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Recognized Identified Assets Acquired and
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(Exact name of registrant as specified in its charter)
iDelaware
i35-2333914
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i230 Park Avenue South
i10003
iNew
York, iNew York
(Zip Code)
(Address of principal executive offices)
(i212) i548-5555
(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
iSeries A Common Stock
iWBD
iThe 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. iYesý 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). iYesý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
iLarge accelerated filer
ý
Accelerated filer
¨
Non-accelerated
filer
o
Smaller reporting company
i☐
Emerging growth company
i☐
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 iý
Warner
Bros. Discovery, Inc. stockholders’ equity:
Series A common stock: $ii0.01/
par value; i10,800 and i10,800 shares authorized; i2,668
and i2,660 shares issued; and i2,438 and i2,430
shares outstanding
i27
i27
Preferred stock: $ii0.01/
par value; i1,200 and i1,200 shares authorized, iiii0///
shares issued and outstanding
i—
i—
Additional
paid-in capital
i54,944
i54,630
Treasury
stock, at cost:i230 and i230 shares
(i8,244)
(i8,244)
(Accumulated
deficit) retained earnings
(i526)
i2,205
Accumulated
other comprehensive loss
(i1,427)
(i1,523)
Total
Warner Bros. Discovery, Inc. stockholders’ equity
i44,774
i47,095
Noncontrolling
interests
i1,087
i1,254
Total equity
i45,861
i48,349
Total
liabilities and equity
$
i123,749
$
i134,001
The
accompanying notes are an integral part of these consolidated financial statements.
The
accompanying notes are an integral part of these consolidated financial statements.
9
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. iDESCRIPTION
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 premier global media and entertainment company that combines the WarnerMedia Business’s premium entertainment, sports and news 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 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. (“WMH”) distributed $i40.5 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 $i42.4 billion
in equity to AT&T 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 resulted in the Company receiving a $i1.2 billion payment from AT&T in the third quarter of 2022 in lieu of adjusting the equity issued as purchase consideration in the Merger. AT&T shareholders received shares
of WBD Series A common stock (“WBD common stock”) in the Merger representing i71% of the combined Company and the Company's pre-Merger shareholders continued to own i29%
of the combined 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 the 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 the Company’s historical financial statements. Accordingly, the financial results of the Company as of and for any periods prior to April 8, 2022 do not
include the financial results of the WM Business and current results will not be comparable to historical results.
Labor Disruption
The Writers Guild of America (“WGA”) and Screen Actors Guild-American Federation of Television and Radio Artists (“SAG-AFTRA”) went on strike in May and July 2023 following the expiration of their respective collective bargaining agreements with the Alliance of Motion Picture and Television Producers (“AMPTP”). The WGA strike ended on September 27, 2023, and a new collective bargaining agreement was ratified on October 9, 2023. The SAG-AFTRA remains on strike. As a result of the strikes, we have paused and may continue to pause certain theatrical and television productions, which has resulted in delayed production spending.
The
strikes have had, and are expected to continue to have, a material impact on the operations and results of the Company. This includes a positive impact on cash flow from operations attributed to delayed production spend, and a negative impact on the results of operations attributed to timing and performance of the remainder of the 2023 film slate, as well as the Company’s ability to produce, license, and deliver content. We continue to closely monitor the ongoing impact to our business; however, the full effects on our operations and results will depend on future developments, which are highly uncertain and cannot be predicted.
i
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.
10
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
i
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, 2022 (the “2022 Form 10-K”).
i
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.
Summary of Significant Accounting Policies
There have been no changes to the Company's significant accounting policies described in the 2022 Form 10-K.
i
Accounting and Reporting Pronouncements Adopted
Supplier Finance Programs
In September 2022, the Financial
Accounting Standards Board issued guidance updating 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 where the obligations are presented in the statement of financial position. The guidance is effective for annual periods beginning after December 15, 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 adopted the guidance effective January
1, 2023 and has provided the required disclosures in Note 14.
NOTE 2. iEQUITY 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 iiione//
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 i13.1135 and i19.3648
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 $i789 million
and was recorded as a transaction expense in selling, general and administrative expense upon the closing of the Merger in the three months ended June 30, 2022.
On April 8, 2022, the Company issued i1.7 billion shares of WBD common stock as consideration paid for the acquisition of
WM. (See Note 3.)
Earnings Per Share
All share and per share amounts have been retrospectively adjusted to reflect the reclassification and automatic conversion into WBD common stock, except for Series A-1 Preferred Stock, which has not been recast because the conversion of Series A-1 Preferred Stock into WBD common stock in connection with the Merger was considered a discrete event and treated prospectively.
11
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
iii
The
table below sets forth the Company’s calculated earnings per share (in millions). Earnings per share amounts may not recalculate due to rounding.
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 i220 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.
Purchase Price
i
The following table summarizes the components of the aggregate purchase consideration paid to acquire WM (in millions).
Fair
value of WBD common stock issued to AT&T shareholders (1)
$
i42,309
Fair value of share-based compensation awards attributable to pre-combination services (2)
i94
Settlement
of preexisting relationships (3)
(i27)
Purchase consideration
$
i42,376
(1)The fair value of WBD common stock issued to AT&T shareholders represents approximately i1,732 million shares of WBD common stock multiplied by the closing share price for Discovery Series A common stock of $i24.43
on 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 i71%/i29%.
/
12
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(2)This amount represents the value of AT&T restricted stock unit awards that were not vested and were replaced by WBD restricted stock unit awards with similar terms and conditions as the original AT&T awards. The conversion was based on the ratio of the volume-weighted average per share closing price of AT&T common stock on the iten
trading days prior to the Closing Date and the volume-weighted average per share closing price of WBD common stock on the iten 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.
(3)The amount represents the effective settlement of outstanding payables and receivables between the
Company and WM. iNo 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 $i1.2 billion payment from AT&T in the third quarter of 2022.
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 allocated to the Studios, Networks and DTC reportable segments in the amount of $i9,308 million, $i7,074 million
and $i5,727 million, respectively, and is not deductible for tax purposes.
During the three months ended June 30, 2023, the Company finalized the fair value of assets acquired and liabilities assumed. Measurement period adjustments were reflected in the period in which the adjustments occurred. Adjustments recorded during the six months ended June 30, 2023 were $i368 million,
primarily related to taxes, and were recorded in other noncurrent assets, deferred income taxes, and other noncurrent liabilities, with an offset to goodwill. iThe 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).
The
fair values of the assets acquired and liabilities assumed were determined using several valuation approaches including, but not limited to, various cost approaches and income approaches, such as relief from royalty, multi-period excess earnings, and with-or-without methods.
13
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The
table below presents a summary of intangible assets acquired, exclusive of content assets, and the weighted average useful life of these assets.
Fair Value
Weighted Average Useful Life in Years
Trade names
$
i21,084
i34
Affiliate,
advertising and subscriber relationships
i14,800
i6
Franchises
i7,900
i35
Other
intangible assets
i1,205
Total intangible assets acquired
$
i44,989
/
The
Company incurred acquisition-related costs of $i31 million and $i125 million for the three and nine months ended September 30, 2023, respectively,
and $i59 million and $i340 million for the three and nine months ended September 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’s Series A-1 Preferred Stock was $i789 million and was recorded as a transaction expense in selling, general and administrative expense upon the closing of the Merger. (See Note 2.)
As a result of the Merger, WM’s assets, liabilities, and operations were included
in the Company’s consolidated financial statements from the Closing Date. iThe following table presents WM revenue and earnings as reported within the consolidated financial statements (in millions).
Net
loss available to Warner Bros. Discovery, Inc.
$
(i2,135)
$
(i5,155)
Pro
Forma Combined Financial Information
The following unaudited pro forma combined financial information presents the combined results of the Company and WM as if the Merger had been completed on January 1, 2021. The unaudited pro forma combined financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the Merger had occurred on January 1, 2021, nor is it indicative of future results. The following table presents the Company’s pro forma combined revenues and net income (in millions).
