ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and related notes. This section provides additional information regarding Discovery, Inc.’s (“Discovery,” the “Company,” “we,” “us,” or “our”) businesses, current developments, results of operations, cash flows and financial condition. Additional context can also be found in our 2020 Annual Report on Form 10-K.
BUSINESS OVERVIEW
We are a global media company that provides content across multiple distribution platforms, including linear platforms such as pay-television ("pay-TV"), free-to-air, and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer ("DTC") subscription products. As one of the world’s largest pay-TV programmers, we provide original and purchased content and live events to approximately 3.7 billion cumulative subscribers and viewers worldwide through networks that we wholly or partially own. As of September 30, 2021, we had 20 million total paid DTC subscribers.1 We distribute customized content in the U.S. and over 220 other countries and territories in nearly 50 languages. We have an extensive library of content and own most rights to our content and footage, which enables us to leverage our library to quickly launch brands and services into new markets and on new platforms. Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms.
Our content spans genres including survival, natural history, exploration, sports, general entertainment, home, food, travel, heroes, adventure, crime and investigation, health, and kids. Our global portfolio of networks includes prominent nonfiction television brands such as Discovery Channel, our most widely distributed global brand, HGTV, Food Network, TLC, Animal Planet, Investigation Discovery, Travel Channel, Science, and MotorTrend (previously known as Velocity domestically and currently known as Turbo in most international countries). Among other networks in the U.S., Discovery also features two Spanish-language services, Discovery en Español and Discovery Familia. Our international portfolio also includes Eurosport, a leading sports entertainment provider and broadcaster of the Olympic Games (the "Olympics") across Europe (excluding Russia), TVN, a Polish media company, as well as Discovery Kids, a leading children's entertainment brand in Latin America. We participate in joint ventures including Magnolia, the recently formed multi-platform venture with Chip and Joanna Gaines, and Group Nine Media, a digital media holding company home to top digital brands including NowThis News, the Dodo, Thrillist, PopSugar, and Seeker. We also operate production studios.
During the fourth quarter of 2020, we announced the global launch of our aggregated DTC product, discovery+, a non-fiction, real life subscription service. In January 2021, we launched discovery+ in the U.S. across several streaming platforms and entered into a partnership with Verizon, which is offering access to discovery+ for up to 12 months to certain of its customers. The global rollout of discovery+ across more than 25 markets has already begun with the U.K. and Ireland, where we have partnered with Sky, and India. We also have a partnership with Vodafone, which will provide discovery+ to existing Vodafone TV and mobile customers in 12 markets across Europe. Upon launch in the U.S., discovery+ included an extensive content library comprised of more than 55,000 episodes and features a wide array of exclusive, original series from the Discovery portfolio of brands that have a strong leadership position. The service is available with ads or on an ad-free tier, providing us with dual revenue streams.
1 We define a subscription as (i) a subscription to a direct-to-consumer product for which we have recognized subscription revenue from a direct-to-consumer platform; (ii) a subscription received through wholesale arrangements in which we receive a fee for the distribution of our direct-to-consumer platforms, as well as subscriptions provided directly or through third-party platforms; and (iii) a subscription recognized by certain joint venture partners and affiliated parties. We may refer to the aggregate number of subscriptions across our direct-to-consumer services as subscribers. A subscriber is only counted if they are on a paying status, and excludes users on free trials. At the end of each quarter, we include the actual number of users that rolled to pay up to seven days immediately following quarter end.
We invest in high-quality content for our networks and brands with the objective of building viewership, optimizing distribution revenue, capturing advertising revenue, and creating or repositioning branded channels and business to sustain long-term growth and occupy a desired content niche with strong consumer appeal. Our strategy is to maximize the distribution, ratings and profit potential of each of our branded networks. In addition to growing distribution and advertising revenues for our branded networks, we have extended content distribution across new platforms, including brand-aligned websites, online streaming platforms, including discovery+, mobile devices, video on demand, and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue. Audience ratings are a key driver in generating advertising revenue and creating demand on the part of cable television operators, direct-to-home satellite operators, telecommunication service providers, and other content distributors who deliver our content to their customers.
Although we utilize certain brands and content globally, we classify our operations in two reportable segments: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting primarily of international television networks and digital content services. Our segment presentation aligns with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments.
WarnerMedia
In May 2021, we entered into an agreement with AT&T Inc. to combine WarnerMedia’s ("WarnerMedia") entertainment, sports and news assets with our nonfiction and international entertainment and sports businesses to create a standalone, global entertainment company.
The proposed combination transaction will be executed through a Reverse Morris Trust type transaction, under which WarnerMedia will be distributed to AT&T’s shareholders via a pro rata dividend or through an exchange offer or a combination of both, and immediately thereafter, combined with Discovery. In connection with the combination transaction, AT&T will receive approximately $43 billion (subject to adjustment) in a combination of cash, debt securities and WarnerMedia’s retention of certain debt. The Company established an interest rate derivative program to mitigate interest rate risk associated with the anticipated issuance of future fixed-rate debt by WarnerMedia, which is expected to be guaranteed by the Company upon closing of the transaction. (See Note 8 to the accompanying consolidated financial statements.)
Immediately prior to closing, all shares of Series A, Series B, and Series C common stock and Series A-1 and Series C-1 convertible preferred stock will be reclassified and converted to one class of Discovery common stock. AT&T’s shareholders that receive WarnerMedia stock in the distribution will receive stock representing 71% of the combined company and Discovery shareholders will own 29% of the combined company, in each case on a fully diluted basis. The Boards of Directors of both AT&T and Discovery have approved the transaction.
The transaction is anticipated to close in mid-2022, subject to approval by the Company's shareholders and customary closing conditions, including receipt of regulatory approvals. Agreements are in place with Dr. John Malone and Advance/Newhouse Programming Partnership to vote in favor of the transaction. The transaction requires, among other things, the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock, which consent was given pursuant to a consent agreement. In connection with Advance/Newhouse’s 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 will receive an increase to the number of shares of common stock of the Company into which the Series A-1 Preferred Stock would be converted. Upon the closing, the impact the issuance of such additional shares of common stock of Discovery will be recorded as a transaction expense. No vote by AT&T shareholders is required.
