 85 | | | — | | 98 | | 98 | | | | | | |
Inter-segment eliminations | | 10 | | — | | 10 | | | — | | — | | — | | | | | | |
Loss on disposition | | 4 | | — | | 4 | | | — | | — | | — | | | | | | |
Operating loss | | $ | (1,950) | | $ | (655) | | $ | (2,605) | | | $ | (941) | | $ | (880) | | $ | (1,821) | | | | | | |
| | | | | | | | | | | | | |
(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast. |
The discussion below is on a pro forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenue, selling, general and administrative expenses and adjusted EBITDA are substantially attributable to the Merger.
Revenues
As of June 30, 2022, we had 92 million core DTC subscribers.1
Advertising revenue increased 14%$61 million and $123 millionfor the three and six months ended June 30, 2022, respectively, primarily attributable to the launch of the HBO Max ad-supported tier in June 2021 and subscriber growth on the discovery+ ad-lite tier.
Distribution revenue increased 1% and 8% for the three and six months ended June 30, 2022, respectively, primarily attributable to global retail subscriber gains at discovery+ and HBO Max that were largely offset by lower domestic wholesale subscribers resulting from the Amazon Channels expiration in September 2021 for HBO Max.
Content revenue increased 5% and 47% for the three and six months ended June 30, 2022, respectively, primarily attributable to higher licensing of HBO Max content to third parties.
1 We define a “Core DTC Subscription” as:
a) a retail subscription to discovery+, HBO or HBO Max for which we have recognized subscription revenue, whether directly or through a third party, from a direct-to-consumer platform; b) a wholesale subscription to discovery+, HBO, or HBO Max for which we have recognized subscription revenue from a fixed-fee arrangement with a third party and where the individual user has activated their subscription; and c) a wholesale subscription to discovery+, HBO or HBO Max for which we have recognized subscription revenue on a per subscriber basis.
We may refer to the aggregate number of Core DTC Subscriptions as “subscribers.”
The reported number of “subscribers” included herein and the definition of “Core DTC Subscription” as used herein excludes:
a) individuals who subscribe to DTC products, other than discovery+, HBO and HBO Max, that may be offered by us or by certain joint venture partners or affiliated parties from time to time; b) a limited number of international discovery+ subscribers that are part of non-strategic partnerships or short-term arrangements as may be identified by the Company from time to time (such subscribers may also be referred to as “non-core” subscribers); c) domestic, and international Cinemax subscribers, and international basic HBO subscribers; and d) users on free trials.
Costs of Revenues
Costs of revenues increased 33% and 34% for the three and six months ended June 30, 2022, respectively, primarily attributable to increased investments in programming expenses to support existing platforms and new market launches.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses decreased 10% for the three months ended March 31,June 30, 2022 and was flat for the six months ended June 30, 2022. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to higher personnel costs and marketing-related expenses to support discovery+ and the Olympics.
Adjusted OIBDA
Adjusted OIBDA increased $10 millionThe decrease for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, June 30, 2022 was primarily attributable to more efficient and measured marketing-related spend to support discovery+ and HBO Max.
Adjusted OIBDA increased $13EBITDA
Adjusted EBITDA decreased $338 million and $451 million for the three and six months ended March 31, 2022.June 30, 2022, respectively.
Corporate Inter-segment Eliminations, and Other
The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDAEBITDA and a reconciliation of Adjusted OIBDAEBITDA to operating loss (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | | |
| | 2022 | | 2021 | | % Change | | | | | | |
Revenues | | $ | (2) | | | $ | (1) | | | NM | | | | | | |
Costs of revenues, excluding depreciation and amortization | | (4) | | | (2) | | | NM | | | | | | |
Selling, general and administrative | | 161 | | | 138 | | | 17 | % | | | | | | |
Adjusted OIBDA | | (159) | | | (137) | | | (16) | % | | | | | | |
Employee share-based compensation | | 57 | | | 61 | | | | | | | | | |
Depreciation and amortization | | 39 | | | 33 | | | | | | | | | |
Restructuring and other charges | | 1 | | | — | | | | | | | | | |
Transaction and integration costs | | 85 | | | — | | | | | | | | | |
Inter-segment eliminations | | (5) | | | — | | | | | | | | | |
Operating loss | | $ | (336) | | | $ | (231) | | | | | | | | | |
: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues | | $ | 13 | | $ | 3 | | $ | 16 | | | $ | — | | $ | 10 | | $ | 10 | | | | NM | 60 | % | 60 | % |
Costs of revenues, excluding depreciation and amortization | | 11 | | 6 | | 17 | | | (2) | | 99 | | 97 | | | | NM | (82) | % | (82) | % |
Selling, general and administrative | | 307 | | 97 | | 404 | | | 96 | | 158 | | 254 | | | | NM | 59 | % | 62 | % |
Adjusted EBITDA | | (305) | | (100) | | (405) | | | (94) | | (247) | | (341) | | | | NM | (19) | % | (21) | % |
Employee share-based compensation | | 147 | | (32) | | 115 | | | 27 | | 63 | | 90 | | | | | | |
Depreciation and amortization | | 72 | | (14) | | 58 | | | 25 | | 47 | | 72 | | | | | | |
Restructuring and other charges | | 68 | | (43) | | 25 | | | — | | (1) | | (1) | | | | | | |
Transaction and integration costs | | 982 | | (782) | | 200 | | | 35 | | 1 | | 36 | | | | | | |
| | | | | | | | | | | | | |
Inter-segment eliminations | | (8) | | — | | (8) | | | — | | — | | — | | | | | | |
Operating loss | | $ | (1,566) | | $ | 771 | | $ | (795) | | | $ | (181) | | $ | (357) | | $ | (538) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues | | $ | 13 | | $ | 19 | | $ | 32 | | | $ | — | | $ | 16 | | $ | 16 | | | | NM | NM | NM |
Costs of revenues, excluding depreciation and amortization | | 11 | | 50 | | 61 | | | (4) | | 181 | | 177 | | | | NM | (66) | % | (66) | % |
Selling, general and administrative | | 411 | | 322 | | 733 | | | 182 | | 276 | | 458 | | | | NM | 60 | % | 63 | % |
Adjusted EBITDA | | (409) | | (353) | | (762) | | | (178) | | (441) | | (619) | | | | NM | (23) | % | (25) | % |
Employee share-based compensation | | 204 | | (11) | | 193 | | | 88 | | 138 | | 226 | | | | | | |
Depreciation and amortization | | 96 | | 11 | | 107 | | | 47 | | 94 | | 141 | | | | | | |
Restructuring and other charges | | 69 | | (44) | | 25 | | | — | | 44 | | 44 | | | | | | |
Transaction and integration costs | | 1,069 | | (564) | | 505 | | | 35 | | 790 | | 825 | | | | | | |
| | | | | | | | | | | | | |
Inter-segment eliminations | | (8) | | — | | (8) | | | — | | — | | — | | | | | | |
Operating loss | | $ | (1,839) | | $ | 255 | | $ | (1,584) | | | $ | (348) | | $ | (1,507) | | $ | (1,855) | | | | | | |
Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation, and third-party transaction and integration costs.
As reported transaction and integration costs for the three and six months ended June 30, 2022 included the impact of the issuance of additional shares of common stock to Advance/Newhouse Programming Partnership of $789 million upon the closing of the Merger. (See Note 2 to the accompanying consolidated financial statements.)
Inter-segment Eliminations
The following tables presents our inter-segment eliminations, by revenue and expense (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
| | | | | | | | | | | | | |
Inter-segment revenue eliminations | | $ | (949) | | $ | (139) | | $ | (1,088) | | | $ | — | | $ | (648) | | $ | (648) | | | | NM | (68) | % | (68) | % |
Inter-segment expense eliminations | | (935) | | (116) | | (1,051) | | | — | | (679) | | (679) | | | | NM | (55) | % | (55) | % |
Adjusted EBITDA | | (14) | | (23) | | (37) | | — | | — | | 31 | | 31 | | | | NM | NM | NM |
Restructuring and other charges | | (18) | | — | | (18) | | | — | | — | | — | | | | | | |
Amortization of fair value step-up for content | | 241 | | — | | 241 | | | — | | — | | — | | | | | | |
Operating income (loss) | | $ | (237) | | $ | (23) | | $ | (260) | | | $ | — | | $ | 31 | | $ | 31 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2022 | | 2021 | | | % Change |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
| | | | | | | | | | | | | |
Inter-segment revenue eliminations | | $ | (949) | | $ | (1,065) | | $ | (2,014) | | | $ | — | | $ | (1,323) | | $ | (1,323) | | | | NM | (52) | % | (52) | % |
Inter-segment expense eliminations | | (935) | | (1,038) | | (1,973) | | | — | | (1,361) | | (1,361) | | | | NM | (45) | % | (45) | % |
Adjusted EBITDA | | (14) | | (27) | | (41) | | — | | — | | 38 | | 38 | | | | NM | NM | NM |
Restructuring and other charges | | (18) | | — | | (18) | | | — | | — | | — | | | | | | |
Amortization of fair value step-up for content | | 241 | | — | | 241 | | | — | | — | | — | | | | | | |
Operating income (loss) | | $ | (237) | | $ | (27) | | $ | (264) | | | $ | — | | $ | 38 | | $ | 38 | | | | | | |
Inter-segment revenue and expense eliminations primarily represent inter-segment content transactions and marketing and promotion activity between reportable segments. In our current segment structure, in certain instances, production and distribution activities are in different segments. Inter-segment content transactions are presented “gross” (i.e. the segment producing and/or licensing the content reports revenue and profit from inter-segment transactions in a manner similar to the reporting of third-party transactions, and the required eliminations are reported on the separate “Eliminations” line when presenting our summary of segment results). Generally, timing of revenue recognition is similar to the reporting of third-party transactions. The segment distributing the content, e.g. via our DTC or linear services, capitalizes the cost of inter-segment content transactions, including “mark-ups” and amortizes the costs over the shorter of the license term, if applicable, or the expected period of use. The content amortization expense related to the inter-segment profit is also eliminated on the separate “Eliminations” line when presenting our summary of segment results.