Net
loss available to Warner Bros. Discovery, Inc.
(i3,951)
14
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The unaudited pro forma combined financial information includes, where applicable, adjustments for (i) additional costs of revenues from the fair value step-up of film and television library, (ii) additional amortization expense related to acquired intangible assets, (iii) additional depreciation expense from the fair value of property and equipment, (iv) transaction costs and other one-time non-recurring costs, (v) additional interest expense for borrowings related to the Merger and amortization associated with fair value adjustments of debt assumed, (vi) changes to align accounting policies, (vii) elimination of intercompany activity, and (viii) associated tax-related impacts of adjustments. These pro forma adjustments
are based on available information as of the date hereof and upon assumptions that the Company believes are reasonable to reflect the impact of the Merger with WM on the Company’s historical financial information on a supplemental pro forma basis. Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined business.
Dispositions
In September and October 2023, the Company sold itwo
of its ithree regional sports networks (“RSN”), and expects to exit its remaining RSN during the fourth quarter of 2023.
In September 2022, the Company sold i75%
of its interest in The CW Network to Nexstar Media Inc. (“Nexstar”), in exchange for Nexstar agreeing to fund a majority of The CW Network’s expenses and the retention of the Company’s share of certain receivables that existed prior to the transaction. There was ino cash consideration exchanged in the transaction. The Company recorded an immaterial gain and retained a i12.5%
ownership interest in The CW Network, which is accounted for as an equity method investment.
In April 2022, the Company completed the sale of its minority interest in Discovery Education for a sale price of $i138 million and recorded a gain of $i133 million.
NOTE 4.
iRESTRUCTURING AND OTHER CHARGES
In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the Company. The Company finalized the framework supporting its ongoing restructuring and transformation initiatives during the year
ended December 31, 2022, which will include, 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. Additionally, the Company initiated a strategic realignment plan associated with its WB Theatrical Animation group during the three months ended September 30, 2023.
i
Restructuring
and other charges by reportable segments and corporate and inter-segment eliminations were as follows (in millions).
During
the three months ended September 30, 2023, restructuring and other charges primarily included content impairments and other content development costs and write-offs of $i112 million, contract terminations and facility consolidation activities of $i31 million,
organization restructuring costs of $i125 million, and other charges of $i1 million. During the three months ended September 30, 2022, restructuring and other charges primarily included content impairments of $i891 million,
organization restructuring costs of $i238 million, other content development costs and write-offs of $i377 million, and contract termination costs of $i15 million.
During
the nine months ended September 30, 2023, restructuring and other charges primarily included content impairments and other content development costs and write-offs of $ii123/ million,
contract terminations and facility consolidation activities of $i102 million, organization restructuring costs of $i284 million, and other charges of $i1 million.
During the nine months ended September 30, 2022, restructuring and other charges primarily included content impairments of $i1,392 million, organization restructuring costs of $i446 million, other content development costs and write-offs of
$i706 million, and contract termination costs of $i15 million.
15
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
Changes in restructuring 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).
As of September 30, 2023, $i12,508
million of revenue is expected to be recognized from remaining performance obligations under our long-term contracts. iThe following table presents a summary of remaining performance obligations by contract type (in millions).
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 6. iSALES OF RECEIVABLES
Revolving Receivables Program
During the three months ended September 30, 2023, the Company amended its revolving receivables program to reduce the facility limit to $i5,500
million and extend the program to August 2024. The Company’s bankruptcy-remote consolidated subsidiary held $i2,892 million of pledged receivables as of September 30, 2023 in connection with its revolving receivables program. For the three and nine months ended September 30, 2023, the Company has recognized $i36
million and $i78 million, respectively,inselling, general and administrative expenses, net of non-designated derivatives from the revolving receivables program in the consolidated statements of operations. (See Note 10.) For the three and nine months ended September 30, 2022, the Company recognized $i93
million and $i134 million in selling, general and administrative expenses in the consolidated statements of operations, respectively. The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $i5,190
million as of September 30, 2023.
17
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The following table presents a summary of receivables sold (in millions).
Total trade accounts receivable sold under the Company’s factoring arrangement was$i72 millionfor the nine months ended September 30, 2023. iNo
amounts were sold under the Company’s factoring arrangement for the nine months ended September 30, 2022. The impact to the consolidated statements of operations was immaterial for the three and nine months ended September 30, 2023 and 2022. This accounts receivable factoring agreement is separate and distinct from the revolving receivables program.
18
WARNER BROS. DISCOVERY, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7. iCONTENT RIGHTS
For purposes of amortization and impairment, capitalized content costs are grouped based on their predominant monetization strategy: individually or as a group. Beginning this quarter, programming rights are presented as two separate captions: licensed content and advances and live programming and advances. Live programming includes licensed sports rights and related advances. iThe
table below presents the components of content rights (in millions).
Content
expense includes amortization, impairments, and development expense and is generally a component of costs of revenues on the consolidated statements of operations. For the three and nine months ended September 30, 2023, total content impairments were $i191 million and $i315
million, respectively. Content impairments and other content development costs and write-offs of $i112 million and $i123 million, respectively, for the three and nine months ended September 30, 2023 were primarily due to the abandonment of
certain films in connection with the third quarter 2023 strategic realignment plan associated with the WB Theatrical Animation group and are reflected in restructuring and other charges in the Studios segment. For the three and nine months ended September 30, 2022, total content impairments were $i909 million and $i1,415 million,
respectively. Content impairments of $i891 million and $i1,392 million, respectively, and content development write-offs of $i234 million
and $i563 million, respectively, for the three and nine months ended September 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.
NOTE 8. iINVESTMENTS
iThe
Company’s equity investments consisted of the following, net of investments recorded in other noncurrent liabilities (in millions).
Investments
without readily determinable fair values
Other noncurrent assets(a)
i434
i498
Total
investments
$
i1,446
$
i1,588
/
(a)
Investments without readily determinable fair values included $i17 million as of September 30, 2023 and $i10 million
as of December 31, 2022 that were included in prepaid expenses and other current assets.
Equity Method Investments
Certain of the Company’s other equity method investments are VIEs, for which the Company is not the primary beneficiary. As of September 30, 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 $i767 million.
The Company’s maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $i708 million as of September 30, 2023 and $i720 million
as of December 31, 2022. VIE gains and losses are recorded in loss from equity investees, net on the consolidated statements of operations. VIE losses were $i6 million and $i59 million
for the three and nine months ended September 30, 2023, respectively, and $i15 million and $i35 million for the three
and nine months ended September 30, 2022, respectively.
20
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Equity Investments Without Readily Determinable Fair Values Assessed Under the Measurement Alternative
During the three and nine months ended September 30, 2023, the Company concluded that its other equity investments without
readily determinable fair values had decreased $i2 million and $i73
million, respectively, in fair value as a result of observable price changes in orderly transactions for the identical or similar investment of the same issuer. The decrease in fair value is recorded in other (expense) income, net on the consolidated statements of operations. (See Note 14.) As of September 30, 2023, the Company had recorded cumulative impairments of $i302
millionfor its equity investments without readily determinable fair values.
NOTE 9. iDEBT
i
The table below presents the components of
outstanding debt (in millions).
