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 June 30, 20222023
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)
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“emerging growth company"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 July 21, 2022:2023:
| | | | | |
Series A Common Stock, par value $0.01 per share | 2,427,592,8612,437,384,400 | |
WARNER BROS. DISCOVERY, INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
WARNER BROS. DISCOVERY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in millions, except per share amounts) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Advertising | $ | 2,721 | | | $ | 1,634 | | | $ | 4,197 | | | $ | 3,043 | |
Distribution | 4,838 | | | 1,312 | | | 6,190 | | | 2,570 | |
Content | 2,064 | | | 100 | | | 2,387 | | | 212 | |
Other | 204 | | | 16 | | | 212 | | | 29 | |
Total revenues | 9,827 | | | 3,062 | | | 12,986 | | | 5,854 | |
Costs and expenses: | | | | | | | |
Costs of revenues, excluding depreciation and amortization | 6,625 | | | 1,055 | | | 7,861 | | | 2,024 | |
Selling, general and administrative | 3,538 | | | 952 | | | 4,578 | | | 2,003 | |
Depreciation and amortization | 2,266 | | | 341 | | | 2,791 | | | 702 | |
| | | | | | | |
Restructuring and other charges | 1,033 | | | 7 | | | 1,038 | | | 22 | |
Loss (gain) on disposition | 4 | | | (72) | | | 4 | | | (72) | |
Total costs and expenses | 13,466 | | | 2,283 | | | 16,272 | | | 4,679 | |
Operating (loss) income | (3,639) | | | 779 | | | (3,286) | | | 1,175 | |
Interest expense, net | (511) | | | (157) | | | (664) | | | (320) | |
| | | | | | | |
Loss from equity investees, net | (43) | | | (7) | | | (57) | | | (11) | |
Other (expense) income, net | (51) | | | 105 | | | 439 | | | 173 | |
(Loss) income before income taxes | (4,244) | | | 720 | | | (3,568) | | | 1,017 | |
Income tax benefit (expense) | 836 | | | (2) | | | 635 | | | (108) | |
Net (loss) income | (3,408) | | | 718 | | | (2,933) | | | 909 | |
Net income attributable to noncontrolling interests | (7) | | | (38) | | | (23) | | | (84) | |
Net income attributable to redeemable noncontrolling interests | (3) | | | (8) | | | (6) | | | (13) | |
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: | | | | | | | |
Basic | $ | (1.50) | | | $ | 1.02 | | | $ | (2.09) | | | $ | 1.23 | |
Diluted | $ | (1.50) | | | $ | 1.01 | | | $ | (2.09) | | | $ | 1.22 | |
Weighted average shares outstanding: | | | | | | | |
Basic | 2,286 | | | 589 | | | 1,443 | | | 587 | |
Diluted | 2,286 | | | 664 | | | 1,443 | | | 666 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Revenues: | | | | | | | |
Distribution | $ | 5,135 | | | $ | 4,838 | | | $ | 10,298 | | | $ | 6,190 | |
Advertising | 2,519 | | | 2,721 | | | 4,817 | | | 4,197 | |
Content | 2,446 | | | 2,064 | | | 5,400 | | | 2,387 | |
Other | 258 | | | 204 | | | 543 | | | 212 | |
Total revenues | 10,358 | | | 9,827 | | | 21,058 | | | 12,986 | |
Costs and expenses: | | | | | | | |
Costs of revenues, excluding depreciation and amortization | 6,636 | | | 6,625 | | | 13,321 | | | 7,861 | |
Selling, general and administrative | 2,562 | | | 3,538 | | | 4,950 | | | 4,578 | |
Depreciation and amortization | 1,914 | | | 2,266 | | | 3,972 | | | 2,791 | |
Restructuring | 146 | | | 1,033 | | | 241 | | | 1,038 | |
Impairments and loss on dispositions | 6 | | | 4 | | | 37 | | | 4 | |
| | | | | | | |
| | | | | | | |
Total costs and expenses | 11,264 | | | 13,466 | | | 22,521 | | | 16,272 | |
Operating loss | (906) | | | (3,639) | | | (1,463) | | | (3,286) | |
Interest expense, net | (574) | | | (511) | | | (1,145) | | | (664) | |
Loss on extinguishment of debt | (5) | | | — | | | (5) | | | — | |
Loss from equity investees, net | (22) | | | (43) | | | (59) | | | (57) | |
Other income (expense), net | 27 | | | (51) | | | (46) | | | 439 | |
Loss before income taxes | (1,480) | | | (4,244) | | | (2,718) | | | (3,568) | |
Income tax benefit | 260 | | | 836 | | | 438 | | | 635 | |
Net loss | (1,220) | | | (3,408) | | | (2,280) | | | (2,933) | |
Net income attributable to noncontrolling interests | (16) | | | (7) | | | (24) | | | (23) | |
Net income attributable to redeemable noncontrolling interests | (4) | | | (3) | | | (5) | | | (6) | |
Net loss available to Warner Bros. Discovery, Inc. | $ | (1,240) | | | $ | (3,418) | | | $ | (2,309) | | | $ | (2,962) | |
Net loss per share allocated to Warner Bros. Discovery, Inc. Series A common stockholders: | | | | | | | |
Basic | $ | (0.51) | | | $ | (1.50) | | | $ | (0.95) | | | $ | (2.09) | |
Diluted | $ | (0.51) | | | $ | (1.50) | | | $ | (0.95) | | | $ | (2.09) | |
Weighted average shares outstanding: | | | | | | | |
Basic | 2,437 | | | 2,286 | | | 2,434 | | | 1,443 | |
Diluted | 2,437 | | | 2,286 | | | 2,434 | | | 1,443 | |
| | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(unaudited; in millions)
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Net (loss) income | | $ | (3,408) | | | $ | 718 | | | $ | (2,933) | | | $ | 909 | | |
Other comprehensive (loss) income adjustments, net of tax: | | |
Net loss | | Net loss | | $ | (1,220) | | | $ | (3,408) | | | $ | (2,280) | | | $ | (2,933) | |
Other comprehensive income (loss): | | Other comprehensive income (loss): | |
Currency translation | Currency translation | | (488) | | | 108 | | | (587) | | | (59) | | Currency translation | |
| Change in net unrealized gains (losses) | | Change in net unrealized gains (losses) | | 60 | | | (488) | | | 486 | | | (585) | |
Less: reclassification adjustment for net (gains) losses included in net income | | Less: reclassification adjustment for net (gains) losses included in net income | | — | | | — | | | — | | | (2) | |
Net change, net of income tax benefit (expense) of $(5), $(25), $(10) and $(39) | | Net change, net of income tax benefit (expense) of $(5), $(25), $(10) and $(39) | | 60 | | | (488) | | | 486 | | | (587) | |
Pension plan and SERP liability, net of income tax benefit (expense) of $(3), $—, $(6) and $— | | Pension plan and SERP liability, net of income tax benefit (expense) of $(3), $—, $(6) and $— | | (4) | | | — | | | (13) | | | — | |
Derivatives | Derivatives | | (18) | | | (112) | | | (36) | | | 125 | | Derivatives | |
Comprehensive (loss) income | | (3,914) | | | 714 | | | (3,556) | | | 975 | | |
| Change in net unrealized gains (losses) | | Change in net unrealized gains (losses) | | 11 | | | (7) | | | 14 | | | (19) | |
Less: reclassification adjustment for net (gains) losses included in net income | | Less: reclassification adjustment for net (gains) losses included in net income | | (4) | | | (11) | | | (6) | | | (17) | |
Net change, net of income tax benefit (expense) of $(6), $4, $(4) and $5 | | Net change, net of income tax benefit (expense) of $(6), $4, $(4) and $5 | | 7 | | | (18) | | | 8 | | | (36) | |
Comprehensive loss | | Comprehensive loss | | (1,157) | | | (3,914) | | | (1,799) | | | (3,556) | |
Comprehensive income attributable to noncontrolling interests | Comprehensive income attributable to noncontrolling interests | | (7) | | | (38) | | | (23) | | | (84) | | Comprehensive income attributable to noncontrolling interests | | (16) | | | (7) | | | (24) | | | (23) | |
Comprehensive income attributable to redeemable noncontrolling interests | Comprehensive income attributable to redeemable noncontrolling interests | | (3) | | | (8) | | | (6) | | | (13) | | Comprehensive income attributable to redeemable noncontrolling interests | | (4) | | | (3) | | | (5) | | | (6) | |
Comprehensive (loss) income attributable to Warner Bros. Discovery, Inc. | | $ | (3,924) | | | $ | 668 | | | $ | (3,585) | | | $ | 878 | | |
Comprehensive loss attributable to Warner Bros. Discovery, Inc. | | Comprehensive loss attributable to Warner Bros. Discovery, Inc. | | $ | (1,177) | | | $ | (3,924) | | | $ | (1,828) | | | $ | (3,585) | |
| 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.
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
| | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
ASSETS | ASSETS | | | | ASSETS | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 2,575 | | | $ | 3,905 | | Cash and cash equivalents | $ | 3,027 | | | $ | 3,731 | |
Receivables, net | Receivables, net | 7,049 | | | 2,446 | | Receivables, net | 6,770 | | | 6,380 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 5,825 | | | 913 | | Prepaid expenses and other current assets | 3,976 | | | 3,888 | |
Total current assets | Total current assets | 15,449 | | | 7,264 | | Total current assets | 13,773 | | | 13,999 | |
Film and television content rights and games, net | 30,120 | | | 3,832 | | |
Film and television content rights and games | | Film and television content rights and games | 24,393 | | | 26,652 | |
Property and equipment, net | Property and equipment, net | 5,597 | | | 1,336 | | Property and equipment, net | 5,473 | | | 5,301 | |
| Goodwill | Goodwill | 34,273 | | | 12,912 | | Goodwill | 34,911 | | | 34,438 | |
Intangible assets, net | Intangible assets, net | 48,724 | | | 6,317 | | Intangible assets, net | 41,584 | | | 44,982 | |
| Other noncurrent assets | Other noncurrent assets | 8,077 | | | 2,766 | | Other noncurrent assets | 8,484 | | | 8,629 | |
Total assets | Total assets | $ | 142,240 | | | $ | 34,427 | | Total assets | $ | 128,618 | | | $ | 134,001 | |
LIABILITIES AND EQUITY | LIABILITIES AND EQUITY | | | | LIABILITIES AND EQUITY | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | $ | 1,397 | | | $ | 412 | | Accounts payable | $ | 1,689 | | | $ | 1,454 | |
Accrued liabilities | Accrued liabilities | 10,279 | | | 2,230 | | Accrued liabilities | 10,668 | | | 11,504 | |
| Deferred revenues | Deferred revenues | 1,663 | | | 478 | | Deferred revenues | 1,548 | | | 1,694 | |
Current portion of debt | Current portion of debt | 1,097 | | | 339 | | Current portion of debt | 3,001 | | | 365 | |
Total current liabilities | Total current liabilities | 14,436 | | | 3,459 | | Total current liabilities | 16,906 | | | 15,017 | |
Noncurrent portion of debt | Noncurrent portion of debt | 51,388 | | | 14,420 | | Noncurrent portion of debt | 44,276 | | | 48,634 | |
Deferred income taxes | Deferred income taxes | 13,666 | | | 1,225 | | Deferred income taxes | 9,718 | | | 11,014 | |
Other noncurrent liabilities | Other noncurrent liabilities | 9,803 | | | 1,927 | | Other noncurrent liabilities | 10,933 | | | 10,669 | |
Total liabilities | Total liabilities | 89,293 | | | 21,031 | | Total liabilities | 81,833 | | | 85,334 | |
Commitments and contingencies (See Note 19) | 0 | | 0 | |
Commitments and contingencies (See Note 16) | | Commitments and contingencies (See Note 16) | |
Redeemable noncontrolling interests | Redeemable noncontrolling interests | 328 | | | 363 | | Redeemable noncontrolling interests | 306 | | | 318 | |
| Warner Bros. Discovery, Inc. stockholders’ equity: | Warner Bros. Discovery, Inc. stockholders’ equity: | | Warner Bros. Discovery, Inc. stockholders’ equity: | |
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 | — | | | — | | |
Series A common stock: $0.01 par value; 10,800 and 10,800 shares authorized; 2,667 and 2,660 shares issued; and 2,437 and 2,430 shares outstanding | | Series A common stock: $0.01 par value; 10,800 and 10,800 shares authorized; 2,667 and 2,660 shares issued; and 2,437 and 2,430 shares outstanding | 27 | | | 27 | |
Preferred stock: $0 par value; 1,200 and 1,200 shares authorized, 0 shares issued and outstanding | | Preferred stock: $0 par value; 1,200 and 1,200 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 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 | — | | | 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 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 | 54,439 | | | 11,086 | | Additional paid-in capital | 54,816 | | | 54,630 | |
Treasury stock, at cost: 230 and 230 shares | Treasury stock, at cost: 230 and 230 shares | (8,244) | | | (8,244) | | Treasury stock, at cost: 230 and 230 shares | (8,244) | | | (8,244) | |
Retained earnings | 6,614 | | | 9,580 | | |
(Accumulated deficit) retained earnings | | (Accumulated deficit) retained earnings | (105) | | | 2,205 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (1,453) | | | (830) | | Accumulated other comprehensive loss | (1,042) | | | (1,523) | |
Total Warner Bros. Discovery, Inc. stockholders' equity | 51,383 | | | 11,599 | | |
Total Warner Bros. Discovery, Inc. stockholders’ equity | | Total Warner Bros. Discovery, Inc. stockholders’ equity | 45,452 | | | 47,095 | |
Noncontrolling interests | Noncontrolling interests | 1,236 | | | 1,434 | | Noncontrolling interests | 1,027 | | | 1,254 | |
Total equity | Total equity | 52,619 | | | 13,033 | | Total equity | 46,479 | | | 48,349 | |
Total liabilities and equity | Total liabilities and equity | $ | 142,240 | | | $ | 34,427 | | Total liabilities and equity | $ | 128,618 | | | $ | 134,001 | |
| 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.
CONSOLIDATED STATEMENTSSTATEMENT OF CASH FLOWS
(unaudited; in millions)
| | | Six Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Operating Activities | Operating Activities | | | | Operating Activities | | | |
Net (loss) income | $ | (2,933) | | | $ | 909 | | |
Adjustments to reconcile net income to cash provided by operating activities: | | |
Net loss | | Net loss | $ | (2,280) | | | $ | (2,933) | |
Adjustments to reconcile net income to cash (used in) provided by operating activities: | | Adjustments to reconcile net income to cash (used in) provided by operating activities: | |
Content rights amortization and impairment | Content rights amortization and impairment | 6,591 | | | 1,516 | | Content rights amortization and impairment | 9,361 | | | 6,591 | |
Depreciation and amortization | Depreciation and amortization | 2,791 | | | 702 | | Depreciation and amortization | 3,972 | | | 2,791 | |
Deferred income taxes | Deferred income taxes | (915) | | | (242) | | Deferred income taxes | (1,426) | | | (915) | |
Preferred stock conversion premium | Preferred stock conversion premium | 789 | | | — | | Preferred stock conversion premium | — | | | 789 | |
Share-based compensation expense | Share-based compensation expense | 210 | | | 95 | | Share-based compensation expense | 248 | | | 210 | |
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 | 91 | | | 38 | | Equity in losses of equity method investee companies and cash distributions | 112 | | | 91 | |
Gain on sale of investments | Gain on sale of investments | (132) | | | (20) | | Gain on sale of investments | — | | | (132) | |
| Gain from derivative instruments, net | Gain from derivative instruments, net | (496) | | | — | | Gain from derivative instruments, net | (111) | | | (496) | |
Other, net | Other, net | 60 | | | (100) | | Other, net | 171 | | | 64 | |
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 | (444) | | | (141) | | Receivables, net | (433) | | | (444) | |
Film and television content rights, games and payables, net | Film and television content rights, games and payables, net | (4,653) | | | (1,701) | | Film and television content rights, games and payables, net | (7,656) | | | (4,653) | |
Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | 8 | | | 41 | | Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | (859) | | | 8 | |
Foreign currency, prepaid expenses and other assets, net | Foreign currency, prepaid expenses and other assets, net | 363 | | | 78 | | Foreign currency, prepaid expenses and other assets, net | 284 | | | 363 | |
Cash provided by operating activities | Cash provided by operating activities | 1,334 | | | 1,103 | | Cash provided by operating activities | 1,383 | | | 1,334 | |
Investing Activities | Investing Activities | | Investing Activities | |
Purchases of property and equipment | Purchases of property and equipment | (307) | | | (167) | | Purchases of property and equipment | (591) | | | (307) | |
Cash acquired from business acquisition | Cash acquired from business acquisition | 2,419 | | | — | | Cash acquired from business acquisition | — | | | 2,419 | |
Proceeds from sales and maturities of investments | Proceeds from sales and maturities of investments | 139 | | | 348 | | Proceeds from sales and maturities of investments | — | | | 139 | |
Investments in and advances to equity investments | Investments in and advances to equity investments | (109) | | | (105) | | Investments in and advances to equity investments | (45) | | | (109) | |
Proceeds from derivative instruments, net | Proceeds from derivative instruments, net | 720 | | | — | | Proceeds from derivative instruments, net | 23 | | | 720 | |
| Other investing activities, net | Other investing activities, net | 18 | | | 120 | | Other investing activities, net | 46 | | | 18 | |
Cash provided by investing activities | 2,880 | | | 196 | | |
Cash (used in) provided by investing activities | | Cash (used in) provided by investing activities | (567) | | | 2,880 | |
Financing Activities | Financing Activities | | Financing Activities | |
Principal repayments of term loans | Principal repayments of term loans | (3,500) | | | — | | Principal repayments of term loans | (2,600) | | | (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 | (660) | | | (327) | |
| Borrowings from debt, net of discount and issuance costs | | Borrowings from debt, net of discount and issuance costs | 1,500 | | | — | |
Distributions to noncontrolling interests and redeemable noncontrolling interests | Distributions to noncontrolling interests and redeemable noncontrolling interests | (264) | | | (213) | | Distributions to noncontrolling interests and redeemable noncontrolling interests | (269) | | | (264) | |
Purchase of redeemable noncontrolling interests | — | | | (31) | | |
| Borrowings under commercial paper program | 90 | | | — | | |
Repayments under commercial paper program | (90) | | | — | | |
Securitization receivables collected but not remitted | | Securitization receivables collected but not remitted | 405 | | | — | |
Borrowings under commercial paper program and revolving credit facility | | Borrowings under commercial paper program and revolving credit facility | 2,599 | | | 90 | |
Repayments under commercial paper program and revolving credit facility | | Repayments under commercial paper program and revolving credit facility | (2,602) | | | (90) | |
| Other financing activities, net | Other financing activities, net | (66) | | | 45 | | Other financing activities, net | (56) | | | (66) | |
Cash used in financing activities | Cash used in financing activities | (4,157) | | | (538) | | Cash used in financing activities | (1,683) | | | (4,157) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (66) | | | (49) | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | 14 | | | (66) | |
Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | (9) | | | 712 | | Net change in cash, cash equivalents, and restricted cash | (853) | | | (9) | |
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 | 3,930 | | | 3,905 | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | $ | 3,896 | | | $ | 2,834 | | Cash, cash equivalents, and restricted cash, end of period | $ | 3,077 | | | $ | 3,896 | |
| 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.