FINANCIAL CONDITION
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the threesix months ended March 31,June 30, 2022, we funded our working capital needs primarily through cash flows from operations. As of March 31,June 30, 2022, we had $4.2$2.6 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. As of March 31,June 30, 2022, we also hadhave a $2.5$6.0 billion revolving credit facility which has subsequently been increased to $6.0 billion and a $1.5 billion commercial paper program, as described below. In connection with the closing of the Merger, on April 8, 2022, we incurred a substantial amount of additional third-party indebtedness, which has significantly increased our future financial commitments, including aggregate interest payments.
•Debt
Revolving Credit Facility and Commercial Paper
In June 2021, weDiscovery Communications, LLC (“DCL”) entered into a multicurrency revolving credit agreement (the "Credit Agreement"“Revolving Credit Agreement”), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. We hadDCL has the capacity to initially borrow up to $2.5$6.0 billion under the Revolving Credit Agreement. Upon completion of the Merger, the available commitments increased by $3.5 billion, to an aggregate amount not to exceed $6.0 billion.Agreement (the “Credit Facility”). The Revolving Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. WeDCL may also request additional commitments up to $1.0$1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Revolving Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks Interactive, Inc. (“Scripps Networks”), and upon completion of the Merger, WarnerMedia Holdings, Inc., which was originally named Magallanes, Inc.
The Credit AgreementFacility will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent. The Revolving Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of March 31,June 30, 2022, DCL was in compliance with all covenants and there were no events of default under the Revolving Credit Facility.Agreement.
Additionally, our commercial paper program is supported by the Credit Facility. Under the commercial paper program, we may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program.
During the six months ended June 30, 2022, we borrowed and repaid $90 million under our commercial paper program. As of March 31,June 30, 2022 and December 31, 2021, wethe Company had no outstanding borrowings under the Credit Facility or the commercial paper program.
•Derivatives
We received investing proceeds of $639 million and financing proceeds of $33$720 million during the threesix months ended March 31,June 30, 2022 from the unwind and settlement of derivative instruments. (See Note 812 to the accompanying consolidated financial statements.)
•Investments and Business Combinations
During the six months ended June 30, 2022, we completed the sale of our minority interest in Discovery Education and received cash of $138 million.
In addition, we acquired $2.4 billion of cash in conjunction with the Merger.
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+HBO Max and HBO Max,discovery+, principal and interest payments on our outstanding senior notes, and funding for various equity method and other investments.investments, and repurchases of our capital stock.
•Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content. PriorSubsequent to the Merger, contractual commitments to acquire content had not materially changedhave increased significantly compared to our commitments as set forth in "Material“Material Cash Requirements from Known Contractual and Other Obligations"Obligations” in Item 7, "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our 2021 Form 10-K. Our contractual commitments to acquire content have increased significantly subsequent(See Note 19 to the Merger.accompanying consolidated financial statements.)
•Debt
Term Loan
During the six months ended June 30, 2022, the Company repaid$3.5 billion of aggregate principal amount outstanding of its term loans due October 2023 and April 2025.
Senior Notes
During the threesix months ended March 31,June 30, 2022, we repaid in full at maturity $327 million aggregate principal amount outstanding of our 2.375% Euro Denominated Senior Notes due March 2022. In addition, we have $106 million, $796 million, and $192 million of senior notes coming due in February, March, and April 2023, respectively, and $182 million of senior notes assumed in the Merger coming due in September 2023.respectively.
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly known as Magallanes, Inc., a wholly owned subsidiary of AT&T, Inc., entered into a $10 billion term loan credit agreement (the “Term Loan Credit Agreement”) and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transactionMerger and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan Credit Agreement or the Revolving Credit Facility,Agreement, and will rank equally with all of the Company's other unsecured senior debt.
WeOn a consolidated basis, we also assumed an additional $1.6$1.5 billion of senior notes (includes accrued interest) from(at par value) issued by the WarnerMedia Business that existed prior to the Merger.
•Capital Expenditures and Investments in Next Generation Initiatives
We effected capital expenditures of $85$307 million during the threesix months ended March 31,June 30, 2022, including amounts capitalized to support our next generation platforms, such as HBO Max and discovery+. In addition, we expect to continue to incur significant costs to develop and market discovery+HBO Max and HBO Maxdiscovery+ streaming products 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 39 to the accompanying consolidated financial statements.) We also provide funding to our investees from time to time. During the threesix months ended March 31,June 30, 2022, we contributed $42$109 million for investments in and advances to our investees.
In April 2022, we completed the Merger with the WarnerMedia Business. We expect to incur significant, one-time transaction and integration costs during the first year following the Merger. Due(See Note 3 to the limited time between the transaction date and our filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial accounting for the business combination is incomplete and we are not yet able to disclose the provisional amounts to be recognized as of the acquisition date for assets acquired and liabilities assumed. We expect to provide preliminary purchase price allocation information in our Quarterly Report on Form 10-Q for the quarter ending June 30, 2022.accompanying consolidated financial statements.)
•Redeemable Noncontrolling Interest and Noncontrolling Interest
Due to business combinations, we have redeemable equity balances of $335$328 million at March 31,June 30, 2022, which may require the use of cash in the event holders of noncontrolling interests put their interests to us. Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $224$264 million and $183$213 million for the threesix months ended March 31,June 30, 2022 and 2021, 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 repurchase 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 threesix months ended March 31,June 30, 2022, 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 threesix months ended March 31,June 30, 2022, we made cash payments of $97$442 million and $186$390 million for income taxes and interest on our outstanding debt, respectively. We expect cash required for interest payments to increase significantly as a result of the Merger.
Cash Flows
The following table presents changes in cash and cash equivalents (in millions). | | | | Three Months Ended March 31, | | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | | 2022 | | 2021 |
Cash, cash equivalents, and restricted cash, beginning of period | Cash, cash equivalents, and restricted cash, beginning of period | | $ | 3,905 | | | $ | 2,122 | | Cash, cash equivalents, and restricted cash, beginning of period | | $ | 3,905 | | | $ | 2,122 | |
Cash provided by operating activities | Cash provided by operating activities | | 323 | | | 269 | | Cash provided by operating activities | | 1,334 | | | 1,103 | |
Cash provided by investing activities | Cash provided by investing activities | | 529 | | | 156 | | Cash provided by investing activities | | 2,880 | | | 196 | |
Cash used in financing activities | Cash used in financing activities | | (587) | | | (469) | | Cash used in financing activities | | (4,157) | | | (538) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (5) | | | (70) | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (66) | | | (49) | |
Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | | 260 | | | (114) | | Net change in cash, cash equivalents, and restricted cash | | (9) | | | 712 | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | | $ | 4,165 | | | $ | 2,008 | | Cash, cash equivalents, and restricted cash, end of period | | $ | 3,896 | | | $ | 2,834 | |
Operating Activities
Cash provided by operating activities was $323$1,334 million and $269$1,103 million during the threesix months ended March 31,June 30, 2022 and 2021, respectively. The increase in cash provided by operating activities was primarily attributable to an increase in net income excluding non-cash items, partially offset by a negative fluctuation in working capital activity.
Investing Activities
Cash provided by investing activities was $529$2,880 million and $156$196 million during the threesix months ended March 31,June 30, 2022 and 2021, respectively. The increase in cash provided by investing activities was primarily attributable to proceeds received from cash acquired during the Merger and from the unwind and settlement of derivative instruments, partially offset by a reduction in cash received from the sales and maturities of investments during the threesix months ended March 31,June 30, 2022.