The merger agreement contains certain customary termination rights for Discovery and AT&T, including, without limitation, a right for either party to terminate if the transaction is not completed on or before July 15, 2023. Termination under specified circumstances will require Discovery to pay AT&T a termination fee of $720 million or AT&T to pay Discovery a termination fee of $1.8 billion.
In anticipation of this combination, in June 2021, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan that will be guaranteed by the Company and certain material subsidiaries of the Company upon closing of the transaction.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic. COVID-19 continues to spread throughout the world, and the duration and severity of its effects and associated economic disruption remain uncertain. We continue to closely monitor the impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties.
Beginning in the second quarter of 2020, demand for our advertising products and services decreased due to economic disruptions from limitations on social and commercial activity. These economic disruptions and the resulting effect on the Company eased during the second half of 2020. We currently do not expect the pandemic will have a significant impact on demand during fiscal year 2021. Many of our third-party production partners that were shut down during most of the second quarter of 2020 due to COVID-19 restrictions came back online in the third quarter of 2020 and, as a result, we have incurred additional costs to comply with various governmental regulations and implement certain safety measures for our employees, talent, and partners. Additionally, certain sporting events that we have rights to were cancelled or postponed, thereby eliminating or deferring the related revenues and expenses, including the Tokyo 2020 Olympic Games, which occurred in July and August 2021. The postponement of the Olympic Games deferred both Olympic-related revenues and significant expenses from fiscal year 2020 to fiscal year 2021.
In response to the impact of the pandemic, we employed innovative production and programming strategies, including producing content filmed by our on-air talent and seeking viewer feedback on which content to air. We continue to pursue a number of cost savings initiatives, which began during the third quarter of 2020 through the implementation of travel, marketing, production and other operating cost reductions, including personnel reductions, restructurings and resource reallocations to align our expense structure to ongoing changes within the industry.
The nature and full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. We will continue to monitor COVID-19 and its impact on our business results and financial condition. Our consolidated financial statements reflect management’s latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.
RESULTS OF OPERATIONS
Foreign Exchange Impacting Comparability
The impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S. dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis ("ex-FX"), in addition to results reported in accordance with U.S. GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with U.S. GAAP.
The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2021 Baseline Rate”), and the prior year amounts translated at the same 2021 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.
Consolidated Results of Operations
The table below presents our consolidated results of operations (in millions).
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Three Months Ended September 30,
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2021
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2020
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% Change
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% Change (ex-FX)
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Revenues:
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|
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Advertising
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$
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1,458
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$
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1,306
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|
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12
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%
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|
11
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%
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Distribution
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1,379
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1,199
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|
|
15
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%
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15
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%
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Other
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313
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56
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NM
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|
NM
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Total revenues
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3,150
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2,561
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|
|
23
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%
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23
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%
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Costs of revenues, excluding depreciation and amortization
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1,529
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1,003
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52
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%
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52
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%
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Selling, general and administrative
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944
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633
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49
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%
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47
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%
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Depreciation and amortization
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341
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341
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—
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%
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(1)
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%
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Restructuring and other charges
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7
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53
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(87)
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%
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(87)
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%
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|
|
|
|
|
|
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Total costs and expenses
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2,821
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|
2,030
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39
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%
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38
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%
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Operating income
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329
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531
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(38)
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%
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(38)
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%
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Interest expense, net
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(159)
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(161)
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(1)
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%
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Loss on extinguishment of debt
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(6)
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(5)
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20
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%
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Loss from equity investees, net
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(9)
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(18)
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(50)
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%
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|
Other income (expense), net
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78
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(28)
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NM
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Income before income taxes
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233
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|
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319
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|
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(27)
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%
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Income tax (expense) benefit
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(36)
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|
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11
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|
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NM
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Net income
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197
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|
|
330
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|
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(40)
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%
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|
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Net income attributable to noncontrolling interests
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(32)
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(29)
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10
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%
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|
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Net income attributable to redeemable noncontrolling interests
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(9)
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(1)
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NM
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Net income available to Discovery, Inc.
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$
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156
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$
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300
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|
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(48)
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%
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|
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NM - Not meaningful
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|
|
|
|
|
|
|
|
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|
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Nine Months Ended September 30,
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2021
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2020
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% Change
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% Change (ex-FX)
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Revenues:
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|
|
|
|
|
|
|
|
Advertising
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$
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4,510
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|
$
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3,981
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13
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%
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12
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%
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Distribution
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4,057
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|
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3,647
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|
|
11
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%
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|
10
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%
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Other
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|
437
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|
|
157
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|
|
NM
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|
NM
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Total revenues
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9,004
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|
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7,785
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|
16
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%
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|
14
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%
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Costs of revenues, excluding depreciation and amortization
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|
3,553
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2,731
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30
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%
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27
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%
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Selling, general and administrative
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|
2,947
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|
|
1,913
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|
|
54
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%
|
|
51
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%
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Depreciation and amortization
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|
1,043
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|
|
1,001
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|
|
4
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%
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|
3
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%
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Impairment of goodwill and other intangible assets
|
|
—
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|
|
38
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|
|
NM
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NM
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Restructuring and other charges
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29
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75
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(61)
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%
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(60)
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%
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Gain on disposition
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(72)
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—
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NM
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|
NM
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Total costs and expenses
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7,500
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5,758
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30
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%
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28
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%
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Operating income
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|
1,504
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2,027
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(26)
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%
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(24)
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%
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Interest expense, net
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(479)
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(485)
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(1)
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%
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Loss on extinguishment of debt
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(10)
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(76)
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(87)
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%
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Loss from equity investees, net
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(20)
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|
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(62)
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|
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(68)
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%
|
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|
Other income (expense), net
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|
255
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|
(92)
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|
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NM
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Income before income taxes
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1,250
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1,312
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(5)
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%
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Income tax expense
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(144)
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(275)
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(48)
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%
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|
|
Net income
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|
1,106
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|
1,037
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7
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%
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|
Net income attributable to noncontrolling interests
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|
(116)
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(82)
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41
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%
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|
|
Net income attributable to redeemable noncontrolling interests
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|
(22)
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(7)
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|
NM
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Net income available to Discovery, Inc.