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
December 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | — | | | $ | — | | | $ | 11,086 | | | $ | (8,244) | | | $ | 9,580 | | | $ | (830) | | | $ | 11,599 | | | $ | 1,434 | | | $ | 13,033 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 456 | | | — | | | 456 | | | 16 | | | 472 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (117) | | | (117) | | | — | | | (117) | |
Share-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 53 | | | — | | | — | | | — | | | 53 | | | — | | | 53 | |
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Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | — | | | (38) | | | — | | | (38) | |
Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (192) | | | (192) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | 3 | | | — | | | — | | | — | | | 19 | | | — | | | — | | | — | | | 19 | | | — | | | 19 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | | | — | | | (3) | |
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March 31, 2022 | | 12 | | | $ | — | | | 739 | | | $ | 7 | | | — | | | $ | — | | | $ | 11,120 | | | $ | (8,244) | | | $ | 10,033 | | | $ | (947) | | | $ | 11,969 | | | $ | 1,258 | | | $ | 13,227 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net (loss) income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,418) | | | — | | | (3,418) | | | 7 | | | (3,411) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (506) | | | (506) | | | — | | | (506) | |
Share-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 143 | | | — | | | — | | | — | | | 143 | | | — | | | 143 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
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Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (31) | | | (31) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
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June 30, 2022 | | — | | | $ | — | | | — | | | $ | — | | | 2,658 | | | $ | 27 | | | $ | 54,439 | | | $ | (8,244) | | | $ | 6,614 | | | $ | (1,453) | | | $ | 51,383 | | | $ | 1,236 | | | $ | 52,619 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Warner Bros. Discovery, Inc. Common Stock | | Additional Paid-In Capital | | Treasury Stock | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Warner Bros. Discovery, Inc. Stockholders’ Equity | | Noncontrolling Interests | | Total Equity |
| | Shares | | Par Value | | | | | | | |
December 31, 2022 | | 2,660 | | | $ | 27 | | | $ | 54,630 | | | $ | (8,244) | | | $ | 2,205 | | | $ | (1,523) | | | $ | 47,095 | | | $ | 1,254 | | | $ | 48,349 | |
| | | | | | | | | | | | | | | | | | |
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Net loss available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | (1,069) | | | — | | | (1,069) | | | 8 | | | (1,061) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 418 | | | 418 | | | — | | | 418 | |
Share-based compensation | | — | | | — | | | 101 | | | — | | | — | | | — | | | 101 | | | — | | | 101 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Tax settlements associated with share-based plans | | — | | | — | | | (53) | | | — | | | — | | | — | | | (53) | | | — | | | (53) | |
Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (225) | | | (225) | |
Issuance of stock in connection with share-based plans | | 6 | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | | | — | | | (3) | |
Other adjustments to stockholders' equity | | — | | | — | | | (2) | | | — | | | — | | | — | | | (2) | | | — | | | (2) | |
March 31, 2023 | | 2,666 | | | $ | 27 | | | $ | 54,685 | | | $ | (8,244) | | | $ | 1,133 | | | $ | (1,105) | | | $ | 46,496 | | | $ | 1,037 | | | $ | 47,533 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Net loss available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | (1,240) | | | — | | | (1,240) | | | 16 | | | (1,224) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | 63 | | | 63 | | | — | | | 63 | |
Share-based compensation | | — | | | — | | | 130 | | | — | | | — | | | — | | | 130 | | | — | | | 130 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Tax settlements associated with share-based plans | | — | | | — | | | (7) | | | — | | | — | | | — | | | (7) | | | — | | | (7) | |
Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (26) | | | (26) | |
Issuance of stock in connection with share-based plans | | 1 | | | — | | | 8 | | | — | | | — | | | — | | | 8 | | | — | | | 8 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | 2 | | | — | | | 2 | | | — | | | 2 | |
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June 30, 2023 | | 2,667 | | | $ | 27 | | | $ | 54,816 | | | $ | (8,244) | | | $ | (105) | | | $ | (1,042) | | | $ | 45,452 | | | $ | 1,027 | | | $ | 46,479 | |
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The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | | | | | | |
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 | | — | | | — | | | — | | | — | | | — | | | — | | | 140 | | | — | | | 140 | | | 46 | | | 186 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 70 | | | 70 | | | — | | | 70 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | — | | | 32 | | | — | | | 32 | |
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Preferred stock conversion | | (1) | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
Tax settlements associated with share-based compensation | | — | | | — | | | — | | | — | | | (68) | | | — | | | — | | | — | | | (68) | | | — | | | (68) | |
Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (178) | | | (178) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | 8 | | | — | | | 186 | | | — | | | — | | | — | | | 186 | | | — | | | 186 | |
Redeemable noncontrolling interest adjustment to redemptions value | | — | | | — | | | — | | | — | | | (8) | | | — | | | (1) | | | — | | | (9) | | | — | | | (9) | |
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March 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 10,951 | | | $ | (8,244) | | | $ | 8,682 | | | $ | (581) | | | $ | 10,815 | | | $ | 1,404 | | | $ | 12,219 | |
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| | | | | | | | | | | | | | | | | | | | | | |
Net income available to Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 672 | | | — | | | 672 | | | 38 | | | 710 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | | | — | | | (4) | |
Share-based compensation | | — | | | — | | | — | | | — | | | 41 | | | — | | | — | | | — | | | 41 | | | — | | | 41 | |
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| | | | | | | | | | | | | | | | | | | | | | |
Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | (29) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | — | | | 6 | | | — | | | 6 | |
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June 30, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 11,000 | | | $ | (8,244) | | | $ | 9,360 | | | $ | (585) | | | $ | 11,538 | | | $ | 1,413 | | | $ | 12,951 | |
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| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
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 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 456 | | | — | | | 456 | | | 16 | | | 472 | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (117) | | | (117) | | | — | | | (117) | |
Share-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 53 | | | — | | | — | | | — | | | 53 | | | — | | | 53 | |
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Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | (38) | | | — | | | — | | | — | | | (38) | | | — | | | (38) | |
Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (192) | | | (192) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | 3 | | | — | | | — | | | — | | | 19 | | | — | | | — | | | — | | | 19 | | | — | | | 19 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3) | | | — | | | (3) | | | — | | | (3) | |
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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 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3,418) | | | — | | | (3,418) | | | 7 | | | (3,411) | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (506) | | | (506) | | | — | | | (506) | |
Share-based compensation | | — | | | — | | | — | | | — | | | — | | | — | | | 143 | | | — | | | — | | | — | | | 143 | | | — | | | 143 | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (31) | | | (31) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | 3 | | | — | | | — | | | — | | | 3 | | | — | | | 3 | |
Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1) | | | — | | | (1) | | | — | | | (1) | |
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June 30, 2022 | | — | | | $ | — | | | — | | | $ | — | | | 2,658 | | | $ | 27 | | | $ | 54,439 | | | $ | (8,244) | | | $ | 6,614 | | | $ | (1,453) | | | $ | 51,383 | | | $ | 1,236 | | | $ | 52,619 | |
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The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Warner Bros. Discovery, Inc. (“Warner Bros. Discovery”, “WBD”, the “Company”, “we”, “us” or “our”) is a leadingpremier global media and entertainment company that createscombines the WarnerMedia Business’s premium entertainment, sports and distributes the world’s mostnews assets with Discovery’s leading non-fiction and international entertainment and sports businesses, thus offering audiences a differentiated and complete portfolio of content, brands and brandsfranchises across television, film, streaming and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through itsgaming. Some of our iconic brands and products including:franchises include Warner Bros. Pictures Group, Warner Bros. Television Group, DC, HBO, Max, 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,TLC, OWN, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTVBatman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, and others.The Lord of the Rings.
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 WM was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. (See Note 2 and Note 3.) Prior to the Merger, WarnerMedia Holdings, Inc. distributed $40.5 billion to AT&T (subject to working capital and other adjustments) in a combination of cash, debt securities, and WM's retention of certain debt. Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders.shareholders in the Merger. 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 resultresulted 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 onlieu of adjusting the consolidated balance sheets at June 30, 2022.equity issued as purchase consideration in the Merger. AT&T shareholders received shares of WBD Series A common stock (“WBD common stock”) in the distributionMerger representing 71% of the combined companyCompany and the Company's pre-Merger shareholders continued to own 29% of the combined company,Company, in each case on a fully diluted basis.
Discovery was deemed to be the accounting acquirer of the WM Business for accounting purposes under U.S. generally accepted accounting principles (“U.S. GAAP”); therefore, Discovery is considered WBD’sthe Company’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’sthe Company’s historical financial statements. Accordingly, the financial results of WBDthe Company as of and for any periods prior to April 8, 2022 do not include the financial results of the WM Business and current and future results will not be comparable to historical results.
SegmentsLabor Disruption
In conjunction with the Merger, the Company reevaluatedThe Writers Guild of America and changed its segment presentationScreen Actors Guild-American Federation of Television and Radio Artists went on strike in May and July 2023, respectively. There were no material impacts to our business during the quarterthree months 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 consists2023 as a result 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 continuesstrikes. We continue to closely monitor the ongoing impact of COVID-19 on all aspects of its business and geographies, includingto our business; however, 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 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 are 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.predicted.
Principles of Consolidation
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”) for which the Company is the primary beneficiary. Intercompany accounts and transactions between consolidated entities have been eliminated.
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, 20212022 (the “2021“2022 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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Summary of Significant Accounting Policies
There have been no changes to the Company's significant accounting policies described in the 20212022 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).
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| | June 30, 2022 | | December 31, 2021 | | | |
Raw materials | | $ | 6 | | | $ | — | | | | |
Work in process | | 6 | | | — | | | | |
Finished goods | | 127 | | | 1 | | | | |
Total inventory | | $ | 139 | | | $ | 1 | | | | |
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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)
10-K.Accounting and Reporting Pronouncements Adopted
LIBORSupplier Finance Programs
In March 2020,September 2022, the Financial Accounting Standards Board (“FASB”) issued guidance providing optional expedientsupdating the disclosure requirements for supplier finance program obligations. This guidance provides specific authoritative guidance for disclosure of supplier finance programs, including key terms of such programs, amounts outstanding, and exceptions for applying U.S. GAAP to contract modifications, hedging relationships, and other transactions associated withwhere the expected market transition away from the London Interbank Offered Rate 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 terminatedobligations are presented in the first quarterstatement 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.position. The guidance is effective for annual periods beginning after December 15, 2021.2022, including interim periods, except for the disclosure of roll forward information, which is effective for annual periods beginning after December 15, 2023. Certain components of this guidance must be applied retrospectively, while others may be applied prospectively. The Company is currently assessingadopted the impact this guidance will have on its consolidated financial statementseffective January 1, 2023 and related disclosures.has provided the required disclosures in Note 14.
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 convertible common stock, and Discovery Series C common stock, was reclassified and automatically converted into 1one 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.Merger in the three months ended June 30, 2022.
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).
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)
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| 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) | |
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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 | |
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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 | |
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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 | |
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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 sets forth the Company’s calculated earnings per share (in millions). Earnings per share amounts may not recalculate due to rounding. | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | |
Net loss | $ | (1,220) | | | $ | (3,408) | | | $ | (2,280) | | | $ | (2,933) | |
Less: | | | | | | | |
Allocation of undistributed income to Series A-1 convertible preferred stock | — | | | — | | | — | | | (49) | |
Net income attributable to noncontrolling interests | (16) | | | (7) | | | (24) | | | (23) | |
Net income attributable to redeemable noncontrolling interests | (4) | | | (3) | | | (5) | | | (6) | |
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Net loss allocated to Warner Bros. Discovery, Inc. Series A common stockholders for basic and diluted net loss per share | $ | (1,240) | | | $ | (3,418) | | | $ | (2,309) | | | $ | (3,011) | |
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Denominator — weighted average: | | | | | | | |
Common shares outstanding — basic and diluted | 2,437 | | | 2,286 | | | 2,434 | | | 1,443 | |
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Basic net loss per share allocated to common stockholders | $ | (0.51) | | | $ | (1.50) | | | $ | (0.95) | | | $ | (2.09) | |
Diluted net loss per share allocated to common stockholders | $ | (0.51) | | | $ | (1.50) | | | $ | (0.95) | | | $ | (2.09) | |
The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Anti-dilutive share-based awards | | 57 | | | 16 | | | 45 | | | 6 | |
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Anti-dilutive share-based awards | | 73 | | | 57 | | | 67 | | | 45 | |
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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..
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Fair value of WBD common stock issued to AT&T shareholders (1) | | $ | 42,309 | |
Estimated fairFair value of share-based compensation awards attributable to pre-combination services (2)
| | 94 | |
Settlement of preexisting relationships (3) | | (27) | |
Preliminary purchasePurchase consideration | | $ | 42,376 | |
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(1) The fair value of WBD common stock issued to AT&T shareholders represents approximately 1,732 million shares of the Company’sWBD 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
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
common stock on the 10ten trading days prior to the Closing Date and the volume-weighted average per share closing price of WBD common stock on the 10ten 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. 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 resulted in the Company receiving a $1.2 billion payment from AT&T in the third quarter of 2022.
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$9,308 million, $7,016$7,074 million and $5,585$5,727 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. TheDuring the three months ended June 30, 2023, the Company is still evaluatingfinalized 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 measurementassumed. Measurement period adjustments if any,were reflected in the period in which the adjustments occur,occurred. Adjustments recorded during the three and the Company will finalize its accounting for the Merger within one year of the Closing Date.six months ended June 30, 2023 were $220 million and $368 million, respectively, primarily related to taxes, and were recorded in other noncurrent assets, deferred income taxes and other noncurrent liabilities, with an offset to goodwill. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed, measurement period adjustments, and a reconciliation to total consideration transferred is presented in the table below (in millions).
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| | 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 | | | | | |
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| | Preliminary April 8, 2022 | | Measurement Period Adjustments | | Final April 8, 2022 |
Cash | | $ | 2,419 | | | $ | (10) | | | $ | 2,409 | |
Accounts receivable | | 4,224 | | | (60) | | | 4,164 | |
Other current assets | | 4,619 | | | (133) | | | 4,486 | |
Film and television content rights and games | | 28,729 | | | (344) | | | 28,385 | |
Property and equipment | | 4,260 | | | 13 | | | 4,273 | |
Goodwill | | 21,513 | | | 596 | | | 22,109 | |
Intangible assets | | 44,889 | | | 100 | | | 44,989 | |
Other noncurrent assets | | 5,206 | | | 283 | | | 5,489 | |
Current liabilities | | (10,544) | | | 12 | | | (10,532) | |
Debt assumed | | (41,671) | | | (9) | | | (41,680) | |
Deferred income taxes | | (13,264) | | | 492 | | | (12,772) | |
Other noncurrent liabilities | | (8,004) | | | (940) | | | (8,944) | |
Total consideration paid | | $ | 42,376 | | | $ | — | | | $ | 42,376 | |
| | | | | | |
|
The fair values of the assets acquired and liabilities assumed were preliminarily determined using theseveral valuation approaches including, but not limited to, various cost approaches and income cost, and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market,approaches, such as discounted cash flow analyses,relief from royalty, multi-period excess earnings, 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)
with-or-without.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 | | | Fair Value | | Weighted Average Useful Life in Years | |
Trade names | Trade names | | $ | 21,084 | | | 25 | | Trade names | | $ | 21,084 | | | 34 | |
Affiliate, advertising and subscriber relationships | Affiliate, advertising and subscriber relationships | | 14,700 | | | 6 | | Affiliate, advertising and subscriber relationships | | 14,800 | | | 6 | |
Franchises | Franchises | | 7,900 | | | 35 | | Franchises | | 7,900 | | | 35 | |
Other intangible assets | Other intangible assets | | 1,205 | | | | Other intangible assets | | 1,205 | | | |
Total intangible assets acquired | Total intangible assets acquired | | $ | 44,889 | | | | Total intangible assets acquired | | $ | 44,989 | | | |
| | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company incurred transaction-relatedacquisition-related costs of $47 million and $94 million for the three and six months ended June 30, 2023, respectively, and $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 integration activities 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'sProgramming’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'sWM’s assets, liabilities, and operations were included in the Company'sCompany’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) | | | |
| | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2023 | | Six Months Ended June 30, 2023 | | Three and Six Months Ended June 30, 2022 |
Revenues: | | | | | | |
Distribution | | $ | 3,871 | | | $ | 7,756 | | | $ | 3,526 | |
Advertising | | 1,250 | | | 2,404 | | | 1,163 | |
Content | | 2,978 | | | 6,316 | | | 2,835 | |
Other | | 226 | | | 454 | | | 208 | |
Total revenues | | 8,325 | | | 16,930 | | | 7,732 | |
Inter-segment eliminations | | (630) | | | (1,107) | | | (840) | |
Net revenues | | $ | 7,695 | | | $ | 15,823 | | | $ | 6,892 | |
Net loss available to Warner Bros. Discovery, Inc. | | $ | (1,366) | | | $ | (2,413) | | | $ | (3,020) | |
| | | | | | |
|
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'sCompany’s pro forma combined revenues and net income (in millions).
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2022 | | 2021 | | | Three Months Ended June 30, 2022 | | | Six Months Ended June 30, 2022 |
| Revenues | Revenues | | $ | 10,823 | | | $ | 11,211 | | | $ | 22,264 | | | $ | 21,933 | | Revenues | | | $ | 10,823 | | | | $ | 22,264 | |
Net loss available to Warner Bros. Discovery, Inc. | Net loss available to Warner Bros. Discovery, Inc. | | (2,151) | | | (341) | | | (2,437) | | | (1,912) | | Net loss available to Warner Bros. Discovery, Inc. | | | (1,857) | | | | (2,156) | |
|
The unaudited pro forma combined financial information includes, where applicable, adjustments for (i) additional costs of revenues from the fair value step upstep-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'sCompany’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
Dispositions
In 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 ASSETSRESTRUCTURING
Goodwill
In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the Company. The carrying valueCompany finalized the framework supporting its ongoing restructuring and changes intransformation initiatives during 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 andyear ended December 31, 2021. The carrying amount of goodwill at2022, which will include, among other things, strategic content programming assessments, organization restructuring, facility consolidation activities, and other contract termination costs. While 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 ofCompany’s restructuring efforts are ongoing, 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 thereafterrestructuring program is estimatedexpected 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 | | | |
substantially completed by the end of 2024.
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 and inter-segment eliminations were as follows (in millions).
| | | | Three Months Ended June 30, | | Six Months Ended June 30, | | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 | | | 2023 | | 2022 | | 2023 | | 2022 |
Studios | Studios | | $ | 200 | | | $ | — | | | $ | 200 | | | $ | — | | Studios | | $ | 10 | | | $ | 200 | | | $ | 86 | | | $ | 200 | |
Networks | Networks | | 308 | | | 7 | | | 312 | | | 21 | | Networks | | 110 | | | 308 | | | 113 | | | 312 | |
DTC | DTC | | 475 | | | — | | | 475 | | | 1 | | DTC | | 18 | | | 475 | | | 27 | | | 475 | |
Corporate | | 50 | | | — | | | 51 | | | — | | |
Total restructuring and other charges | | $ | 1,033 | | | $ | 7 | | | $ | 1,038 | | | $ | 22 | | |
Corporate and inter-segment eliminations | | Corporate and inter-segment eliminations | | 8 | | | 50 | | | 15 | | | 51 | |
| Total restructuring | | Total restructuring | | $ | 146 | | | $ | 1,033 | | | $ | 241 | | | $ | 1,038 | |
RestructuringDuring the three months ended June 30, 2023, restructuring charges includeprimarily included contract terminations and facility consolidation activities of $15 million, organization restructuring of $124 million, and other charges of $7 million. During the three months ended June 30, 2022, restructuring charges primarily included content impairments of $496 million, employee terminations of $208 million, and content development write-offs of $329 million formillion.
During the threesix months ended June 30, 2022. Content2023, restructuring charges primarily included contract terminations and facility consolidation activities of $71 million, organization restructuring of $159 million, and other charges of $11 million. During the six months ended June 30, 2022, restructuring charges primarily included content impairments of $501 million, employee terminations of $208 million, and content 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.$329 million.
Changes in restructuring and other liabilities recorded in accrued liabilities and other noncurrent liabilities by major category and by reportable segment and corporate and inter-segment eliminations 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Studios | | Networks | | DTC | | Corporate and Inter-Segment Eliminations | | Total |
December 31, 2022 | | | | | | $ | 156 | | | $ | 361 | | | $ | 188 | | | $ | 159 | | | $ | 864 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Contract termination accruals, net | | | | | | 25 | | | 2 | | | — | | | — | | | 27 | |
| | | | | | | | | | | | | | |
Employee termination accruals, net | | | | | | 21 | | | 107 | | | 13 | | | 18 | | | 159 | |
Other accruals | | | | | | — | | | 2 | | | — | | | — | | | 2 | |
Cash paid | | | | | | (117) | | | (252) | | | (116) | | | (95) | | | (580) | |
June 30, 2023 | | | | | | $ | 85 | | | $ | 220 | | | $ | 85 | | | $ | 82 | | | $ | 472 | |
NOTE 6.5. REVENUES
The following table presents the Company’s revenues disaggregated by revenue source (in millions).
| | | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2023 |
| | Studios | | Networks | | DTC | | Corporate | | Total | | Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
Revenues: | Revenues: | | | | | | | | | | Revenues: | | | | | | | | | |
Distribution | | Distribution | $ | 3 | | | $ | 2,941 | | | $ | 2,192 | | | $ | (1) | | | $ | 5,135 | |
Advertising | Advertising | $ | 10 | | | $ | 2,624 | | | $ | 96 | | | $ | (9) | | | $ | 2,721 | | Advertising | 4 | | | 2,448 | | | 121 | | | (54) | | | 2,519 | |
Distribution | 4 | | | 2,841 | | | 1,993 | | | — | | | 4,838 | | |
Content | Content | 2,636 | | | 220 | | | 132 | | | (924) | | | 2,064 | | Content | 2,398 | | | 284 | | | 410 | | | (646) | | | 2,446 | |
Other | Other | 146 | | | 57 | | | 4 | | | (3) | | | 204 | | Other | 176 | | | 85 | | | 9 | | | (12) | | | 258 | |
Total | Total | $ | 2,796 | | | $ | 5,742 | | | $ | 2,225 | | | $ | (936) | | | $ | 9,827 | | Total | $ | 2,581 | | | $ | 5,758 | | | $ | 2,732 | | | $ | (713) | | | $ | 10,358 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | Three Months Ended June 30, 2021 | | | Three Months Ended June 30, 2022 |
| | | Studios | | Networks | | DTC | | Corporate | | Total | | | Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
Revenues: | Revenues: | | | | | | | | | | | Revenues: | | | | | | | | | | |
Distribution | | Distribution | | $ | 4 | | | $ | 2,841 | | | $ | 1,993 | | | $ | — | | | $ | 4,838 | |
Advertising | Advertising | | $ | — | | | $ | 1,601 | | | $ | 33 | | | $ | — | | | $ | 1,634 | | Advertising | | 10 | | | 2,624 | | | 96 | | | (9) | | | 2,721 | |
Distribution | | — | | | 1,132 | | | 180 | | | — | | | 1,312 | | |
Content | Content | | 2 | | | 96 | | | 2 | | | — | | | 100 | | Content | | 2,636 | | | 220 | | | 132 | | | (924) | | | 2,064 | |
Other | Other | | — | | | 15 | | | 1 | | | — | | | 16 | | Other | | 146 | | | 57 | | | 4 | | | (3) | | | 204 | |
Total | Total | | $ | 2 | | | $ | 2,844 | | | $ | 216 | | | $ | — | | | $ | 3,062 | | Total | | $ | 2,796 | | | $ | 5,742 | | | $ | 2,225 | | | $ | (936) | | | $ | 9,827 | |
| | | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2023 |
| | Studios | | Networks | | DTC | | Corporate | | Total | | Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
Revenues: | Revenues: | | | | | | | | | | Revenues: | | | | | | | | | |
Distribution | | Distribution | $ | 6 | | | $ | 5,936 | | | $ | 4,357 | | | $ | (1) | | | $ | 10,298 | |
Advertising | Advertising | $ | 10 | | | $ | 4,054 | | | $ | 142 | | | $ | (9) | | | $ | 4,197 | | Advertising | 7 | | | 4,685 | | | 224 | | | (99) | | | 4,817 | |
Distribution | 4 | | | 3,961 | | | 2,225 | | | — | | | 6,190 | | |
Content | Content | 2,641 | | | 536 | | | 134 | | | (924) | | | 2,387 | | Content | 5,425 | | | 529 | | | 595 | | | (1,149) | | | 5,400 | |
Other | Other | 146 | | | 64 | | | 5 | | | (3) | | | 212 | | Other | 355 | | | 189 | | | 11 | | | (12) | | | 543 | |
Total | Total | $ | 2,801 | | | $ | 8,615 | | | $ | 2,506 | | | $ | (936) | | | $ | 12,986 | | Total | $ | 5,793 | | | $ | 11,339 | | | $ | 5,187 | | | $ | (1,261) | | | $ | 21,058 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
Revenues: | | | | | | | | | |
Distribution | $ | 4 | | | $ | 3,961 | | | $ | 2,225 | | | $ | — | | | $ | 6,190 | |
Advertising | 10 | | | 4,054 | | | 142 | | | (9) | | | 4,197 | |
Content | 2,641 | | | 536 | | | 134 | | | (924) | | | 2,387 | |
Other | 146 | | | 64 | | | 5 | | | (3) | | | 212 | |
Total | $ | 2,801 | | | $ | 8,615 | | | $ | 2,506 | | | $ | (936) | | | $ | 12,986 | |
Contract AssetsLiabilities 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.Contract Assets
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 | |
| | | | | | | | | | | | | | | | | | | | |
Category | | Balance Sheet Location | | June 30, 2023 | | December 31, 2022 |
| | | | | | |
| | | | | | |
Contract liabilities | | Deferred revenues | | $ | 1,548 | | | $ | 1,694 | |
Contract liabilities | | Other noncurrent liabilities | | 393 | | | 361 | |
For the six months ended June 30, 2023 and 2022, respectively, revenues of $1,102 million and $347 million were recognized that were included in deferred revenues as of December 31, 2022 and December 31, 2021, respectively.Contract assets were not material as of June 30, 2023 and December 31, 2022.
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 asAs of June 30, 2022 and2023, $13,216 million of revenue 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 tofrom remaining performance obligations on these contracts was $5.2 billion asunder our long-term contracts. The following table presents a summary 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.by contract type (in millions).