Financing Activities
Cash used in financing activities was $587$4,157 million and $469$538 million during the threesix months ended March 31,June 30, 2022 and 2021, respectively. The increase in cash used in financing activities was primarily attributable to principal repayments made on our term loans and senior notes and an increase in distributions to noncontrolling interests and redeemable noncontrolling interests during the threesix months ended March 31,June 30, 2022.
Capital Resources
As of March 31,June 30, 2022, capital resources were comprised of the following (in millions). | | | | March 31, 2022 | | | June 30, 2022 |
| | | Total Capacity | | | Outstanding Indebtedness | | Unused Capacity | | | Total Capacity | | | Outstanding Indebtedness | | Unused Capacity |
Cash and cash equivalents | Cash and cash equivalents | | $ | 4,162 | | | | $ | — | | | $ | 4,162 | | Cash and cash equivalents | | $ | 2,575 | | | | $ | — | | | $ | 2,575 | |
Revolving credit facility and commercial paper program | Revolving credit facility and commercial paper program | | 2,500 | | | | — | | | 2,500 | | Revolving credit facility and commercial paper program | | 6,000 | | | | — | | | 6,000 | |
Term loans | | Term loans | | 6,500 | | | | 6,500 | | | — | |
Senior notes (a) | Senior notes (a) | | 14,824 | | | | 14,824 | | | — | | Senior notes (a) | | 46,259 | | | | 46,259 | | | — | |
Total | Total | | $ | 21,486 | | | | $ | 14,824 | | | $ | 6,662 | | Total | | $ | 61,334 | | | | $ | 52,759 | | | $ | 8,575 | |
| (a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of March 31, 2022 had interest rates that ranged from 1.90% to 6.35% and will mature between 2023 and 2055. | |
(a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of June 30, 2022 had interest rates that ranged from 1.82% to 9.15% and will mature between 2023 and 2062. | | (a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of June 30, 2022 had interest rates that ranged from 1.82% to 9.15% and will mature between 2023 and 2062. |
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly known as Magallanes, Inc., a wholly owned subsidiary of AT&T, Inc., entered into a $10 billion term loanthe Term Loan Credit Agreement and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transactionMerger and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan Credit Agreement or the Credit Facility,Agreement, and will rank equally with all of the Company's other unsecured senior debt.
WeOn a consolidated basis, we also assumed an additional $1.6$1.5 billion of senior notes (includes accrued interest) from(at par value) issued by the WarnerMedia Business that existed prior to the Merger.
We expect that our cash balance, cash generated from operations and availability under the Credit Facility will be sufficient to fund our cash needs for both the short-term and the long-term. 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 March 31,June 30, 2022, we held $437 million$1.2 billion of our $4.2$2.6 billion of cash and cash equivalents in our foreign subsidiaries. The 2017 Tax Cuts and Jobs Act of 2017 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
As of March 31,June 30, 2022 and December 31, 2021, all of the Company’s outstanding $14.7 billion registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company, and guaranteed by the Company, and Scripps Networks, except forand WarnerMedia Holdings, Inc. As of June 30, 2022, the Company also has outstanding $30.0 billion of senior notes issued by WarnerMedia Holdings, Inc. and guaranteed by the Company, Scripps and DCL; $1.5 billion of senior notes issued by the legacy WarnerMedia Business (not guaranteed); and approximately $23 million of un-exchanged senior notes outstanding as of March 31, 2022 that have been issued by Scripps Networks and are not guaranteed.(not guaranteed). (See Note 710 to the accompanying consolidated financial statements.) DCL primarily includes the Discovery Channel and TLC networks in the U.S. DCL is a wholly owned subsidiary of the Company. Scripps Networks is also 100% owned by the Company.
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly known as Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan and $30 billion aggregate principal amount of senior unsecured notes. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor (currently DCL and Scripps Networks, and subsequent to the Merger, Discovery Communications Benelux B.V.), and will rank equally with all of the Company's other unsecured senior debt.
The tables below present the summarized financial information as combined for Warner Bros. Discovery, Inc. (the “Parent”), Scripps Networks, DCL, and DCLWarnerMedia Holdings, Inc. (collectively, the “Obligors”), and do not include the WarnerMedia Business.. All guarantees of DCL'sDCL and WarnerMedia Holdings, Inc.'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. The tables below do not include WarnerMedia.
Note Guarantees issued by Scripps Networks, DCL or WarnerMedia Holdings, Inc., 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, WarnerMedia Holdings, Inc. or the Parent or another Subsidiary Guarantor, as applicable, 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). The summarized balance sheet information as of December 31, 2021 does not include information with respect to WarnerMedia Holdings, Inc., as WarnerMedia Holdings, Inc. was a wholly-owned subsidiary of AT&T with | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Current assets | | $ | 4,843 | | | $ | 4,452 | |
Non-guarantor intercompany trade receivables, net | | 120 | | | 85 | |
Noncurrent assets | | 5,925 | | | 5,969 | |
Current liabilities | | 1,342 | | | 1,018 | |
Noncurrent liabilities | | 14,888 | | | 15,778 | |
de minimis assets and no operating activities for the year ended December 31, 2021. The summarized income statement information for the six months ended June 30, 2022 includes information with respect to WarnerMedia Holdings, Inc. beginning subsequent to the close of the Merger. | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Current assets | | $ | 1,809 | | | $ | 4,452 | |
Non-guarantor intercompany trade receivables, net | | 109 | | | 85 | |
Noncurrent assets | | 5,853 | | | 5,969 | |
Current liabilities | | 1,938 | | | 1,018 | |
Noncurrent liabilities | | 51,318 | | | 15,778 | |
| | | | | | | | | | |
| | ThreeSix Months Ended March 31,June 30, 2022 | | |
Revenues | | $ | 5421,099 | | | |
Operating income | | 137 (770) | | | |
Net income | | 390 (882) | | | |
Net income available to Warner Bros. Discovery, Inc. | | 388 (886) | | | |
COMMITMENTSMATERIAL CASH REQUIREMENTS FROM KNOWN CONTRACTUAL AND OTHER OBLIGATIONS
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+. PriorSubsequent to the Merger, total contractual commitments, had notparticularly in respect of long-term debt and content purchase obligations, have increased materiallyassignificantly compared to our commitments set forth in "Material“Material Cash Requirements from Known Contractual and Other Obligations"Obligations” in Item 7, "Management's“Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations” in our 2021 Annual Report on Form 10-K. Our contractual commitments have increased significantly subsequent(See Note 10 and Note 19 to the Merger.accompanying consolidated financial statements.)
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 1518 to the accompanying consolidated financial statements.)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
OurExcept for updates to accounting policies as a result of the Merger described in Note 1 to the accompanying consolidated financial statements, our critical accounting policies and estimates have not changed since December 31, 2021. 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“Critical Accounting Policies and Estimates"Estimates” included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K:
•Uncertain tax positions;
•Goodwill and intangible assets;
•Content rights;
•Consolidation; and
•Revenue recognition
NEW ACCOUNTING AND REPORTING PRONOUNCEMENTS
We adopted certain new accounting and reporting standards during the threesix months ended March 31,June 30, 2022. (See Note 1 to the accompanying consolidated financial statements.)
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, as well as in other public statements we may make, may 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, anticipated sources and uses of capital and our recently completed acquisition of the WarnerMedia Business. Words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “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 effects of our recently completed acquisition of the WarnerMedia Business;
•changes in the distribution and viewing of television programming, including the continuing expanded deployment of personal video recorders, subscription video on demand, internet protocol television, mobile personal devices, personal tablets and user-generated content and their impact on television advertising revenue;
•continued consolidation of distribution customers and production studios;
•a failure to secure affiliate or distribution agreements or the renewal of such agreements or other wholesale subscription or bundled service arrangements 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, 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, political unrest and regulatory changes in international markets, including 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 regarding the financial performance of our 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 recently completed acquisition of the WarnerMedia Business, 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, and the success of our discovery+ and HBO Max streaming products;
•realizing direct-to-consumer subscriber goals;goals, including through the activation of subscriptions by subscribers receiving access through bundled services or other wholesale subscription arrangements;
•future financial performance, including availability, terms, and deployment of capital;
•inherent uncertainties involved in the estimates and assumptions used in the preparation of financial forecasts;
•the ability of suppliers and vendors to deliver products, equipment, software, and services;
•the outcome of any pending or threatened or potential litigation, including any litigation that has been or may be instituted against us relating to our recently completed acquisition of the WarnerMedia Business;
•availability of qualified personnel and recruiting, motivating and retaining talent;
•the possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union or others involved in the development and production of our television programming, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements;
•changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and similar authorities internationally and data privacy regulations and adverse outcomes from regulatory proceedings;
•changes in income taxes due to regulatory changes 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 terrorist attacks and military action, including the intensification or expansion of the conflict in Ukraine;
•service disruptions or the failure of communications satellites or transmitter facilities;
•theft of our content and unauthorized duplication, distribution and exhibition of such content;
•changes in existing U.S. and foreign laws and regulations, as well as possible private rights of action, regarding intellectual property rights protection and privacy, personal data protection and user consent;
•potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the Federal Communications Commission could negatively impact our WarnerMedia Business's ability to deliver pay-TV network feeds of our domestic pay-TV programming networks to our affiliates, and, in some cases, to produce high-value news and entertainment programming on location;
•our level of debt, including the significant indebtedness incurred in connection with the acquisition of the WarnerMedia Business, and our future compliance with debt covenants;
•reduced access to capital markets or significant increases in costs to borrow, including as a result of higher interest rates and perceived, potential or actual inflation; 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 Part I, Item 1A, “Risk Factors,” in our 2021 Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors"“Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2022 (the “Q1 10-Q”) and this Quarterly Report on Form 10-Q.10-Q for the period ended June 30, 2022. 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.