Floating
rate senior notes with maturities of i5 years or less
i7.00
%
i40
i500
Senior
notes with maturities of i5 years or less
i4.00
%
i13,646
i12,759
Senior
notes with maturities between i5 and i10 years
i4.28
%
i8,607
i10,373
Senior
notes with maturities greater than i10 years
i5.11
%
i21,644
i21,644
Total
debt
i45,087
i49,276
Unamortized
discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net
(i287)
(i277)
Debt,
net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting
i44,800
i48,999
Current
portion of debt
(i1,302)
(i365)
Noncurrent
portion of debt
$
i43,498
$
i48,634
/
During
the three months ended September 30, 2023, the Company’s wholly-owned subsidiaries, Warner Media, LLC (“WML”), Historic TW Inc. (“TWI”), Discovery Communications, LLC (“DCL”) and WMH, commenced cash tender offers to purchase for cash any and all of (i) WML’s outstanding i4.050% Senior Notes due 2023 and i3.550%
Senior Notes due 2024, (ii) TWI’s outstanding i7.570% Senior Notes due 2024, (iii) DCL’s outstanding i3.800% Senior Notes due 2024, and (iv) WMH’s outstanding i3.528%
Senior Notes due 2024 and i3.428% Senior Notes due 2024. The Company completed the tender offer in August 2023 by purchasing senior notes in the amount of $i1.9
billion validly tendered and accepted for purchase pursuant to the offers. The Company also repaid $i250 million of aggregate principal amount outstanding of its term loan prior to the due date of April 2025, repaid in full at maturity $i178
million of aggregate principal amount outstanding of its senior notes due September 2023, and completed open market repurchases for $i95 million of aggregate principal amount outstanding of its senior notes.
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 $i460 million validly tendered and accepted for purchase pursuant to the offer. The Company also repaid $i1.1 billion
of aggregate principal amount outstanding of its term loan prior to the due date of April 2025 and completed open market repurchases for $i88 million of aggregate principal amount outstanding of its senior notes.
During the three months ended March 31, 2023, the Company issued $i1.5 billion
of i6.412% 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 $i1.5 billion of aggregate principal amount outstanding of the
Company’s term loan prior to the due date of April 2025. The Company also repaid $i106 million of aggregate principal amount outstanding of its senior notes due February 2023.
During the three months ended September 30, 2022, the Company repaid $i2.5 billion
of aggregate principal amount outstanding of its term loan prior to its due date of April 2025.
During the three months ended June 30, 2022, the Company repaid $i3.5 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 $i41.5 billion
of senior notes (at par value) and term loans in connection with the Merger.
During the three months ended March 31, 2022, the Company repaid in full at maturity $i327 million aggregate principal amount outstanding of its i2.375%
Euro Denominated Senior Notes due March 2022.
21
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of September 30, 2023, all senior notes are fully and unconditionally guaranteed by the Company, Scripps Networks Interactive, Inc. (“Scripps Networks”), DCL (to the extent it is not the primary obligor on such senior notes), and WMH (to the extent it is not the primary obligor on such senior notes), except for $i1.2 billion
of senior notes of the legacy WarnerMedia Business assumed by the Company in connection with the Merger and $i23 million of un-exchanged senior notes issued by Scripps Networks. Additionally, the term loans of WMH, made under the $i10.0 billion
term loan credit agreement (the “Term Loan Credit 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 $i6.0 billion
under the Revolving Credit Agreement (the “Credit Facility”). The Company may also request additional commitments up to $i1.0 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 September 30, 2023 and December 31, 2022, the Company had iino/
outstanding borrowings under its Credit Facility or its 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 ii3.00/
to 1.00 and a maximum adjusted consolidated leverage ratio of ii5.75/
to 1.00 following the closing of the Merger, with step-downs to ii5.00/
to 1.00 and ii4.50/
to 1.00 on the first and second anniversaries of the closing, respectively. As of September 30, 2023, DCL and WMH were in compliance with all covenants and there were no events of default under the Credit Agreements.
NOTE 10. iDERIVATIVE FINANCIAL INSTRUMENTS
iIn
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, primarily foreign currency forward contracts, fixed-to-fixed currency swaps, total return swaps and interest 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.
22
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The
following table summarizes the impact of derivative financial instruments on the Company’s consolidated balance sheets (in millions). There were iino/
amounts eligible to be offset under master netting agreements as of September 30, 2023 and December 31, 2022. The fair value of the Company’s derivative financial instruments was determined using a market-based approach (Level 2).
(a)
Excludes €i164 million of euro-denominated notes ($i174 million equivalent at December 31, 2022) designated as a net investment hedge and £i400 million
of sterling notes ($i487 million equivalent at September 30, 2023) designated as a net investment hedge. (See Note 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 $i76 million
as an adjustment to other comprehensive income. The Sterling debt was subsequently re-designated as a net investment hedge effective May 2023.
i
The following table presents the pre-tax impact of derivatives designated as cash flow hedges on income and other comprehensive loss (in millions).
Gains (losses) recognized in accumulated other comprehensive loss:
Foreign
exchange - derivative adjustments
$
i15
$
i30
$
i35
$
i10
Gains
(losses) reclassified into income from accumulated other comprehensive loss:
Foreign exchange - distribution revenue
(i3)
(i2)
(i5)
i—
Foreign
exchange - advertising revenue
i—
i—
i—
i1
Foreign
exchange - costs of revenues
i12
i8
i3
i27
Foreign
exchange - other (expense) income, net
i—
i—
i18
i—
Interest
rate - interest expense, net
(i1)
i—
i—
(i1)
Interest
rate - other (expense) income, net
i1
i—
i1
i—
/
23
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
If current fair values of designated cash flow hedges as of September 30, 2023 remained static over the next twelve months, the amount the Company would reclassify from accumulated other comprehensive loss into income in the next twelve 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 i32
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 September 30, 2023, the Company settled its Euro denominated debt that was designated as the hedging instrument in a net investment hedge.
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.
i
The following table presents the pre-tax impact of derivatives designated as net investment hedges on other comprehensive loss (in millions). Other than amounts excluded from effectiveness testing, there were no other material gains (losses) reclassified from accumulated other comprehensive loss to income during the three and nine months ended September
30, 2023 and 2022.
Three Months Ended September 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
$
i5
$
(i63)
Interest
expense, net
$
i7
$
i5
Euro-denominated
notes (foreign denominated debt)
(i2)
i13
N/A
i—
i—
Sterling
notes (foreign denominated debt)
i17
i58
N/A
i—
i—
Total
$
i20
$
i8
$
i7
$
i5
Nine
Months Ended September 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
$
i30
$
i8
Interest
expense, net
$
i18
$
i27
Euro-denominated
notes (foreign denominated debt)
i3
i19
N/A
i—
i—
Sterling
notes (foreign denominated debt)
i11
i112
N/A
i—
i—
Total
$
i44
$
i139
$
i18
$
i27
/
Fair
Value Hedges
During the three months ended March 31, 2023, the Company issued $i1.5 billion of i6.412%
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.
i
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
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).
Gain (loss) on changes in fair value of hedged fixed rate debt (1)
$
i4
$
i—
$
i3
$
i—
(Loss)
gain on changes in the fair value of derivative contracts(1)
(i4)
i—
(i3)
i—
Total
in interest expense, net
$
i—
$
i—
$
i—
$
i—
(1)
Accrued interest expense related to the hedged debt and derivative contracts is excluded from the amounts above and was not material as of September 30, 2023.
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 $i6.0 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.
Forward contracts designated as cash flow hedges are de-designated as production spend occurs or when rebate receivables are recognized. After de-designation, gains and losses on these derivatives directly impact earnings in the same line as the hedged risk.
i
The
following table presents the pretax gains (losses) on derivatives not designated as hedges and recognized in selling, general and administrative expense and other (expense) income, net in the consolidated statements of operations (in millions).
Total
in selling, general and administrative expense
(i1)
i—
i92
i—
Interest
rate swaps
(i1)
i—
(i1)
i512
Cross-currency
swaps
i—
i5
i1
i12
Foreign
exchange derivatives
(i1)
(i24)
i1
(i70)
Total
in other (expense) income, net
(i2)
(i19)
i1
i454
Total
$
(i3)
$
(i19)
$
i93
$
i454
/
NOTE 11.
iFAIR VALUE MEASUREMENTS
iFair 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.
25
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
i
The tables below present assets and liabilities measured at fair value on a recurring basis (in millions).
In
addition to the financial instruments listed in the tables above, the Company holds 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 September 30, 2023 and December 31, 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 $i36.8
billion and $i38.0 billion as of September 30, 2023 and December 31, 2022, respectively.