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. | | | | | | | | | | | | | | |
Contract Type | | June 30, 2023 | | Duration |
Distribution - fixed price or minimum guarantee | | $ | 3,951 | | | Through 2031 |
Content licensing and sports sublicensing | | 6,077 | | | Through 2030 |
Brand licensing | | 2,267 | | | Through 2043 |
Advertising | | 921 | | | Through 2027 |
Total | | $ | 13,216 | | | |
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 7.6. 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$3,585 million of cash and $1,838 millionof pledged receivables as of June 30, 20222023 in connection with thisits revolving agreement. The gross valuereceivables program. For the three and six months ended June 30, 2023, the Company has recognized $9 million and $42 million, respectively,inselling, general and administrative expenses, net of non-designated derivatives from the proceeds received resultsrevolving receivables program in derecognitionthe consolidated statements 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.operations. (See Note 10.) 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 programexpenses in the consolidated statements of operations. The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $5,700$5,295 million as of June 30, 2022.2023.
The following table presents a summary of receivables sold (in millions).
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Gross receivables sold/cash proceeds received | $ | 3,637 | | | $ | 3,205 | | | $ | 6,416 | | | $ | 3,205 | |
Collections reinvested under revolving agreement | (3,642) | | | (3,505) | | | (6,487) | | | (3,505) | |
Net cash proceeds remitted (a) | $ | (5) | | | $ | (300) | | | $ | (71) | | | $ | (300) | |
Net receivables sold | $ | 3,606 | | | $ | 3,198 | | | $ | 6,304 | | | $ | 3,198 | |
Obligations recorded (Level 3) | $ | 112 | | | $ | 98 | | | $ | 260 | | | $ | 98 | |
(a) Includes the collection on receivables sold but not remitted of $405 million as of June 30, 2023. |
The following table presents a summary of the amounts transferred or pledged (in millions).
| | | | | | | | | | | |
| June 30, 2023 | | December 31, 2022 |
Gross receivables pledged as collateral | $ | 3,585 | | | $ | 3,468 | |
Restricted cash pledged as collateral | $ | — | | | $ | 150 | |
Balance sheet classification: | | | |
Receivables, net | $ | 3,285 | | | $ | 3,015 | |
Prepaid expenses and other current assets | $ | — | | | $ | 150 | |
Other noncurrent assets | $ | 300 | | | $ | 453 | |
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 Company’s factoring arrangementsarrangement was$72 millionfor the six months ended June 30, 2023. No amounts were $103 million as ofsold under the Company’s factoring arrangement for the six months ended June 30, 2022. The impact to the consolidated statements of operations was immaterial for the three and six months ended June 30, 2023 and 2022. This accounts receivable factoring agreement is separate and distinct from the revolving receivables program.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8.7. CONTENT RIGHTS
For purposes of amortization and impairment, the capitalized content costs are grouped based on their predominant monetization strategy: individually or as a group. Programming rights include content licensed from third parties, such as film, television and sports rights. 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 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | |
| June 30, 2023 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
Theatrical film production costs: | | | | | | |
Released, less amortization | | $ | 2,774 | | | $ | — | | | $ | 2,774 | |
Completed and not released | | 629 | | | — | | | 629 | |
In production | | 1,549 | | | — | | | 1,549 | |
In development | | 105 | | | — | | | 105 | |
| | | | | | |
Television production costs: | | | | | | |
Released, less amortization | | 2,050 | | | 6,718 | | | 8,768 | |
Completed and not released | | 412 | | | 664 | | | 1,076 | |
In production | | 337 | | | 3,620 | | | 3,957 | |
In development | | 64 | | | 12 | | | 76 | |
Total theatrical film and television production costs | | $ | 7,920 | | | $ | 11,014 | | | $ | 18,934 | |
| | | | | | |
Programming rights, less amortization | | | | | | 5,295 | |
Game development costs, less amortization | | | | | | 604 | |
Total film and television content rights and games | | | | | | 24,833 | |
Less: Current content rights and prepaid license fees, net | | | | | | (440) | |
Total noncurrent film and television content rights and games | | | | | | $ | 24,393 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
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).
|
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
Theatrical film production costs: | | | | | | |
Released, less amortization | | $ | 3,544 | | | $ | — | | | $ | 3,544 | |
Completed and not released | | 507 | | | — | | | 507 | |
In production | | 1,700 | | | — | | | 1,700 | |
In development | | 95 | | | — | | | 95 | |
| | | | | | |
Television production costs: | | | | | | |
Released, less amortization | | 2,200 | | | 6,513 | | | 8,713 | |
Completed and not released | | 939 | | | 310 | | | 1,249 | |
In production | | 427 | | | 4,424 | | | 4,851 | |
In development | | 30 | | | 15 | | | 45 | |
Total theatrical film and television production costs | | $ | 9,442 | | | $ | 11,262 | | | $ | 20,704 | |
| | | | | | |
Programming rights, less amortization | | | | | | 5,843 | |
Game development costs, less amortization | | | | | | 650 | |
Total film and television content rights and games | | | | | | 27,197 | |
Less: Current content rights and prepaid license fees, net | | | | | | (545) | |
Total noncurrent film and television content rights and games | | | | | | $ | 26,652 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
Content expenseamortization 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
Predominately monetized individually | | $ | 1,031 | | | $ | 1,927 | | | $ | 2,562 | | | $ | 2,177 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Predominately monetized as a group | | 3,579 | | | 3,189 | | | 6,675 | | | 3,908 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Total content amortization | | $ | 4,610 | | | $ | 5,116 | | | $ | 9,237 | | | $ | 6,085 | |
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 forFor the three and six months ended June 30, 2023, total content impairments were $28 million and $124 million, respectively. For the three and six months ended June 30, 2022, total content impairments were $502 million and $506 million, respectively. Content impairments 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 9.8. INVESTMENTS
The Company’s equity investments consisted of the following, net of investments recorded in other noncurrent liabilities (in millions). | Category | Category | | Balance Sheet Location | | Ownership | | June 30, 2022 | | December 31, 2021 | Category | | Balance Sheet Location | | Ownership | | June 30, 2023 | | December 31, 2022 |
Equity method investments: | Equity method investments: | | | | | | | | | Equity method investments: | | | | | | | | |
The Chernin Group (TCG) 2.0-A, LP | The Chernin Group (TCG) 2.0-A, LP | | Other noncurrent assets | | 44% | | $ | 352 | | | $ | — | | The Chernin Group (TCG) 2.0-A, LP | | Other noncurrent assets | | 44% | | $ | 279 | | | $ | 313 | |
nC+ | nC+ | | Other noncurrent assets | | 32% | | 129 | | | 151 | | nC+ | | Other noncurrent assets | | 32% | | 135 | | | 135 | |
Other | Other | | Other noncurrent assets | | 683 | | | 390 | | Other | | Other noncurrent assets | | 595 | | | 614 | |
Total equity method investments | Total equity method investments | | 1,164 | | | 541 | | Total equity method investments | | 1,009 | | | 1,062 | |
| | Investments with readily determinable fair values | Investments with readily determinable fair values | | Other noncurrent assets | | 45 | | | 80 | | Investments with readily determinable fair values | | Other noncurrent assets | | 43 | | | 28 | |
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 | Investments without readily determinable fair values | | Other noncurrent assets | | 637 | | | 496 | | Investments without readily determinable fair values | | Other noncurrent assets (a) | | 436 | | | 498 | |
Total investments | Total investments | | $ | 1,860 | | | $ | 1,157 | | Total investments | | $ | 1,488 | | | $ | 1,588 | |
| | | | | |
(a) Investments without readily determinable fair values included $17 million as of June 30, 2023 and $10 million as of December 31, 2022 that were included in prepaid expenses and other current assets.
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 or the entity is not a VIE and the Company does 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 operations. Impairment losses for the three and six months ended June 30, 2022 were not material.
Certain of the Company'sCompany’s other equity method investments are VIEs, for which the Company is not the primary beneficiary. As of June 30, 2022,2023, 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 $810$771 million. The Company'sCompany’s maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $772$712 million as of June 30, 20222023 and $126$720 million as of December 31, 2021.2022. VIE gains and losses are recorded in loss from equity investees, net on the consolidated statements of operations,operations. VIE losses were $25 million and were not material$3 million for the three months ended June 30, 2023 and 2022, respectively, and $53 million and $20 million for the six months ended June 30, 2023 and 2022, respectively.
Equity Investments Without Readily Determinable Fair Values Assessed Under the Measurement Alternative
During the three and six months ended June 30, 2022 and 2021.
Investments with Readily Determinable Fair Value
Investments in entities or other securities in which2023, the Company has no control or significant influence, is not the primary beneficiary, and have aconcluded that its other equity investments without readily determinable fair value are classified as equity investments with readily determinable fair value. The investments are measured atvalues had decreased $3 million and $71 million, respectively, in fair value based onas a quoted marketresult of observable price per unitchanges in active markets multiplied byorderly transactions for the numberidentical or similar investment of units held without consideration of transaction costs (Level 1). Gains and losses arethe same issuer. The decrease in fair value is recorded in other income (expense) income,, net on the consolidated statements of operations.
The gains and losses related to (See Note 14.) As of June 30, 2023, the Company'sCompany had recorded cumulative impairments of $300 millionfor its equity investments withwithout readily determinable fair values for the three and six months ended June 30, 2022 and 2021 are summarized in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | |
values.
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 six months ended June 30, 2022, the Company did not invest in any material equity investments without readily determinable fair values and concluded there were no indicators that a change in fair value had taken place. As of 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.
NOTE 10.9. DEBT
The table below presents the components of outstanding debt (in millions).
| | | Weighted-Average Interest Rate as of June 30, 2022 | | June 30, 2022 | | December 31, 2021 | | | Weighted-Average Interest Rate as of June 30, 2023 | | June 30, 2023 | | December 31, 2022 | |
Term loans with maturities of 3 years or less | Term loans with maturities of 3 years or less | | 2.32 | % | | $ | 6,500 | | | $ | — | | | Term loans with maturities of 3 years or less | | 6.52 | % | | $ | 1,400 | | | $ | 4,000 | | |
Floating rate senior notes with maturities of 5 years or less | Floating rate senior notes with maturities of 5 years or less | | 2.31 | % | | 500 | | | — | | | Floating rate senior notes with maturities of 5 years or less | | 6.70 | % | | 40 | | | 500 | | |
Senior notes with maturities of 5 years or less | Senior notes with maturities of 5 years or less | | 3.60 | % | | 13,742 | | | 4,314 | | | Senior notes with maturities of 5 years or less | | 3.91 | % | | 15,873 | | | 12,759 | | |
Senior notes with maturities between 5 and 10 years | Senior notes with maturities between 5 and 10 years | | 4.25 | % | | 10,373 | | | 4,128 | | | Senior notes with maturities between 5 and 10 years | | 4.28 | % | | 8,607 | | | 10,373 | | |
Senior notes with maturities greater than 10 years | Senior notes with maturities greater than 10 years | | 5.11 | % | | 21,644 | | | 6,745 | | | Senior notes with maturities greater than 10 years | | 5.11 | % | | 21,644 | | | 21,644 | | |
Total debt | Total debt | | 0 | | 52,759 | | | 15,187 | | | Total debt | | | | 47,564 | | | 49,276 | | |
Unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net | Unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net | | (274) | | | (428) | | | Unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net | | (287) | | | (277) | | |
Debt, net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, | | 52,485 | | | 14,759 | | | |
Debt, net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting | | Debt, net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting | | 47,277 | | | 48,999 | | |
Current portion of debt | Current portion of debt | | (1,097) | | | (339) | | | Current portion of debt | | (3,001) | | | (365) | | |
Noncurrent portion of debt | Noncurrent portion of debt | | $ | 51,388 | | | $ | 14,420 | | | Noncurrent portion of debt | | $ | 44,276 | | | $ | 48,634 | | |
During the three months ended June 30, 2023, the Company commenced a tender offer to purchase for cash any and all of its outstanding Floating Rate Notes due in 2024. The Company completed the tender offer in June 2023, by purchasing Floating Rate Notes in the amount of $460 million validly tendered and accepted for purchase pursuant to the offer. The Company also repaid $1.1 billion of aggregate principal amount outstanding of its term loan prior to the due date of April 2025 and completed open market repurchases for $88 million of aggregate principal amount outstanding of its senior notes.
During the three months ended March 31, 2023, the Company issued $1.5 billion of 6.412% fixed rate senior notes due March 2026. After March 2024, the senior notes are redeemable at par plus accrued and unpaid interest. The proceeds were used to pay $1.5 billion of aggregate principal amount outstanding of the Company’s term loan prior to the due date of April 2025. The Company also repaid $106 million of aggregate principal amount outstanding of its senior notes due February 2023.
During the three months ended June 30, 2022, the Company repaid $3.5 billion of aggregate principal amount outstanding of its term loans prior to the due dates of October 2023 and April 2025. The Company also assumed $41.5 billion of senior notes (at par value) and term loans duringin connection with the Merger.
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 June 30, 2022,2023, all senior notes are fully and unconditionally guaranteed by the Company, Scripps Networks Interactive, Inc. ("(“Scripps Networks"Networks”), Discovery Communications, LLC ("DCL"(“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$1.4 billion of senior notes of the legacy 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$10.0 billion term loan credit agreement (the "Term“Term Loan Credit Agreement"Agreement”), are fully and unconditionally guaranteed by the Company, Scripps Networks, and DCL.
Revolving Credit Facility and Commercial Paper Programs
The Company has a multicurrency revolving credit agreement (the “Revolving Credit Agreement”) and has the capacity to borrow up to $6.0 billion under the Revolving Credit Agreement (the “Credit Facility”). The Company may also request additional commitments up to $1.0 billion from the lenders upon the satisfaction of certain conditions. The Company’s commercial paper program is supported by the Credit Facility. Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program. As of June 30, 2023 and December 31, 2022, the Company had no outstanding borrowings under its Credit Facility or its commercial paper program.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revolving Credit Facility and Commercial Paper Programs
In June 2021, DCL entered into a multicurrency revolving credit agreement (the “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 borrow up to $6.0 billion under the Revolving Credit Agreement (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 WarnerMedia Holdings, 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.
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 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 and the 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 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, 2022,2023, 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 12.10. DERIVATIVE FINANCIAL INSTRUMENTS
TheIn the normal course of business, the Company is exposed to foreign currency exchange rate market risk and interest rate fluctuations. As part of its risk management strategy, the Company uses derivative financial instruments, to modify its exposure to market risks from changes inprimarily foreign currency exchange ratesforward contracts, fixed-to-fixed currency swaps, total return swaps and interest rates.rate swaps, to hedge certain foreign currency, market value and interest rate exposures. The Company’s objective is to reduce earnings volatility by offsetting gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them. 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.
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'sCompany’s consolidated balance sheets (in millions). There were no amounts eligible to be offset under master netting agreements as of June 30, 20222023 and December 31, 2021.2022. The fair value of the Company'sCompany’s derivative financial instruments was determined using a market-based approach (Level 2).
| | | June 30, 2022 | | December 31, 2021 | | June 30, 2023 | | December 31, 2022 |
| | | 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 | $ | 2,196 | | | $ | 31 | | | $ | 54 | | | $ | 80 | | | $ | 15 | | | $ | 777 | | | $ | 14 | | | $ | — | | | $ | 2 | | | $ | — | | Foreign exchange | $ | 1,867 | | | $ | 62 | | | $ | 27 | | | $ | 34 | | | $ | 16 | | | $ | 1,382 | | | $ | 49 | | | $ | 35 | | | $ | 42 | | | $ | 25 | |
Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 2,000 | | | 44 | | | — | | | 11 | | | — | | |
Cross-currency swaps | | Cross-currency swaps | — | | | — | | | — | | | — | | | — | | | 482 | | | 3 | | | 58 | | | — | | | — | |
| Net investment hedges: (a) | Net investment hedges: (a) | | Net investment hedges: (a) | |
Cross-currency swaps | Cross-currency swaps | 1,620 | | | 16 | | | 29 | | | — | | | 59 | | | 3,512 | | | 54 | | | 61 | | | 20 | | | 76 | | Cross-currency swaps | 1,761 | | | 20 | | | 9 | | | 10 | | | 49 | | | 1,778 | | | 20 | | | 12 | | | — | | | 73 | |
| Fair value hedges: | | Fair value hedges: | |
Interest rate swaps | | Interest rate swaps | 1,500 | | | 14 | | | — | | | — | | | 13 | | | — | | | — | | | — | | | — | | | — | |
No hedging designation: | No hedging designation: | | No hedging designation: | |
Foreign exchange | Foreign exchange | 806 | | | 4 | | | 1 | | | — | | | 98 | | | 1,020 | | | — | | | — | | | 34 | | | 66 | | Foreign exchange | 1,090 | | | 2 | | | 1 | | | 3 | | | 87 | | | 976 | | | 5 | | | 1 | | | 3 | | | 96 | |
Cross-currency swaps | | Cross-currency swaps | — | | | — | | | — | | | — | | | — | | | 139 | | | 3 | | | — | | | — | | | 3 | |
Interest rate swaps | Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 15,000 | | | 126 | | | 28 | | | 9 | | | 5 | | Interest rate swaps | 6,000 | | | 41 | | | 20 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Cross-currency swaps | 139 | | | 3 | | | 2 | | | — | | | — | | | 139 | | | 3 | | | — | | | — | | | 5 | | |
Total return swaps | | Total return swaps | 377 | | | 15 | | | — | | | — | | | — | | | 291 | | | — | | | — | | | 13 | | | — | |
| | Total | Total | | $ | 54 | | | $ | 86 | | | $ | 80 | | | $ | 172 | | | $ | 241 | | | $ | 89 | | | $ | 76 | | | $ | 152 | | Total | | $ | 154 | | | $ | 57 | | | $ | 47 | | | $ | 165 | | | $ | 80 | | | $ | 106 | | | $ | 58 | | | $ | 197 | |
(a) Excludes £400€164 million of sterlingeuro-denominated notes ($486179 million and $174 million equivalent at June 30, 2022)2023 and €164December 31, 2022, respectively) designated as net investment hedges and £407 million of euro-denominatedsterling notes ($173($513 million equivalent at June 30, 2022)2023) designated as a net investment hedges.hedge. (See Note 10.9.)
Derivatives Designated for Hedge Accounting
Cash Flow Hedges
The Company uses foreign exchange forward contracts to mitigate the foreign currency risk related to revenues, production rebates and production expenses and fixed-to-fixed cross-currency swaps to mitigate foreign currency risk associated with its British Pound Sterling denominated debt. In April 2023, the Company unwound cross-currency swaps related to its Sterling debt and recognized a gain of $76 million as an adjustment to other comprehensive income. The Sterling debt was subsequently re-designated as a net investment hedge effective May 2023.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following table presents the pre-tax impact of derivatives designated as cash flow hedges on income and other comprehensive (loss) income (loss) (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Gains (losses) recognized in accumulated other comprehensive loss: | | | | | | | | |
Foreign exchange - derivative adjustments | | $ | (7) | | | $ | (7) | | | $ | (20) | | | $ | 30 | |
Interest rate - derivative adjustments | | — | | | (134) | | | — | | | 126 | |
Gains (losses) reclassified into income from accumulated other comprehensive loss: | | | | | | | | |
Foreign exchange - advertising revenue | | — | | | — | | | 1 | | | — | |
Foreign exchange - distribution revenue | | (2) | | | 2 | | | 2 | | | (1) | |
Foreign exchange - costs of revenues | | 18 | | | — | | | 19 | | | — | |
Interest rate - interest expense, net | | (1) | | | (1) | | | (1) | | | (1) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Gains (losses) recognized in accumulated other comprehensive loss: | | | | | | | | |
Foreign exchange - derivative adjustments | | $ | 19 | | | $ | (7) | | | $ | 20 | | | $ | (20) | |
| | | | | | | | |
Gains (losses) reclassified into income from accumulated other comprehensive loss: | | | | | | | | |
Foreign exchange - distribution revenue | | (1) | | | (2) | | | (2) | | | 2 | |
Foreign exchange - advertising revenue | | — | | | — | | | — | | | 1 | |
Foreign exchange - costs of revenues | | (11) | | | 18 | | | (9) | | | 19 | |
Foreign exchange - other income (expense), net | | 18 | | | — | | | 18 | | | — | |
Interest rate - interest expense, net | | — | | | (1) | | | 1 | | | (1) | |
If current fair values of designated cash flow hedges as of June 30, 20222023 remained static over the next twelve months, the amount the Company would reclassify $5 million of net deferred losses from accumulated other comprehensive loss into income in the next twelve months.months would not be material for the current fiscal year. The maximum length of time the Company is hedging exposure to the variability in future cash flows is 3332 years.
Net Investment Hedges
The Company uses fixed-to-fixed cross currency swaps to mitigate foreign currency risk associated with the net assets of non-USD functional entities.
During the three months ended June 30, 2023, to mitigate the currency risk associated with the net assets of non-USD functional entities, the Company re-designated its Sterling denominated debt due in 2024 as a net investment hedge after the unwind of the cash flow hedge previously noted.
The following table presents the pre-tax impact of derivatives designated as net investment hedges on other comprehensive
(loss) 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 June 30,
20222023 and
2021. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) |
| | 2022 | | 2021 | | | 2022 | | 2021 |
Cross currency swaps | | $ | 52 | | | $ | (5) | | | Interest expense, net | | $ | 7 | | | $ | 11 | |
| | | | | | | | | | |
| | | | | | | | | | |
Euro-denominated notes (foreign denominated debt) | | 6 | | | — | | | N/A | | — | | | — | |
Sterling notes (foreign denominated debt) | | 41 | | | (3) | | | N/A | | — | | | — | |
Total | | $ | 99 | | | $ | (8) | | | | | $ | 7 | | | $ | 11 | |
2022. | | | Six Months Ended June 30, | | 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 | | 2023 | | 2022 | | 2023 | | 2022 |
Cross currency swaps | Cross currency swaps | | $ | 71 | | | $ | 47 | | | Interest expense, net | | $ | 22 | | | $ | 21 | | Cross currency swaps | | $ | 3 | | | $ | 52 | | | Interest expense, net | | $ | 6 | | | $ | 7 | |
| Euro denominated notes (foreign denominated debt) | | 6 | | | — | | | N/A | | — | | | — | | |
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) | | 54 | | | (8) | | | N/A | | — | | | — | | Sterling notes (foreign denominated debt) | | (6) | | | 41 | | | N/A | | — | | | — | |
Total | Total | | $ | 131 | | | $ | 39 | | | $ | 22 | | | $ | 21 | | Total | | $ | (3) | | | $ | 99 | | | $ | 6 | | | $ | 7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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) |
| | 2023 | | 2022 | | | 2023 | | 2022 |
Cross currency swaps | | $ | 25 | | | $ | 71 | | | Interest expense, net | | $ | 11 | | | $ | 22 | |
| | | | | | | | | | |
| | | | | | | | | | |
Euro denominated notes (foreign denominated debt) | | 5 | | | 6 | | | N/A | | — | | | — | |
Sterling notes (foreign denominated debt) | | (6) | | | 54 | | | N/A | | — | | | — | |
Total | | $ | 24 | | | $ | 131 | | | | | $ | 11 | | | $ | 22 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Fair Value Hedges
During the three months ended March 31, 2023, the Company issued $1.5 billion of 6.412% fixed rate senior notes due March 2026. Simultaneously, the Company entered into a fixed-to-floating interest rate swap designated as a fair value hedge to allow the Company to mitigate the variability in the fair value of its senior notes due to fluctuations in the benchmark interest rate. Changes in the fair value of the senior note and the interest rate swap are recorded in interest expense, net.
