WARNER BROS. DISCOVERY, INC.
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
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| | Discovery, Inc.
Preferred Stock | | Discovery, Inc.
Common Stock | | Additional
Paid-In
Capital | | Treasury
Stock | | Retained
Earnings | | Accumulated
Other
Comprehensive
Loss | | Warner Bros. Discovery,
Inc.
Stockholders’
Equity | | Noncontrolling
Interests | | Total
Equity |
| | Shares | | Par Value | | Shares | | Par Value | | | | | | | |
| December 31, 2020 | | 13 | | | $ | — | | | 717 | | | $ | 7 | | | $ | 10,809 | | | $ | (8,244) | | | $ | 8,543 | | | $ | (651) | | | $ | 10,464 | | | $ | 1,536 | | | $ | 12,000 | |
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| Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 140 | | | — | | | 140 | | | 46 | | | 186 | |
| Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 70 | | | 70 | | | — | | | 70 | |
| Share-based compensation | | — | | | — | | | — | | | — | | | 32 | | | — | | | — | | | — | | | 32 | | | — | | | 32 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Preferred stock conversion | | (1) | | | — | | | 11 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | | | | |
| Tax settlements associated with share-based compensation | | — | | | — | | | — | | | — | | | (68) | | | — | | | — | | | — | | | (68) | | | — | | | (68) | |
| Dividends paid to noncontrolling interest | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (178) | | | (178) | |
| Issuance of stock in connection with share-based plans | | — | | | — | | | 8 | | | — | | | 186 | | | — | | | — | | | — | | | 186 | | | — | | | 186 | |
Redeemable noncontrolling interest
adjustments to redemption value | | — | | | — | | | — | | | — | | | (8) | | | — | | | (1) | | | — | | | (9) | | | — | | | (9) | |
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| March 31, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 10,951 | | | $ | (8,244) | | | $ | 8,682 | | | $ | (581) | | | $ | 10,815 | | | $ | 1,404 | | | $ | 12,219 | |
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Net income available to Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 672 | | | — | | | 672 | | | 38 | | | 710 | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | (4) | | | — | | | (4) | |
| Share-based compensation | | — | | | — | | | — | | | — | | | 41 | | | — | | | — | | | — | | | 41 | | | — | | | 41 | |
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| | | | | | | | | | | | | | | | | | | | | | |
| Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
| Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (29) | | | (29) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | 9 | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Redeemable noncontrolling interest
adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | — | | | 6 | | | — | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 11,000 | | | $ | (8,244) | | | $ | 9,360 | | | $ | (585) | | | $ | 11,538 | | | $ | 1,413 | | | $ | 12,951 | |
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| | | | | | | | | | | | | | | | | | | | | | |
Net income available to Discovery, Inc. and attributable to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | 156 | | | — | | | 156 | | | 32 | | | 188 | |
| Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (132) | | | (132) | | | — | | | (132) | |
| Share-based compensation | | — | | | — | | | — | | | — | | | 43 | | | — | | | — | | | — | | | 43 | | | — | | | 43 | |
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| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Tax settlements associated with share-based compensation | | — | | | — | | | — | | | — | | | (1) | | | — | | | — | | | — | | | (1) | | | — | | | (1) | |
Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (16) | | | (16) | |
Issuance of stock in connection with share-based plans | | — | | | — | | | — | | | — | | | 1 | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Redeemable noncontrolling interest
adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | 6 | | | — | | | 6 | | | — | | | 6 | |
| | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2021 | | 12 | | | $ | — | | | 736 | | | $ | 7 | | | $ | 11,043 | | | $ | (8,244) | | | $ | 9,522 | | | $ | (717) | | | $ | 11,611 | | | $ | 1,429 | | | $ | 13,040 | |
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| The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Warner Bros. Discovery, Inc. (“Warner Bros. Discovery”, “WBD”, the “Company”, “we”, “us” or “our”) is a leading global media and entertainment company that creates and distributes the world’s most differentiated and complete portfolio of content and brands across television, film and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.