ITEM 3. Quantitative and Qualitative Disclosures About Market RiskRisk.
Quantitative and qualitative disclosures about our existing market risk are set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the 2021 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2021.
ITEM 4. Controls and ProceduresProcedures.
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 March 31,June 30, 2022. 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 March 31,June 30, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
On April 8, 2022, Discovery completed its merger with WM. (See Note 3 to the accompanying consolidated financial statements). We are currently integrating policies, processes, people, technology and operations for the combined company. Management will continue to evaluate our internal control over financial reporting as we execute integration activities. During the three months ended March 31,June 30, 2022, except as noted above, 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. See(See Note 1619 to the accompanying consolidated financial statements.)
As of AprilJuly 1, 2022, eight lawsuits havehad been filed by alleged Discovery stockholders against Discovery and the Discovery BoardCompany related to the preliminary proxy statement filed with the SEC in connection with the Merger. The cases have been dismissed.
The dismissed cases are as follows: A complaint captioned Rahman v. Discovery Inc. et al., Case No. 1:21-cv-09785 (the “Rahman Complaint”), was filed in the United States District Court for the Southern District of New York on November 23, 2021. A complaint captioned Chiao v. Discovery Inc. et al., Case No. 1:21-cv-10409, was filed in the United States District Court for the Southern District of New York on December 6, 2021. A complaint captioned Whitfield v. Discovery Inc. et al., Case No. 1:21-cv-10514 (the “Whitfield Complaint”), was filed by Matthew Whitfield in the United States District Court for the Southern District of New York on December 8, 2021. A complaint captioned Solakian v. Discovery Inc. et al., Case No. 1:21-cv-06806, was filed in the United States District Court for the Eastern District of New York on December 8, 2021. A complaint captioned Finger v. Discovery Inc. et al., Case No. 2:21-cv-09799, was filed in the United States District Court for the Central District of California on December 20, 2021. A complaint captioned Ciccotelli v. Discovery Inc. et al., Case No. 2:21-cv-05566, was filed in the United States District Court for the Eastern District of Pennsylvania on December 21, 2021. A complaint captioned Kent v. Discovery Inc. et al., Case No. 1:22-cv-00033-UNA, was filed by Michael Kent in the United States District Court for the District of Delaware on January 7, 2022. A complaint captioned Jones v. Discovery Inc. et al., Case No. 1:22-cv-00204, was filed by Brian Jones in the United States District Court for the Southern District of New York on January 10, 2022. Each of the above complaints namenamed as defendants Discovery and members of the Discovery Board. The Whitfield Complaint and the Rahman Complaint also namenamed as defendants AT&T, Inc. and Drake Subsidiary, Inc. The Whitfield Complaint namesnamed Magallanes, Inc. as an additional defendant. Each of the complaints allegesalleged violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder. The complaints generally allegealleged that the respective defendants filed a materially incomplete and misleading preliminary proxy statement with the SEC. Each of the complaints seekssought injunctive relief, damages and other relief.
ITEM 1A. Risk Factors
Investors should carefully review and consider the information regarding certain factors that could materially affect our business, results of operations, financial condition and cash flows as set forth under Part I, Item 1A - Risk Factors of the Company’s Annual Report on2021 Form 10-K forand Part II, Item 1A - Risk Factors of the year ended December 31, 2021 (“Company's Q1 Form 10-K”), and10-Q, as supplemented by the additional risk factorsfactor described below under “Risk“Risks Related to our Acquisition of the WarnerMedia Business”.Our Industry.” In addition, certain of the risks described in our 2021 Form 10-K under “Risks Related to Corporate Structure” as well as risks related to COVID-19and Q1 Form 10-Q are amended and restated as set forth 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.
RiskRisks Related to our Acquisition of the WarnerMedia Business
We expect to incur significant costs during the first year following the Merger.
On April 8, 2022, we completed the previously announced transaction (the “Merger”) in which we acquired the business, operations and activities that constitute the WarnerMedia segment of AT&T, Inc., subject to certain exceptions (the “WarnerMedia Business”). We have incurred significant costs in connection with the signing and closing of the Merger, and expect to continue to incur significant additional one-time cash costs during the first year following the Merger which costs we believe will be necessary to realize the anticipated cost synergies from the Merger. Additional unanticipated costs may also be incurred in connection with the integration of the legacy business, operations and activities of Discovery, Inc. prior to the Merger (the “Discovery Business”) and the WarnerMedia Business. No assurances of the timing or amount of synergies able to be captured, or the timing or amount of costs necessary to achieve those synergies, can be provided. Some of the factors affecting the costs associated in the integration phase of the Merger include the resources required in integrating the WarnerMedia Business with the Discovery Business and the length of time during which transition services are provided to us by AT&T. The amount and timing of any such charges could materially adversely affect our business, financial condition and results of operations.
We could be required to recognize impairment charges related to goodwill and other intangible assets.
The Merger added a significant amount of goodwill and other intangible assets to our consolidated balance sheet. In accordance with GAAP, management periodically assesses these assets to determine if they are impaired. Significant negative industry or economic trends, including the ongoing effects of the COVID-19 pandemic, disruptions to our business, inability to effectively integrate acquired businesses, underperformance of the WarnerMedia Business as compared to management's initial expectations, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairments could materially adversely affect our results of operations in the periods recognized.
We may be unable to provide (or obtain from third parties) the same types and level of services to the WarnerMedia Business that historically have been provided by AT&T or may be unable to provide (or obtain) them at the same cost.
Prior to the Merger, as part of a separate reporting segment of AT&T, the WarnerMedia Business was able to receive services from AT&T. Following the Merger, we have replaced these services either by providing them internally from our existing services or by obtaining them from unaffiliated third parties, including AT&T. These services include AT&T bundling HBO Max with some of its wireless and broadband offerings, and certain administrative and operating functions of which effective and appropriate performance is critical to the operations of the WarnerMedia Business and the Company as a whole following the Merger. AT&T is providing certain services on a transitional basis pursuant to a Transition Services Agreement (the “TSA”) with us. The duration of such services is subject to a limited term set out in the Services Schedule to the TSA. We may have difficulty enforcing the terms of the agreements governing the provision of these services or be unable to replace these services in a timely manner or on terms and conditions as favorable as those the WarnerMedia Business currently receives from AT&T. The costs for these services, or the costs associated with replacing these services, could in the aggregate be higher than the combination of our historical costs and those reflected in the historical financial statements of the WarnerMedia Business. If we are unable to replace the services provided by AT&T or are unable to replace them at the same cost or are delayed in replacing the services provided by AT&T, our results of operations may be materially adversely impacted.
Following the Merger, we will need to replace or renegotiate certain contracts that the WarnerMedia Business is party to. If we cannot negotiate terms that are as favorable as those AT&T had been able to negotiate, our business, financial condition and results of operations may be adversely affected.
Prior to the Merger, as a separate reporting segment of AT&T, the WarnerMedia Business was able to receive benefits from being a part of AT&T and had been able to benefit from AT&T’s financial strength, extensive business relationships and purchasing power. Following the Merger, the WarnerMedia Business is not able to leverage AT&T’s financial strength, does not have access to all of AT&T’s extensive business relationships and may not have purchasing power similar to what the WarnerMedia Business benefited from by being a part of AT&T prior to the Merger. In addition, certain contracts that AT&T or its subsidiaries are a party to on behalf of the WarnerMedia Business may have required consents of third parties in order to transfer them to us in connection with the Merger.We may not be able to obtain those consents, enter into new agreements with respect to those contracts if consents are not obtained or arrange for a lawful alternative arrangement to provide the WarnerMedia Business with the rights and obligations under such contracts. Additionally, some of those contracts may contain termination rights in connection with the Merger or the transactions contemplated thereby, and some third parties may exercise this right.It is therefore possible, whether as a result of routine renegotiations of terms in the ordinary course of business, or as part of a request for consent or a replacement of a contract where consent has not been obtained, or in connection with the termination of such contracts, that we may not be able to negotiate terms as favorable as those AT&T received previously for one or more contracts, and in the aggregate the loss or renegotiation of contracts in connection with the foregoing could materially adversely affect our business, financial condition and results of operations by increasing costs or decreasing revenues.