The following table presents fair value hedge adjustments to hedged borrowings (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Carrying Amount of Hedged Borrowings | | Cumulative Amount of Fair Value Hedging Adjustments Included in Hedged Borrowings |
Balance Sheet Location | | June 30, 2023 | | December 31, 2022 | | June 30, 2023 | | December 31, 2022 |
| | | | | | | | |
Noncurrent portion of debt | | $ | 1,501 | | | $ | — | | | $ | 1 | | | $ | — | |
The following table presents the pretax impact of derivatives designated as fair value hedges on income, including offsetting changes in fair value of the hedged items (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Gain (loss) on changes in fair value of hedged fixed rate debt (1) | | $ | 11 | | | $ | — | | | $ | (1) | | | $ | — | |
(Loss) gain on changes in the fair value of derivative contracts (1) | | (11) | | | — | | | 1 | | | — | |
Total in interest expense, net | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | |
(1) Accrued interest related to the hedged debt and derivative contracts is excluded from the amounts above and was $20 million and $25 million for the three and six months ended June 30, 2023, respectively. |
Derivatives Not Designated for Hedge Accounting
Prior to the Merger, the Company was exposed to interest rate risk associated with the expected issuance of debt related to the Merger. To mitigate this risk, the Company entered into interest rate swaps and subsequently unwound them prior to the Merger.
As part of the Merger, the Company acquired deferred compensation plans that have risk related to the fair value gains and losses on these investments and entered into total return swaps to mitigate this risk. The gains and losses associated with these swaps are recorded to selling, general and administrative expenses, offsetting the deferred compensation investment gains and losses.
The Company is exposed to risk of secured overnight financing rate changes in connection with securitization interest paid on the receivables securitization program. To mitigate this risk, the Company entered into $6.0 billion notional of non-designated interest rate swaps. The gains and losses on these derivatives are recorded to selling, general and administrative expenses, offsetting securitization interest expense.
As production spend occurs or when rebate receivables are recognized, the aforementioned forward contracts designated as cash flow hedges are de-designated. After de-designation, gains and losses on these derivatives directly impact earnings in the same line as the hedged risk.
The following table presents the pretax gains (losses) on derivatives not designated as hedges and recognized in selling, general and administrative expense and other income (expense) income,, net in the consolidated statements of operations (in millions).
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
Interest rate swaps | | Interest rate swaps | | $ | 62 | | | $ | — | | | $ | 62 | | | $ | — | |
Total return swaps | | Total return swaps | | 13 | | | — | | | 31 | | | — | |
Total in selling, general and administrative expense | | Total in selling, general and administrative expense | | 75 | | | — | | | 93 | | | — | |
Interest rate swaps | Interest rate swaps | | $ | — | | | $ | — | | | $ | 512 | | | $ | — | | Interest rate swaps | | — | | | — | | | — | | | 512 | |
Cross-currency swaps | Cross-currency swaps | | 7 | | | 1 | | | 7 | | | 6 | | Cross-currency swaps | | 1 | | | 7 | | | 1 | | | 7 | |
| Foreign exchange derivatives | Foreign exchange derivatives | | (31) | | | (2) | | | (46) | | | (27) | | Foreign exchange derivatives | | (1) | | | (31) | | | 2 | | | (46) | |
Total in other (expense) income, net | | $ | (24) | | | $ | (1) | | | $ | 473 | | | $ | (21) | | |
Total in other income (expense), net | | Total in other income (expense), net | | — | | | (24) | | | 3 | | | 473 | |
Total | | Total | | $ | 75 | | | $ | (24) | | | $ | 96 | | | $ | 473 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 13.11. 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). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2023 |
Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | |
Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 145 | | | $ | — | | | $ | 145 | |
| | | | | | | | | | |
Equity securities: | | | | | | | | | | |
Money market fund | | Cash and cash equivalents | | 2 | | | — | | | — | | | 2 | |
Mutual funds | | Prepaid expenses and other current assets | | 10 | | | — | | | — | | | 10 | |
Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 4 | | | — | | | 4 | |
Mutual funds | | Other noncurrent assets | | 238 | | | — | | | — | | | 238 | |
Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 94 | | | — | | | 94 | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Total | | | | $ | 250 | | | $ | 243 | | | $ | — | | | $ | 493 | |
Liabilities | | | | | | | | | | |
Deferred compensation plan | | Accrued liabilities | | $ | 65 | | | $ | — | | | $ | — | | | $ | 65 | |
Deferred compensation plan | | Other noncurrent liabilities | | 604 | | | — | | | — | | | 604 | |
Total | | | | $ | 669 | | | $ | — | | | $ | — | | | $ | 669 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 |
Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
Assets | | | | | | | | | | |
Cash equivalents: | | | | | | | | | | |
Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 50 | | | $ | — | | | $ | 50 | |
| | | | | | | | | | |
Equity securities: | | | | | | | | | | |
Money market funds | | Cash and cash equivalents | | 20 | | | — | | | — | | | 20 | |
| | | | | | | | | | |
Mutual funds | | Prepaid expenses and other current assets | | 14 | | | — | | | — | | | 14 | |
Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 1 | | | — | | | 1 | |
Mutual funds | | Other noncurrent assets | | 243 | | | — | | | — | | | 243 | |
Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 94 | | | — | | | 94 | |
Time deposits | | Other noncurrent assets | | — | | | 8 | | | — | | | 8 | |
Total | | | | $ | 277 | | | $ | 153 | | | $ | — | | | $ | 430 | |
Liabilities | | | | | | | | | | |
Deferred compensation plan | | Accrued liabilities | | $ | 73 | | | $ | — | | | $ | — | | | $ | 73 | |
Deferred compensation plan | | Other noncurrent liabilities | | 590 | | | — | | | — | | | 590 | |
Total | | | | $ | 663 | | | $ | — | | | $ | — | | | $ | 663 | |
| | | | | | | | | | |
|
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The tables below present 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 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 recorded in other (expense) income, net and changes in the deferred 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 hasholds 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 June 30, 20222023 and December 31, 2021.2022. The estimated fair value of the Company’s outstanding senior notes, including accrued interest, using quoted prices from over-the-counter markets, considered Level 2 inputs, was $42.1$41.2 billion and $17.2$38.0 billion as of June 30, 20222023 and December 31, 2021,2022, respectively.
The Company'sCompany’s derivative financial instruments are discussed in Note 12,10, its investments with readily determinable fair value are discussed in Note 9,8, and the obligation for its revolving receivable program is discussed in Note 7.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 14.12. SHARE-BASED COMPENSATION
The Company has various incentive plans under which performance-basedperformance based restricted stock units ("PRSUs"(“PRSUs”), service-basedservice based restricted stock units ("RSUs"(“RSUs”), stock options, and stock appreciation rights ("SARs")options 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 | |
| | | | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2023 |
| | Awards | | Weighted-Average Grant Price |
Awards granted: | | | | |
PRSUs | | 4.0 | | | $ | 15.41 | |
RSUs | | 27.9 | | | $ | 14.93 | |
Stock options | | 2.2 | | | $ | 15.02 | |
| | | | |
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,
20222023 (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. | | | | | | | | | | | | | | |
| | Unrecognized Compensation Cost | | Weighted-Average Amortization Period (years) |
PRSUs | | $ | 49 | | | 1.9 |
RSUs | | 682 | | | 2.2 |
Stock options | | 144 | | | 2.9 |
| | | | |
Total unrecognized compensation cost | | $ | 875 | | | |
NOTE 15.13. INCOME TAXES
The incomeIncome tax balances as ofbenefit was $260 million and $438 million for the three and six months ended June 30, 2022 are inclusive of the WM Business as a result of the Merger. Income2023, respectively, and income tax benefit was $836 million and $635 million for the three and six months ended June 30, 2022, respectively, andrespectively. The decrease in income tax expense was $2 million and $108 millionbenefit for the three and six months ended June 30, 2021, respectively.2023 was primarily attributable to an increase in pre-tax book income. The decrease is partially offset by the tax benefit from an uncertain tax position reserve release as a result of a multi-year audit resolution recorded in the three months ended June 30, 2022 was primarily attributable to a decrease in pre-tax book income, partially offset by2023 and 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 of2022 associated with the UK Finance Act 2021 that was enacted in June 2021.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Merger.Income tax benefit for the three and six months ended June 30, 20222023 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, which included taxationchanges in uncertain tax positions, 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.taxes.
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, 20222023 and December 31, 2021,2022, the Company'sCompany’s reserves for uncertain tax positions totaled $1,386$2,134 millionand $420$1,929 million, respectively. The increase in the reserve for uncertain tax positions atas of June 30, 20222023 is primarily attributable to tax reserves that were recorded in 2023 through purchase accounting related to the Merger.Merger, which is partially offset by tax reserves released in 2023 upon audit resolutions. It is reasonably possible that the total amount of unrecognized tax benefits related to certain of the Company'sCompany’s uncertain tax positions could decrease by as much as $256$69 million within the next twelve months as a result of ongoing audits, lapses of statutes of limitations or regulatory developments.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of June 30, 20222023 and December 31, 2021,2022, the Company had accrued approximately $258$507 million and $60$413 million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The increase in the accrual for interest and penalties payable ataccrual as of June 30, 2022 is primarily attributable2023 includes interest and penalty accruals recorded in 2023 through purchase accounting related 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 17.14. SUPPLEMENTAL DISCLOSURES
The following tables present supplemental information related to the consolidated financial statements (in millions).
Accrued LiabilitiesOther Income (Expense), net
Accrued liabilitiesOther income (expense), net, 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | |
Foreign currency losses, net | $ | (4) | | | $ | (81) | | | $ | (97) | | | $ | (70) | |
(Losses) gains on derivative instruments, net | — | | | (24) | | | 3 | | | 473 | |
| | | | | | | |
Change in the value of investments with readily determinable fair value | (8) | | | (70) | | | 21 | | | (90) | |
Gain on sale of equity method investments | — | | | 133 | | | — | | | 133 | |
| | | | | | | |
Change in fair value of equity investments without readily determinable fair value | (3) | | | — | | | (71) | | | — | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Other income (expense), net | 42 | | | (9) | | | 98 | | | (7) | |
Total other income (expense), net | $ | 27 | | | $ | (51) | | | $ | (46) | | | $ | 439 | |
Other (Expense) Income, netSupplemental Cash Flow Information | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | |
| | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2023 | | 2022 |
Cash paid for taxes, net | | $ | 830 | | | $ | 442 | |
Cash paid for interest, net | | 1,137 | | | 390 | |
Non-cash investing and financing activities: | | | | |
Equity issued for the acquisition of WarnerMedia | | — | | | 42,309 | |
| | | | |
| | | | |
| | | | |
Accrued purchases of property and equipment | | 72 | | | 47 | |
Assets acquired under finance lease and other arrangements | | 72 | | | 27 | |
Assets held for sale | | 25 | | | — | |
Cash, Cash Equivalents, and Restricted Cash | | | | | | | | | | | | | | | | | | |
| | | | | | June 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | | | | | | $ | 3,027 | | | $ | 3,731 | |
Restricted cash - recorded in prepaid expenses and other current assets (1) | | | | | | 50 | | | 199 | |
Total cash, cash equivalents, and restricted cash | | | | | | $ | 3,077 | | | $ | 3,930 | |
| | | | | | | | |
(1) Restricted cash primarily includes cash posted as collateral related to the Company’s revolving receivables and hedging programs. (See Note 6 and Note 10.) |
| | | | | | | | |
|
Goodwill and Intangible Assets Impairment Analysis
During the six months ended June 30, 2023, the Company performed goodwill and intangible assets impairment monitoring procedures for all of its reporting units and identified no indicators of impairment or triggering events. Due to declining levels of global GDP growth, disruption in the film and television industry, a weakening advertising market associated with the Company’s Networks reporting unit, and execution risk associated with anticipated growth in the Company’s DTC reporting unit, the Company will continue to monitor its reporting units for changes that could impact recoverability.
WARNER BROS. 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 | |
Assets Held for SaleCash, Cash Equivalents,In 2022, the Company classified its Ranch Lot 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.) |
| | | | | | | | |
|
Knoxville office building and land as assets held for sale. The Company reclassified $209 million to prepaid expenses and other assets on the consolidated balance sheet during 2022 and stopped recording depreciation on the assets. The Knoxville office building and land was sold during the three months ended March 31, 2023.Supplier Finance Programs
Other Comprehensive Income (Loss) Adjustments
The table below presentsConsistent with customary industry practice, the tax effectsCompany generally pays certain content producers at or near the completion of the production cycle. In these arrangements, content producers may earn fees upon contractual milestones to be invoiced at or near completion of production. In these instances, the Company accrues the content in progress in accordance with the contractual milestones. Certain of the Company’s content producers sell their related receivables to each componenta bank intermediary who provides payments that coincide with these contractual production milestones upon confirmation with the Company of other comprehensive income (loss) and reclassifications madeour obligation to the content producer. This confirmation does not involve a security interest in the underlying content or otherwise result in the payable receiving seniority with respect to other payables of the Company. As of June 30, 2023 and December 31, 2022, the Company has confirmed $270 million and $273 million, respectively, of accrued content producer liabilities. These amounts were outstanding and unpaid by the Company and were recorded in accrued liabilities on the consolidated statementsbalance sheets, given the principal purpose 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 | |
the arrangement is to allow producers access to funds prior to the typical payment due date and the arrangement does not significantly change the nature of the payables and does not significantly extend the payment terms beyond the industry norms. Invoices processed through the program are subject to a one-year maximum tenor. The Company does not incur any fees or expenses associated with the paying agent services, and this service may be terminated by the Company or the financial institution upon 30 days’ notice. At, or near, the production completion date (invoice due date), the Company pays the financial institution the stated amounts for confirmed producer invoices. These payments are reported as cash flows from operating activities.Accumulated Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes (in millions). | | | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2023 |
| | Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss | | Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | Beginning balance | $ | (944) | | | $ | 10 | | | $ | (13) | | | $ | (947) | | Beginning balance | $ | (1,072) | | | $ | 15 | | | $ | (48) | | | $ | (1,105) | |
Other comprehensive income (loss) before reclassifications | Other comprehensive income (loss) before reclassifications | (488) | | | (7) | | | — | | | (495) | | Other comprehensive income (loss) before reclassifications | 60 | | | 11 | | | (4) | | | 67 | |
Reclassifications from accumulated other comprehensive loss to net income | Reclassifications from accumulated other comprehensive loss to net income | — | | | (11) | | | — | | | (11) | | Reclassifications from accumulated other comprehensive loss to net income | — | | | (4) | | | — | | | (4) | |
Other comprehensive income (loss) | Other comprehensive income (loss) | (488) | | | (18) | | | — | | | (506) | | Other comprehensive income (loss) | 60 | | | 7 | | | (4) | | | 63 | |
| Ending balance | Ending balance | $ | (1,432) | | | $ | (8) | | | $ | (13) | | | $ | (1,453) | | Ending balance | $ | (1,012) | | | $ | 22 | | | $ | (52) | | | $ | (1,042) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 loss before reclassifications | (488) | | | | | (7) | | | — | | | (495) | |
Reclassifications from accumulated other comprehensive loss to net income | — | | | | | (11) | | | — | | | (11) | |
Other comprehensive loss | (488) | | | | | (18) | | | — | | | (506) | |
Ending balance | $ | (1,432) | | | | | $ | (8) | | | $ | (13) | | | $ | (1,453) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2023 |
| | Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss | | Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | Beginning balance | $ | (845) | | | $ | 28 | | | $ | (13) | | | $ | (830) | | Beginning balance | $ | (1,498) | | | $ | 14 | | | $ | (39) | | | $ | (1,523) | |
Other comprehensive (loss) before reclassifications | (585) | | | (19) | | | — | | | (604) | | |
Other comprehensive income (loss) before reclassifications | | Other comprehensive income (loss) before reclassifications | 486 | | | 14 | | | (13) | | | 487 | |
Reclassifications from accumulated other comprehensive loss to net income | Reclassifications from accumulated other comprehensive loss to net income | (2) | | | (17) | | | — | | | (19) | | Reclassifications from accumulated other comprehensive loss to net income | — | | | (6) | | | — | | | (6) | |
| Other comprehensive (loss) | (587) | | | (36) | | | — | | | (623) | | |
| Other comprehensive income (loss) | | Other comprehensive income (loss) | 486 | | | 8 | | | (13) | | | 481 | |
Ending balance | Ending balance | $ | (1,432) | | | $ | (8) | | | $ | (13) | | | $ | (1,453) | | Ending balance | $ | (1,012) | | | $ | 22 | | | $ | (52) | | | $ | (1,042) | |
| | | Six Months Ended June 30, 2021 | | Six Months Ended June 30, 2022 |
| | Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss | | Currency Translation | | Derivatives | | Pension Plan and SERP Liability | | Accumulated Other Comprehensive Loss |
Beginning balance | Beginning balance | $ | (555) | | | $ | (81) | | | $ | (15) | | | $ | (651) | | Beginning balance | $ | (845) | | | $ | 28 | | | $ | (13) | | | $ | (830) | |
Other comprehensive (loss) income before reclassifications | (59) | | | 123 | | | — | | | 64 | | |
Other comprehensive loss before reclassifications | | Other comprehensive loss before reclassifications | (585) | | | (19) | | | — | | | (604) | |
Reclassifications from accumulated other comprehensive loss to net income | Reclassifications from accumulated other comprehensive loss to net income | — | | | 2 | | | — | | | 2 | | Reclassifications from accumulated other comprehensive loss to net income | (2) | | | (17) | | | — | | | (19) | |
Other comprehensive (loss) income | (59) | | | 125 | | | — | | | 66 | | |
Other comprehensive loss | | Other comprehensive loss | (587) | | | (36) | | | — | | | (623) | |
Ending balance | Ending balance | $ | (614) | | | $ | 44 | | | $ | (15) | | | $ | (585) | | Ending balance | $ | (1,432) | | | $ | (8) | | | $ | (13) | | | $ | (1,453) | |
NOTE 18.15. 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"Broadband”) and their subsidiaries and equity method investees (collectively the “Liberty Group”). The Company’s Board of Directors includes Dr. John Malone, who is Chairman of the Board of Liberty Global and Liberty Broadband and beneficially owns approximately 30% and 48% of the aggregate voting power with respect to the election of directors of Liberty Global. Dr. Malone is also Chairman of the Board ofGlobal and Liberty Broadband, and beneficially owns approximately 47% of the aggregate voting power with respect to the election of directors of Liberty Broadband.respectively. 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) | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Revenues and service charges: | | | | | | | | |
Liberty Group | | $ | 456 | | | $ | 535 | | | $ | 974 | | | $ | 693 | |
Equity method investees | | 118 | | | 179 | | | 293 | | | 237 | |
Other | | 47 | | | 156 | | | 94 | | | 189 | |
Total revenues and service charges | | $ | 621 | | | $ | 870 | | | $ | 1,361 | | | $ | 1,119 | |
Expenses | | $ | 93 | | | $ | 166 | | | $ | 192 | | | $ | 242 | |
Distributions to noncontrolling interests and redeemable noncontrolling interests | | $ | 32 | | | $ | 40 | | | $ | 269 | | | $ | 264 | |
| | | | | | | | |
|
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 | |
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Receivables | | $ | 403 | | | $ | 338 | |
Payables | | $ | 19 | | | $ | 38 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 19.16. 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.subsidiaries, but the Company is unable to reasonably predict the ultimate amount or timing of any payment.
In 2022, GoldenTree exercised its irrevocable put right for MotorTrend Group LLC (“MTG”), and the Company will be required to purchase GoldenTree’s 32.5% noncontrolling interest. The Company performed an analysis of the redemption value as of December 31, 2022, and both parties have begun the process of determining a fair market value based on their own appraisals. The Company does not expect this process, which is one of potentially several steps to agreeing to a redemption value, will be completed until later in 2023. Accordingly, there has been no change in the classification of MTG as mezzanine equity since the amount or date of the put is not certain.
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, stockholders, vendors, other business partners or patent issues.intellectual property. 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 20.17. 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. 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 and facility consolidation, and other charges;consolidation;
•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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, certain 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. Integration costs include transformative system implementations and integrations, such as Enterprise Resource Planning systems, and may take several years to complete. 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'sCompany’s reportable segments and corporate, and inter-segment eliminations (in millions).
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 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Studios | | $ | 2,581 | | | $ | 2,796 | | | $ | 5,793 | | | $ | 2,801 | |
Networks | | 5,758 | | | 5,742 | | | 11,339 | | | 8,615 | |
DTC | | 2,732 | | | 2,225 | | | 5,187 | | | 2,506 | |
Corporate | | (1) | | | 13 | | | (1) | | | 13 | |
Inter-segment eliminations | | (712) | | | (949) | | | (1,260) | | | (949) | |
Total revenues | | $ | 10,358 | | | $ | 9,827 | | | $ | 21,058 | | | $ | 12,986 | |
Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Studios | | $ | 306 | | | $ | 239 | | | $ | 913 | | | $ | 242 | |
Networks | | 2,166 | | | 2,262 | | | 4,459 | | | 3,617 | |
DTC | | (3) | | | (518) | | | 47 | | | (745) | |
Corporate | | (245) | | | (305) | | | (600) | | | (409) | |
Inter-segment eliminations | | (75) | | | (14) | | | (59) | | | (14) | |
Adjusted EBITDA | | $ | 2,149 | | | $ | 1,664 | | | $ | 4,760 | | | $ | 2,691 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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) IncomeLoss 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 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Net loss available to Warner Bros. Discovery, Inc. | | $ | (1,240) | | | $ | (3,418) | | | $ | (2,309) | | | $ | (2,962) | |
Net income attributable to redeemable noncontrolling interests | | 4 | | | 3 | | | 5 | | | 6 | |
Net income attributable to noncontrolling interests | | 16 | | | 7 | | | 24 | | | 23 | |
Income tax benefit | | (260) | | | (836) | | | (438) | | | (635) | |
Loss before income taxes | | (1,480) | | | (4,244) | | | (2,718) | | | (3,568) | |
Other (income) expense, net | | (27) | | | 51 | | | 46 | | | (439) | |
Loss from equity investees, net | | 22 | | | 43 | | | 59 | | | 57 | |
Loss on extinguishment of debt | | 5 | | | — | | | 5 | | | — | |
Interest expense, net | | 574 | | | 511 | | | 1,145 | | | 664 | |
Operating loss | | (906) | | | (3,639) | | | (1,463) | | | (3,286) | |
Depreciation and amortization | | 1,914 | | | 2,266 | | | 3,972 | | | 2,791 | |
Employee share-based compensation | | 135 | | | 147 | | | 241 | | | 204 | |
Restructuring | | 146 | | | 1,033 | | | 241 | | | 1,038 | |
Transaction and integration costs | | 47 | | | 983 | | | 94 | | | 1,070 | |
Facility consolidation costs | | 23 | | | — | | | 23 | | | — | |
Amortization of fair value step-up for content | | 762 | | | 870 | | | 1,593 | | | 870 | |
Amortization of capitalized interest for content | | 22 | | | — | | | 22 | | | — | |
Impairments and loss on dispositions | | 6 | | | 4 | | | 37 | | | 4 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 2,149 | | | $ | 1,664 | | | $ | 4,760 | | | $ | 2,691 | |
NOTE 21.18. SUBSEQUENT EVENTS
DuringOn July and August 2022,26, 2023, the Company repaid $1.3 billionof aggregate principal amount outstandingterminated its Rule 10b5-1 senior note repurchase programs. Under the programs, $95 million was repurchased during July 2023.