Merger with the WarnerMedia Business of AT&T
On April 8, 2022 (the “Closing Date”), Discovery, Inc. (“Discovery”) completed its merger (the “Merger”) with the WarnerMedia business (the “WarnerMedia Business”, “WM Business” or “WM”) of AT&T Inc. (“AT&T”) and changed its name to “Warner Bros. Discovery, Inc.”. On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market (the “Nasdaq”) under the trading symbol WBD.
The Merger was executed through a Reverse Morris Trust type transaction, under which WM was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. (See Note 2 and Note 3). Prior to the Merger, WarnerMedia Holdings, Inc. distributed $40.5 billion to AT&T (subject to working capital and other adjustments) in a combination of cash, debt securities, and WM's retention of certain debt. Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. In August 2022, the Company and AT&T finalized the post-closing working capital settlement process, pursuant to section 1.3 of the Separation and Distribution Agreement, which resulted in the Company receiving a $1.2 billion payment from AT&T in the third quarter of 2022. AT&T shareholders received shares of WBD Series A common stock (“WBD common stock”) in the distribution representing 71% of the combined company and the Company's pre-Merger shareholders continued to own 29% of the combined company, in each case on a fully diluted basis.
Discovery was deemed to be the accounting acquirer of the WM Business for accounting purposes under U.S. generally accepted accounting principles (“U.S. GAAP”); therefore, Discovery is considered WBD’s predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD’s historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WM Business and current and future results will not be comparable to historical results.
Segments
In connection with the Merger, the Company reevaluated and changed its segment presentation during the quarter ended June 30, 2022. Accordingly, beginning in the quarter ended June 30, 2022, and for all periods presented, we are reporting results based on the following segments:
Studios - Our Studios segment primarily consists of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/direct-to-consumer (“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 digital content services.
Impact of COVID-19
The Company continues to closely monitor the ongoing impact of COVID-19 on all aspects of its business and geographies, including the impact on its customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties. Certain key sources of revenue for the Studios segment, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The nature and full extent of COVID-19’s effects on our operations and results are not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future variants or surges of COVID-19, vaccine distribution and efficacy and other actions to contain the virus or treat its impact, among others. The consolidated financial statements reflect management’s estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries in which a controlling interest is maintained, including variable interest entities (“VIE”) for which the Company is the primary beneficiary. Intercompany accounts and transactions between consolidated entities have been eliminated.
Unaudited Interim Financial Statements
These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates.
Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, estimated credit losses, content rights, leases, depreciation and amortization, business combinations, share-based compensation, income taxes, other financial instruments, contingencies, estimated defined benefit plan liabilities, and the determination of whether the Company should consolidate certain entities.
Summary of Significant Accounting Policies
There have been no changes to the Company's significant accounting policies described in the 2021 Form 10-K, other than updates to policies as a result of the Merger as described below.
Film and Television Content Rights
The Company groups its film and television content rights by monetization strategy. For films and television programs predominantly monetized individually, the amount of capitalized film and television production costs and the amount of participations and residuals to be recognized as expense in a particular period are determined using the individual film forecast method. Under this method, the amortization of capitalized costs and the accrual of participations and residuals are based on the proportion of the film’s or television program’s revenues recognized for such period to the film’s or television program’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s or television program’s remaining life cycle).