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$
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968
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$
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948
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2
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%
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Revenues
Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, market demand, the mix in sales of commercial time between the upfront and scatter markets, and economic conditions. These factors impact the pricing and volume of our advertising inventory.
Advertising revenue increased 12% and 13% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, advertising revenue increased 11% and 12% for the three and nine months ended September 30, 2021, respectively. The increase for the three and nine months ended September 30, 2021 was primarily attributable to improved overall performance in all regions at International Networks as advertising markets continued to recover from the impact of COVID-19.
Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from subscription video on demand content licensing and DTC subscription services.
Distribution revenue increased 15% and 11% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, distribution revenue increased 15% and 10% for the three and nine months ended September 30, 2021, respectively. The increase for the three and nine months ended September 30, 2021 was primarily attributable to an increase at U.S. Networks due to discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers. The increase for the nine months ended September 30, 2021 was also partially offset by certain prior year non-recurring items.
Other revenue increased $257 million and $280 million for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, other revenue increased $266 million and $288 million for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.
Revenue for our segments is discussed separately below under the heading “Segment Results of Operations.”
Costs of Revenues
The Company's principal component of costs of revenues is content expense. Content expense includes television series, television specials, films, sporting events, and digital products. The costs of producing a content asset and bringing that asset to market consist of film costs, participation costs, exploitation costs, and production costs.
Costs of revenues increased 52% and 30% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, cost of revenues increased 52% and 27% for the three and nine months ended September 30, 2021, respectively. The increase for the three and nine months ended September 30, 2021, was primarily attributable to the Olympics, and to a lesser extent European sporting events and leagues returning to a more normalized schedule, and higher content investment related to discovery+.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees.
Selling, general and administrative expenses increased 49% and 54% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses increased 47% and 51% for the three and nine months ended September 30, 2021, respectively. The increase for the three and nine months ended September 30, 2021 was primarily attributable to higher marketing-related expenses to support the launch of discovery+ and the Olympics.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization was flat and increased 4% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, depreciation and amortization decreased 1% and increased 3% for the three and nine months ended September 30, 2021, respectively. The increase for the nine months ended September 30, 2021 was primarily attributable to assets placed in service related to the launch of discovery+.
Restructuring and Other Charges
Restructuring and other charges were $7 million and $29 million for the three and nine months ended September 30, 2021, respectively, as compared to $53 million and $75 million for the three and nine months ended September 30, 2020, respectively. Restructuring and other charges primarily include employee relocation and termination costs during the three and nine months ended September 30, 2021 and 2020. (See Note 18 to the accompanying consolidated financial statements.)
Gain on Disposition
Gain on disposition was $72 million for the nine months ended September 30, 2021, and was primarily attributable to the sale of our Great American Country network. (See Note 2 to the accompanying consolidated financial statements.)
Interest Expense, net
Interest expense, net decreased 1% for the three and nine months ended September 30, 2021 compared to the prior year period. (See Note 7 and Note 8 to the accompanying consolidated financial statements.)
Loss on Extinguishment of Debt
Losses of extinguishment of debt were $6 million and $10 million for the three and nine months ended September 30, 2021, respectively, as compared to losses of $5 million and $76 million for the three and nine months ended September 30, 2020, respectively. During the nine months ended September 30, 2020, we repurchased $1.5 billion aggregate principal amount of DCL's and Scripps Networks' senior notes. The repurchase resulted in a loss on extinguishment of debt of $76 million. (See Note 7 to the accompanying consolidated financial statements.)
Loss From Equity Investees, net
We reported losses from our equity method investees of $9 million and $20 million for the three and nine months ended September 30, 2021, respectively, as compared to losses of $18 million and $62 million for the three and nine months ended September 30, 2020, respectively. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 3 to the accompanying consolidated financial statements.)
Other Income (Expense), net
The table below presents the details of other income (expense), net (in millions).
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|
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|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
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|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Change in the value of equity investments without readily determinable fair value
|
|
$
|
(7)
|
|
|
$
|
—
|
|
|
$
|
74
|
|
|
$
|
(2)
|
|
Foreign currency gain (loss), net
|
|
26
|
|
|
(46)
|
|
|
73
|
|
|
(75)
|
|
Gains (losses) on derivative instruments, net
|
|
88
|
|
|
19
|
|
|
67
|
|
|
(4)
|
|
Gain on sale of investment with readily determinable fair value
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
Change in the value of investments with readily determinable fair value
|
|
(31)
|
|
|
9
|
|
|
15
|
|
|
(6)
|
|
Gain on sale of equity method investments
|
|
—
|
|
|
—
|
|
|
4
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
1
|
|
|
1
|
|
|
4
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
1
|
|
|
—
|
|
|
2
|
|
|
(3)
|
|
Total other income (expense), net
|
|
$
|
78
|
|
|
$
|
(28)
|
|
|
$
|
255
|
|
|
$
|
(92)
|
|
Income Tax Expense (Benefit)
Income tax expense (benefit) was $36 million and $144 million for the three and nine months ended September 30, 2021, respectively, and an $11 million benefit and $275 million expense for the three and nine months ended September 30, 2020, respectively. The increase in the three months ended September 30, 2021 was primarily attributable to a deferred tax benefit of $51 million recorded in the three months ended September 30, 2020 as a result of the UK Finance Act 2020 that was enacted in July 2020 and a tax benefit from favorable multi-year state resolution that did not recur in the current quarter. The decrease in income tax expense for the nine months ended September 30, 2021 was primarily attributable to a deferred tax benefit of $151 million as a result of the UK Finance Act 2021 that was enacted in June 2021.
Income tax expense for the three months ended September 30, 2021 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, which included taxation and allocation of income and losses among multiple foreign jurisdictions. Income tax expense for the nine months ended September 30, 2021 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to a deferred tax benefit of $151 million as a result of the UK Finance Act 2021 that was enacted in June 2021, and to a lesser extent, state and local income taxes and favorable noncontrolling interest tax adjustments.