On August 3, 2023, the Company announced that its wholly-owned subsidiaries, Warner Media, LLC (“WML”), Historic TW Inc. (“TWI”), DCL and WarnerMedia Holdings, Inc. (“WMH”), had commenced cash tender offers pursuant to which (i) WML will offer to purchase for cash any and all of its term loanoutstanding 4.050% Senior Notes due April 2025. Additionally, during August 2022, the Company issued $300 million2023 and 3.550% Senior Notes due 2024, (ii) TWI will offer to purchase for cash any and all of commercial paper.
In August 2022, the Company,its outstanding 7.570% Senior Notes due 2024, (iii) DCL Scripps Networks,will offer to purchase for cash any and all of its outstanding 3.800% Senior Notes due 2024 and (iv) WMH entered into Amendment 2will offer to DCL Revolving Credit Agreementpurchase for cash any and Amendment 1 to WMH Term Loan Credit Agreement to amend the definitionall 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).its outstanding 3.528% Senior Notes due 2024 and 3.428% Senior Notes due 2024.
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 Annual Report on Form 10-K for the year ended December 31, 20212022 (the “2021“2022 Form 10-K”).
BUSINESS OVERVIEW
On April 8, 2022, Discovery, Inc., 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 (the “WarnerMedia Business”, “WM Business”, or “WM”) of AT&T Inc. (“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 leadingpremier global media and entertainment company that createscombines the WarnerMedia Business’s premium entertainment, sports and distributesnews assets with Discovery’s leading non-fiction and international entertainment and sports businesses, thus offering audiences a differentiated portfolio of content, brands and franchises across television, film, streaming and gaming. Some of our iconic brands and franchises include Warner Bros. Pictures Group, Warner Bros. Television Group, DC, HBO, Max, Discovery Channel, discovery+, CNN, HGTV, Food Network, TNT, TBS, TLC, OWN, Warner Bros. Games, Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, and The Lord of the world’sRings.
We are home to a powerful creative engine and one of the largest collections of owned content in the world and have one of the strongest hands in the industry in terms of the completeness and quality of assets and intellectual property across sports, news, lifestyle, and entertainment in virtually every region of the globe and in most differentiatedlanguages. Additionally, we serve audiences and consumers around the world with content that informs, entertains, and, when at its best, inspires.
Our asset mix positions us to drive a balanced approach to creating long-term value for shareholders. It represents the full entertainment eco-system, and the ability to serve consumers across the entire spectrum of offerings from domestic and international networks, premium pay-TV, streaming, production and release of feature films and original series, related consumer products and themed experience licensing, and interactive gaming.
The Writers Guild of America and Screen Actors Guild-American Federation of Television and Radio Artists went on strike in May and July 2023, respectively. There were no material impacts to our business during the three months ended June 30, 2023 as a result of the strikes. We continue to closely monitor the ongoing impact to our business; however, the effects on our operations and results are not yet known and will depend on future developments, which are highly uncertain and cannot be predicted.
In May 2023, we launched Max, our enhanced streaming service. Max combines HBO Max and discovery+ content to create a unique and complete portfolioviewing experience for consumers by combining our unrivaled breadth and superior quality of content and brands across television, filmwith iconic franchises 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,strong product experience. 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. will continue to be available to consumers.
In conjunctionconnection with the Merger, the Company reevaluatedhas announced and changed its segment presentation and reportable segmentshas taken actions to implement projects to achieve cost synergies for the quarter endingCompany. The Company finalized the framework supporting its ongoing restructuring and transformation initiatives during the year ended December 31, 2022, which includes, among other things, strategic content programming assessments, organization restructuring, facility consolidation activities, and other contract termination costs. While the Company’s restructuring efforts are ongoing, the restructuring program is expected to be substantially completed by the end of 2024. We expect that we will incur approximately $4.1 - $5.3 billion in pre-tax restructuring charges, of which we have incurred $4.0 billion as of June 30, 2022. 2023. Of the total expected pre-tax restructuring charges, we expect total cash expenditures to be $1.0 - $ 1.5 billion. During the three and six months ended June 30, 2023, we incurred $146 million and $241 million, respectively, of pre-tax restructuring charges. While our restructuring efforts are ongoing, the restructuring program is expected to be substantially completed by the end of 2024.
As of June 30, 2022,2023, we classified our operations in three reportable segments:
Studios,• consistingStudios - 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;gaming.
Networks,• consisting principallyNetworks - Our Networks segment primarily consists of our domestic and international television networks; andnetworks.
•DTC - consistingOur DTC segment primarily consists of our premium pay TVpay-TV and digital contentstreaming services.
Our segment presentation is 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. Prior periods have been recast to conform to the 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.
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 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 are 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
The discussion below compares our actual results for the three and six months ended June 30, 2023 to our pro forma combined results, as if the Merger occurred on January 1, 2021, for the three and six months ended June 30, 2022 to the three and six months ended June 30, 2021.2022. 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 upstep-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) 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 (vi) adjustments to eliminate intercompany activity.(viii) associated tax-related impacts of adjustments.
Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined business.businesses. 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'sCompany’s future consolidated results of operations.
Actual amounts for the three and six months ended June 30, 2022 include results of operations for Discovery for the entire period and WM for the period subsequent to the completion of the Merger on April 8, 2022.
Foreign Exchange Impacting Comparability
In 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”), in addition to results reported in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”)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“2023 Baseline Rate”), and the prior year amounts translated at the same 20222023 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 tabletables below presentspresent our consolidated results of operations (in millions). | | | Three Months Ended June 30, | | | | | Three Months Ended June 30, | | | |
| | 2022 | | 2021 | | | % Change | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Combined (ex-FX) |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | |
Distribution | | Distribution | | $ | 5,135 | | | | $ | 4,838 | | $ | 343 | | $ | 5,181 | | | | 6 | % | (1) | % | — | % |
Advertising | Advertising | | $ | 2,721 | | $ | 178 | | $ | 2,899 | | | $ | 1,634 | | $ | 1,191 | | $ | 2,825 | | | | 67 | % | 3 | % | 5 | % | Advertising | | 2,519 | | | | 2,721 | | 178 | | 2,899 | | | | (7) | % | (13) | % | (13) | % |
Distribution | | 4,838 | | 343 | | 5,181 | | | 1,312 | | 3,956 | | 5,268 | | | | NM | (2) | % | — | % | |
Content | Content | | 2,064 | | 446 | | 2,510 | | | 100 | | 2,842 | | 2,942 | | | | NM | (15) | % | (12) | % | Content | | 2,446 | | | | 2,064 | | 446 | | 2,510 | | | | 19 | % | (3) | % | (3) | % |
Other | Other | | 204 | | 29 | | 233 | | | 16 | | 160 | | 176 | | | | NM | 32 | % | 32 | % | Other | | 258 | | | | 204 | | 29 | | 233 | | | | 26 | % | 11 | % | 9 | % |
Total revenues | Total revenues | | 9,827 | | 996 | | 10,823 | | | 3,062 | | 8,149 | | 11,211 | | | | NM | (3) | % | (1) | % | Total revenues | | 10,358 | | | | 9,827 | | 996 | | 10,823 | | | | 5 | % | (4) | % | (4) | % |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 6,625 | | 667 | | 7,292 | | | 1,055 | | 5,619 | | 6,674 | | | | NM | 9 | % | 12 | % | Costs of revenues, excluding depreciation and amortization | | 6,636 | | | | 6,625 | | 520 | | 7,145 | | | | — | % | (7) | % | (7) | % |
Selling, general and administrative | Selling, general and administrative | | 3,538 | | (553) | | 2,985 | | | 952 | | 1,865 | | 2,817 | | | | NM | 6 | % | 8 | % | Selling, general and administrative | | 2,562 | | | | 3,538 | | (553) | | 2,985 | | | | (28) | % | (14) | % | (14) | % |
Depreciation and amortization | Depreciation and amortization | | 2,266 | | (425) | | 1,841 | | | 341 | | 1,725 | | 2,066 | | | | NM | (11) | % | (10) | % | Depreciation and amortization | | 1,914 | | | | 2,266 | | (420) | | 1,846 | | | | (16) | % | 4 | % | 4 | % |
Restructuring | | Restructuring | | 146 | | | | 1,033 | | (89) | | 944 | | | | (86) | % | (85) | % | (85) | % |
Impairments and loss on dispositions | | Impairments and loss on dispositions | | 6 | | | | 4 | | — | | 4 | | | | 50 | % | 50 | % | (25) | % |
| Restructuring and other charges | | 1,033 | | (89) | | 944 | | | 7 | | — | | 7 | | | | NM | |
Loss (gain) on disposition | | 4 | | — | | 4 | | | (72) | | — | | (72) | | | | NM | |
Total costs and expenses | Total costs and expenses | | 13,466 | | (400) | | 13,066 | | | 2,283 | | 9,209 | | 11,492 | | | | NM | 14 | % | NM | Total costs and expenses | | 11,264 | | | | 13,466 | | (542) | | 12,924 | | | | (16) | % | (13) | % | (13) | % |
Operating (loss) income | | (3,639) | | 1,396 | | (2,243) | | | 779 | | (1,060) | | (281) | | | | NM | |
Operating loss | | Operating loss | | (906) | | | | (3,639) | | 1,538 | | (2,101) | | | | 75 | % | 57 | % | 57 | % |
Interest expense, net | Interest expense, net | | (511) | | | (157) | | | | NM | | Interest expense, net | | (574) | | | | (511) | | (54) | | (565) | | | | |
| Loss on extinguishment of debt | | Loss on extinguishment of debt | | (5) | | | | — | | — | | — | | | | |
Loss from equity investees, net | Loss from equity investees, net | | (43) | | | (7) | | | | NM | | Loss from equity investees, net | | (22) | | | | (43) | | (7) | | (50) | | | | |
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 | | |
Other income (expense), net | | Other income (expense), net | | 27 | | | | (51) | | 25 | | (26) | | | | |
Loss before income taxes | | Loss before income taxes | | (1,480) | | | | (4,244) | | 1,502 | | (2,742) | | | | |
Income tax benefit | | Income tax benefit | | 260 | | | | 836 | | 60 | | 896 | | | | |
Net loss | | Net loss | | (1,220) | | | | (3,408) | | 1,562 | | (1,846) | | | | |
Net income attributable to noncontrolling interests | Net income attributable to noncontrolling interests | | (7) | | | (38) | | | | (82) | % | | Net income attributable to noncontrolling interests | | (16) | | | | (7) | | (1) | | (8) | | | | |
Net income attributable to redeemable noncontrolling interests | Net income attributable to redeemable noncontrolling interests | | (3) | | | (8) | | | | (63) | % | | Net income attributable to redeemable noncontrolling interests | | (4) | | | | (3) | | — | | (3) | | | | |
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. | |
Net loss available to Warner Bros. Discovery, Inc. | | Net loss available to Warner Bros. Discovery, Inc. | | $ | (1,240) | | | | $ | (3,418) | | $ | 1,561 | | $ | (1,857) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2023 | | 2022 | | | % Change |
| | Actual | | | | Actual (a) | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Distribution | | $ | 10,298 | | | | | $ | 6,190 | | $ | 4,339 | | $ | 10,529 | | | | 66 | % | (2) | % | (1) | % |
Advertising | | 4,817 | | | | | 4,197 | | 1,412 | | 5,609 | | | | 15 | % | (14) | % | (14) | % |
Content | | 5,400 | | | | | 2,387 | | 3,297 | | 5,684 | | | | NM | (5) | % | (4) | % |
Other | | 543 | | | | | 212 | | 230 | | 442 | | | | NM | 23 | % | 22 | % |
Total revenues | | 21,058 | | | | | 12,986 | | 9,278 | | 22,264 | | | | 62 | % | (5) | % | (4) | % |
Costs of revenues, excluding depreciation and amortization | | 13,321 | | | | | 7,861 | | 5,781 | | 13,642 | | | | 69 | % | (2) | % | (2) | % |
Selling, general and administrative | | 4,950 | | | | | 4,578 | | 1,745 | | 6,323 | | | | 8 | % | (22) | % | (21) | % |
Depreciation and amortization | | 3,972 | | | | | 2,791 | | 997 | | 3,788 | | | | 42 | % | 5 | % | 5 | % |
Restructuring | | 241 | | | | | 1,038 | | (90) | | 948 | | | | (77) | % | (75) | % | (75) | % |
Impairments and loss on dispositions | | 37 | | | | | 4 | | — | | 4 | | | | NM | NM | NM |
| | | | | | | | | | | | | |
Total costs and expenses | | 22,521 | | | | | 16,272 | | 8,433 | | 24,705 | | | | 38 | % | (9) | % | (8) | % |
Operating loss | | (1,463) | | | | | (3,286) | | 845 | | (2,441) | | | | 55 | % | 40 | % | 42 | % |
Interest expense, net | | (1,145) | | | | | (664) | | (499) | | (1,163) | | | | | | |
Loss on extinguishment of debt | | (5) | | | | | — | | — | | — | | | | | | |
Loss from equity investees, net | | (59) | | | | | (57) | | (20) | | (77) | | | | | | |
Other (expense) income, net | | (46) | | | | | 439 | | 139 | | 578 | | | | | | |
Loss before income taxes | | (2,718) | | | | | (3,568) | | 465 | | (3,103) | | | | | | |
Income tax benefit | | 438 | | | | | 635 | | 342 | | 977 | | | | | | |
Net loss | | (2,280) | | | | | (2,933) | | 807 | | (2,126) | | | | | | |
Net income attributable to noncontrolling interests | | (24) | | | | | (23) | | (1) | | (24) | | | | | | |
Net income attributable to redeemable noncontrolling interests | | (5) | | | | | (6) | | — | | (6) | | | | | | |
Net loss available to Warner Bros. Discovery, Inc. | | $ | (2,309) | | | | | $ | (2,962) | | $ | 806 | | $ | (2,156) | | | | | | |
| | | | | | | | | | | | | |
(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. |
TheUnless otherwise indicated, the discussion through operating (loss) income below isreflects results for the three and six months ended June 30, 2022 on a pro formapro-forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenue,revenues, and selling, general and administrative expenses and adjusted EBITDA are substantially attributable to the Merger. The percent changes of line items below operating (loss) income in the table above are not included as the activity is principally in U.S. dollars.
Revenues
Distribution revenues are generated from fees charged to network distributors, which include cable, DTH satellite, telecommunications and digital service providers, and DTC subscribers. The largest component of distribution revenue is comprised of linear distribution rights to our networks from cable, DTH satellite and telecommunication service providers. We have contracts with distributors representing most cable and satellite service providers around the world, including the largest operators in the U.S. and major international distributors. Distribution revenues are largely dependent on the rates negotiated in the agreements, the number of subscribers that receive our networks, the number of platforms covered in the distribution agreement, and the market demand for the content that we provide. From time to time, renewals of multi-year carriage agreements include significant year one market adjustments to re-set subscriber rates, which then increase at rates lower than the initial increase in the following years. In some cases, we have provided distributors launch incentives, in the form of cash payments or free periods, to carry our networks.
Distribution revenue was flat and decreased 1% for the three and six months ended June 30, 2023, respectively. For the three months ended June 30, 2023, declines in linear subscribers in the U.S. and DTC wholesale revenues were offset by global DTC subscriber growth and higher U.S. contractual affiliate rates. The decrease for the six months ended June 30, 2023 was primarily attributable to declines in DTC wholesale revenues and linear subscribers in the U.S., partially offset by global DTC subscriber growth and higher U.S. contractual affiliate rates.
Advertising revenues are principally generated from the sale of commercial time on linear (television networks and authenticated TVE applications) and digital platforms (DTC subscription services and websites), and sold primarily on a national basis in the U.S. and on a pan-regional or local-language feed basis outside the U.S. Advertising contracts generally have a term of one year or less. 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 stage of development of television markets, and the popularity of FTA television. Revenue from advertising is subject to seasonality, market-based variations, the mix in sales of commercial time between the upfront and scatter markets, and general economic conditions. These factors impact the pricing and volume of our advertising inventory.
Advertising revenue increased 5%is typically highest in the second and fourth quarters. In some cases, advertising sales are subject to ratings guarantees that require us to provide additional advertising time if the guaranteed audience levels are not achieved. We also generate revenue from the sale of advertising through our digital platforms on a stand-alone basis and as part of advertising packages with our television networks.
Advertising revenue decreased 13% and 14% for the three and six months ended June 30, 2023, respectively, primarily attributable to audience declines in domestic general entertainment and news networks, soft advertising markets in the U.S. and, to a lesser extent, certain international markets, and broadcast of the NCAA March Madness Final Four and Championship in 2022, partially offset by the broadcast of the Stanley Cup Finals. Additionally, the six months ended June 30, 2023 was unfavorably impacted by the prior year broadcast of the Olympics in Europe.
Content revenues are generated from the release of feature films for initial exhibition in theaters, the licensing of feature films and television programs to various television, SVOD and other digital markets, distribution of feature films and television programs in the physical and digital home entertainment market, sales of console games and mobile in-game content, sublicensing of sports rights, and licensing of intellectual property such as characters and brands.
Content revenue decreased 3% and 4% for the three and six months ended June 30, 2022, respectively, primarily attributable to increased sports advertising in the U.S., the launch of the HBO Max ad-supported tier product in June 2021, and subscriber growth at discovery+ ad-lite tier, partially offset by lower news, kids, and general entertainment performance in the U.S.
Distribution revenue consists principally of fees from affiliates for distributing our linear networks and DTC subscription services.
Distribution revenue was flat for the three months ended June 30, 2022 and increased 3% for the six months ended June 30, 2022, respectively. While distribution revenue was flat for the three months ended 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, 2022,2023, respectively. The decrease for the three months ended June 30, 2022 is2023 was primarily attributable to lower TV licensing, games, home entertainment revenue, and theatrical film rentals, partially offset by the proportiontiming of inter-segmentcertain DTC licensing increasing as a percentage of total content revenue.deals. The increasedecrease for the six months ended June 30, 2022 is2023 was primarily attributable to lower TV licensing, theatrical film rental, and home entertainment revenue, partially offset by higher third party internationalgames revenue due to the release of Hogwarts Legacy and the timing of certain DTC licensing deals.
Other revenue primarily consists of sports rights.studio production services and tours.
Other revenue increased 32%9% and 39%22% for the three and six months ended June 30, 2022,2023, respectively, primarily attributable to increased studio operations revenues fromservices provided to the reopeningunconsolidated TNT Sports joint venture (formerly known as BT Sport) and continued strong attendance at Warner Bros. Studio Tour London and Hollywood, as well as the opening of the Warner Bros. Studio Tour London.
Revenue for our segments is discussed separately below underTokyo. In addition, the heading “Segment Results of Operations.”six months ended June 30, 2023 was favorably impacted by higher studio production services.
Costs of Revenues
The Company'sOur principal component of costs of revenues is content expense. Content expense includes televisiontelevision/digital series, television specials, films, games, and sporting events, and digital products.events. The costs of producing a content asset and bringing that asset to market consist of production costs, participation costs, and exploitation costs.
CostCosts of revenues increased 12%decreased 7% and 8%2% for the three and six months ended June 30, 2022, respectively,2023, respectively. The decrease for the three months ended June 30, 2023 was primarily attributable to increased investments inlower content expense for Studios (television, theatrical, and games), DTC, programming expenses,and Networks. The decrease for the six months ended June 30, 2023 was primarily attributable to lower content expense for Studios (television and theatrical products) and Networks, partially offset by higher games and theatrical content expenses, and sports rights.cost of revenue.
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% decreased 14%and decreased 2%21% for the three and six months ended June 30, 2022, respectively. Selling, general, and administrative expenses2023, respectively, primarily attributable to more efficient marketing-related spend, notwithstanding increased forcosts in the three months ended June 30, 2022, primarily attributable to increased third-party transaction and integration costs related to the Merger and share-based compensation. Selling, general, and administrative expenses decreased2023 for the six months ended June 30, 2022, primarily attributable to lower marketing-relatedMax U.S. launch campaign, and a reduction in personnel costs and technology-related operating expenses.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization decreased $214 millionincreased 4% and $429 million,5% for the three and six months ended June 30, 2023, respectively, primarily attributable to a change in amortization method fromintangible assets acquired during the straight-line method toMerger that are being amortized using the sum of the years'months’ digits method, for some ofwhich resulted in lower pro forma amortization in the WM assets acquired.three and six months ended June 30, 2022.
Restructuring and
Other Charges
Restructuring
In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the Company. Restructuring costs were primarily attributable to contract terminations, facility consolidation activities, organizational restructuring, and other charges increased $937and decreased $797 million and $836$707 million for the three and six months ended 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 a result of the Merger.2023, respectively. (See Note 54 to the accompanying consolidated financial statements.)
Impairments and Loss (Gain) on DispositionDispositions
GainImpairments and loss on dispositiondispositions was $72$6 million and $37 million for the three and six months ended June 30, 2021, and was primarily attributable to the sale of our Great American Country network. (See Note 3 to the accompanying consolidated financial statements.)2023, respectively.
Interest Expense, net
InterestActual interest expense, net increased $354$63 million and $344$481 million for the three and six months ended June 30, 2022,2023, respectively, primarily attributable to debt assumed debt as a result of the Merger. (See Note 109 and Note 1210 to the accompanying consolidated financial statements.)
Loss From Equity Investees, net
We reportedActual losses from our equity method investees of $43were $22 million and$57 $59 million for the three and six months ended June 30, 2022, as compared to losses of $7 million and $11 million for the three and six months ended June 30, 2021,2023, respectively. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 98 to the accompanying consolidated financial statements.)