The success of the Company depends on relationships with third parties and existing customers of both the Discovery Business and the WarnerMedia Business, which relationships may be affected by customer or third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect our business, financial condition and results of operations.
Our success will depend on our ability to maintain and renew relationships with existing customers, business partners and other third parties of both the Discovery Business and the WarnerMedia Business, and our ability to establish new relationships. There can be no assurance that the combined business of the Discovery Business and the WarnerMedia Business will be able to maintain and renew existing contracts and other business relationships, or that we will be able to enter into or maintain new contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition and results of operations.
If the results of operations of the WarnerMedia Business following the Merger arecontinue to be below management’s expectations, the Company may not achieve the increases in revenues and net earnings that management expects as a result of the Merger.
Management projectedIn connection with our comprehensive business and strategic review which commenced following the Merger, we determined that the Discovery Business andcertain WarnerMedia Business combined willbudget projections that were made available to us prior to closing varied from what we now view as WarnerMedia’s baseline post-closing. We are actively implementing actions to address these issues. However, as we derive a majority of itsour revenues and net earnings from the WarnerMedia Business, after the Merger. Therefore, if the results of operations of the WarnerMedia Business following the Merger arecontinue to be below management’s expectations, the Companywe may not achieve the consolidated results of operations that wereincreases in revenue and net earnings expected as a result of the Merger. Some of the significantSignificant factors that could negatively impact the results of operations of the WarnerMedia Business, and therefore harm the results of operations of the Company, include:
•more intense competitive pressure from existing or new competitors;
•fluctuations in the exchange rates in the jurisdictions in which the WarnerMedia Business operates;
•increases in promotional and operating costs for the WarnerMedia Business;
•a decline in the viewership or consumption of content provided by the WarnerMedia Business; and
•additional material variations in the results of operations of the WarnerMedia Business from expectations or projections of such results of operations, which were based on estimates and assumptions developed by our management, any or all of which may prove to be incorrect or inaccurate.
Service disruptions or the failure of communications satellites or transmitter facilities we rely upon could adversely impact our business, financial condition and results of operations.
The WarnerMedia Business relies on communications satellites and transmitter facilities and other technical infrastructure, including fiber, to transmit their programming to affiliates and other distributors. Shutdowns of communications satellites and transmitter facilities or service disruptions pose significant risks to the WarnerMedia Business’s operations and will pose significant risksRisks Related to our operations. Such disruptions may be caused by power outages, natural disasters, extreme weather, terrorist attacks, war, failures or impairments of communications satellites or on-ground uplinks or downlinks or other technical facilitiesIndustry
If our DTC products fail to attract and services used to transmit programming, failure of service providers to meet contractual requirements, or other similar events. If a communications satellite or other transmission means (e.g., fiber) is not able to transmit our programming, or if any material component thereof fails or becomes inoperable, we may not be able to secure an alternative communications path in a timely manner because, among other factors, there are a limited number of communications satellites and other means available for the transmission of programming, and any alternatives may require lead time and additional technical resources and infrastructure to implement. If such an event were to occur, there could be a disruption in the delivery of our programming, which could harm our reputation and materially adversely affect our business, financial condition and results of operations.
Our participation in multiemployer defined benefit pension plans could subject the Company to liabilities that could adversely affect our business, financial condition and results of operations.
The WarnerMedia Business contributes to various multiemployer defined benefit pension plans (the “multiemployer plans”) under the terms of collective bargaining agreements that cover certain of its union-represented employees. Following the Merger, we assumed certain of the obligations under these multiemployer plans with respect to transferred employees from the WarnerMedia Business. The risks of participation in these multiemployer plans are different from single-employer pension plans in that: (1) contributions made by the Company to the multiemployer plans may be used to provide benefits to employees of other participating employers; (2) if we choose to stop participating or substantially reduce participation in certain of these multiemployer plans, we may be required to pay those plans an amount based on the underfunded status of the plan, which is referred to as a withdrawal liability; and (3) actions taken by any participating employer that lead to a deterioration of the financial health of a multiemployer plan may result in the unfunded obligations of the multiemployer plan being borne by its remaining participating employers, including the Company. While we do not expect any of the multiemployer plans to which we contribute to be individually significant to the Company as a whole, as of December 31, 2021, the WarnerMedia Business was, and the Company could be, an employer that provides more than 5% of total contributions to certain of the multiemployer plans in which it participates or the Company will participate.
To the extent that U.S.-registered multiemployer plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980 (collectively, “ERISA”), may subject the Company to substantial liabilities in the event of a complete or partial withdrawal from, or upon termination of, such plans. The WarnerMedia Business currently contributes to, and in the past has contributed to, multiemployer plans that are underfunded, and, therefore, could have potential liability associated with a voluntary or involuntary withdrawal from, or termination of, such plans. In addition, for a multiemployer plan in endangered, seriously endangered or critical status, additional required contributions, generally in the form of surcharges on contributions otherwise required, and benefit reductions may apply if such plan is determined to be underfunded, which could adversely affectretain subscribers, our business, financial condition and results of operations ifmay be adversely impacted.
In January 2021, Discovery launched an aggregated DTC product, discovery+, in the U.S. In May 2020, the WarnerMedia Business launched HBO Max in the U.S. We have incurred and will likely continue to incur significant costs to develop and market discovery+ and HBO Max, including costs related to developing and implementing a go-to-market strategy that coordinates and/or combines our DTC products, and there can be no assurance that consumers and advertisers will embrace our offerings or that subscribers will activate or renew a subscription.
Our discovery+ and HBO Max offerings are subscription-based streaming products and are among many such services in a crowded and competitive landscape. Their success will also be largely dependent on our ability to initially attract, and ultimately retain, subscribers. Competitors to discovery+ and HBO Max include traditional linear programming networks, including our own linear channels, competing subscription video-on-demand services, and other digital entertainment platforms and offerings all vying for consumer time, attention and discretionary spending. If we are unable to adequately mitigate these costs.
Aseffectively market our DTC products or if consumers do not perceive the pricing and related features of December 31, 2021, two of the multiemployer plans in which the WarnerMedia Business participates were underfunded, but neither plan was consideredour DTC products to be of value versus our competitors, we may not be able to attract and retain subscribers. In particular, decreases in endangered, seriously endangeredconsumer discretionary spending where our DTC products are offered may reduce our ability to attract and retain subscribers to our services, which could have a negative impact on our business. Relatedly, a decrease in viewing subscribers on our advertising-supported DTC products could also have a negative impact on the rates we are able to charge advertisers for advertising-supported services. The ability to attract and retain subscribers will also depend in part on our ability to provide compelling content choices that are differentiated from that of our competitors and that are more attractive than other sources of entertainment that consumers could choose in their free time. Furthermore, our ability to provide a quality subscriber experience and our relative service levels, may also impact our ability to attract and retain subscribers. If existing subscribers, including those who receive subscriptions through wireless and broadband bundling arrangements with third parties, cancel or critical status. The amountdiscontinue their subscriptions for any reason, including as a result of fundsselecting an alternative wireless or broadband plan that does not bundle our products, or due to the Companyavailability of competing offerings that are perceived to offer greater value compared to our DTC products, our business may be obligatedadversely affected. We must continue to contributeadd new subscribers both to multiemployer plans inreplace subscribers who cancel or discontinue their subscriptions and to grow our business. If we are unable to attract and retain subscribers and offset the future cannot be estimated, as these amounts are based on future levelslosses of work of the union-represented employees covered by the multiemployer plans, investment returns and the funding status of such plans. The WarnerMedia Business does not currently intendsubscribers who cancel or discontinue their subscriptions to withdraw from the multiemployer plans in which it participates, and it is not aware of circumstances that would reasonably lead to material claims against the Company in connection with the multiemployer plans in which the Company will participate. There can be no assurance, however, that the Company will not be assessed liabilities in the future. Potential withdrawal liabilities, requirements to pay increased contributions, and/or surcharges in connection with any multiemployer plans in which the Company will participate could materially adversely affectour DTC products, our business, financial condition and results of operations.operations could be adversely affected.
Our businessesForecasting our financial results requires us to make judgements and estimates which may be subject to labor disruption.differ materially from actual results.