Segment Results of Operations
We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration costs, and (viii) other items impacting comparability. We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We exclude employee share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. We also exclude the depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. GAAP.
The tables below present our reconciliation of consolidated net income available to Discovery, Inc. to Adjusted OIBDA and Adjusted OIBDA by segment (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
% Change
|
Net income available to Discovery, Inc.
|
|
$
|
156
|
|
|
$
|
300
|
|
|
(48)
|
%
|
Net income attributable to redeemable noncontrolling interests
|
|
9
|
|
|
1
|
|
|
NM
|
Net income attributable to noncontrolling interests
|
|
32
|
|
|
29
|
|
|
10
|
%
|
Income tax expense (benefit)
|
|
36
|
|
|
(11)
|
|
|
NM
|
Income before income taxes
|
|
233
|
|
|
319
|
|
|
(27)
|
%
|
Other (income) expense, net
|
|
(78)
|
|
|
28
|
|
|
NM
|
Loss from equity investees, net
|
|
9
|
|
|
18
|
|
|
(50)
|
%
|
Loss on extinguishment of debt
|
|
6
|
|
|
5
|
|
|
20
|
%
|
Interest expense, net
|
|
159
|
|
|
161
|
|
|
(1)
|
%
|
Operating income
|
|
329
|
|
|
531
|
|
|
(38)
|
%
|
|
|
|
|
|
|
|
Restructuring and other charges
|
|
7
|
|
|
53
|
|
|
(87)
|
%
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
341
|
|
|
341
|
|
|
—
|
%
|
Employee share-based compensation
|
|
36
|
|
|
29
|
|
|
24
|
%
|
Transaction and integration costs
|
|
13
|
|
|
—
|
|
|
NM
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
726
|
|
|
$
|
954
|
|
|
(24)
|
%
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
|
|
|
|
U.S. Networks
|
|
$
|
963
|
|
|
$
|
951
|
|
|
1
|
%
|
International Networks
|
|
(79)
|
|
|
127
|
|
|
NM
|
Corporate, inter-segment eliminations, and other
|
|
(158)
|
|
|
(124)
|
|
|
(27)
|
%
|
Adjusted OIBDA
|
|
$
|
726
|
|
|
$
|
954
|
|
|
(24)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
% Change
|
Net income available to Discovery, Inc.
|
|
$
|
968
|
|
|
$
|
948
|
|
|
2
|
%
|
Net income attributable to redeemable noncontrolling interests
|
|
22
|
|
|
7
|
|
|
NM
|
Net income attributable to noncontrolling interests
|
|
116
|
|
|
82
|
|
|
41
|
%
|
Income tax expense
|
|
144
|
|
|
275
|
|
|
(48)
|
%
|
Income before income taxes
|
|
1,250
|
|
|
1,312
|
|
|
(5)
|
%
|
Other (income) expense, net
|
|
(255)
|
|
|
92
|
|
|
NM
|
Loss from equity investees, net
|
|
20
|
|
|
62
|
|
|
(68)
|
%
|
Loss on extinguishment of debt
|
|
10
|
|
|
76
|
|
|
(87)
|
%
|
Interest expense, net
|
|
479
|
|
|
485
|
|
|
(1)
|
%
|
Operating income
|
|
1,504
|
|
|
2,027
|
|
|
(26)
|
%
|
Gain on disposition
|
|
(72)
|
|
|
—
|
|
|
NM
|
Restructuring and other charges
|
|
29
|
|
|
75
|
|
|
(61)
|
%
|
Impairment of goodwill and other intangible assets
|
|
—
|
|
|
38
|
|
|
NM
|
Depreciation and amortization
|
|
1,043
|
|
|
1,001
|
|
|
4
|
%
|
Employee share-based compensation
|
|
124
|
|
|
53
|
|
|
NM
|
Transaction and integration costs
|
|
52
|
|
|
—
|
|
|
NM
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
$
|
2,680
|
|
|
$
|
3,194
|
|
|
(16)
|
%
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
|
|
|
|
U.S. Networks
|
|
$
|
2,836
|
|
|
$
|
3,029
|
|
|
(6)
|
%
|
International Networks
|
|
287
|
|
|
527
|
|
|
(46)
|
%
|
Corporate, inter-segment eliminations, and other
|
|
(443)
|
|
|
(362)
|
|
|
(22)
|
%
|
Adjusted OIBDA
|
|
$
|
2,680
|
|
|
$
|
3,194
|
|
|
(16)
|
%
|
The table below presents the calculation of Adjusted OIBDA (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
% Change
|
|
2021
|
|
2020
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Networks
|
|
$
|
1,858
|
|
|
$
|
1,659
|
|
|
12
|
%
|
|
$
|
5,637
|
|
|
$
|
5,171
|
|
|
9
|
%
|
International Networks
|
|
1,295
|
|
|
902
|
|
|
44
|
%
|
|
3,375
|
|
|
2,608
|
|
|
29
|
%
|
Corporate, inter-segment eliminations, and other
|
|
(3)
|
|
|
—
|
|
|
NM
|
|
(8)
|
|
|
6
|
|
|
NM
|
Total revenues
|
|
3,150
|
|
|
2,561
|
|
|
23
|
%
|
|
9,004
|
|
|
7,785
|
|
|
16
|
%
|
Costs of revenues, excluding depreciation and amortization
|
|
1,529
|
|
|
1,003
|
|
|
52
|
%
|
|
3,553
|
|
|
2,731
|
|
|
30
|
%
|
Selling, general and administrative (a)
|
|
895
|
|
|
604
|
|
|
48
|
%
|
|
2,771
|
|
|
1,860
|
|
|
49
|
%
|
Adjusted OIBDA
|
|
$
|
726
|
|
|
$
|
954
|
|
|
(24)
|
%
|
|
$
|
2,680
|
|
|
$
|
3,194
|
|
|
(16)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs.