Other Income (Expense) Income,, net
The table below presents the details of other income (expense) income,, net (in millions).
| | | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Foreign currency (losses) gain, net | | $ | (81) | | | $ | (5) | | | $ | (70) | | | $ | 47 | | |
Foreign currency losses, net | | Foreign currency losses, net | | $ | (4) | | | $ | (81) | | | $ | (97) | | | $ | (70) | |
(Losses) gains on derivative instruments, net | (Losses) gains on derivative instruments, net | | (24) | | | (1) | | | 473 | | | (21) | | (Losses) gains on derivative instruments, net | | — | | | (24) | | | 3 | | | 473 | |
| Change in the value of investments with readily determinable fair value | Change in the value of investments with readily determinable fair value | | (70) | | | 29 | | | (90) | | | 46 | | Change in the value of investments with readily determinable fair value | | (8) | | | (70) | | | 21 | | | (90) | |
Gain on sale of equity method investments | Gain on sale of equity method investments | | 133 | | | (1) | | | 133 | | | 4 | | Gain on sale of equity method investments | | — | | | 133 | | | — | | | 133 | |
Change in fair value of equity investments without readily determinable fair value | Change in fair value of equity investments without readily determinable fair value | | — | | | 81 | | | — | | | 81 | | Change in fair value of equity investments without readily determinable fair value | | (3) | | | — | | | (71) | | | — | |
| Other (expense) income, net | | (9) | | | 2 | | | (7) | | | 16 | | |
Total other (expense) income, net | | $ | (51) | | | $ | 105 | | | $ | 439 | | | $ | 173 | | |
Other income (expense), net | | Other income (expense), net | | 42 | | | (9) | | | 98 | | | (7) | |
Total other income (expense), net | | Total other income (expense), net | | $ | 27 | | | $ | (51) | | | $ | (46) | | | $ | 439 | |
Income Tax Benefit (Expense)
Income tax benefit was $260 million and $438 million for the three and six months ended June 30, 2023, respectively, and income tax benefit was $836 million and $635 million for the three and six months ended June 30, 2022, respectively, andrespectively. The decrease in income tax expense was $2 million and $108 millionbenefit for the three and six months ended June 30, 2021, respectively.2023 was primarily attributable to an increase in pre-tax book income. The decrease is partially offset by the tax benefit from an uncertain tax position reserve release as a result of a multi-year audit resolution recorded in the three months ended June 30, 2022 was primarily attributable to a decrease in pre-tax book income.The decrease is partially offset by the2023 and an unfavorable tax adjustment related to the preferred stock conversion transaction expensediscussed in Note 2 recorded in the three months ended June 30, 2022 that was not deductible for tax purposes and a deferred tax benefit of $162 million recorded inassociated with the three months ended June 30, 2021 as a result of the UK Finance Act 2021 that was enacted in June 2021.merger.
Income tax benefit for the three and six months ended June 30, 20222023 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, which included taxationchanges in uncertain tax positions, 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.taxes.
Segment Results of Operations
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 and facility consolidation, and other charges;consolidation;
•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, certain 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. Integration costs include transformative system implementations and integrations, such as Enterprise Resource Planning systems, and may take several years to complete. 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 table below presents our reconciliation of consolidated net income available to Warner Bros. Discovery, Inc. to Adjusted EBITDA and Adjusted EBITDA by segment (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | 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 | % |
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| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
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Studios | | $ | 306 | | | $ | 239 | | | 28 | % | | $ | 913 | | | $ | 242 | | | NM |
Networks | | $ | 2,166 | | | $ | 2,262 | | | (4) | % | | $ | 4,459 | | | $ | 3,617 | | | 23 | % |
DTC | | $ | (3) | | | $ | (518) | | | 99 | % | | $ | 47 | | | $ | (745) | | | NM |
Corporate | | $ | (245) | | | $ | (305) | | | 20 | % | | $ | (600) | | | $ | (409) | | | (47) | % |
Inter-segment eliminations | | $ | (75) | | | $ | (14) | | | NM | | $ | (59) | | | $ | (14) | | | NM |
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| | 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 EBITDA (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2022 | | 2021 | | % Change | | 2022 | | 2021 | | % Change |
Revenues: | | | | | | | | | | | | |
Studios | | $ | 2,796 | | | $ | 2 | | | NM | | $ | 2,801 | | | $ | 7 | | | NM |
Networks | | 5,742 | | | 2,844 | | | NM | | 8,615 | | | 5,504 | | | 57 | % |
DTC | | 2,225 | | | 216 | | | NM | | 2,506 | | | 343 | | | NM |
Corporate | | 13 | | | — | | | NM | | 13 | | | — | | | NM |
Inter-segment eliminations | | (949) | | | — | | | NM | | (949) | | | — | | | NM |
Total revenues | | 9,827 | | | 3,062 | | | NM | | 12,986 | | | 5,854 | | | NM |
Costs of revenues, excluding depreciation and amortization | | 5,755 | | | 1,055 | | | NM | | 6,991 | | | 2,024 | | | NM |
Selling, general and administrative (a) | | 2,408 | | | 890 | | | NM | | 3,304 | | | 1,876 | | | 76 | % |
Adjusted EBITDA | | $ | 1,664 | | | $ | 1,117 | | | 49 | % | | $ | 2,691 | | | $ | 1,954 | | | 38 | % |
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(a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs. |
Studios Segment
The following tables present, for our StudioStudios segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating (loss) income (in millions).
| | | | Three Months Ended June 30, | | | | | | | Three Months Ended June 30, | | | | |
| | | 2022 | | 2021 | | | % Change | | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | |
Distribution | | Distribution | | $ | 3 | | | | $ | 4 | | $ | 1 | | $ | 5 | | | | (25) | % | (40) | % | (40) | % |
Advertising | Advertising | | $ | 10 | | $ | — | | $ | 10 | | | $ | — | | $ | 27 | | $ | 27 | | | | NM | (63) | % | (63) | % | Advertising | | 4 | | | | 10 | | — | | 10 | | | | (60) | % | (60) | % | (60) | % |
Distribution | | 4 | | 1 | | 5 | | | — | | 5 | | 5 | | | | NM | — | % | — | % | |
Content | Content | | 2,636 | | 551 | | 3,187 | | | 2 | | 3,195 | | 3,197 | | | | NM | — | % | 3 | % | Content | | 2,398 | | | | 2,636 | | 551 | | 3,187 | | | | (9) | % | (25) | % | (25) | % |
Other | Other | | 146 | | 16 | | 162 | | | — | | 104 | | 104 | | | | NM | 56 | % | 56 | % | Other | | 176 | | | | 146 | | 16 | | 162 | | | | 21 | % | 9 | % | 9 | % |
Total revenues | Total revenues | | 2,796 | | 568 | | 3,364 | | | 2 | | 3,331 | | 3,333 | | | | NM | 1 | % | 4 | % | Total revenues | | 2,581 | | | | 2,796 | | 568 | | 3,364 | | | | (8) | % | (23) | % | (24) | % |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 2,006 | | 328 | | 2,334 | | | — | | 2,244 | | 2,244 | | | | NM | 4 | % | 6 | % | Costs of revenues, excluding depreciation and amortization | | 1,645 | | | | 2,006 | | 328 | | 2,334 | | | | (18) | % | (30) | % | (30) | % |
Selling, general and administrative | Selling, general and administrative | | 551 | | 70 | | 621 | | | — | | 650 | | 650 | | | | NM | (4) | % | (2) | % | Selling, general and administrative | | 630 | | | | 551 | | 70 | | 621 | | | | 14 | % | 1 | % | 1 | % |
Adjusted EBITDA | Adjusted EBITDA | | 239 | | 170 | | 409 | | | 2 | | 437 | | 439 | | | | NM | (7) | % | — | % | Adjusted EBITDA | | 306 | | | | 239 | | 170 | | 409 | | | | 28 | % | (25) | % | (26) | % |
Depreciation and amortization | Depreciation and amortization | | 158 | | (21) | | 137 | | | — | | 172 | | 172 | | | | | Depreciation and amortization | | 143 | | | | 158 | | (21) | | 137 | | | | |
Employee share-based compensation | Employee share-based compensation | | — | | 1 | | 1 | | | — | | 11 | | 11 | | | | | Employee share-based compensation | | — | | | | — | | 1 | | 1 | | | | |
| Restructuring and other charges | | 200 | | (38) | | 162 | | | — | | — | | — | | | | | |
Restructuring | | Restructuring | | 10 | | | | 200 | | (38) | | 162 | | | | |
Transaction and integration costs | | Transaction and integration costs | | 2 | | | | — | | — | | — | | | | |
| Amortization of fair value step-up for content | | Amortization of fair value step-up for content | | 271 | | | | 563 | | (422) | | 141 | | | | |
Amortization of capitalized interest for content | | Amortization of capitalized interest for content | | 22 | | | | — | | — | | — | | | | |
| Impairments and loss on dispositions | | Impairments and loss on dispositions | | (1) | | | | — | | — | | — | | | | |
Operating (loss) income | | Operating (loss) income | | $ | (141) | | | | $ | (682) | | $ | 650 | | $ | (32) | | | | |
| | | 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. | |
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| | 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. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2023 | | 2022 | | | % Change |
| | Actual | | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | | | | | | | | | | | | | |
Distribution | | $ | 6 | | | | | $ | 4 | | $ | 6 | | $ | 10 | | | | 50 | % | (40) | % | (40) | % |
Advertising | | 7 | | | | | 10 | | 9 | | 19 | | | | (30) | % | (63) | % | (63) | % |
Content | | 5,425 | | | | | 2,641 | | 3,898 | | 6,539 | | | | NM | (17) | % | (16) | % |
Other | | 355 | | | | | 146 | | 154 | | 300 | | | | NM | 18 | % | 18 | % |
Total revenues | | 5,793 | | | | | 2,801 | | 4,067 | | 6,868 | | | | NM | (16) | % | (15) | % |
Costs of revenues, excluding depreciation and amortization | | 3,604 | | | | | 2,007 | | 2,392 | | 4,399 | | | | 80 | % | (18) | % | (18) | % |
Selling, general and administrative | | 1,276 | | | | | 552 | | 698 | | 1,250 | | | | NM | 2 | % | 4 | % |
Adjusted EBITDA | | 913 | | | | | 242 | | 977 | | 1,219 | | | | NM | (25) | % | (24) | % |
Depreciation and amortization | | 315 | | | | | 158 | | 115 | | 273 | | | | | | |
Employee share-based compensation | | — | | | | | — | | 26 | | 26 | | | | | | |
| | | | | | | | | | | | | |
Restructuring | | 86 | | | | | 200 | | (38) | | 162 | | | | | | |
Transaction and integration costs | | 4 | | | | | — | | — | | — | | | | | | |
| | | | | | | | | | | | | |
Amortization of fair value step-up for content | | 713 | | | | | 563 | | (251) | | 312 | | | | | | |
Amortization of capitalized interest for content | | 22 | | | | | — | | — | | — | | | | | | |
Inter-segment eliminations | | 1 | | | | | — | | — | | — | | | | | | |
Impairments and loss on dispositions | | (1) | | | | | — | | — | | — | | | | | | |
Operating (loss) income | | $ | (227) | | | | | $ | (679) | | $ | 1,125 | | $ | 446 | | | | | | |
| | | | | | | | | | | | | |
|
The discussion below isreflects results for the three and six months ended June 30, 2022 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 adjustedAdjusted EBITDA are substantially attributable to the Merger.
Revenues
Content revenue increased 3%decreased 25% and 7%16% for the three and six months ended June 30, 2022,2023, respectively. The increasedecrease for the three months ended June 30, 20222023 was primarily attributable to higherlower TV licensing, games, home entertainment, and theatrical film rental revenue. TV licensing revenue withdecreased due to the timing of TV production, fewer CW series, and fewer series sold to our owned platforms. Games revenue decreased due to the release of LEGO Star Wars -Wars: The Skywalker Saga partially offset by lower TV licensing, homein the second quarter of 2022. Home entertainment and theatrical film rental revenue. The decrease in TV licensing was primarily attributable to lower TV production revenue partially offset by the timing of new series availabilities. Theatrical performance was unfavorably impacted by the timing of releases, and home entertainment across theatrical and television product was lowerdecreased due to strong COVID-induced demand in the performance of prior year quarter.theatrical releases, including The Batman.
The increasedecrease for the six months ended June 30, 20222023 was primarily attributable to lower TV licensing, theatrical film rental, and home entertainment revenue, partially offset by higher games revenue due to the release of Hogwarts Legacy. TV licensing revenue decreased due to certain large TV licensing deals in the prior year, fewer CW series, fewer series sold to our owned platforms, the quantity and mix of theatrical availabilities, and the timing of TV production. Theatrical film rental revenue and TV licensing revenue, partly offset by lower home entertainment revenue. Theatricalrevenue decreased due to the performance was favorably impacted by performance of prior year theatrical releases, including The Batman, which was released in the first quarter of 2022. The increase in TV licensing revenue was primarily attributable to timing of availabilities across theatrical and television product, partially offset by lower TV production revenue..
Other revenue increased 56%9% and 62%18% for the three and six months ended June 30, 2022,2023, respectively. The increase for the three and six months ended June 30, 20222023 was primarily attributable to increased studio operations revenues fromcontinued strong attendance at Warner Bros. Studio Tour London and Hollywood, as well as the reopeningopening of Warner Bros. Studio Tour London.Tokyo. In addition, the six months ended June 30, 2023 was favorably impacted by higher studio production services.
Costs of Revenues
Costs of revenues increased 6%decreased 30% and 3%18% for the three and six months ended June 30, 2022,2023, respectively. The increasedecrease for the three months ended June 30, 2023 was primarily attributable to lower content expense for television, theatrical, and games products associated with lower revenues. The decrease for the six months ended June 30, 2023 was primarily attributable to lower content expense for television and theatrical products, partially offset by higher games cost of revenue.
Selling, General and Administrative
Selling, general and administrative expenses increased 1% and 4% for the three and six months ended June 30, 20222023, respectively. The increase for the three months ended June 30, 2023 was primarily attributable to higher games and theatrical content expense, partially offset by lower contentmarketing expense. The increase for the six months ended June 30, 2023 was primarily attributable to higher marketing expense for television products.games to support the release of Hogwarts Legacy.
Selling, GeneralAdjusted EBITDA
Adjusted EBITDA decreased 26% and Administrative
Selling, general and administrative expenses decreased 2%24% for the three and six months ended June 30, 2022, respectively. The decrease for the three and six months ended June 30, 2022 was primarily attributable to lower marketing expenses due to fewer theatrical releases, partially offset by higher bad debt expense.
Adjusted EBITDA
Adjusted EBITDA was flat and increased 46% for the three and six months ended June 30, 2022,2023, respectively.
Networks Segment
The tabletables below presents,present, for our Networks segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating income (in millions).
| | | | Three Months Ended June 30, | | | | | | Three Months Ended June 30, | | | |
| | | 2022 | | 2021 | | | % Change | | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | |
Distribution | | Distribution | | $ | 2,941 | | | | $ | 2,841 | | $ | 171 | | $ | 3,012 | | | | 4 | % | (2) | % | (1) | % |
Advertising | Advertising | | $ | 2,624 | | $ | 178 | | $ | 2,802 | | | $ | 1,601 | | $ | 1,195 | | $ | 2,796 | | | | 64 | % | — | % | 2 | % | Advertising | | 2,448 | | | | 2,624 | | 178 | | 2,802 | | | | (7) | % | (13) | % | (13) | % |
Distribution | | 2,841 | | 171 | | 3,012 | | | 1,132 | | 1,955 | | 3,087 | | | | NM | (2) | % | (1) | % | |
Content | Content | | 220 | | 21 | | 241 | | | 96 | | 123 | | 219 | | | | NM | 10 | % | 11 | % | Content | | 284 | | | | 220 | | 21 | | 241 | | | | 29 | % | 18 | % | 18 | % |
Other | Other | | 57 | | 9 | | 66 | | | 15 | | 47 | | 62 | | | | NM | 6 | % | 6 | % | Other | | 85 | | | | 57 | | 9 | | 66 | | | | 49 | % | 29 | % | 24 | % |
Total revenues | Total revenues | | 5,742 | | 379 | | 6,121 | | | 2,844 | | 3,320 | | 6,164 | | | | NM | (1) | % | 1 | % | Total revenues | | 5,758 | | | | 5,742 | | 379 | | 6,121 | | | | — | % | (6) | % | (5) | % |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 2,767 | | 253 | | 3,020 | | | 874 | | 1,848 | | 2,722 | | | | NM | 11 | % | 14 | % | Costs of revenues, excluding depreciation and amortization | | 2,849 | | | | 2,767 | | 253 | | 3,020 | | | | 3 | % | (6) | % | (5) | % |
Selling, general and administrative | Selling, general and administrative | | 713 | | 31 | | 744 | | | 432 | | 328 | | 760 | | | | 65 | % | (2) | % | — | % | Selling, general and administrative | | 743 | | | | 713 | | 31 | | 744 | | | | 4 | % | — | % | — | % |
Adjusted EBITDA | Adjusted EBITDA | | 2,262 | | 95 | | 2,357 | | | 1,538 | | 1,144 | | 2,682 | | | | 47 | % | (12) | % | (11) | % | Adjusted EBITDA | | 2,166 | | | | 2,262 | | 95 | | 2,357 | | | | (4) | % | (8) | % | (7) | % |
Depreciation and amortization | Depreciation and amortization | | 1,482 | | (283) | | 1,199 | | | 262 | | 1,061 | | 1,323 | | | | | Depreciation and amortization | | 1,262 | | | | 1,482 | | (281) | | 1,201 | | | | |
Employee share-based compensation | | — | | — | | — | | | — | | 8 | | 8 | | | | | |
Restructuring and other charges | | 308 | | (5) | | 303 | | | 7 | | — | | 7 | | | | | |
| Restructuring | | Restructuring | | 110 | | | | 308 | | (5) | | 303 | | | | |
Transaction and integration costs | Transaction and integration costs | | 1 | | — | | 1 | | | — | | — | | — | | | | | Transaction and integration costs | | 8 | | | | 1 | | — | | 1 | | | | |
| Amortization of fair value step-up for content | Amortization of fair value step-up for content | | 1 | | 293 | | 294 | | | — | | 280 | | 280 | | | | | Amortization of fair value step-up for content | | 279 | | | | 1 | | 293 | | 294 | | | | |
| Inter-segment eliminations | Inter-segment eliminations | | (2) | | — | | (2) | | | — | | — | | — | | | | | Inter-segment eliminations | | 22 | | | | (2) | | — | | (2) | | | | |
Loss on disposition | | — | | — | | — | | | (72) | | — | | (72) | | | | | |
Impairments and loss on dispositions | | Impairments and loss on dispositions | | 4 | | | | — | | — | | — | | | | |
Operating income | Operating income | | $ | 472 | | $ | 90 | | $ | 562 | | | $ | 1,341 | | $ | (205) | | $ | 1,136 | | | | | Operating income | | $ | 481 | | | | $ | 472 | | $ | 88 | | $ | 560 | | | | |
| (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, | | | | | | Six Months Ended June 30, | | | |
| | | 2022 | | 2021 | | | % Change | | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | |
Distribution | | Distribution | | $ | 5,936 | | | | $ | 3,961 | | $ | 2,183 | | $ | 6,144 | | | | 50 | % | (3) | % | (2) | % |
Advertising | Advertising | | $ | 4,054 | | $ | 1,380 | | $ | 5,434 | | | $ | 2,993 | | $ | 2,449 | | $ | 5,442 | | | | 35 | % | — | % | 2 | % | Advertising | | 4,685 | | | | 4,054 | | 1,380 | | 5,434 | | | | 16 | % | (14) | % | (13) | % |
Distribution | | 3,961 | | 2,183 | | 6,144 | | | 2,281 | | 3,968 | | 6,249 | | | | 74 | % | (2) | % | — | % | |
Content | Content | | 536 | | 220 | | 756 | | | 202 | | 324 | | 526 | | | | NM | 44 | % | 46 | % | Content | | 529 | | | | 536 | | 220 | | 756 | | | | (1) | % | (30) | % | (28) | % |
Other | Other | | 64 | | 55 | | 119 | | | 28 | | 80 | | 108 | | | | NM | 10 | % | 10 | % | Other | | 189 | | | | 64 | | 55 | | 119 | | | | NM | 59 | % | 56 | % |
Total revenues | Total revenues | | 8,615 | | 3,838 | | 12,453 | | | 5,504 | | 6,821 | | 12,325 | | | | 57 | % | 1 | % | 3 | % | Total revenues | | 11,339 | | | | 8,615 | | 3,838 | | 12,453 | | | | 32 | % | (9) | % | (8) | % |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 3,822 | | 2,102 | | 5,924 | | | 1,691 | | 3,547 | | 5,238 | | | | NM | 13 | % | 15 | % | Costs of revenues, excluding depreciation and amortization | | 5,443 | | | | 3,822 | | 2,148 | | 5,970 | | | | 42 | % | (9) | % | (8) | % |
Selling, general and administrative | Selling, general and administrative | | 1,176 | | 352 | | 1,528 | | | 866 | | 664 | | 1,530 | | | | 36 | % | — | % | 2 | % | Selling, general and administrative | | 1,437 | | | | 1,176 | | 364 | | 1,540 | | | | 22 | % | (7) | % | (5) | % |
Adjusted EBITDA | Adjusted EBITDA | | 3,617 | | 1,384 | | 5,001 | | | 2,947 | | 2,610 | | 5,557 | | | | 23 | % | (10) | % | (10) | % | Adjusted EBITDA | | 4,459 | | | | 3,617 | | 1,326 | | 4,943 | | | | 23 | % | (10) | % | (9) | % |
Depreciation and amortization | Depreciation and amortization | | 1,887 | | 594 | | 2,481 | | | 534 | | 2,173 | | 2,707 | | | | | Depreciation and amortization | | 2,566 | | | | 1,887 | | 598 | | 2,485 | | | | |
Employee share-based compensation | Employee share-based compensation | | — | | 9 | | 9 | | | — | | 17 | | 17 | | | | | Employee share-based compensation | | — | | | | — | | 9 | | 9 | | | | |
Restructuring and other charges | | 312 | | (5) | | 307 | | | 21 | | 5 | | 26 | | | | | |
Restructuring | | Restructuring | | 113 | | | | 312 | | (5) | | 307 | | | | |
Transaction and integration costs | Transaction and integration costs | | — | | — | | — | | | 4 | | — | | 4 | | | | | Transaction and integration costs | | 11 | | | | — | | — | | — | | | | |
| Amortization of fair value step-up for content | Amortization of fair value step-up for content | | 1 | | 419 | | 420 | | | — | | 401 | | 401 | | | | | Amortization of fair value step-up for content | | 400 | | | | 1 | | 419 | | 420 | | | | |
| Inter-segment eliminations | Inter-segment eliminations | | (2) | | — | | (2) | | | — | | — | | — | | | | | Inter-segment eliminations | | 15 | | | | (2) | | — | | (2) | | | | |
Loss on disposition | | — | | — | | — | | | (72) | | — | | (72) | | | | | |
Impairments and loss on dispositions | | Impairments and loss on dispositions | | 5 | | | | — | | — | | — | | | | |
Operating income | Operating income | | $ | 1,419 | | $ | 367 | | $ | 1,786 | | | $ | 2,460 | | $ | 14 | | $ | 2,474 | | | | | Operating income | | $ | 1,349 | | | | $ | 1,419 | | $ | 305 | | $ | 1,724 | | | | |
| (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 isreflects results for the three and six months ended June 30, 2022 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 adjustedAdjusted EBITDA are substantially attributable to the Merger.