The Company’s derivative financial instruments are discussed in Note 10, its investments with readily determinable fair value are discussed in Note 8, and the obligation for its revolving receivable program is discussed in Note 6.
26
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 12. iSHARE-BASED COMPENSATION
The Company has various incentive plans under which performance based restricted stock units (“PRSUs”), service based restricted stock units (“RSUs”),
and stock options have been issued. iThe table below presents awards granted (in millions, except weighted-average grant price).
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 September 30, 2023 (in millions, except years).
Unrecognized Compensation Cost
Weighted-Average Amortization Period (years)
PRSUs
$
i37
i1.6
RSUs
i576
i2.1
Stock
options
i128
i2.7
Total
unrecognized compensation cost
$
i741
/
NOTE 13.
iINCOME TAXES
Income tax benefit was $i125 million and $i563
million for the three and nine months ended September 30, 2023, respectively, and income tax benefit was $i566 million and $i1,201 million for the three and nine months ended September
30, 2022, respectively. The decrease in income tax benefit for the three and nine months ended September 30, 2023 was primarily attributable to an increase in pre-tax book income. The decrease was partially offset by an unfavorable tax adjustment related to the preferred stock conversion transaction expense recorded in the nine months ended September 30, 2022 associated with the Merger.
Income tax benefit for the three and nine months ended September 30, 2023 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, changes in uncertain tax positions, and state and local income taxes.
As of September 30,
2023 and December 31, 2022, the Company’s reserves for uncertain tax positions totaled $i2,191 millionand $i1,929
million, respectively. The increase in the reserve for uncertain tax positions as of September 30, 2023 was primarily attributable to tax reserves that were recorded in 2023 through purchase accounting related to the Merger, 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’s uncertain tax positions could decrease by as much as $i77
million within the next twelve months as a result of ongoing audits, lapses of statutes of limitations or regulatory developments.
As of September 30, 2023 and December 31, 2022, the Company had accrued $i558 million and $i413
million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The increase in the interest and penalties accrual as of September 30, 2023 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.
27
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 14.
iSUPPLEMENTAL DISCLOSURES
The following tables present supplemental information related to the consolidated financial statements (in millions).
Other (Expense) Income, net
iOther
(expense) income, net, consisted of the following (in millions).
Restricted
cash - recorded in prepaid expenses and other current assets (1)
i47
i199
Total
cash, cash equivalents, and restricted cash
$
i2,430
$
i3,930
(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
During
the nine months ended September 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.
28
WARNER
BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During the three months ended September 30, 2023, the Company reassessed the useful lives and amortization methods for its linear networks and HBO trademarks and trade names and concluded the pattern of amortization should be accelerated. Accordingly, the Company has changed the amortization method for these assets from the straight-line method to the sum-of-the-months’ digits method effective July 1, 2023. This change was considered a change in estimate,
was accounted for prospectively, and resulted in incremental amortization expense of $i171 million.
Assets Held for Sale
In 2022, the Company classified its Ranch Lot and Knoxville office building and land as assets held for sale. The Company reclassified $i209 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 and the Ranch Lot was sold during the three months ended September 30, 2023. The Burbank Studios Lot was purchased during the three months ended September 30, 2023 in exchange for the Ranch Lot and cash.
Supplier Finance Programs
Consistent with customary industry practice, the Company 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 a bank intermediary who provides payments that coincide with these contractual production milestones upon confirmation with the Company of our 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 September 30, 2023 and December 31, 2022, the Company has confirmed $i266 million and $i273 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 balance sheets, given the principal purpose of 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
i30 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.
Noncontrolling Interest
In August 2023, the Company and JCOM Co., Ltd. (“JCOM”) executed a series of transaction agreements to which the
Company and JCOM each contributed to Discovery Japan, Inc. (“JVCo”), an existing i80/i20 joint venture between the Company and JCOM, certain rights, liabilities, or rights
via license agreements in exchange for new common shares of JVCo, resulting in the Company and JCOM owning i51% and i49% of JVCo, respectively. Retaining controlling financial interest
subsequent to the transaction, the Company continues to consolidate the joint venture. As the terms of the agreement no longer incorporate JCOM’s option to put its noncontrolling interest to the Company, JCOM’s noncontrolling interest was reclassified from redeemable noncontrolling interest to noncontrolling interest outside of stockholders’ equity on the Company’s consolidated balance sheet.
Accumulated Other Comprehensive Loss
iThe
table below presents the changes in the components of accumulated other comprehensive loss, net of taxes (in millions).
Other
comprehensive income (loss) before reclassifications
(i1,275)
i9
i—
(i1,266)
Reclassifications
from accumulated other comprehensive loss to net income
(i2)
(i21)
i—
(i23)
Other
comprehensive income (loss)
(i1,277)
(i12)
i—
(i1,289)
Ending
balance
$
(i2,122)
$
i16
$
(i13)
$
(i2,119)
NOTE 15.
iRELATED PARTY TRANSACTIONS
In the normal course of business, the Company enters into transactions with related parties. Related parties include entities that share common directorship, such as Liberty Global plc (“Liberty Global”), Liberty Broadband Corporation (“Liberty Broadband”) and their subsidiaries (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 i30% and i48% of the aggregate voting power with respect to the election of directors of
Liberty Global and 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.
30
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
iThe
table below presents a summary of the transactions with related parties (in millions).
The Company has granted put rights to non-controlling interest holders in certain consolidated 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 i32.5% noncontrolling interest. Subsequent to September 30, 2023, the process of determining fair market value based on the procedures required under the joint venture agreement was finalized. The Company expects to
complete its purchase of GoldenTree’s i32.5% interest during the fourth quarter of 2023.
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 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 17. iREPORTABLE
SEGMENTS
i
The Company’s operating segments are determined based on: (i) financial information reviewed by its chief operating decision maker, the Chief Executive Officer (“CEO”), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions.
The 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. The Company does not report assets by segment because it is not used to allocate resources or evaluate segment performance.
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;
•certain impairment charges;
31
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
•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, 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.
i
The tables below present summarized financial information for each of the
Company’s reportable segments and inter-segment eliminations (in millions).
Net loss available to Warner Bros. Discovery, Inc.
$
(i417)
$
(i2,308)
$
(i2,726)
$
(i5,270)
Net
income attributable to redeemable noncontrolling interests
i2
i2
i7
i8
Net
income attributable to noncontrolling interests
i8
i21
i32
i44
Income
tax benefit
(i125)
(i566)
(i563)
(i1,201)
Loss
before income taxes
(i532)
(i2,851)
(i3,250)
(i6,419)
Other
expense (income), net
i63
i28
i109
(i411)
Loss
from equity investees, net
i14
i78
i73
i135
Gain
on extinguishment of debt
(i22)
i—
(i17)
i—
Interest
expense, net
i574
i555
i1,719
i1,219
Operating
income (loss)
i97
(i2,190)
(i1,366)
(i5,476)
Depreciation
and amortization
i1,989
i2,233
i5,961
i5,024
Employee
share-based compensation
i140
i113
i381
i317
Restructuring
and other charges
i269
i1,521
i510
i2,559
Transaction
and integration costs
i31
i59
i125
i1,129
Facility
consolidation costs
i14
i—
i37
i—
Amortization
of fair value step-up for content
i393
i645
i1,986
i1,515
Amortization
of capitalized interest for content
i12
i—
i34
i—
Impairments
and loss on dispositions
i24
i43
i61
i47
Adjusted
EBITDA
$
i2,969
$
i2,424
$
i7,729
$
i5,115
/
NOTE 18.
iSUBSEQUENT EVENTS
In October 2023, the Company repaid $i600 million of aggregate principal amount outstanding of its term loan due April 2025.
33
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, 2022 (the “2022 Form 10-K”).