|
U.S. Networks
The table below presents, for our U.S. Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
% Change
|
|
2021
|
|
2020
|
|
% Change
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
991
|
|
|
$
|
941
|
|
|
5
|
%
|
|
$
|
3,090
|
|
|
$
|
2,964
|
|
|
4
|
%
|
Distribution
|
|
841
|
|
|
696
|
|
|
21
|
%
|
|
2,465
|
|
|
2,143
|
|
|
15
|
%
|
Other
|
|
26
|
|
|
22
|
|
|
18
|
%
|
|
82
|
|
|
64
|
|
|
28
|
%
|
Total revenues
|
|
1,858
|
|
|
1,659
|
|
|
12
|
%
|
|
5,637
|
|
|
5,171
|
|
|
9
|
%
|
Costs of revenues, excluding depreciation and amortization
|
|
459
|
|
|
445
|
|
|
3
|
%
|
|
1,339
|
|
|
1,334
|
|
|
—
|
%
|
Selling, general and administrative
|
|
436
|
|
|
263
|
|
|
66
|
%
|
|
1,462
|
|
|
808
|
|
|
81
|
%
|
Adjusted OIBDA
|
|
963
|
|
|
951
|
|
|
1
|
%
|
|
2,836
|
|
|
3,029
|
|
|
(6)
|
%
|
Employee share-based compensation
|
|
—
|
|
|
—
|
|
|
|
|
(1)
|
|
|
—
|
|
|
|
Depreciation and amortization
|
|
222
|
|
|
225
|
|
|
|
|
671
|
|
|
676
|
|
|
|
Restructuring and other charges
|
|
4
|
|
|
29
|
|
|
|
|
5
|
|
|
41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inter-segment eliminations
|
|
(1)
|
|
|
1
|
|
|
|
|
(3)
|
|
|
3
|
|
|
|
Gain on disposition
|
|
—
|
|
|
—
|
|
|
|
|
(77)
|
|
|
—
|
|
|
|
Operating income
|
|
$
|
738
|
|
|
$
|
696
|
|
|
|
|
$
|
2,241
|
|
|
$
|
2,309
|
|
|
|
Revenues
Advertising revenue increased 5% and 4% for the three and nine months ended September 30, 2021, respectively. The increases were primarily attributable to higher pricing, the continued monetization of content offerings on our next generation initiatives and higher inventory, partially offset by lower overall ratings, and to a lesser extent, secular declines in the pay-TV ecosystem.
Distribution revenue increased 21% and 15% for the three and nine months ended September 30, 2021, respectively. The increases were primarily attributable to discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers. The increase for the nine months ended September 30, 2021 was also partially offset by certain prior year non-recurring items. Excluding these prior year non-recurring items, distribution revenue increased 17% for the nine months ended September 30, 2021. Total subscribers to our linear networks at September 30, 2021 were 8% lower than at September 30, 2020, while subscribers to our fully distributed linear networks were 3% lower than the prior year. Excluding the impact of the sale of our Great American Country linear network, total subscribers to our linear networks at September 30, 2021 were 4% lower than at September 30, 2020.
Other revenues increased $4 million and $18 million for the three and nine months ended September 30, 2021, respectively.
Costs of Revenues
Costs of revenues increased 3% for the three months ended September 30, 2021 and was flat for the nine months ended September 30, 2021. The increase for the three months ended September 30, 2021 was primarily attributable to third-party app store fees and our growing content investment in discovery+. The change for the nine months ended September 30, 2021 was primarily attributable to our growing content investment in discovery +, a non-recurring, non-cash item in the second quarter of 2020, and third-party app store fees, offset by more efficient content spend on our linear networks.
Content expense was $395 million and $391 million for the three months ended September 30, 2021 and 2020, respectively, and $1.1 billion and $1.2 billion for the nine months ended September 30, 2021 and 2020, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 66% and 81% for the three and nine months ended September 30, 2021, respectively. The increases were primarily attributable to higher marketing-related expenses to support discovery+.
Adjusted OIBDA
Adjusted OIBDA increased 1% and decreased 6% for the three and nine months ended September 30, 2021, respectively.
International Networks
The following tables present, for our International Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
|
2021
|
|
2020
|
|
% Change
|
|
% Change (ex-FX)
|
|
2021
|
|
2020
|
|
% Change
|
|
% Change (ex-FX)
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advertising
|
|
$
|
467
|
|
|
$
|
365
|
|
|
28
|
%
|
|
26
|
%
|
|
$
|
1,420
|
|
|
$
|
1,017
|
|
|
40
|
%
|
|
32
|
%
|
Distribution
|
|
538
|
|
|
503
|
|
|
7
|
%
|
|
6
|
%
|
|
1,592
|
|
|
1,504
|
|
|
6
|
%
|
|
4
|
%
|
Other
|
|
290
|
|
|
34
|
|
|
NM
|
|
NM
|
|
363
|
|
|
87
|
|
|
NM
|
|
NM
|
Total revenues
|
|
1,295
|
|
|
902
|
|
|
44
|
%
|
|
43
|
%
|
|
3,375
|
|
|
2,608
|
|
|
29
|
%
|
|
25
|
%
|
Costs of revenues, excluding depreciation and amortization
|
|
1,072
|
|
|
554
|
|
|
94
|
%
|
|
92
|
%
|
|
2,218
|
|
|
1,389
|
|
|
60
|
%
|
|
52
|
%
|
Selling, general and administrative
|
|
302
|
|
|
221
|
|
|
37
|
%
|
|
32
|
%
|
|
870
|
|
|
692
|
|
|
26
|
%
|
|
19
|
%
|
Adjusted OIBDA
|
|
(79)
|
|
|
127
|
|
|
NM
|
|
NM
|
|
287
|
|
|
527
|
|
|
(46)
|
%
|
|
(43)
|
%
|
Depreciation and amortization
|
|
90
|
|
|
93
|
|
|
|
|
|
|
281
|
|
|
259
|
|
|
|
|
|
Impairment of goodwill and other intangible assets
|
|
—
|
|
|
—
|
|
|
|
|
|
|
—
|
|
|
38
|
|
|
|
|
|
Restructuring and other charges
|
|
4
|
|
|
13
|
|
|
|
|
|
|
24
|
|
|
17
|
|
|
|
|
|
Transaction and integration costs
|
|
—
|
|
|
—
|
|
|
|
|
|
|
4
|
|
|
—
|
|
|
|
|
|
Inter-segment eliminations
|
|
1
|
|
|
—
|
|
|
|
|
|
|
3
|
|
|
—
|
|
|
|
|
|
Loss on disposition
|
|
—
|
|
|
—
|
|
|
|
|
|
|
5
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
(174)
|
|
|
$
|
21
|
|
|
|
|
|
|
$
|
(30)
|
|
|
$
|
213
|
|
|
|
|
|
Revenues
Advertising revenue increased 28% and 40% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, advertising revenue increased 26% and 32% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to improved overall performance in all regions as advertising markets continued to recover from the impact of COVID-19, as well as benefiting from the broadcast of the Summer Olympics across Europe.