Revenues
AdvertisingDistribution revenue increaseddecreased 1% and 2%for the three and six months ended June 30, 2022, primarily attributable to increased sports advertising in the 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, 2022,2023, respectively, primarily attributable to a decline in linear subscribers in the U.S. and lower contractual affiliate rates in some European markets,, partially offset by an increase inhigher U.S. contractual affiliate rates.
ContentAdvertising revenue increased 11%decreased 13% and 46%13% for the three and six months ended June 30, 2023, respectively, primarily attributable to audience declines in domestic general entertainment and news networks, soft advertising markets in the U.S. and, to a lesser extent, certain international markets, and broadcast of the NCAA March Madness Final Four and Championship in 2022, partially offset by the broadcast of the Stanley Cup Finals. Additionally, the six months ended June 30, 2023 was unfavorably impacted by the prior year broadcast of the Olympics in Europe.
Content revenue increased 18% and decreased 28% for the three and six months ended June 30, 2023, respectively. The increase for the three months ended June 30, 20222023 was primarily attributable to higherthe timing of inter-segment licensing of digital content.content to DTC. The increasedecrease for the six months ended June 30, 20222023 was primarily attributable to higher third party international licensingthe prior year broadcast of sports rights, mainly related to Olympic sports rights to broadcast networks throughoutthe Olympics in Europe.
Other revenue increased 6%24% and 10%56% for the three and six months ended June 30, 2022, respectively.2023, respectively, primarily attributable to services provided to the unconsolidated TNT Sports joint venture (formerly known as BT Sport).
Costs of Revenues
CostCosts of revenues increased 14%decreased 5% and 15%8% for the three and six months ended June 30, 2022,2023, respectively. The increasedecrease for the three months ended June 30, 2023 was primarily attributable to the broadcast of the NCAA March Madness Final Four and Championship in 2022 and lower domestic general entertainment content expense, partially offset by higher domestic sports related expense and costs associated with the unconsolidated TNT Sports joint venture. The decrease for the six months ended June 30, 20222023 was primarily attributable to the broadcast of the 2022 Olympics, lower domestic general entertainment content expense, and the broadcast of the NCAA March Madness Final Four and Championship in 2022, partially offset by higher domestic sports rightsrelated expense and content expense.
costs associated with the unconsolidated TNT Sports joint venture. Selling, General and Administrative
Selling, general and administrative expenses were flat for the three months ended June 30, 2022, as higher marketing expenses were offset by cost synergies,2023 and increased 2%decreased 5% for the six months ended June 30, 2022,2023, primarily attributable to higherlower personnel and marketing offset by cost synergies.expenses.
Adjusted EBITDA
Adjusted EBITDA decreased 11%7% and 10%9% for the three and six months ended June 30, 2022,2023, respectively.
DTC Segment
The following tables present, for our DTC segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating incomeloss (in millions).
| | | | Three Months Ended June 30, | | | | | | | Three Months Ended June 30, | | | | |
| | | 2022 | | 2021 | | | % Change | | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | |
Distribution | | Distribution | | $ | 2,192 | | | | $ | 1,993 | | $ | 171 | | $ | 2,164 | | | | 10 | % | 1 | % | 2 | % |
Advertising | Advertising | | $ | 96 | | $ | 1 | | $ | 97 | | | $ | 33 | | $ | 4 | | $ | 37 | | | | NM | Advertising | | 121 | | | | 96 | | 1 | | 97 | | | | 26 | % | 25 | % | 25 | % |
Distribution | | 1,993 | | 171 | | 2,164 | | | 180 | | 1,996 | | 2,176 | | | | NM | (1) | % | 1 | % | |
Content | Content | | 132 | | 11 | | 143 | | | 2 | | 134 | | 136 | | | | NM | 5 | % | 5 | % | Content | | 410 | | | | 132 | | 11 | | 143 | | | | NM |
Other | Other | | 4 | | 2 | | 6 | | | 1 | | 2 | | 3 | | | | NM | Other | | 9 | | | | 4 | | 2 | | 6 | | | | NM | 50 | % | 29 | % |
Total revenues | Total revenues | | 2,225 | | 185 | | 2,410 | | | 216 | | 2,136 | | 2,352 | | | | NM | 2 | % | 4 | % | Total revenues | | 2,732 | | | | 2,225 | | 185 | | 2,410 | | | | 23 | % | 13 | % | 14 | % |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 1,902 | | 165 | | 2,067 | | | 183 | | 1,396 | | 1,579 | | | | NM | 31 | % | 33 | % | Costs of revenues, excluding depreciation and amortization | | 1,951 | | | | 1,902 | | 163 | | 2,065 | | | | 3 | % | (6) | % | (5) | % |
Selling, general and administrative | Selling, general and administrative | | 841 | | 62 | | 903 | | | 362 | | 646 | | 1,008 | | | | NM | (10) | % | (10) | % | Selling, general and administrative | | 784 | | | | 841 | | 62 | | 903 | | | | (7) | % | (13) | % | (13) | % |
Adjusted EBITDA | Adjusted EBITDA | | (518) | | (42) | | (560) | | | (329) | | 94 | | (235) | | | | (57) | % | NM | Adjusted EBITDA | | (3) | | | | (518) | | (40) | | (558) | | | | 99 | % | 99 | % | 99 | % |
Depreciation and amortization | Depreciation and amortization | | 554 | | (107) | | 447 | | | 54 | | 445 | | 499 | | | | | Depreciation and amortization | | 424 | | | | 554 | | (103) | | 451 | | | | |
Employee share-based compensation | Employee share-based compensation | | — | | (1) | | (1) | | | — | | 3 | | 3 | | | | | Employee share-based compensation | | — | | | | — | | (1) | | (1) | | | | |
| Restructuring and other charges | | 475 | | (3) | | 472 | | | — | | 1 | | 1 | | | | | |
Restructuring | | Restructuring | | 18 | | | | 475 | | (3) | | 472 | | | | |
Transaction and integration costs | | Transaction and integration costs | | 1 | | | | — | | — | | — | | | | |
| Amortization of fair value step-up for content | Amortization of fair value step-up for content | | 65 | | (23) | | 42 | | | — | | 48 | | 48 | | | | | Amortization of fair value step-up for content | | 104 | | | | 65 | | 16 | | 81 | | | | |
| Inter-segment eliminations | Inter-segment eliminations | | 10 | | — | | 10 | | | — | | — | | — | | | | | Inter-segment eliminations | | — | | | | 10 | | — | | 10 | | | | |
Loss on disposition | | 4 | | — | | 4 | | | — | | — | | — | | | | | |
Impairments and loss on dispositions | | Impairments and loss on dispositions | | (4) | | | | 4 | | — | | 4 | | | | |
Operating loss | Operating loss | | $ | (1,626) | | $ | 92 | | $ | (1,534) | | | $ | (383) | | $ | (403) | | $ | (786) | | | | | Operating loss | | $ | (546) | | | | $ | (1,626) | | $ | 51 | | $ | (1,575) | | | | |
| (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, | | | | | | Six Months Ended June 30, | | | |
| | | 2022 | | 2021 | | | % Change | | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | | |
Distribution | | Distribution | | $ | 4,357 | | | | $ | 2,225 | | $ | 2,150 | | $ | 4,375 | | | | 96 | % | — | % | — | % |
Advertising | Advertising | | $ | 142 | | $ | 36 | | $ | 178 | | | $ | 50 | | $ | 6 | | $ | 56 | | | | NM | Advertising | | 224 | | | | 142 | | 36 | | 178 | | | | 58 | % | 26 | % | 27 | % |
Distribution | | 2,225 | | 2,150 | | 4,375 | | | 289 | | 3,806 | | 4,095 | | | | NM | 7 | % | 8 | % | |
Content | Content | | 134 | | 230 | | 364 | | | 3 | | 245 | | 248 | | | | NM | 47 | % | 47 | % | Content | | 595 | | | | 134 | | 230 | | 364 | | | | NM | 63 | % | 62 | % |
Other | Other | | 5 | | 3 | | 8 | | | 1 | | 8 | | 9 | | | | NM | (11) | % | (11) | % | Other | | 11 | | | | 5 | | 3 | | 8 | | | | NM | 38 | % | 38 | % |
Total revenues | Total revenues | | 2,506 | | 2,419 | | 4,925 | | | 343 | | 4,065 | | 4,408 | | | | NM | 12 | % | 13 | % | Total revenues | | 5,187 | | | | 2,506 | | 2,419 | | 4,925 | | | | NM | 5 | % | 6 | % |
Costs of revenues, excluding depreciation and amortization | Costs of revenues, excluding depreciation and amortization | | 2,082 | | 1,881 | | 3,963 | | | 335 | | 2,667 | | 3,002 | | | | NM | 32 | % | 34 | % | Costs of revenues, excluding depreciation and amortization | | 3,766 | | | | 2,082 | | 1,977 | | 4,059 | | | | 81 | % | (7) | % | (7) | % |
Selling, general and administrative | Selling, general and administrative | | 1,169 | | 909 | | 2,078 | | | 827 | | 1,258 | | 2,085 | | | | 41 | % | — | % | — | % | Selling, general and administrative | | 1,374 | | | | 1,169 | | 909 | | 2,078 | | | | 18 | % | (34) | % | (34) | % |
Adjusted EBITDA | Adjusted EBITDA | | (745) | | (371) | | (1,116) | | | (819) | | 140 | | (679) | | | | 9 | % | (64) | % | (67) | % | Adjusted EBITDA | | 47 | | | | (745) | | (467) | | (1,212) | | | | NM |
Depreciation and amortization | Depreciation and amortization | | 650 | | 267 | | 917 | | | 121 | | 910 | | 1,031 | | | | | Depreciation and amortization | | 930 | | | | 650 | | 275 | | 925 | | | | |
Employee share-based compensation | | — | | — | | — | | | — | | 8 | | 8 | | | | | |
| Restructuring and other charges | | 475 | | (3) | | 472 | | | 1 | | 4 | | 5 | | | | | |
| Restructuring | | Restructuring | | 27 | | | | 475 | | (3) | | 472 | | | | |
Transaction and integration costs | Transaction and integration costs | | 1 | | — | | 1 | | | — | | — | | — | | | | | Transaction and integration costs | | 1 | | | | 1 | | — | | 1 | | | | |
| Amortization of fair value step-up for content | Amortization of fair value step-up for content | | 65 | | 20 | | 85 | | | — | | 98 | | 98 | | | | | Amortization of fair value step-up for content | | 238 | | | | 65 | | 76 | | 141 | | | | |
| Inter-segment eliminations | Inter-segment eliminations | | 10 | | — | | 10 | | | — | | — | | — | | | | | Inter-segment eliminations | | 2 | | | | 10 | | — | | 10 | | | | |
Loss on disposition | | 4 | | — | | 4 | | | — | | — | | — | | | | | |
Impairments and loss on dispositions | | Impairments and loss on dispositions | | 1 | | | | 4 | | — | | 4 | | | | |
Operating loss | Operating loss | | $ | (1,950) | | $ | (655) | | $ | (2,605) | | | $ | (941) | | $ | (880) | | $ | (1,821) | | | | | Operating loss | | $ | (1,152) | | | | $ | (1,950) | | $ | (815) | | $ | (2,765) | | | | |
| (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 isreflects results for the three and six months ended June 30, 2022 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 adjustedAdjusted EBITDA are substantially attributable to the Merger.
Revenues
As of June 30, 2022,2023, we had 9295.8 million core DTC subscribers.1
AdvertisingDistribution revenue increased $61 million2% and $123 millionwas flat for the three and six months ended June 30, 2022,2023, respectively, primarily attributable to the launch of the global Max/HBO Max ad-supported tier in June 2021retail subscriber gains and Amazon Prime Video Channels subscriber growth onfrom the discovery+ ad-lite tier.re-launch in December 2022, partially offset by a decline in wholesale subscribers.
DistributionAdvertising revenue increased 1%25% and 8%27% for the three and six months ended June 30, 2022,2023, 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.growth.
Content revenue increased 5%184% and 47%62% for the three and six months ended June 30, 2022,2023, respectively, primarily attributable to the timing of certain licensing deals.
Costs of Revenues
Costs of revenues decreased 5% and 7% for the three and six months ended June 30, 2023, respectively, primarily attributable to lower content amortization and the shutdown of CNN+ in the prior year, partially offset by increased content licensing costs commensurate with higher licensingcontent revenue.
Selling, General, and Administrative Expenses
Selling, general and administrative expenses decreased 13% and 34% for the three and six months ended June 30, 2023, respectively, primarily attributable to more efficient marketing-related spend, notwithstanding increased costs in the three months ended June 30, 2023 for the Max U.S. launch campaign, and the shutdown of HBO Max contentCNN+ in the prior year.
Adjusted EBITDA
Adjusted EBITDA increased $554 million and $1,258 million for the three and six months ended June 30, 2023, respectively.
Corporate
The following tables presents our Adjusted EBITDA and a reconciliation of Adjusted EBITDA to third parties.operating loss (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | |
| | 2023 | | 2022 | | | % Change |
| | Actual | | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Adjusted EBITDA | | $ | (245) | | | | | $ | (305) | | $ | (100) | | $ | (405) | | | | 20 | % | 40 | % | 39 | % |
Depreciation and amortization | | 85 | | | | | 72 | | (15) | | 57 | | | | | | |
Employee share-based compensation | | 135 | | | | | 147 | | (32) | | 115 | | | | | | |
Restructuring | | 10 | | | | | 68 | | (43) | | 25 | | | | | | |
Transaction and integration costs | | 36 | | | | | 982 | | (782) | | 200 | | | | | | |
Facility consolidation costs | | 23 | | | | | — | | — | | — | | | | | | |
Amortization of fair value step-up for content | | (8) | | | | | — | | — | | — | | | | | | |
| | | | | | | | | | | | | |
Inter-segment eliminations | | (22) | | | | | (8) | | — | | (8) | | | | | | |
Impairments and loss on dispositions | | 7 | | | | | — | | — | | — | | | | | | |
Operating loss | | $ | (511) | | | | | $ | (1,566) | | $ | 772 | | $ | (794) | | | | | | |
1 We define a “Core DTC“DTC Subscription” as:
a)(i) a retail subscription to discovery+, HBO, HBO Max, or HBO Max for which we have recognized subscription revenue, whether directly or through a third party, from a direct-to-consumer platform; b)(ii) a wholesale subscription to discovery+, HBO, HBO Max, 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)(iii) a wholesale subscription to discovery+, HBO, HBO Max, or HBO Max for which we have recognized subscription revenue on a per subscriber basis.basis; and (iv) users on free trials who convert to a subscription for which we have recognized subscription revenue within the first seven days of the calendar month immediately following the month in which their free trial expires.
We may refer to the aggregate number of Core DTC Subscriptions as “subscribers.”“subscribers”.
The reported number of “subscribers” included herein and the definition of “Core DTC“DTC Subscription” as used herein excludes:
a) (i) individuals who subscribe to DTC products, other than discovery+, HBO, HBO Max, and HBO Max, that may be offered by us or by certain joint venture partners or affiliated parties from time to time; b)(ii) 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)time; (iii) domestic and international Cinemax subscribers, and international basic HBO subscribers; and d)(iv) users on free trials.trials except for those users on free trial that convert to a DTC Subscription within the first seven days of the next month as noted above.
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 June 30, 2022 and was flat for the six months ended June 30, 2022. The decrease for the three months ended June 30, 2022 was primarily attributable to more efficient and measured marketing-related spend to support discovery+ and HBO Max.
Adjusted EBITDA
Adjusted EBITDA decreased $338 million and $451 million for the three and six months ended June 30, 2022, respectively.
Corporate
The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (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) |
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) | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | |
| | 2023 | | 2022 | | | % Change |
| | Actual | | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Adjusted EBITDA | | $ | (600) | | | | | $ | (409) | | $ | (353) | | $ | (762) | | | | (47) | % | 21 | % | 21 | % |
Depreciation and amortization | | 161 | | | | | 96 | | 9 | | 105 | | | | | | |
Employee share-based compensation | | 241 | | | | | 204 | | (11) | | 193 | | | | | | |
Restructuring | | 17 | | | | | 69 | | (44) | | 25 | | | | | | |
Transaction and integration costs | | 78 | | | | | 1,069 | | (564) | | 505 | | | | | | |
Facility consolidation costs | | 23 | | | | | — | | — | | — | | | | | | |
Amortization of fair value step-up for content | | (8) | | | | | — | | — | | — | | | | | | |
| | | | | | | | | | | | | |
Inter-segment eliminations | | (18) | | | | | (8) | | — | | (8) | | | | | | |
Impairments and loss on dispositions | | 32 | | | | | — | | — | | — | | | | | | |
Operating loss | | $ | (1,126) | | | | | $ | (1,839) | | $ | 257 | | $ | (1,582) | | | | | | |
Corporate operations primarily consist of executive management and administrative support services, which are recorded in selling, general and administrative expense, as well as 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.)
Adjusted EBITDA improved 39% and 21% for the three and six months ended June 30, 2023, respectively,primarily attributable to reductions to personnel costs and technology-related operating expenses, as well as a favorable timing impact related to the hedging of the securitization program, partially offset by higher deferred compensation expense.
Inter-segment Eliminations
The following tables presentspresent our inter-segment eliminations by revenue and expense, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions):.
| | | | Three Months Ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2022 | | 2021 | | | % Change | | | Three Months Ended June 30, | | | | |
| | Actual | Pro Forma Adjustments | Pro Forma Combined | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) | | | 2023 | | 2022 | | | % Change |
| | | | | | | | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
Inter-segment revenue eliminations | Inter-segment revenue eliminations | | $ | (949) | | $ | (139) | | $ | (1,088) | | | $ | — | | $ | (648) | | $ | (648) | | | | NM | (68) | % | (68) | % | Inter-segment revenue eliminations | | $ | (712) | | | | $ | (949) | | $ | (139) | | $ | (1,088) | | | | 25 | % | 35 | % | 35 | % |
Inter-segment expense eliminations | Inter-segment expense eliminations | | (935) | | (116) | | (1,051) | | | — | | (679) | | (679) | | | | NM | (55) | % | (55) | % | Inter-segment expense eliminations | | (637) | | | | (935) | | (116) | | (1,051) | | | | 32 | % | 39 | % | 39 | % |
Adjusted EBITDA | Adjusted EBITDA | | (14) | | (23) | | (37) | | — | | — | | 31 | | 31 | | | | NM | Adjusted EBITDA | | (75) | | | | (14) | | (23) | | (37) | | | | NM |
Restructuring and other charges | | (18) | | — | | (18) | | | — | | — | | — | | | | | |
| Restructuring | | Restructuring | | (2) | | | | (18) | | — | | (18) | | | | |
| Amortization of fair value step-up for content | Amortization of fair value step-up for content | | 241 | | — | | 241 | | | — | | — | | — | | | | | Amortization of fair value step-up for content | | 116 | | | | 241 | | — | | 241 | | | | |
Operating income (loss) | | $ | (237) | | $ | (23) | | $ | (260) | | | $ | — | | $ | 31 | | $ | 31 | | | | | |
| Operating loss | | Operating loss | | $ | (189) | | | | $ | (237) | | $ | (23) | | $ | (260) | | | | |
| | | | Six Months Ended June 30, | | | | | | | Six Months Ended June 30, | | | | |
| | | 2022 | | 2021 | | | % Change | | | 2023 | | 2022 | | | % 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) | | Actual | | | Actual | Pro Forma Adjustments | Pro Forma Combined | | | Actual | Pro Forma Combined (Actual) | Pro Forma Combined (ex-FX) |
| Inter-segment revenue eliminations | Inter-segment revenue eliminations | | $ | (949) | | $ | (1,065) | | $ | (2,014) | | | $ | — | | $ | (1,323) | | $ | (1,323) | | | | NM | (52) | % | (52) | % | Inter-segment revenue eliminations | | $ | (1,260) | | | | $ | (949) | | $ | (1,065) | | $ | (2,014) | | | | (33) | % | 37 | % | 37 | % |
Inter-segment expense eliminations | Inter-segment expense eliminations | | (935) | | (1,038) | | (1,973) | | | — | | (1,361) | | (1,361) | | | | NM | (45) | % | (45) | % | Inter-segment expense eliminations | | (1,201) | | | | (935) | | (1,038) | | (1,973) | | | | (28) | % | 39 | % | 39 | % |
Adjusted EBITDA | Adjusted EBITDA | | (14) | | (27) | | (41) | | — | | — | | 38 | | 38 | | | | NM | Adjusted EBITDA | | (59) | | | | (14) | | (27) | | (41) | | | | NM | (44) | % | (44) | % |
Restructuring and other charges | | (18) | | — | | (18) | | | — | | — | | — | | | | | |
| Restructuring | | Restructuring | | (2) | | | | (18) | | — | | (18) | | | | |
| Amortization of fair value step-up for content | Amortization of fair value step-up for content | | 241 | | — | | 241 | | | — | | — | | — | | | | | Amortization of fair value step-up for content | | 250 | | | | 241 | | — | | 241 | | | | |
Operating income (loss) | | $ | (237) | | $ | (27) | | $ | (264) | | | $ | — | | $ | 38 | | $ | 38 | | | | | |
| Operating loss | | Operating loss | | $ | (307) | | | | $ | (237) | | $ | (27) | | $ | (264) | | | | |
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 CONDITIONLIQUIDITY AND CAPITAL RESOURCES
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the six months ended June 30, 2022,2023, we funded our working capital needs primarily through cash flows from operations. As of June 30, 2022,2023, we had $2.6$3.0 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 June 30, 2022, we alsoWe have a $6.0 billion revolving credit facility and a $1.5 billion commercial paper program as described below. In connection with the Merger, we incurredWe also participate in a substantial amount of additional third-party indebtedness, which has significantly increased our future financial commitments, including aggregate interest payments.revolving receivables program and an accounts receivable factoring program described below.
•Debt
Senior Notes
During the six months ended June 30, 2023, we issued $1.5 billion of 6.412% fixed rate senior notes due March 2026. After March 2024, the senior notes are redeemable at par plus accrued and unpaid interest.
Revolving Credit Facility and Commercial Paper
In June 2021, Discovery Communications, LLC (“DCL”) entered intoWe have a multicurrency revolving credit agreement (the “Revolving Credit Agreement”), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. DCL has and have the capacity to borrow up to $6.0 billion under the Revolving Credit Agreement (the “Credit Facility”). The Revolving Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. DCLWe may also request additional commitments up to $1$1.0 billion from the lenders upon the 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 WarnerMedia Holdings, Inc. The Credit Facility 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 June 30, 2022,2023, DCL was in compliance with all covenants and there were no events of default under the Revolving Credit 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, 2022,2023, we borrowed and repaid $90$2,599 million and $2,602 million, respectively, under our Credit Facility and commercial paper program. As of June 30, 2022 and December 31, 2021, the Company2023, we had no outstanding borrowings under the Credit Facility or the commercial paper program.