INDUSTRY TRENDS
The WGA and SAG-AFTRA went on strike in May and July 2023 following the expiration of their respective collective bargaining agreements with the AMPTP. The WGA strike ended on September
27, 2023, and a new collective bargaining agreement was ratified on October 9, 2023. The SAG-AFTRA remains on strike. As a result of the strikes, we have paused and may continue to pause certain theatrical and television productions, which has resulted in delayed production spending.
The strikes, together with other headwinds in the industry, such as continued pressures on linear distribution and soft advertising markets in the U.S., have had, and are expected to continue to have, a material impact on the operations and results of the Company. This includes a positive impact on cash flow from operations attributed to delayed production spend, and a negative impact on the results of operations attributed to timing and performance of the remainder of the 2023 film slate, as well as the
Company’s ability to produce, license, and deliver content, and declines in linear advertising revenue attributed to secular trends and soft advertising markets in the U.S.
We continue to closely monitor the ongoing impact to our business; however, the full effects on our operations and results will depend on future developments, which are highly uncertain and cannot be predicted.
BUSINESS OVERVIEW
Warner Bros. Discovery is a premier global media and entertainment company that combines the WarnerMedia Business’s premium entertainment, sports and news 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 Rings.
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 languages. 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.
In May 2023, we launched Max, our enhanced streaming service. Max combines HBO Max and discovery+ content to create a unique and complete viewing experience for consumers by combining our unrivaled breadth and superior quality of content and brands with iconic franchises and strong product experience. discovery+ will continue to be available to consumers.
In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the
Company. 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, this restructuring program is expected to be substantially completed by the end of 2024. We expect to incur approximately $4.1 - $5.3 billion in pre-tax restructuring charges, of which we have incurred $4.1 billion as of September 30,
2023. Of the total expected pre-tax restructuring charges, we expect total cash expenditures to be $1.0 - $ 1.5 billion.
34
As of September 30, 2023, we classified our operations in three reportable segments:
•Studios - Our Studios segment primarily consists of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/DTC services, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical
and digital), related consumer products and themed experience licensing, and interactive gaming.
•Networks - Our Networks segment primarily consists of our domestic and international television networks.
•DTC - Our DTC segment primarily consists of our premium pay-TV and streaming 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.
35
RESULTS
OF OPERATIONS
The discussion below compares our actual results for the three months ended September 30, 2023 to the three months ended September 30, 2022, as well as our actual results for the nine months ended September 30, 2023 to our pro forma combined results for the nine months ended September 30, 2022, as if the Merger occurred on January 1, 2021. Management believes reviewing our pro forma combined operating results in addition to actual operating results is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance of our businesses. Our Studios, Networks, DTC, Corporate, and inter-segment eliminations information is based on the
historical operating results of the respective segments and include, where applicable, adjustments for (i) additional costs of revenues from the fair value step-up of film and television library, (ii) additional amortization expense related to acquired intangible assets, (iii) additional depreciation expense from the fair value of property and equipment, (iv) 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.
Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined 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’s future consolidated results of operations.
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. 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 “2023 Baseline Rate”), and the prior year amounts translated at the same 2023 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.
36
Consolidated Results of Operations
The tables below present our consolidated results of operations (in millions).
Costs of revenues, excluding depreciation and amortization
18,630
13,488
5,553
19,041
38
%
(2)
%
(2)
%
Selling,
general and administrative
7,241
7,167
1,745
8,912
1
%
(19)
%
(19)
%
Depreciation and amortization
5,961
5,024
532
5,556
19
%
7
%
7
%
Restructuring
and other charges
510
2,559
(90)
2,469
(80)
%
(79)
%
(79)
%
Impairments and loss on dispositions
61
47
—
47
30
%
30
%
21
%
Total
costs and expenses
32,403
28,285
7,740
36,025
15
%
(10)
%
(10)
%
Operating loss
(1,366)
(5,476)
1,538
(3,938)
75
%
65
%
67
%
Interest
expense, net
(1,719)
(1,219)
(512)
(1,731)
Gain on extinguishment of debt
17
—
—
—
Loss
from equity investees, net
(73)
(135)
(20)
(155)
Other (expense) income, net
(109)
411
139
550
Loss
before income taxes
(3,250)
(6,419)
1,145
(5,274)
Income tax benefit
563
1,201
174
1,375
Net
loss
(2,687)
(5,218)
1,319
(3,899)
Net income attributable to noncontrolling interests
(32)
(44)
—
(44)
Net
income attributable to redeemable noncontrolling interests
(7)
(8)
—
(8)
Net loss available to Warner Bros. Discovery, Inc.
$
(2,726)
$
(5,270)
$
1,319
$
(3,951)
NM
- Not meaningful
Unless otherwise indicated, the discussion below through operating loss reflects results for the nine months ended September 30, 2022 on a pro-forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenues, and selling, general and administrative expenses are substantially attributable to the Merger. The percent changes of line items below operating loss 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 increased 1% and was flat for the three and nine months ended September 30, 2023, respectively. The increase for the three months ended September 30, 2023 was primarily attributable to new DTC partnership launches and higher U.S. contractual affiliate rates, partially offset by declines in linear subscribers in the U.S. For the nine months ended September 30, 2023, declines in linear subscribers in the U.S. were offset by higher U.S. contractual affiliate rates and new DTC partnership launches.
38
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 number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, 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. Advertising revenue 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% for the three and nine months ended September 30, 2023, 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, partially offset by Max U.S. ad-lite subscriber growth and higher engagement. Additionally, the nine months ended September 30,
2023 was unfavorably impacted by the prior year broadcast of the NCAA March Madness Final Four and Championship in 2022 and, to a lesser extent, the prior year broadcast of the Olympics in Europe, partially offset by the broadcast of the Stanley Cup Finals in the current year.
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 increased 11% and 1% for
the three and nine months ended September 30, 2023, respectively. The increase for the three months ended September 30, 2023 was primarily attributable to higher theatrical film rental revenue due to the release of Barbie and higher games revenue due to the current year releases of Mortal Kombat 1 and Hogwarts Legacy, partially offset by lower TV licensing revenue. The increase for the nine months ended September 30, 2023 was primarily attributable to higher games revenue due to the release of Hogwarts Legacy and higher theatrical film rental revenue due to the release of Barbie, partially
offset by lower TV licensing revenue, the prior year broadcast of the Olympics in Europe, and home entertainment revenue.
Other revenue primarily consists of studio production services and tours.
Other revenue increased 17% and 20% for the three and nine months ended September 30, 2023, respectively, primarily attributable to services provided to the unconsolidated TNT Sports joint venture, the opening of Warner Bros. Studio Tour Tokyo in June 2023, and continued strong attendance at Warner Bros. Studio Tour London and Hollywood.
Costs of Revenues
Our principal component of costs of revenues is content expense. Content expense includes television/digital series, specials, films, games, and sporting events. The costs of producing a content asset
and bringing that asset to market consist of production costs, participation costs, and exploitation costs.
Costs of revenues decreased 6% and 2% for the three and nine months ended September 30, 2023, respectively. The decrease for the three months ended September 30, 2023 was primarily attributable to lower content expense at Studios (for television products), DTC, and Networks, partially offset by higher content expense for theatrical and games products. The decrease for the nine months ended September 30, 2023 was primarily attributable to lower content expense at Studios (for television products) and DTC, the prior year broadcast of the Olympics in Europe, and the NCAA March Madness Final Four and Championship in 2022, partially
offset by higher games content expense.
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 decreased 12% and 19% for the three and nine months ended September 30, 2023, respectively, primarily attributable to more efficient marketing-related spend and a reduction in personnel costs, partially offset by higher theatrical and games marketing expense.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation
and amortization decreased 12% and increased 7% for the three and nine months ended September 30, 2023, respectively. The decrease for the three months ended September 30, 2023 was primarily attributable to intangible assets acquired during the Merger that are being amortized using the sum of the months’ digits method. The increase for the nine months ended September 30, 2023 was primarily attributable to intangible assets acquired during the Merger that are being amortized using the sum of the months’ digits method, which resulted in lower pro forma amortization in the nine months ended September 30, 2022.