Distribution revenue increased 7% and 6% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, distribution revenue increased 6% and 4% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to an increase in next generation revenues due to subscriber growth for discovery+, partially offset by lower contractual affiliate rates in some European markets.
Other revenue increased $256 million and $276 million for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, other revenue increased $265 million and $284 million for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.
Costs of Revenues
Costs of revenues increased 94% and 60% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, costs of revenues increased 92% and 52% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to costs related to the Olympics and to a lesser extent, European sporting events and leagues returning to a more normalized schedule, and higher content investment related to discovery+.
Content expense, excluding the impact of foreign currency fluctuations, was $845 million and $387 million for the three months ended September 30, 2021 and 2020, respectively, and $1.6 billion and $968 million for the nine months ended September 30, 2021 and 2020, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 37% and 26% for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses increased 32% and 19% for the three and nine months ended September 30, 2021. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to higher marketing-related expenses to support discovery+ and the Olympics, and to a lesser extent, personnel costs to support discovery+.
Adjusted OIBDA
Adjusted OIBDA decreased $206 million and $240 million for the three and nine months ended September 30, 2021, respectively. Excluding the impact of foreign currency fluctuations, Adjusted OIBDA decreased $205 million and $226 million for the three and nine months ended September 30, 2021, respectively.
Corporate, Inter-segment Eliminations, and Other
The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating loss (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
2021
|
|
2020
|
|
% Change
|
|
2021
|
|
2020
|
|
% Change
|
Revenues
|
|
$
|
(3)
|
|
|
$
|
—
|
|
|
NM
|
|
$
|
(8)
|
|
|
$
|
6
|
|
|
NM
|
Costs of revenues, excluding depreciation and amortization
|
|
(2)
|
|
|
4
|
|
|
NM
|
|
(4)
|
|
|
8
|
|
|
NM
|
Selling, general and administrative
|
|
157
|
|
|
120
|
|
|
31
|
%
|
|
439
|
|
|
360
|
|
|
22
|
%
|
Adjusted OIBDA
|
|
(158)
|
|
|
(124)
|
|
|
(27)
|
%
|
|
(443)
|
|
|
(362)
|
|
|
(22)
|
%
|
Employee share-based compensation
|
|
36
|
|
|
29
|
|
|
|
|
125
|
|
|
53
|
|
|
|
Depreciation and amortization
|
|
29
|
|
|
23
|
|
|
|
|
91
|
|
|
66
|
|
|
|
Restructuring and other charges
|
|
(1)
|
|
|
11
|
|
|
|
|
—
|
|
|
17
|
|
|
|
Transaction and integration costs
|
|
13
|
|
|
—
|
|
|
|
|
48
|
|
|
—
|
|
|
|
Inter-segment eliminations
|
|
—
|
|
|
(1)
|
|
|
|
|
—
|
|
|
(3)
|
|
|
|
Operating loss
|
|
$
|
(235)
|
|
|
$
|
(186)
|
|
|
|
|
$
|
(707)
|
|
|
$
|
(495)
|
|
|
|
Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation, and third-party transaction and integration costs.
FINANCIAL CONDITION
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the nine months ended September 30, 2021, we funded our working capital needs primarily through cash flows from operations. As of September 30, 2021, we had $3.1 billion of cash and cash equivalents on hand. We are a well-known seasoned issuer and have the ability to conduct registered offerings of securities, including debt securities, common stock, and preferred stock, on short notice, subject to market conditions. Access to sufficient capital from the public market is not assured. We also have a $2.5 billion revolving credit facility and commercial paper program described below.
•Debt
Revolving Credit Facility and Commercial Paper
In June 2021, we entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. We have the capacity to initially borrow up to $2.5 billion under the Credit Agreement. Upon the closing of the proposed combination transactions with WarnerMedia, the available commitments may be increased by $3.5 billion, to an aggregate amount not to exceed $6 billion. The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. We may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by Discovery, Inc. and Scripps Networks Interactive, Inc., and will also be guaranteed by the holding company of the WarnerMedia business upon the closing of the proposed combination transactions.
The Credit Agreement will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods. The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of September 30, 2021, DCL was in compliance with all covenants and there were no events of default under the Credit Facility.
Additionally, the Company's commercial paper program is supported by the Credit Facility. Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is reduced by any outstanding borrowings under the commercial paper program.
As of September 30, 2021 and December 31, 2020, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.
•Investments
We received proceeds of $498 million during the nine months ended September 30, 2021 from the sales and maturities of investments.
Uses of Cash
Our primary uses of cash include the creation and acquisition of new content, business acquisitions, repurchases of our capital stock, income taxes, personnel costs, costs to develop and market discovery+, principal and interest payments on our outstanding senior notes, and funding for various equity method and other investments.
•Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content. Our investment in content has increased as we acquire and develop new content for discovery+. Contractual commitments to acquire content have increased less than 10% as set forth in "Commitments and Off-Balance Sheet Arrangements" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Form 10-K.
•Debt
Senior Notes
In July 2021, we issued notices for the redemption in full of all $168 million aggregate principal amount outstanding of our 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of our 3.500% Senior Notes due June 2022 (the "2022 Notes"). The 2022 Notes were redeemed on July 31, 2021 for an aggregate redemption price of $235 million, plus accrued interest. The redemption included $5 million for premium over par on the 2022 Notes and resulted in a loss on extinguishment of debt of $6 million.