We and someGiven the dynamic nature of our suppliersbusiness, the current uncertain economic climate and business partners retain the services of writers, directors, actors, announcers, athletes, technicians, trade employees and others involvedinherent limitations in predicting the development and productionfuture, forecasts of our television programming, feature filmsrevenues, Adjusted EBITDA, free cash flow and interactive entertainment (e.g., games) who are covered by collective bargaining agreements. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the affected unions could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns, work stoppages or the possibility of such actions could result in delays in the production of our television programming, feature filmscore subscriber growth, and interactive entertainment. We could also incur higher costsother financial and operating data, may differ materially from such actions, enter into new collective bargaining agreements or renew collective bargaining agreements on less favorable terms. Many of the collective bargaining agreements that cover individuals providing services to the Company are industry-wide agreements, and we may lack practical control over the negotiations and terms of these agreements. Union or labor disputes or player lock-outs relating to certain professional sports leagues may preclude us from producing and telecasting scheduled games or events and could negatively impact our promotional and marketing opportunities. Depending on their duration, union or labor disputes or player lock-outs could have a material adverse effect on our business, financial condition andactual results, of operations.
Risk Related to COVID-19
The COVID-19 pandemic has caused substantial disruption in theatrical and television production, financial markets and economies worldwide, which could result in adverse effects on the market price of our common stock and our business, operations and ability to raise capital.
The COVID-19 pandemic has negatively impacted the global economy and continues to create significant volatility and disruption in the credit and financial markets, and while some economic disruption may ease from time to time, such disruption is expected to continue and may worsen for an undetermined period of time. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of the global economic disruption caused by COVID-19; however, a prolonged disruption, slowdown or recession could materially adversely affect the market price of our common stock and our credit ratings, ability to access capital on favorable terms and ability to meet its liquidity needs and could have a material adverse effect on our business, financial condition and results of operations.
The Discovery Business and the WarnerMedia Business, as with other businesses globally, have been significantly affected by the COVID-19 pandemic both domestically and internationally, including as a result of governmentally imposed shutdowns, workforce realignments, labor and supply chain interruptions, and quarantines and travel restrictions, among other factors. Certain key sourcesevents outside of revenue for the WarnerMedia Business, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks. Shutdowns and/or restrictions relating to television and theatrical production activity have impacted, and may continue to impact, various aspects of project scheduling, completion and budgets, as well as revenue streams tied to projected release or availability dates. All such impacts may continue for an indefinite length of time.
Our actions to limit the adverse effects of COVID-19 on our financial condition may not be successful, as the extent and duration of the adverse effects of the pandemic are not determinable and depend on future developments, which are highly uncertain and cannot be predicted. Events resulting from the effects of COVID-19 may negatively impact our ability to comply with its financial covenants. Also, additional funding may not be available to us on acceptable terms or at all. If adequate funding is not available, we may be required to reduce expenditures, including curtailing our growth strategies and reducing our product development efforts, or forego acquisition opportunities.
Risks Related to Domestic and Foreign Laws and Regulations and Other Risks Related to International Operations
Changes in domestic and foreign laws and regulationscontrol and other risks related to international operationsand uncertainties described herein. Such discrepancies could adversely impact our business, financial condition and results of operations.
Programming services like the Discovery Business and the WarnerMedia Business, and the distributors of our services, including cable operators, satellite operators and other multi-channel video programming distributors, are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the Federal Communications Commission (the “FCC”), as well as by state and local governments, in ways that will affect the daily conduct of our video content business. These obligations and regulations, among other things, require closed captioning of programming for the hearing impaired, require certain content providers to make available audio descriptions of programming for the visually impaired, limit the amount and content of commercial matter that may be shown during programming aimed primarily at an audience of children aged 12 and under, and require the identification of (or the maintenance of lists of) sponsors of political advertising. The U.S. Congress, the FCC and the courts currently have under consideration, and may adopt or interpretcause a decline 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 the Discovery Business and the WarnerMedia Business networks are offered have, in varying degrees, laws and regulations that govern our business. The Discovery Business and the WarnerMedia Business have operations through which we offer for sale and distribute programming and other goods and services outside of the United States. As a result, our business will be 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;
•local regulatory requirements (and any changes to such requirements), including restrictions on content, censorship, imposition of local content quotas, local production levies and restrictions or prohibitions on foreign ownership, outsourcing, consumer protection, intellectual property and related rights, including copyright and rightsholder rights and remuneration;
•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 and central banking controls;
•the instability of foreign economies and governments;
•the potential for political, social, or economic unrest, terrorism, hostilities, cyber-attacks or war, including the conflict between Russia and Ukraine;
•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;
•sanction laws and regulations such as those administered by the Office of Foreign Assets Control that restrict our dealings with certain sanctioned countries, territories, individuals and entities; these laws and regulations are complex, frequently changing, and increasing in number, and may impose additional prohibitions or compliance obligations on our dealings in certain countries and territories, including sanctions imposed on Russia and certain Ukrainian territories;
•foreign privacy and data protection laws and regulations 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 and results of operations. Acts of terrorism, hostilities, imposition of sanctions or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could materially adversely affect our results of operations. Furthermore, some foreign markets where the Discovery Business, the WarnerMedia Business and our partners operate may be more adversely affected by current economic conditions than the United States. We also may incur substantial expense as a result of changes, including the imposition of new restrictions, in the existing regulatory, economic or political environment in the regions where we do business.
This is of particular concern in Poland, where we own and operate TVN, a portfolio of free-to-air and pay-TV lifestyle, entertainment, and news networks. On December 17, 2021, a proposed amendment to the Polish Broadcasting Act commonly referred to as “LEX TVN” was presented to the lower chamber of the Polish Parliament (the “Sejm”) for consideration and was subsequently passed by the Sejm. LEX TVN would prohibit the granting of licenses for television and radio broadcasting channels in Poland, such as the TVN portfolio of channels, to broadcasters with more than 49% of their share capital directly or indirectly controlled by an entity with a registered seat outside of the European Economic Area, essentially precluding non-European Economic Area ownership of media entities in Poland. LEX TVN was presented to the President of Poland for consideration and, on December 27, 2021, the President of Poland vetoed LEX TVN. In the future, if legislation similar to LEX TVN is enacted, it could, directly or indirectly, affect the future operations of our Polish media properties and/or modify the terms under which we offer our services and operate in that market in the future.
The evolving regulatory environment in international markets may also impact strategy, costs and results of operations, including with respect to local programming investment obligations, satisfaction of local content quotas, access to local production incentive schemes, such as film subsidies, and direct and indirect digital taxes or levies on internet-based programming services.
Risks Related to Corporate Structure
We have directors in common with those of Liberty Media Corporation (“Liberty Media”), Liberty Global plc (“Liberty Global”), Qurate Retail Group f/k/a Liberty Interactive Corporation (“Qurate Retail”), Liberty Broadband Corporation ("Liberty Broadband"), Liberty Latin America Ltd ("LLA") and Liberty Media Acquisition Corp (“LMAC”), which may result in the diversion of business opportunities or other potential conflicts.
Liberty Media, Liberty Global, Qurate Retail, Liberty Broadband and LLA (together, the "Liberty Entities") own interests in various U.S. and international companies, such as Charter Communications, Inc. ("Charter"), that have subsidiaries that own or operate domestic or foreign content services that may compete with the content services we offer. We have no rights in respect of U.S. or international content opportunities developed by or presented to the subsidiaries of any Liberty Entities, and the pursuit of these opportunities by such subsidiaries may adversely affect our interests and those of our stockholders. Because we and the Liberty Entities have overlapping directors, the pursuit of business opportunities may serve to intensify the conflicts of interest or appearance of conflicts of interest faced by the respective management teams. Our charter provides that none of our directors or officers will be liable to us or any of our subsidiaries for breach of any fiduciary duty by reason of the fact that such individual directs a corporate opportunity to another person or entity (including any Liberty Entities), for which such individual serves as a director or officer, or does not refer or communicate information regarding such corporate opportunity to us or any of our subsidiaries, unless (a) such opportunity was expressly offered to such individual solely in his or her capacity as a director or officer of us or any of our subsidiaries and (b) such opportunity relates to a line of business in which we or any of our subsidiaries is then directly engaged.
We have directors that are also related persons of Advance/Newhouse and that overlap with those of the Liberty Entities, which may lead to conflicting interests for those tasked with the fiduciary duties of our board.
Following the Merger, Advance/Newhouse owns shares representing approximately 8% of our outstanding common stock.
Our thirteen-person board of directors includes Steven A. Miron, the Chief Executive Officer of Advance/Newhouse Programming Partnership (“Advance/Newhouse”) and Steven O. Newhouse, Co-President of Advance Publications, Inc., which holds interests in Advance/Newhouse and Charter. Pursuant to a consent agreement entered into between Advance/Newhouse and the Company in connection with the Merger, the Company designated Mr. Miron and Mr. Newhouse to our board of directors with terms ending on the third annual meeting following the Merger. In addition, our board of directors includes two persons who are currently members of the board of directors of Liberty Media, two persons who are currently members of the board of directors of Liberty Global, one person who is currently a member of the board of directors of Qurate Retail, one person who is currently a member of the board of directors of Liberty Broadband, one person who is currently a member of the board of directors of Charter, of which Liberty Broadband owns an equity interest, one person who is currently a member of the board of directors of LLA, and one person who is currently a member of the board of directors of LMAC. John C. Malone is the Chairman of the boards of all of the Liberty Entities other than LLA and Qurate Retail. The parent company of Advance/Newhouse and the Liberty Entities own interests in a range of media, communications and entertainment businesses.