39
Restructuring
and other charges
In connection with the Merger, the Company has announced and has taken actions to implement projects to achieve cost synergies for the Company. Restructuring and other charges were primarily attributable to contract terminations, facility consolidation activities, organizational restructuring, and other charges and decreased 82% and 79% for the three and nine months ended September 30, 2023, respectively. (See Note 4 to the accompanying consolidated financial statements.)
Impairments and Loss on Dispositions
Impairments
and loss on dispositions was $24 million and $61 million for the three and nine months ended September 30, 2023, respectively.
Interest Expense, net
Actual interest expense, net increased $19 million and $500 million for the three and nine months ended September 30, 2023, respectively. The increase for nine months ended September 30, 2023 was primarily attributable to debt assumed as a result of the Merger. (See Note 9 and Note 10 to the accompanying consolidated financial statements.)
Loss From Equity Investees, net
Actual losses from our equity method investees were $14 million and $73 million for the three and nine months ended September
30, 2023, respectively. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 8 to the accompanying consolidated financial statements.)
Other (Expense) Income, net
The table below presents the details of other (expense) income, net (in millions).
Change in the value of investments with readily determinable fair value
—
(16)
21
(106)
Gain
on sale of equity method investments
—
8
—
141
Change in fair value of equity investments without readily determinable fair value
(2)
—
(73)
—
Interest
income
43
20
128
39
Other (loss) income, net
(19)
15
(6)
(11)
Total
other (expense) income, net
$
(63)
$
(28)
$
(109)
$
411
Income Tax Benefit
Income tax benefit was $125 million and $563 million for the three and nine months ended September 30, 2023, respectively, and income tax benefit was $566 million and $1,201 million for the three and
nine months ended September 30, 2022, respectively. The decrease in income tax benefit for the three and nine months ended September 30, 2023 was primarily attributable to an increase in pre-tax book income. The decrease was partially offset by an unfavorable tax adjustment related to the preferred stock conversion transaction expense recorded in the nine months ended September 30, 2022 associated with the Merger.
Income tax benefit for the three and nine months ended September 30, 2023 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations, changes in uncertain tax positions, and state and local income taxes.
40
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;
•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, 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 Adjusted EBITDA by segment (in millions).
The following tables present, for our Studios segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating income (loss) (in millions).
Costs of revenues, excluding depreciation and amortization
5,398
3,763
2,392
6,155
43
%
(12)
%
(12)
%
Selling,
general and administrative
1,981
1,122
698
1,820
77
%
9
%
9
%
Adjusted EBITDA
1,640
1,004
977
1,981
63
%
(17)
%
(17)
%
Depreciation
and amortization
458
332
77
409
Employee share-based compensation
—
1
26
27
Restructuring
and other charges
220
762
(38)
724
Transaction and integration costs
5
1
—
1
Amortization
of fair value step-up for content
886
834
(382)
452
Amortization of capitalized interest for content
34
—
—
—
Inter-segment
eliminations
1
—
—
—
Impairments and loss on dispositions
(1)
15
—
15
Operating
income (loss)
$
37
$
(941)
$
1,294
$
353
The
discussion below reflects results for the nine months ended September 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 Adjusted EBITDA are substantially attributable to the Merger.
42
Revenues
Content revenue increased 3% and decreased 10% for the three and nine months ended September 30, 2023, respectively. The increase for the three months ended September 30, 2023 was primarily attributable to higher theatrical film rental revenue due to the release
of Barbie and higher games revenue due to the current year releases of Mortal Kombat 1 and Hogwarts Legacy, partially offset by lower TV licensing revenue due to certain large TV licensing deals in the prior year and the impact of the WGA and SAG-AFTRA strikes.
The decrease for the nine months ended September 30, 2023 was primarily attributable to lower TV licensing and home entertainment revenue, partially offset by higher games revenue due to the release of Hogwarts Legacy and higher theatrical film rental revenue due to the release of Barbie. TV licensing revenue decreased due to certain large TV licensing deals in the prior year, the
timing of TV production, including the impact of the WGA and SAG-AFTRA strikes, fewer series sold to our owned platforms, fewer CW series, and the mix of theatrical availabilities. Home entertainment revenue decreased due to fewer new releases of theatrical products.
Other revenue increased 5% and 13% for the three and nine months ended September 30, 2023, respectively. The increase for the three and nine months ended September 30, 2023 was primarily attributable to the opening of Warner Bros. Studio Tour Tokyo in June 2023 and continued strong attendance at Warner Bros Studio Tour London and Hollywood. In addition, the three months ended September 30, 2023 was unfavorably impacted by lower studio production services due to the impact of the WGA and SAG-AFTRA strikes.
Costs
of Revenues
Costs of revenues increased 1% and decreased 12% for the three and nine months ended September 30, 2023, respectively. The increase for the three months ended September 30, 2023 was primarily attributable to higher content expense for theatrical and games products commensurate with higher revenues, partially offset by lower television product content expense, including the impact of the WGA and SAG-AFTRA strikes. The decrease for the nine months ended September 30, 2023 was primarily attributable to lower television product content expense, including the impact of the WGA and SAG-AFTRA strikes, partially offset by higher content expense for games and theatrical products commensurate with higher revenues.
Selling, General
and Administrative
Selling, general and administrative expenses increased 21% and 9% for the three and nine months ended September 30, 2023, respectively. The increase for the three months ended September 30, 2023 was primarily attributable to higher theatrical marketing expense due to the increased quantity of films released. The increase for the nine months ended September 30, 2023 was primarily attributable to higher theatrical marketing expense due to the increased quantity of films released and higher games marketing expense to support the release of Hogwarts Legacy.
Adjusted EBITDA
Adjusted EBITDA decreased 6% and 17% for the three and
nine months ended September 30, 2023, respectively.
43
Networks Segment
The tables below present, for our Networks segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating income (in millions).
Costs of revenues, excluding depreciation and amortization
7,243
5,728
2,148
7,876
26
%
(8)
%
(7)
%
Selling,
general and administrative
2,109
1,854
364
2,218
14
%
(5)
%
(4)
%
Adjusted EBITDA
6,855
6,247
1,326
7,573
10
%
(9)
%
(9)
%
Depreciation
and amortization
3,768
3,311
307
3,618
Employee share-based compensation
—
—
9
9
Restructuring
and other charges
161
666
(5)
661
Transaction and integration costs
3
1
—
1
Amortization
of fair value step-up for content
400
3
419
422
Inter-segment
eliminations
5
28
—
28
Impairments and loss on dispositions
16
—
—
—
Operating
income
$
2,502
$
2,238
$
596
$
2,834
The
discussion below reflects our results for the nine months ended September 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 Adjusted EBITDA are substantially attributable to the Merger.
Revenues
Distribution revenue decreased 2% for the three and nine months ended September 30, 2023, primarily attributable to a decline in linear subscribers in the U.S., partially offset by higher U.S. contractual affiliate rates.
44
Advertising revenue decreased 13% for the
three and nine months ended September 30, 2023, 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. In addition, the nine months ended September 30, 2023 was unfavorably impacted by the broadcast of the NCAA March Madness Final Four and Championship in 2022 and, to a lesser extent, the prior year broadcast of the Olympics in Europe, partially offset by the broadcast of the Stanley Cup Finals in the current year.
Content revenue decreased 22% and 26% for the three and nine months ended September 30, 2023, respectively. The decrease for the three months
ended September 30, 2023 was primarily attributable to the timing of third-party content licensing deals in the U.S. and lower international sports sublicensing, partially offset by inter-segment content licensing to DTC. The decrease for the nine months ended September 30, 2023 was primarily attributed to the prior year broadcast of the Olympics in Europe, lower international sports sublicensing, and, to a lesser extent, timing of third-party content licensing deals in the U.S., partially offset by inter-segment licensing of content to DTC.