In February 2021, we issued a notice for the redemption in full of all $335 million aggregate principal amount outstanding of our 4.375% Senior Notes due June 2021 (the “2021 Notes”). The 2021 Notes were redeemed in March 2021 for an aggregate redemption price of $339 million, plus accrued interest. The redemption included $3 million for premium over par and resulted in a loss on extinguishment of debt of $3 million.
In addition, we have $349 million of senior notes coming due in March 2022.
•Capital Expenditures and Investments in Next Generation Initiatives
We effected capital expenditures of $273 million during the nine months ended September 30, 2021, including amounts capitalized to support our next generation platforms, such as discovery+. In addition, we expect to continue to incur significant costs to develop and market discovery+ in the future.
•Investments and Business Combinations
Our uses of cash have included investments in equity method investments and equity investments without readily determinable fair value. (See Note 3 to the accompanying consolidated financial statements.) We provide funding to our investees from time to time. During the nine months ended September 30, 2021, we contributed $137 million for investments in and advances to our investees. We also purchased $103 million of investments during the nine months ended September 30, 2021.
•Redeemable Noncontrolling Interest and Noncontrolling Interest
Due to business combinations, we also have redeemable equity balances of $358 million, which may require the use of cash in the event holders of noncontrolling interests put their interests to us, which may be exercised in 2021. Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $231 million and $216 million for the nine months ended September 30, 2021 and 2020, respectively.
•Common Stock Repurchases
Historically, we have funded our stock repurchases through a combination of cash on hand, cash generated by operations, and the issuance of debt. In February 2020, our Board of Directors authorized additional stock repurchases of up to $2 billion upon completion of our existing $1 billion authorization announced in May 2019. Under the new stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors. (See Note 9 to the accompanying consolidated financial statements.) During the nine months ended September 30, 2021, we did not repurchase any of our common stock.
•Income Taxes and Interest
We expect to continue to make payments for income taxes and interest on our outstanding senior notes. During the nine months ended September 30, 2021, we made cash payments of $555 million and $515 million for income taxes and interest on our outstanding debt, respectively.
Cash Flows
The following table presents changes in cash and cash equivalents (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2021
|
|
2020
|
Cash, cash equivalents, and restricted cash, beginning of period
|
|
$
|
2,122
|
|
|
$
|
1,552
|
|
Cash provided by operating activities
|
|
1,914
|
|
|
2,186
|
|
Cash used in investing activities
|
|
(30)
|
|
|
(550)
|
|
Cash used in financing activities
|
|
(811)
|
|
|
(1,272)
|
|
Effect of exchange rate changes on cash, cash equivalents, and restricted cash
|
|
(69)
|
|
|
40
|
|
Net change in cash, cash equivalents, and restricted cash
|
|
1,004
|
|
|
404
|
|
Cash, cash equivalents, and restricted cash, end of period
|
|
$
|
3,126
|
|
|
$
|
1,956
|
|
Operating Activities
Cash provided by operating activities was $1.9 billion and $2.2 billion during the nine months ended September 30, 2021 and 2020, respectively. The decrease in cash provided by operating activities was primarily attributable to a negative fluctuation in working capital activity, partially offset by an increase in net income excluding non-cash items.
Investing Activities
Cash used in investing activities was $30 million and $550 million during the nine months ended September 30, 2021 and 2020, respectively. The decrease in cash used in investing activities was primarily attributable to proceeds received from the sales and maturities of investments and a reduction in purchases of investments, partially offset by an increase in payments for derivatives during the nine months ended September 30, 2021.
Financing Activities
Cash used in financing activities was $811 million and $1.3 billion during the nine months ended September 30, 2021 and 2020, respectively. The decrease in cash used in financing activities was primarily attributable to a reduction in repurchases of stock during the nine months ended September 30, 2021.
Capital Resources
As of September 30, 2021, capital resources were comprised of the following (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
|
Total
Capacity
|
|
Outstanding
Letters of
Credit
|
|
Outstanding
Indebtedness
|
|
Unused
Capacity
|
Cash and cash equivalents
|
|
$
|
3,116
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,116
|
|
Revolving credit facility and commercial paper program
|
|
2,500
|
|
|
—
|
|
|
—
|
|
|
2,500
|
|
Senior notes (a)
|
|
15,217
|
|
|
—
|
|
|
15,217
|
|
|
—
|
|
Total
|
|
$
|
20,833
|
|
|
$
|
—
|
|
|
$
|
15,217
|
|
|
$
|
5,616
|
|
|
|
|
|
|
|
|
|
|
(a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of September 30, 2021 had interest rates that ranged from 1.90% to 6.35% and will mature between 2022 and 2055.
|
We expect that our cash balance, cash generated from operations and availability under the Credit Agreement will be sufficient to fund our cash needs for the next twelve months. Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios.
As of September 30, 2021, we held $457 million of our $3.1 billion of cash and cash equivalents in our foreign subsidiaries. The 2017 Tax Act features a participation exemption regime with current taxation of certain foreign income and imposes a mandatory repatriation toll tax on unremitted foreign earnings. Notwithstanding the U.S. taxation of these amounts, we intend to continue to reinvest these funds outside of the U.S. Our current plans do not demonstrate a need to repatriate them to the U.S. However, if these funds are needed in the U.S., we would be required to accrue and pay non-U.S. taxes to repatriate them. The determination of the amount of unrecognized deferred income tax liability with respect to these undistributed foreign earnings is not practicable.
Summarized Guarantor Financial Information
Basis of Presentation
Each of the Company, DCL, Discovery Communications Holding LLC (“DCH”), and/or Scripps Networks has the ability to conduct registered offerings of debt securities under the Company’s shelf registration statement. As of September 30, 2021 and December 31, 2020, all of the Company’s outstanding registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company and guaranteed by the Company and Scripps Networks, except for $23 million of senior notes outstanding as of September 30, 2021 that have been issued by Scripps Networks and are not guaranteed. (See Note 7.) DCL primarily includes the Discovery Channel and TLC networks in the U.S. DCL is a wholly owned subsidiary of DCH. The Company wholly owns DCH through a 33 1/3% direct ownership interest and a 66 2/3% indirect ownership interest through Discovery Holding Company (“DHC”), a wholly owned subsidiary of the Company. Scripps Networks is 100% owned by the Company.