None of the Liberty Entities own any interest in us. Mr. Malone beneficially owns: shares of Liberty Media representing approximately 48% of the aggregate voting power of its outstanding stock, shares representing approximately 30% of the aggregate voting power of Liberty Global, shares representing approximately 6% of the aggregate voting power of Qurate Retail, shares representing approximately 49% of the aggregate voting power of Liberty Broadband and, following the Merger, shares representing less than 1% of our outstanding common stock. Our directors who are also directors of the Liberty Entities hold stock and stock-based compensation in the Liberty Entities and hold our stock and stock-based compensation.
These ownership interests and/or business positions could create, or appear to create, potential conflicts of interest when these individuals are faced with decisions that could have different implications for us, Advance/Newhouse and/or the Liberty Entities. For example, there may be the potential for a conflict of interest when we, on the one hand, or Advance/Newhouse and/or one or more of the Liberty Entities, on the other hand, consider acquisitions and other corporate opportunities that may be suitable for the other.
The members of our board of directors have fiduciary duties to us and our stockholders. Likewise, those persons who serve in similar capacities at Advance/Newhouse or a Liberty Entity have fiduciary duties to those companies. Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting both respective companies, and there can be no assurance that the terms of any transactions will be as favorable to us or our subsidiaries as would be the case in the absence of a conflict of interest.
It may be difficult for a third party to acquire us, even if such acquisition would be beneficial to our stockholders.
Certain provisions of our charter and bylaws may discourage, delay or prevent a change in control that a stockholder may consider favorable. These provisions include the following:
•authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt;
•classifying our Board of Directors with staggered three-year terms until the election of directors at our 2025 annual meeting of stockholders, which may lengthen the time required to gain control of our Board of Directors;
•limiting who may call special meetings of stockholders;
•prohibiting stockholder action by written consent (subject to certain exceptions), thereby requiring stockholder action to be taken at a meeting of the stockholders;
•establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
•the existence of authorized and unissued stock which would allow our Board of Directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.
In addition, under our charter, we have not opted out of the protections of Section 203 of the Delaware General Corporation Law, and we are therefore governed by Section 203. Accordingly, it is expected that Section 203 will have an anti-takeover effect with respect to transactions that the Board does not approve in advance and that Section 203 may discourage takeover attempts that might result in a premium over the market price of WBD capital stock.
If Advance/Newhouse were to sell its shares following the exercise of its registration rights, it may cause a significant decline in our stock price, even if our business is doing well.
Advance/Newhouse and Advance Newhouse Partnership (“ANP”) have been granted registration rights covering all of the shares of common stock now held or hereafter acquired by them. The registration rights, which are immediately exercisable subject to certain customary “blackout periods”, are transferable with the sale or transfer by them to their affiliates and successors, as well as a specified family foundation. The registration rights have been partially exercised, and this exercise or any other exercise of the registration rights, and subsequent sale of possibly large amounts of our common stock in the public market, could materially and adversely affect the markettrading price of our common stock.
ITEM 5. Other Information
Aircraft Time Sharing Agreement
On August 1, 2022, Warner Media LLC (“Warner”), a wholly owned subsidiary of the Company, entered into an aircraft time sharing agreement for the use of Warner’s aircrafts (the “Aircraft Time Sharing Agreement”) with David Zaslav, the Company’s President and Chief Executive Officer.
Under the Aircraft Time Sharing Agreement and in accordance with Mr. Zaslav’s amended and restated employment agreement, dated as of May 16, 2021 (as amended, the “Employment Agreement”), Mr. Zaslav is entitled to use the Company’s aircrafts for up to 250 hours of personal use per year, which includes Mr. Zaslav’s spouse traveling separately on the aircraft if such travel is to join Mr. Zaslav at a location where he has travelled for business purposes. The Company shall pay for the first 125 hours of personal use and Mr. Zaslav shall reimburse the Company for personal use in excess of 125 hours. Under the Aircraft Time Sharing Agreement, the reimbursement rate is two times the actual fuel cost for the airplane, in accordance with FAA-permitted reimbursement methods.
Amendment No. 2 to DCL Revolving Credit Agreement
On August 2, 2022, DCL, the Company, Scripps Networks, WMH, certain lenders party thereto and Bank of America, N.A., as administrative agent, entered into the second amendment to the DCL Revolving Credit Agreement (“Amendment No. 2 to Revolver”) to amend the definition of “Consolidated EBITDA” to add back certain cash restructuring costs, charges or expenses subject to a cap equal to 15% of Consolidated EBITDA (prior to giving effect to such add-back).
The foregoing description of Amendment No. 2 to Revolver does not purport to be complete and is qualified in its entirety by reference to Amendment No. 2 to Revolver, a copy of which is attached hereto as Exhibit 10.6 and incorporated by reference herein.
Amendment No. 1 to WMH Term Loan Credit Agreement
On August 2, 2022, WMH, the Company, Scripps Networks, DCL, certain lenders party thereto and JP Morgan Chase Bank, N.A., as administrative agent, entered into the first amendment to the WMH Term Loan Credit Agreement (“Amendment No. 1 to Term Loan”) to amend the definition of “Consolidated EBITDA” to add back certain cash restructuring costs, charges or expenses subject to a cap equal to 15% of Consolidated EBITDA (prior to giving effect to such add-back).
The foregoing description of Amendment No. 1 to Term Loan does not purport to be complete and is qualified in its entirety by reference to Amendment No. 1 to Term Loan, a copy of which is attached hereto as Exhibit 10.7 and incorporated by reference herein.
JB Perrette Employment Agreement
On August 2, 2022, Discovery Communications, LLC, a wholly owned subsidiary of the Company, entered into an employment agreement with JB Perrette, our President and CEO, Global Streaming and Games (the “Perrette Agreement”).
Pursuant to the Perrette Agreement, Mr. Perrette will continue to serve as our President and CEO, Global Streaming and Games. The term of the Perrette Agreement is effective as of August 2, 2022 and runs through August 1, 2025. The parties may agree to renew the Perrette Agreement at the end of the term. If we desire to renew the Perrette Agreement, Mr. Perrette must be notified to that effect, in writing, no later than 150 days prior to the end of the term of the Perrette Agreement. If a “qualifying renewal offer” (as described below) is not made to Mr. Perrette, Mr. Perrette will be eligible for severance payments in connection with his termination.
For purposes of the Perrette Agreement, a “qualifying renewal offer” is an offer to renew the term of the Perrette Agreement with a meaningful increase in base salary and a bonus target that is at least the same level as in effect under the Perrette Agreement at the end of his term, and with other material terms that are at least as favorable to Mr. Perrette in the aggregate as the material terms of the Perrette Agreement.
Under the Perrette Agreement, Mr. Perrette’s base salary was increased from £1.525 million per annum to $2.5 million per annum, effective as of April 8, 2022 (the same day as the closing of the Merger (the “Closing”). Future salary increases will be reviewed and decided in accordance with the Company’s standard practices and procedures for similarly situated executives. Mr. Perrette’s target annual bonus was increased from 175% of his base salary to 200% of his base salary, effective as of the Closing. There is no guaranteed annual bonus amount. Mr. Perrette is also entitled to certain tax-related benefits related to his relocation from the United Kingdom to Los Angeles, California. In addition, two times per year, Mr. Perrette will be permitted to be accompanied by his family on the Company’s corporate airplane in connection with Mr. Perrette’s business duties in Europe.
Mr. Perrette will also be considered for annual equity grants under the Warner Bros. Discovery, Inc. Stock Incentive Plan (the “Plan”) in accordance with our normal executive compensation processes and practices. Beginning in 2023, and subject to approval from our Compensation Committee, such annual equity grants will have a target grant date value of $8.5 million per annum. Mr. Perrette will also be granted a one-time award of 146,736 restricted stock units (“RSUs”) under the Plan. This one-time award of RSUs shall vest in three equal annual installments, with the first installment vesting on August 2, 2023. The award documents that evidence equity awards made to Mr. Perrette pursuant to the Perrette Agreement shall provide for double-trigger vesting upon an Approved Transaction, Board Change or Control Purchase (each as defined in the Plan). The terms of the equity awards granted to Mr. Perrette under the Perrette Agreement will otherwise be consistent with our normal executive compensation processes and practices, with vesting subject to continued employment, and other terms and conditions, as well as approval of our Compensation Committee in each case.