Other revenue increased 51% and 54% for the three and nine months ended September 30, 2023, respectively, primarily attributable to services provided to the unconsolidated TNT Sports joint venture.
Costs
of Revenues
Costs of revenues decreased 6% and 7% for the three and nine months ended September 30, 2023, respectively, primarily attributable to lower international and regional sports networks content expense, and lower domestic general entertainment related expense, partially offset by higher costs associated with the unconsolidated TNT Sports joint venture. In addition, the nine months ended September 30, 2023 was favorably impacted by the prior year broadcast of the Olympics in Europe and the NCAA March Madness Final Four and Championship in 2022, partially offset by higher domestic sports related expense.
Selling, General and Administrative
Selling, general and administrative expenses
decreased 1% and 4% for the three and nine months ended September 30, 2023, respectively, primarily attributable to lower marketing and personnel expenses.
Adjusted EBITDA
Adjusted EBITDA decreased 9% for the three and nine months ended September 30, 2023.
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 loss (in millions).
Costs of revenues, excluding depreciation and amortization
5,640
4,200
1,977
6,177
34
%
(9)
%
(8)
%
Selling,
general and administrative
1,827
2,002
909
2,911
(9)
%
(37)
%
(37)
%
Adjusted EBITDA
158
(1,379)
(467)
(1,846)
NM
NM
NM
Depreciation
and amortization
1,520
1,193
163
1,356
Employee share-based compensation
—
(1)
—
(1)
Restructuring
and other charges
61
992
(3)
989
Transaction and integration costs
2
1
—
1
Amortization
of fair value step-up for content
349
256
(21)
235
Inter-segment
eliminations
10
—
—
—
Impairments and loss on dispositions
4
4
—
4
Operating
loss
$
(1,788)
$
(3,824)
$
(606)
$
(4,430)
The
discussion below reflects results for the nine months ended September 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 Adjusted EBITDA are substantially attributable to the Merger.
Distribution revenue increased 5% and 2% for the three and nine months ended September 30, 2023, respectively, primarily attributable tonew partnership launches, price increases in the U.S. and certain international markets, the launch of the Ultimate
tier in the U.S., and favorable mix shifts from wholesale to higher revenue channels.
Advertising revenue increased 29% and 28% for the three and nine months ended September 30, 2023, respectively, primarily attributable to Max U.S. ad-lite subscriber growth and higher engagement.
Content revenue decreased 17% and increased 40% for the three and nine months ended September 30, 2023, respectively. The decrease for the three months ended September 30, 2023 was primarily attributable to higher third-party licensing for HBO content in September 2022. The increase for the nine months ended September 30, 2023 was primarily attributable to the timing of certain licensing deals.
Costs
of Revenues
Costs of revenues decreased 12% and 8% for the three and nine months ended September 30, 2023, respectively, primarily attributable to lower content expense. Additionally, the nine months ended September 30, 2023 was unfavorably impacted by increased content licensing costs commensurate with higher content revenue, partially offset by the shutdown of CNN+ in the prior year.
1 We define a “DTC Subscription” as:
(i) a retail subscription to discovery+, HBO, HBO Max, or Max for which we have recognized subscription revenue, whether directly or through a third party, from a direct-to-consumer platform; (ii) a wholesale subscription to discovery+, HBO, HBO Max, or 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; (iii) a wholesale subscription to discovery+, HBO, HBO Max, or Max for which we have recognized subscription revenue on a per subscriber 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 DTC Subscriptions as “subscribers”.
The reported number of “subscribers” included herein and the definition of “DTC Subscription” as used herein excludes: (i) individuals who subscribe to DTC products, other than discovery+, HBO, HBO Max, and Max, that may be offered by us or by certain joint venture partners or affiliated
parties from time to time; (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; (iii) domestic and international Cinemax subscribers, and international basic HBO subscribers; and (iv) users on free 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.
46
Selling, General, and Administrative Expenses
Selling, general and administrative expenses decreased 46% and 37% for the three and nine months ended September
30, 2023, respectively, primarily attributable to more efficient marketing-related spend.
Adjusted EBITDA
Adjusted EBITDA increased $738 million and $1,996 million for the three and nine months ended September 30, 2023, respectively.
Corporate
The following tables presents our Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions).
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 nine months ended September 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 4% and 16% for the three and nine months ended September 30, 2023, respectively,primarily attributable to reductions to personnel costs and technology-related operating expenses and lower securitization expense, partially offset by higher deferred compensation expense.
47
Inter-segment
Eliminations
The following tables present our inter-segment eliminations by revenue and expense, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions).
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.
48
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the nine months ended September 30, 2023, we funded our working capital needs primarily through cash flows from operations. As of September 30, 2023, we had $2.4 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 have a $6.0 billion revolving credit facility and a commercial paper program described below.We also participate in a revolving receivables program and an accounts receivable factoring program described below.
•Debt
Senior Notes
During the nine months ended September 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
We have a multicurrency revolving credit agreement (the “Revolving Credit Agreement”) and have the capacity to borrow up to $6.0 billion under the Revolving Credit Agreement (the “Credit Facility”). We may also request additional commitments up to $1.0 billion from the lenders upon the satisfaction of certain conditions. The Revolving Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of September 30, 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 nine months ended September 30, 2023, we borrowed and repaid $4,298 million and $4,304 million, respectively, under our Credit Facility and commercial paper program. As of September 30, 2023, 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 $5,500 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 $5,190 millionas of September 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 thenine months ended September 30, 2023.
•Derivatives
We received investing proceeds of $38 million during the nine months ended September 30, 2023 from the unwind and settlement of derivative instruments. (See Note 10 to the accompanying consolidated financial statements.)
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 our enhanced streaming service
Max, 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.
49
•Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content, as well as certain sports rights. Contractual commitments to acquire content have not materially changed as set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K. However, our spending to acquire content may be lower than we initially anticipated
due to temporary pauses of certain theatrical and television productions as a result of the recently concluded WGA strike and the ongoing SAG-AFTRA strike.
•Debt
Term Loan
During the nine months ended September 30, 2023, we repaid$2,850 million of aggregate principal amount outstanding of our term loan prior to the due date of April 2025.
Floating Rate Notes
During the nine months ended September 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 nine months ended September 30, 2023, we repurchased or repaid $2,378 million of aggregate principal amount outstanding of our senior notes due in 2023 and 2024. In addition, we have $42 million of senior notes coming due in December 2023, and an additional $1,261 million of senior notes coming due through September 30, 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 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 $1,048 million during the nine months ended September 30, 2023, including amounts capitalized to support Max. In addition, we expect to continue to incur significant costs to develop and market 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 8 to the accompanying consolidated financial statements.) We also provide
funding to our investees from time to time. During the nine months ended September 30, 2023, we contributed $91 million for investments in and advances to our investees.
•Redeemable Noncontrolling Interest and Noncontrolling Interest
Due to business combinations, we had redeemable equity balances of $281 million at September 30, 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 $282 million and $286 million for the nine months
ended September 30, 2023 and 2022, respectively.
•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, 2023, we made cash payments of $1,191 million and $2,065 million for income taxes and interest on our outstanding debt, respectively. Cash required for interest payments has increased significantly as a result of the Merger.
50
Cash Flows
The
following table presents changes in cash and cash equivalents (in millions).
Cash, cash equivalents, and restricted cash, beginning of period
$
3,930
$
3,905
Cash
provided by operating activities
3,899
1,458
Cash (used in) provided by investing activities
(1,025)
3,742
Cash used in financing activities
(4,308)
(6,470)
Effect of exchange
rate changes on cash, cash equivalents, and restricted cash
(66)
(122)
Net change in cash, cash equivalents, and restricted cash
(1,500)
(1,392)
Cash, cash equivalents, and restricted cash, end of period
$
2,430
$
2,513
Operating
Activities
Cash provided by operating activities was $3,899 million and $1,458 million during the nine months ended September 30, 2023 and 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 $(1,025) million and $3,742 million during the nine months ended September 30, 2023 and 2022, respectively. The decrease in cash provided by investing activities was primarily attributable to cash acquired
from the Merger in the prior year, less proceeds received from the unwind and settlement of derivative instruments and sales of investments, and increased purchases of property and equipment during the nine months ended September 30, 2023.