•Revolving Receivables Program
We have a revolving agreement to transfer up to $5,700 millionof certain receivables through our 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. We service the sold receivables for the financial institution for a fee and pay fees to the financial institution in connection with this revolving agreement. As customers pay their balances, our available capacity under this revolving agreement increases and typically we transfer additional receivables into the program. In some cases, we may have collections that have not yet been remitted to the bank, resulting in a liability. The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $5,295 millionas of June 30, 2023.
•Accounts Receivable Factoring
We have a factoring agreement to sell certain of our non-U.S. trade accounts receivable on a non-recourse basis to a third-party financial institution. Total trade accounts receivable sold under our factoring arrangement was $72 million during thesix months ended June 30, 2023.
•Derivatives
We received investing proceeds of $720$23 million during the six months ended June 30, 20222023 from the unwind and settlement of derivative instruments. (See Note 1210 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, income taxes, personnel costs, costs to develop and market HBOour enhanced streaming service Max, and discovery+, principal and interest payments on our outstanding senior notes and term loan, funding for various equity method and other investments, and repurchases of our capital stock.
•Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content. Subsequent to the Merger, contractualcontent, as well as certain sports rights. Contractual commitments to acquire content have increased significantly compared to our commitmentsnot materially changed as set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20212022 Form 10-K. (See Note 19 to the accompanying consolidated financial statements.)
•Debt
Term Loan
During the six months ended June 30, 2022, the Company2023, we repaid $3.5 billion2,600 million of aggregate principal amount outstanding of itsour term loansloan prior to the due October 2023 anddate of April 2025.
Floating Rate Notes
During the six months ended June 30, 2023, we completed a tender offer and purchased $460 million of aggregate principal amount of our floating rate notes prior to the due date of March 2024.
Senior Notes
During the six months ended June 30, 2022,2023, we repaid in full at maturity $327purchased $194 million of aggregate principal amount outstanding of our 2.375% Euro Denominated Senior Notessenior notes due March 2022.in 2023 and 2024. In addition, we have $106 million, $796$179 million and $192$67 million of senior notes coming due in February, March,September and AprilDecember 2023, respectively.
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly a wholly owned subsidiary of AT&T, entered into a $10 billion term loan credit agreement (the “Term Loan Credit Agreement”)respectively, 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 Merger 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 Agreement, and will rank equally with all of the Company's other unsecured senior debt.
On a consolidated basis, we also assumed an additional $1.5 billion$2,753 million of senior notes (at par value) issued bycoming due in the WarnerMedia Business that existed priorfirst and second quarter of 2024.
We may from time to time seek to prepay, retire or purchase our other outstanding indebtedness through prepayments, redemptions, open market purchases, privately negotiated transactions, tender offers or otherwise. Any such repurchases or exchanges will be dependent upon several factors, including our liquidity requirements, contractual restrictions, general market conditions, as well as applicable regulatory, legal and accounting factors. Whether or not we repurchase or exchange any debt and the Merger.size and timing of any such repurchases or exchanges will be determined at our discretion.
•Capital Expenditures and Investments in Next Generation Initiatives
We effected capital expenditures of $307$591 million during the six months ended June 30, 2022,2023, including amounts capitalized to support our next generation platforms, such as HBO Max and discovery+.Max. In addition, we expect to continue to incur significant costs to develop and market HBO Max and discovery+ streaming products in the future.Max.
•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 98 to the accompanying consolidated financial statements.) We also provide funding to our investees from time to time. During the six months ended June 30, 2022,2023, we contributed $109$45 million for investments in and advances to our investees.
We expect to incur significant, one-time transaction and integration costs during the first year following the Merger. (See Note 3 to the accompanying consolidated financial statements.)
•Redeemable Noncontrolling Interest and Noncontrolling Interest
Due to business combinations, we havehad redeemable equity balances of $328$306 million at June 30, 2022,2023, which may require the use of cash in the event holders of noncontrolling interests put their interests to us. In 2022, GoldenTree exercised its put right and we are required to purchase GoldenTree’s noncontrolling interest. (See Note 16 to the accompanying consolidated financial statements.) Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $264$269 million and $213$264 million for the six months ended June 30, 2023 and 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. During the six months ended 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 six months ended June 30, 2022,2023, we made cash payments of $442$830 million and $390$1,137 million for income taxes and interest on our outstanding debt, respectively. We expect cashCash required for interest payments to increasehas increased significantly as a result of the Merger.
Cash Flows
The following table presents changes in cash and cash equivalents (in millions). | | | | Six Months Ended June 30, | | | Six Months Ended June 30, |
| | | 2022 | | 2021 | | | 2023 | | 2022 |
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 | | $ | 3,930 | | | $ | 3,905 | |
Cash provided by operating activities | Cash provided by operating activities | | 1,334 | | | 1,103 | | Cash provided by operating activities | | 1,383 | | | 1,334 | |
Cash provided by investing activities | | 2,880 | | | 196 | | |
Cash (used in) provided by investing activities | | Cash (used in) provided by investing activities | | (567) | | | 2,880 | |
Cash used in financing activities | Cash used in financing activities | | (4,157) | | | (538) | | Cash used in financing activities | | (1,683) | | | (4,157) | |
Effect of exchange rate changes on cash, cash equivalents, and restricted cash | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | (66) | | | (49) | | Effect of exchange rate changes on cash, cash equivalents, and restricted cash | | 14 | | | (66) | |
Net change in cash, cash equivalents, and restricted cash | Net change in cash, cash equivalents, and restricted cash | | (9) | | | 712 | | Net change in cash, cash equivalents, and restricted cash | | (853) | | | (9) | |
Cash, cash equivalents, and restricted cash, end of period | Cash, cash equivalents, and restricted cash, end of period | | $ | 3,896 | | | $ | 2,834 | | Cash, cash equivalents, and restricted cash, end of period | | $ | 3,077 | | | $ | 3,896 | |
Operating Activities
Cash provided by operating activities was $1,334$1,383 million and $1,103$1,334 million during the six months ended June 30, 20222023 and 2021,2022, 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 (used in) provided by investing activities was $2,880$(567) million and $196$2,880 million during the six months ended June 30, 20222023 and 2021,2022, respectively. The increasedecrease in cash provided by investing activities was primarily attributable to proceeds received from cash acquired duringfrom the Merger andin the prior year, less proceeds received from the unwind and settlement of derivative instruments partially offset by a reduction in cash received from theand sales and maturities of investments and increased purchases of property and equipment during the six months ended June 30, 2022.2023.
Financing Activities
Cash used in financing activities was $4,157$1,683 million and $538$4,157 million during the six months ended June 30, 20222023 and 2021,2022, respectively. The increasedecrease 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 interestsless net debt activity during the six months ended June 30, 2022.2023.
Capital Resources
As of June 30, 2022,2023, capital resources were comprised of the following (in millions). | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Total Capacity | | | | Outstanding Indebtedness | | Unused Capacity |
Cash and cash equivalents | | $ | 2,575 | | | | | $ | — | | | $ | 2,575 | |
Revolving credit facility and commercial paper program | | 6,000 | | | | | — | | | 6,000 | |
Term loans | | 6,500 | | | | | 6,500 | | | — | |
Senior notes (a) | | 46,259 | | | | | 46,259 | | | — | |
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 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 a wholly owned subsidiary of AT&T, entered into 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 Merger 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 Agreement, and will rank equally with all of the Company's other unsecured senior debt.
On a consolidated basis, we also assumed an additional $1.5 billion of senior notes (at par value) issued by the WarnerMedia Business that existed prior to the Merger.
| | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2023 |
| | Total Capacity | | | | Outstanding Indebtedness | | Unused Capacity |
Cash and cash equivalents | | $ | 3,027 | | | | | $ | — | | | $ | 3,027 | |
Revolving credit facility and commercial paper program | | 6,000 | | | | | — | | | 6,000 | |
Term loans | | 1,400 | | | | | 1,400 | | | — | |
Senior notes (a) | | 46,164 | | | | | 46,164 | | | — | |
Total | | $ | 56,591 | | | | | $ | 47,564 | | | $ | 9,027 | |
| | | | | | | | |
(a) Interest on the senior notes is paid annually, semi-annually, or quarterly. Our senior notes outstanding as of June 30, 2023 had interest rates that ranged from 1.90% to 8.30% and will mature between 2023 and 2062. |
We expect that our cash balance, cash generated from operations and availability under the Credit FacilityAgreements 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 June 30, 2022, we held $1.2 billion of our $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 arewere to be 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 June 30, 20222023 and December 31, 2021,2022, all of the Company’s outstanding $14.7$13.7 billion registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company, and guaranteed by the Company, Scripps Networks, and WarnerMedia Holdings, Inc. As of June 30, 2022,2023, the Company also has outstanding $30.0$31.0 billion of senior notes issued by WarnerMedia Holdings, Inc. and guaranteed by the Company, Scripps and DCL; $1.5$1.4 billion of senior notes issued by the legacy WarnerMedia Business (not guaranteed); and approximately $23 million of un-exchanged senior notes issued by Scripps Networks (not guaranteed). (See Note 109 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%wholly owned by the Company.
The tables below present the summarized financial information as combined for Warner Bros. Discovery, Inc. (the “Parent”), Scripps Networks, DCL, and WarnerMedia Holdings, Inc. (collectively, the “Obligors”). All guarantees of DCL and WarnerMedia Holdings, Inc.'s’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.
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, (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 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 | |
| | | | | | | | | | | | | | |
| | June 30, 2023 | | December 31, 2022 |
Current assets | | $ | 1,418 | | | $ | 1,949 | |
Non-guarantor intercompany trade receivables, net | | 204 | | | 112 | |
Noncurrent assets | | 5,733 | | | 5,785 | |
Current liabilities | | 3,633 | | | 1,095 | |
Noncurrent liabilities | | 44,474 | | | 48,839 | |
| | | | | | | | | | |
| | Six Months Ended June 30, 20222023 | | |
Revenues | | $ | 1,099985 | | | |
Operating income | | (770)200 | | | |
Net income | | (882)(659) | | | |
Net income available to Warner Bros. Discovery, Inc. | | (886)(664) | | | |
MATERIAL 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. Subsequent to the Merger, total contractualContractual commitments particularly in respect of long-term debt and content purchase obligations, have not increased significantly compared to our commitments set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20212022 Form 10-K. (See Note 10 and Note 19 to the 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 1815 to the accompanying consolidated financial statements.)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Except for updates to accounting policies as a result of the Merger described in Note 1 to the accompanying consolidated financial statements, ourOur critical accounting policies and estimates have not changed since December 31, 2021.2022. For a discussion of each of our critical accounting estimates listed below, including information and analysis of estimates and assumptions involved in their application, see “Critical Accounting Policies and Estimates” included in Item 7, “Management's“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 20212022 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 six months ended June 30, 2022.2023. (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 and anticipated sources and uses of capital and our recently completed acquisition of the WarnerMedia Business.capital. 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:
•potential unknown liabilities, adverse consequences or unforeseen increased expenses associated with the effectsWarnerMedia Business or our efforts to integrate the WarnerMedia Business;
•inherent uncertainties involved in the estimates and assumptions used in the preparation of financial forecasts;
•our recently completedlevel of debt, including the significant indebtedness incurred in connection with the acquisition of the WarnerMedia Business;
•changes in the distributionBusiness, 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;our future compliance with debt covenants;
•continued consolidation of distribution customers and production studios;more intense competitive pressure from existing or new competitors in the industries in which we operate;
•a failurereduced spending on domestic and foreign television advertising, due to secure affiliatemacroeconomic trends, industry trends or distribution agreements or the renewalunexpected reductions in our number 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;subscribers;
•industry trends, including the timing of, and spending on, sports programming, 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 ofnegative publicity or damage to 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 basisbrands, reputation or at all;talent;
•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;services;
•realizing direct-to-consumer subscriber goals, including through the activation of subscriptions by subscribers receiving access through bundled services or other wholesale subscription arrangements;goals;
•future financial performance,general economic and business conditions, including availability, terms,the impact of the ongoing COVID-19 pandemic, fluctuations in foreign currency exchange rates, and deployment of capital;
•inherent uncertainties involvedpolitical unrest in the estimates and assumptions usedinternational markets 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 usrelating to our recently completed acquisition of the WarnerMedia Business;
•availability of qualified personnel and recruiting, motivating and retaining talent;which we operate;
•the possibility or duration of an industry-wide strike, including the ongoing Writers Guild of America strike and Screen Actors Guild-American Federation of Television and Radio Artists strike, player lock-outs or other job action affecting a major entertainment industry union, athletes or others involved in the development and production of our sports programming, television programming, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements;
•disagreements with our distributors or other business partners;
•continued consolidation of distribution customers and production studios;
•theft of our content and unauthorized duplication, distribution and exhibition of such content;
•threatened or actual cyber-attacks and cybersecurity breaches; and
•changes in, or failure or inability to comply with, laws and 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.proceedings.
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill orand 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 riskManagement’s expectations and assumptions, and the continued validity of any forward-looking statements we make, cannot be foreseen with certainty and are subject to change due to a broad range of factors referaffecting the U.S. and global economies and regulatory environments, factors specific to Warner Bros. Discovery, and other factors described under Part I, Item 1A, “Risk Factors,” in our 20212022 Form 10-K and Part II, Item 1A, “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 for the period ended June 30, 2022.10-K. 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 Risk.
Quantitative and qualitative disclosures about our existing market risk are set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the 20212022 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2021.2022.
ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2022.2023. 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 June 30, 2022,2023, 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 June 30, 2022, except as noted above,2023, 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
InFrom 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, stockholders, vendors, other business we experience routine claims and legal proceedings. It ispartners or intellectual property. However, a determination as to the opinion of our management, based on information available at this time, that noneamount of the current claimsaccrual required for such contingencies is highly subjective and proceedingsrequires judgments 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 our consolidated financial position, future results of operations, or cash flows. (See Note 19 to the accompanying consolidated financial statements.)
As of July 1,Between September 23, 2022 eightand October 24, 2022, two purported class action lawsuits had been filed by alleged Discovery stockholders against the Company 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(Collinsville Police Pension Board v. Discovery, Inc., et al., Case No. 1:21-cv-09785 (the “Rahman Complaint”)22-cv-08171; Todorovski v. Discovery, Inc., waset al., Case No. 1:22-cv-09125) were filed in the United States District Court for the Southern District of New York on November 23, 2021. A complaint captioned Chiao v.York. The complaints named Warner Bros. 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 namedDavid Zaslav, and Gunnar Wiedenfels as defendants Discovery and members of the Discovery Board. The Whitfield Complaint and the Rahman Complaint also named as defendants AT&T, Inc. and Drake Subsidiary, Inc. The Whitfield Complaint named Magallanes, Inc. as an additional defendant. Each of the complaints alleged violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder.defendants. The complaints generally alleged that the respective defendants filed a materially incompletemade false and misleading preliminary proxy statementstatements in SEC filings and in certain public statements relating to the Merger, in violation of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, and sought damages and other relief. On November 4, 2022, the court consolidated the Collinsville and Todorovski complaints under case number 1:22-CV-8171, and on December 12, 2022, the court appointed lead plaintiffs and lead counsel. On February 15, 2023, the lead plaintiffs filed an amended complaint adding Advance/Newhouse Partnership and Advance/Newhouse Programming Partnership (collectively, “Advance/Newhouse”), Steven A. Miron, Robert J. Miron, and Steven O. Newhouse as defendants. The amended complaint continues to assert violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended, and seeks damages and other relief. On April 7, 2023, defendants moved to dismiss the amended complaint. The Company intends to vigorously defend these litigations.
On December 2, 2022, a purported class action and derivative lawsuit (Monroe County Employees’ Retirement System, Plumbers Local Union No. 519 Pension Trust Fund, and Davant Scarborough v. David M. Zaslav, et al., Case No. 2022-1115-JTL) was filed in the Delaware Court of Chancery (the “Monroe County Action”). The Monroe County Action named certain of the Company’s directors and officers, Advance/Newhouse and AT&T as defendants. The Monroe County Action generally alleged that former directors and officers of Discovery and Advance/Newhouse breached their fiduciary duties in connection with the SEC. EachMerger, and that AT&T aided and abetted these alleged breaches of the complaintsfiduciary duties. The Monroe County Action sought injunctive relief, damages and other relief.
Also on December 2, 2022, a separate purported class action lawsuit (Bricklayers Pension Fund of Western Pennsylvania v. Advance/Newhouse Partnership, Case No. 2022-1114-JTL) was filed in the Delaware Court of Chancery (the “Bricklayers Action”). The complaint in the Bricklayers Action names Advance/Newhouse and certain of the Company’s current and former directors as defendants and generally alleges that former directors of Discovery and Advance/Newhouse breached their fiduciary duties in connection with the Merger, and that Advance/Newhouse aided and abetted these alleged breaches of fiduciary duties. The Bricklayers Action seeks damages and other relief.
On January 11, 2023, the Delaware Court of Chancery consolidated the Monroe County Action and the Bricklayers Action under the caption In re Warner Bros. Discovery, Inc. Stockholders Litigation, Consolidated Case No. 2022-1114-JTL. On March 9, 2023, the court appointed the plaintiffs which filed the Bricklayers Action lead plaintiffs in the consolidated action. On April 5, 2023, the court approved a stipulated briefing schedule, and the remaining defendants in the case (Advance/Newhouse, Robert Miron, Steven Miron, and Susan Swain) responded to the complaint originally filed in the Bricklayers Action on May 31, 2023.
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“Risk Factors” of the Company’s 20212022 Form 10-K and Part II, Item 1A - Risk Factors of the Company's Q1 Form 10-Q, as supplemented by the additional risk factor described below under “Risks Related to Our Industry.” In addition, certain10-K. Certain of the risks described in our 20212022 Form 10-K and 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.
Risks Related to our Acquisition of the WarnerMediaOur Business and Industry
Our businesses may be subject to labor disruption.
We and some of our suppliers and business partners retain the services of writers, directors, actors, announcers, athletes, technicians, trade employees and others involved in the development and production of our television programs, feature films 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 be required to recognize impairment charges related to goodwill and other intangible assets.
The Merger added a significant amounttake actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns, work stoppages or the possibility 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,such actions, including the ongoing effectsWriters Guild of the COVID-19 pandemic, disruptions to our business, inability to effectively integrate acquired businesses, underperformanceAmerica (“WGA”) strike and Screen Actors Guild-American Federation of the WarnerMedia Business as compared to management's initial expectations, unexpected significant changes or planned changesTelevision and Radio Artists (“SAG-AFTRA”) strike and potential strikes by other unions involved in use of the assets, divestituresdevelopment and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairmentsproduction, could materially adversely affect our results of operationsresult in delays in the periods recognized.
Weproduction of, or the release of, our television programs, feature films and interactive entertainment. The current WGA strike and SAG-AFTRA strike have caused delays in the production of our television programs and feature films, which will likely result in a delay in the release of such programming. If such strikes, work slowdowns or work stoppages are prolonged, we may be unable to provide (or obtain from third parties) the same typesproduce, distribute or license programming, feature films 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 ofinteractive entertainment, 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 outcould result 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.
If the results of operations of the WarnerMedia Business following the Merger continue 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.
In connection with our comprehensive business and strategic review which commenced following the Merger, we determined that certain WarnerMedia budget 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 our revenues and net earnings from the WarnerMedia Business, if the results of operations of the WarnerMedia Business continue to be below management’s expectations, we may not achieve the increases inreduced revenue and net earnings expected ashave a result of the Merger.Significant 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, any or all of which may prove to be incorrect or inaccurate.
Risks Related to our Industry
If our DTC products fail to attract and retain subscribers,adverse effect on our business, financial condition and results of operations may 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.operations. We have incurred and will likely continue tocould also incur significanthigher 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 activatefrom such actions, enter into new collective bargaining agreements or renew a subscription.
Our discovery+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 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 effectively market our DTC products or if consumers do not perceive the pricing and related features of our DTC products to be of value versus our competitors, we may not be ablelack practical control over the negotiations and terms of these agreements. Union or labor disputes or player lock-outs relating to attractcertain professional sports leagues may preclude us from producing and retain subscribers. In particular, decreases in consumer discretionary spending wheretelecasting scheduled games or events and could negatively impact our DTC products are offered may reduce our ability to attractpromotional and retain subscribers to our services, whichmarketing opportunities. Depending on their duration, union or labor disputes or player lock-outs could have a negative impactmaterial adverse effect 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 discontinue their subscriptions for any reason, including as a result of selecting an alternative wireless or broadband plan that does not bundle our products, or due to the availability of competing offerings that are perceived to offer greater value compared to our DTC products, our business may be adversely affected. We must continue to add new subscribers both to replace subscribers who cancel or discontinue their subscriptions and to grow our business. If we are unable to attract and retain subscribers and offset the losses of subscribers who cancel or discontinue their subscriptions to our DTC products, our business, financial condition and results of operations could be adversely affected.
Forecasting our financial results requires us to make judgements and estimates which may differ materially from actual results.
Given the dynamic nature of our business, the current uncertain economic climate and the inherent limitations in predicting the future, forecasts of our revenues, Adjusted EBITDA, free cash flow and core subscriber growth, and other financial and operating data, may differ materially from actual results, including as a result of events outside of our control and other risks and uncertainties described herein. Such discrepancies could cause a decline in the trading 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).operations.
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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4.110.1 | | Twentieth Supplemental Indenture,Amendment No. 2 to Credit Agreement, dated as of April 8, 2022,May 25, 2023, 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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10.3 | | Credit Agreement, dated as of June 4, 2021, by and among WarnerMedia Holdings, Inc. (f/k/a Magallanes, Inc., thecertain 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.party thereto and JPMorgan Chase Bank, N.A., as agent (filed herewith). | |
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10.610.2 | | Amendment No. 23 to Credit Agreement, dated as of August 2, 2022,June 6, 2023, by and among Discovery Communications, LLC, Warner Bros. Discovery, Inc., Scripps Networks Interactive, Inc., WarnerMedia Holdings, Inc., certain lenders party thereto and Bank of America, N.A., as administrative agent (filed herewith). | |
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10.7 | | Amendment No. 1 to Credit Agreement, dated as of 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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10.14 | | 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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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 June 30, 20222023 and December 31, 2021,2022, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 20222023 and 2021,2022, (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 20222023 and 2021,2022, (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 20222023 and 2021,2022, (v) Consolidated StatementStatements of Equity for the three and six months ended June 30, 20222023 and 2021,2022, 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: August 4, 20223, 2023 | | | | By: | | /s/ David M. Zaslav |
| | | | | | David M. Zaslav |
| | | | | | President and Chief Executive Officer |
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Date: August 4, 20223, 2023 | | | | By: | | /s/ Gunnar Wiedenfels |
| | | | | | Gunnar Wiedenfels |
| | | | | | Chief Financial Officer |