Mr. Perrette’s employment may be terminated for “cause.” “Cause” for purposes of the Perrette Agreement means: (i) the conviction of, or nolo contendere or guilty plea, to a felony (whether any right to appeal has been or may be exercised); (ii) conduct constituting embezzlement, misappropriation or fraud, whether or not related to Mr. Perrette’s employment with us; (iii) conduct constituting a financial crime, material act of dishonesty or conduct in material violation of our Code of Ethics or other of our written policies of which Mr. Perrette has knowledge; (iv) improper conduct substantially prejudicial to our business (whether financial or otherwise); (v) willful unauthorized disclosure or use of our confidential information; (vi) material improper destruction of our property; or (vii) willful misconduct in connection with the performance of Mr. Perrette’s duties. If Mr. Perrette’s employment is terminated for “cause,” he will be entitled to receive only amounts or benefits that have been earned or vested at the time of his termination, or as may be required by applicable law.
If Mr. Perrettes’s employment is terminated without “cause” (as defined above) or by Mr. Perrette for “good reason”, Mr. Perrette will be eligible to receive the following severance payments: (a) base salary for the longest of (i) the balance of the term of employment under the Perrette Agreement, (ii) twelve (12) months, or (iii) the number of weeks of severance Mr. Perrette would otherwise have been entitled to under our severance plan, in each case subject to a maximum of twenty-four (24) months; (b) annual bonus payments at target under our annual incentive plan for each year in which Mr. Perrette is entitled to base salary continuation under clause (a) above (subject to proration for partial years); and (c) reimbursement of up to eighteen (18) months of COBRA premiums. In certain circumstances in which Mr. Perrette is relieved of all work responsibilities for some period of time prior to the effective date of his termination of employment, salary paid during this period of “garden leave” will be offset against the severance amounts otherwise payable to Mr. Perrette. “Good reason” under the Perrette Agreement means: (a) a material reduction in Mr. Perrette’s duties or responsibilities; (b) a material change in the location of the office where Mr. Perrette works (i.e., relocation outside the Los Angeles, CA metropolitan area); or (c) a material breach of the Perrette Agreement by us, including a diminution of Mr. Perrette’s title or change in the position to which Mr. Perrette reports. These severance amounts are contingent on Mr. Perrette executing a release of claims. Additionally, if Mr. Perrette secures employment or any consulting, contractor or other business arrangement for services during the period during which he is receiving severance payments, the severance payments he is receiving may be reduced by the amounts otherwise payable under the Perrette Agreement by the amount Mr. Perrette receives for those services.
The Perrette Agreement also contains certain nonsolicitation covenants effective during Mr. Perrette’s employment and for a period of twelve (12) months after the conclusion of Mr. Perrette’s employment. If Mr. Perrette ceases to comply with the nonsolicitation clauses in the Perrette Agreement, any unpaid severance payments would be terminated.
ITEM 6. Exhibits. | | | | | | | | | | | |
Exhibit No. | | Description | |
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2.1 | | Amendment No. 2 to Agreement and Plan of Merger, dated as of April 8, 2022, by and among Warner Bros. Discovery, Inc. (f/k/a Discovery, Inc.), AT&T Inc., WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc.) and Drake Subsidiary, Inc. (filed herewith). | |
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2.2 | | Letter Agreement, dated as of March 29, 2022, by and among Warner Bros. Discovery, Inc. (f/k/a Discovery, Inc.), AT&T Inc., WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc.) and Drake Subsidiary, Inc. (filed herewith). | |
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2.3 | | Letter Agreement, dated as of April 8, 2022, by and among Warner Bros. Discovery, Inc. (f/k/a Discovery, Inc.), AT&T Inc., WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc.) and Drake Subsidiary, Inc. (filed herewith). | |
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2.4 | | | |
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3.1 | | | |
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3.2 | | | |
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4.1 | | Twentieth Supplemental Indenture, dated as of April 8, 2022, by and among Discovery Communications, LLC, Warner Bros. Discovery, Inc., WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc.) and U.S. Bank Trust Company, National Association, as trustee (incorporated by reference to Exhibit 4.1 on Warner Bros. Discovery, Inc. Current Report on Form 8-K filed on April 12, 2022).** | |
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4.2 | | Twenty-First Supplemental Indenture, dated as of April 8, 2022, by and among Discovery Communications, LLC, Warner Bros. Discovery, Inc., WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc.) and U.S. Bank Trust Company, National Association, as trustee (incorporated by reference to Exhibit 4.2 on Warner Bros. Discovery, Inc. Current Report on Form 8-K filed on April 12, 2022). | |
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4.3 | | Indenture, dated as of March 15, 2022, by and among WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc.), AT&T Inc. and U.S. Bank Trust Company, National Association, as Trustee (incorporated by reference to Exhibit 4.3 on Warner Bros. Discovery, Inc. Current Report on Form 8-K filed on April 12, 2022). | |
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4.4 | | First Supplemental Indenture, dated as of April 8, 2022, by and among WarnerMedia Holdings, Inc. (f/k/aMagallanes, Inc.), Warner Bros. Discovery, Inc., Discovery Communications, LLC, Scripps Networks Interactive, Inc., and U.S. Bank Trust Company, National Association, as Trustee (incorporated by reference to Exhibit 4.4 on Warner Bros. Discovery, Inc. Current Report on Form 8-K filed on April 12, 2022). | |
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4.5 | | | |
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4.6 | | | |
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4.7 | | | |
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4.8 | | | |
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10.1 | | | |
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10.2 | | | |
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10.3 | | Credit Agreement, dated as of June 4, 2021, by and among WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc., the lenders named therein and JPMorgan Chase Bank, N.A., as agent (incorporated by reference to Exhibit 10.3 on Warner Bros. Discovery, Inc. Current Report on Form 8-K filed on April 12, 2022). | |
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10.4 | | Joinder Agreement, dated as of April 8, 2022, by and between Warner Bros. Discovery, Inc. (f/k/a Discovery, Inc.), Discovery Communications, LLC, Scripps Networks Interactive, Inc. and JPMorgan Chase Bank, N.A., as agent (filed herewith). | |
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10.5 | | |
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10.110.6 | | Amendment No. 2 to Credit Agreement, dated as of August 2, 2022, by and among Discovery Communications, LLC, Supplemental Deferred Compensation Plan, amendedWarner Bros. Discovery, Inc., Scripps Networks Interactive, Inc., WarnerMedia Holdings, Inc., certain lenders party thereto and restatedBank of America, N.A., as administrative agent (filed herewith). | |
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10.7 | | Amendment No. 1 to Credit Agreement, dated as of March 11,August 2, 2022, by and among WarnerMedia Holdings, Inc., Warner Bros. Discovery, Inc., Discovery Communications, LLC, Scripps Networks Interactive, Inc., certain lenders party thereto and JPMorgan Chase Bank, N.A., as agent (filed herewith).* | |
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10.210.8 | | | |
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10.310.9 | | | |
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10.10 | | | |
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10.11 | | | |
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10.12 | | | |
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10.13 | | | |
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10.14 | | Second Amended and Restated Receivables Purchase Agreement, dated as of April 7, 2022, by and among Warner Bros. Discovery Receivables Funding, LLC (f/k/a AT&T Receivables Funding II, LLC), the persons from time to time party thereto, PNC Bank, National Association, Turner Broadcasting System, Inc. and PNC Capital Markets LLC (incorporated by reference to Exhibit 10.5 on Warner Bros. Discovery, Inc. Current Report on Form 8-K filed on April 12, 2022).* | |
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10.24 | | | |
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10.25 | | | |
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22 | | | |
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31.1 | | | |
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101.INS | | XBRL Instance Document - 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) | |
*Exhibits, schedules and annexes have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be supplementally provided to the SEC upon request.
**Other instruments defining the rights of holders of long-term debt of the registrant and its consolidated subsidiaries may be omitted from Exhibit 4 in accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. Copies of any such agreements will be supplementally provided to the SEC upon request.
*** Indicates management contract or compensatory plan, contract or arrangement.
†Certain provisions of this exhibit have been omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K and will be supplementally provided to the SEC upon request.
♦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 March 31,June 30, 2022 and December 31, 2021, (ii) Consolidated Statements of Operations for the three and six months ended March 31,June 30, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended March 31,June 30, 2022 and 2021, (iv) Consolidated Statements of Cash Flows for the threesix months ended March 31,June 30, 2022 and 2021, (v) Consolidated Statement of Equity for the three and six months ended March 31,June 30, 2022 and 2021, 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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| | | | WARNER BROS. DISCOVERY, INC. (Registrant) |
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Date: April 26,August 4, 2022 | | | | By: | | /s/ David M. Zaslav |
| | | | | | David M. Zaslav |
| | | | | | President and Chief Executive Officer |
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Date: April 26,August 4, 2022 | | | | By: | | /s/ Gunnar Wiedenfels |
| | | | | | Gunnar Wiedenfels |
| | | | | | Chief Financial Officer |