Financing Activities
Cash used in financing activities was $4,308 million and $6,470 million during the nine months ended September 30, 2023 and 2022, respectively. The decrease in cash used in financing activities was primarily attributable to less net debt activity during the nine months ended September 30, 2023.
Capital Resources
As
of September 30, 2023, capital resources were comprised of the following (in millions).
Revolving credit facility and commercial paper program
6,000
—
6,000
Term
loans
1,150
1,150
—
Senior notes (a)
43,937
43,937
—
Total
$
53,470
$
45,087
$
8,383
(a)
Interest on the senior notes is paid annually, semi-annually, or quarterly. Our senior notes outstanding as of September 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 Agreements 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.
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 were 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.
51
Summarized Guarantor Financial Information
Basis of Presentation
As
of September 30, 2023 and December 31, 2022, all of the Company’s outstanding $13.5 billion registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company, and guaranteed by the Company, Scripps Networks, and WMH. As of September 30, 2023, the Company also has outstanding $29.3 billion of senior notes issued by WMH and guaranteed by the Company, Scripps and DCL; $1.2 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 9 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 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 WMH (collectively, the “Obligors”). All guarantees of DCL and WMH’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 WMH, 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, WMH 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).
Net income available to Warner Bros. Discovery, Inc.
(991)
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. Contractual commitments have not materially changed as set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 Form 10-K.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we enter into transactions with related parties, primarily the Liberty Group and our equity method investees. (See Note 15 to the
accompanying consolidated financial statements.)
52
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed since December 31, 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 Discussion and Analysis of Financial Condition and Results of Operations” in our 2022 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, 2023. (See Note 1 to the accompanying consolidated financial 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. 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 WarnerMedia 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
level of debt, including the significant indebtedness incurred in connection with the acquisition of the WarnerMedia Business, and our future compliance with debt covenants;
•more intense competitive pressure from existing or new competitors in the industries in which we operate;
•reduced spending on domestic and foreign television advertising, due to macroeconomic trends, industry trends or unexpected reductions in our number of subscribers;
•industry trends, including the timing of, and spending on, sports programming, feature film, television and television commercial production;
•market demand for foreign first-run and existing content libraries;
•negative
publicity or damage to our brands, reputation or 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 streaming services;
•realizing direct-to-consumer subscriber goals;
•general economic and business conditions, including the impact of the ongoing COVID-19 pandemic, fluctuations in foreign currency exchange rates, and political unrest in the international markets in which we operate;
•the possibility or duration of an industry-wide strike, including the recently concluded WGA strike and ongoing SAG-AFTRA 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;
53
•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.
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill and other intangibles. Additionally, many of these risks are amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. Management’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 affecting 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 2022 Form 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 2022 Form 10-K. Our exposures to market risk have not changed materially since December 31, 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 September 30, 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 September 30, 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
During the three months ended September 30, 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.
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PART
II. OTHER INFORMATION
ITEM 1. Legal Proceedings
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 intellectual property. However, a determination as to the amount of the accrual required for such contingencies is highly subjective and requires 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.
Between September 23, 2022 and October 24, 2022, two purported class action lawsuits (Collinsville Police Pension Board v. Discovery, Inc., et al., Case No. 1:22-cv-08171; Todorovski v. Discovery, Inc., et al., Case No. 1:22-cv-09125) were filed in the United States District Court for the Southern District of New York. The complaints named Warner Bros. Discovery, Inc., Discovery, Inc., David Zaslav, and Gunnar Wiedenfels as defendants. The complaints generally alleged that the defendants made false and misleading
statements 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 Merger, and that AT&T aided and abetted these alleged breaches of fiduciary duties. The Monroe County Action sought 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” of the Company’s 2022 Form 10-K. Certain of the risks described in our 2022 Form 10-K and Q2 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.
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Risks
Related to Our 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 take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns, work stoppages, or the possibility of such actions, including the recently concluded WGA strike and ongoing SAG-AFTRA strike and potential strikes by other unions involved in development and production, have resulted in, and could in
the future result in, delays in the production of, or the release of, our television programs, feature films, and interactive entertainment. For example, the recently concluded WGA strike and ongoing SAG-AFTRA strike have caused, and are expected to continue to cause, delays in the production of our television programs and feature films and in the release of certain programming. The impact of these strike-related delays and the ongoing SAG-AFTRA strike in general could continue to be felt even after the SAG-AFTRA strike is resolved.
If our industry experiences prolonged strikes, work slowdowns or work stoppages, we may be unable to produce, distribute or license programming, feature films, and interactive entertainment, which could result in reduced revenue and have a material adverse effect on our business, financial condition and results of operations. For example, the recently concluded WGA strike and ongoing SAG-AFTRA
strike have had, and are expected to continue to have, a material impact on the operations and results of the Company. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Overview—Industry Trends.” In addition, the pausing and restarting of productions may result in incremental costs, delay the completion and release of some of our content (films, television programs, and licensed programs) and could cause an impairment of our investment in film, television programs, or licensed program rights if the incremental costs are significant or we are unable to efficiently complete the production of the film, television show or program or decide to abandon the production.
We could also enter into new collective bargaining agreements or renew collective bargaining agreements on less favorable
terms and incur higher costs as a result of prolonged strikes, work slowdowns, or work stoppages. Many of the collective bargaining agreements that cover individuals providing services to the Company are industry-wide agreements, and we may lack practical control over the negotiations and terms of these agreements. Union or labor disputes or player lock-outs relating to certain professional sports leagues may preclude us from producing and telecasting scheduled games or events and could negatively impact our promotional and marketing opportunities. Depending on their duration, union or labor disputes or player lock-outs could have a material adverse effect on our business, financial condition and results of operations.
ITEM 5.
Other Information
Disclosure of iiiTrading Arrangements//
Item
408(a) of Regulation S-K requires the Company to disclose whether any director or officer of the Company has adopted or terminated (i) any trading arrangement that is intended to satisfy the affirmative defense conditions of Rule 10b5-1(c); and/or (ii) any written trading arrangement that meets the requirements of a “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of Regulation S-K. During the quarter ended September 30, 2023, the following activity occurred requiring disclosure under Item 408(a) of Regulation S-K:
iiBruce
Campbell, iChief Revenue and Strategy Officer, iadopted a new Rule 10b5-1 trading arrangement on iSeptember 11, 2023. This trading arrangement has a termination date of March
3, 2025. Under the trading arrangement, up to an aggregate of i202,962 shares of common stock issuable upon the exercise of options expiring on March 1, 2025, are available to be sold by the broker upon reaching pricing targets defined in the trading arrangement./
iiGunnar
Wiedenfels, iChief Financial Officer, iadopted a new Rule 10b5-1 trading arrangement on iSeptember 12, 2023. This trading arrangement has a termination date of March
3, 2025. Under the trading arrangement, up to (i) i100,000 shares of common stock, (ii) i40,001 shares of common stock issuable upon the exercise of options expiring on May 22, 2024, and (iii) i50,741
shares of common stock issuable upon the exercise of options expiring on March 1, 2025, for an aggregate of i190,742 shares of common stock, are available to be sold by the broker upon reaching pricing targets defined in the trading arrangement./
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.
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.
† 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 September 30, 2023
and December 31, 2022, (ii) Consolidated Statements of Operations for the three and nine months ended September 30, 2023 and 2022, (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2023 and 2022, (iv) Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022, (v) Consolidated Statements of Equity for the three and nine months ended September 30, 2023 and 2022, and (vi) Notes to Consolidated Financial Statements.
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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.