The tables below present the summarized financial information as combined for Discovery, Inc. (the “Parent”), Scripps Networks, and DCL (collectively, the “Obligors”). All guarantees of DCL's senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes. DCH currently is not an issuer or guarantor of any securities and therefore is not included in the summarized financial information included herein.
Note Guarantees issued by Scripps Networks or any subsidiary of the Parent that in the future issues a Note Guarantee (each, a “Subsidiary Guarantor”) may be released and discharged (i) concurrently with any direct or indirect sale or disposition of such Subsidiary Guarantor or any interest therein, (ii) at any time that such Subsidiary Guarantor is released from all of its obligations under its guarantee of payment by DCL, (iii) upon the merger or consolidation of any Subsidiary Guarantor with and into DCL or the Parent or another Subsidiary Guarantor, or upon the liquidation of such Subsidiary Guarantor and (iv) other customary events constituting a discharge of the Obligors’ obligations.
Summarized Financial Information
The Company has included the accompanying summarized combined financial information of the Obligors after the elimination of intercompany transactions and balances among the Obligors and the elimination of equity in earnings from and investments in any subsidiary of the Parent that is a non-guarantor (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2021
|
|
December 31, 2020
|
Current assets
|
|
$
|
3,820
|
|
|
$
|
2,308
|
|
Non-guarantor intercompany trade receivables, net
|
|
$
|
103
|
|
|
$
|
217
|
|
Noncurrent assets
|
|
$
|
6,077
|
|
|
$
|
5,905
|
|
Current liabilities
|
|
$
|
905
|
|
|
$
|
915
|
|
Noncurrent liabilities
|
|
$
|
15,742
|
|
|
$
|
16,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2021
|
|
|
Revenues
|
|
$
|
1,562
|
|
|
|
Operating income
|
|
$
|
815
|
|
|
|
Net income
|
|
$
|
419
|
|
|
|
Net income available to Discovery, Inc.
|
|
$
|
401
|
|
|
|
COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, we enter into commitments for the purchase of goods or services that require us to make payments or provide funding in the event certain circumstances occur. The nature of our contractual commitments is evolving with the launch and our support of discovery+. Total contractual commitments have increased approximately 14% as set forth in "Commitments and Off-Balance Sheet Arrangements" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2020 Annual Report on Form 10-K, which was primarily attributable to new technology and marketing commitments.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we enter into transactions with related parties, primarily the Liberty Group and our equity method investees. (See Note 15 to the accompanying consolidated financial statements.)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed since December 31, 2020. For a discussion of each of our critical accounting estimates listed below, including information and analysis of estimates and assumptions involved in their application, see "Critical Accounting Policies and Estimates" included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report on Form 10-K:
•Uncertain tax positions;
•Goodwill and intangible assets;
•Content rights;
•Consolidation; and
•Revenue recognition
NEW ACCOUNTING AND REPORTING PRONOUNCEMENTS
We adopted certain new accounting and reporting standards during the nine months ended September 30, 2021. (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 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, and anticipated sources and uses of capital and our proposed transaction to combine our business with AT&T's WarnerMedia business. Words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among other terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
•the occurrence of any event, change or other circumstance that could give rise to the termination of, or prevent or delay our ability to consummate, our proposed transaction to combine with WarnerMedia;
•the effects of the announcement, pendency or completion of our proposed transaction to combine with WarnerMedia on our ongoing business operations;
•changes in the distribution and viewing of television programming, including the expanded deployment of personal video recorders, subscription video on demand, internet protocol television, mobile personal devices and personal tablets and their impact on television advertising revenue;
•continued consolidation of distribution customers and production studios;
•a failure to secure affiliate agreements or the renewal of such agreements on less favorable terms;
•rapid technological changes;
•the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
•general economic and business conditions, including the impact of the ongoing COVID-19 pandemic;
•industry trends, including the timing of, and spending on, feature film, television and television commercial production;
•spending on domestic and foreign television advertising;
•disagreements with our distributors or other business partners over contract interpretation;
•fluctuations in foreign currency exchange rates, political unrest and regulatory changes in international markets, including any proposed or adopted regulatory changes that impact the operations of our international media properties and/or modify the terms under which we offer our services and operate in international markets;
•market demand for foreign first-run and existing content libraries;
•the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
•uncertainties inherent in the development of new business lines and business strategies;
•uncertainties regarding the financial performance of our investments in unconsolidated entities;
•our ability to complete, integrate, maintain and obtain the anticipated benefits and synergies from our proposed business combinations and acquisitions, including our proposed transaction to combine with WarnerMedia, on a timely basis or at all;
•uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies, and the success of our new discovery+ streaming product;
•future financial performance, including availability, terms, and deployment of capital;
•the ability of suppliers and vendors to deliver products, equipment, software, and services;
•our ability to achieve the efficiencies, savings and other benefits anticipated from our cost-reduction initiatives;
•the outcome of any pending or threatened litigation;
•availability of qualified personnel;
•the possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union;
•changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and data privacy regulations and adverse outcomes from regulatory proceedings;
•changes in income taxes due to regulatory changes or changes in our corporate structure;
•changes in the nature of key strategic relationships with partners, distributors and equity method investee partners;
•competitor responses to our products and services and the products and services of the entities in which we have interests;
•threatened or actual cyber-attacks and cybersecurity breaches;
•threatened or actual terrorist attacks and military action;
•our level of debt;
•reduced access to capital markets or significant increases in costs to borrow; and
•a reduction of advertising revenue associated with unexpected reductions in the number of subscribers.
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. For additional risk factors, refer to Item 1A, “Risk Factors,” in our 2020 Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
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 2020 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2020.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2021. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2021, 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
During the three months ended September 30, 2021, there were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.