The process of estimating ultimate revenues requires us to make a series of judgments related to future revenue-generating activities associated with a particular film. Prior to the theatrical release of a film, our estimates are based on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings), international distribution plans and the expected number of theaters in which the film will be released. Subsequent to release, ultimate revenues are updated to reflect initial performance, which is often predictive of future performance. For a film or television program that is predominantly monetized on its own but also monetized with other films and/or programs (such as our DTC or linear services), we make a reasonable estimate of the value attributable to the film or program’s exploitation while monetized with other films/programs and expense such costs as the film or television program is exhibited. For theatrical films, the period over which ultimate revenues from all applicable sources and exhibition windows are estimated does not exceed 10 years from the date of the film’s initial release. For television programs, the ultimate period does not exceed 10 years from delivery of the first episode, or, if still in production, five years from delivery of the most recent episode, if later. For games, the ultimate period does not exceed two years from the date of the game’s initial release. Ultimates for produced content monetized on an individual basis are reviewed and updated (as applicable) on a quarterly basis; any adjustments are applied prospectively as of the beginning of the fiscal year of the change.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
For programs monetized as a group, including licensed programming, the Company’s film groups are generally aligned along the Company’s networks and digital content offerings, except for certain international territories wherein content assets are shared across the various networks in the territory and therefore, the territory is the film group. Amortization expense for each period is generally based on the revenue forecast model, which approximates the proportion that estimated distribution and advertising revenues for the current period represent in relation to the estimated remaining total lifetime revenues. Digital content and premium pay TV amortization for each period is recognized based on estimated viewing patterns as there are generally no direct revenues to associate to the individual content assets and therefore number of views is most representative of the use of the title. Licensed rights to film and television programming are typically amortized over the useful life of the program’s license period on a straight-line basis (or per-play basis, if greater, for certain programming on our ad-supported networks), or accelerated basis for licensed original programs.
Quarterly, the Company prepares analyses to support its content amortization expense. Critical assumptions used in determining content amortization for programming predominately monetized as a group include: (i) the grouping of content with similar characteristics, (ii) the application of a quantitative revenue forecast model or viewership model based on the adequacy of historical data, (iii) determining the appropriate historical periods to utilize and the relative weighting of those historical periods in the forecast model, and (iv) incorporating secondary streams. The Company then considers the appropriate application of the quantitative assessment given forecasted content use, expected content investment and market trends. Content use and future revenues may differ from estimates based on changes in expectations related to market acceptance, network affiliate fee rates, advertising demand, the number of cable and satellite television subscribers receiving the Company’s networks, the number of subscribers to its digital services, and program usage. Accordingly, the Company continually reviews its estimates and planned usage and revises its assumptions if necessary. Any material adjustments from the Company’s review of the amortization rates for assets in film groups are applied prospectively in the period of the change.
Unamortized film costs are tested for impairment whenever events or changes in circumstances indicate that the fair value of a film (or television program) predominately monetized on its own, or a film group, may be less than its unamortized costs. In addition, a change in the predominant monetization strategy is considered a triggering event for impairment testing before a title is accounted for as part of a film group. If the carrying value of an individual feature film or television program, or film group, exceeds the estimated fair value, an impairment charge will be recorded in the amount of the difference. For content that is predominately monetized individually, we utilize estimates including ultimate revenues and additional costs to be incurred (including exploitation and participation costs), in order to determine whether the carrying value of a film or television program is impaired.
Game development costs are expensed as incurred before the applicable games reach technological feasibility, or for online hosted arrangements, before the preliminary project phase is complete and it is probable the project will be completed and the software will be used to perform the function intended. Upon release, the capitalized game development costs are amortized based on the proportion of the game’s revenues recognized for such period to the game’s total current and anticipated revenues. Unamortized capitalized game production and development costs are stated at the lower of cost, less accumulated amortization, or net realizable value and reported in “Film and television content rights and games, net” on the consolidated balance sheets.
Inventory
Inventory is comprised primarily of DVDs, Blu-ray Discs and game units and is stated at the lower of cost or net realizable value in prepaid expenses and other current assets on the consolidated balance sheets. Cost is determined using the average cost method for the majority of our inventory, with the remaining inventory valued using the standard cost method, which approximates average cost. Returned goods included in inventory are valued at estimated realizable value, but not in excess of cost. The Company periodically reviews its inventory for excess and obsolete inventory. The Company's inventory consisted of the following (in millions).
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| | September 30, 2022 | | December 31, 2021 | | | |
| Raw materials | | $ | 6 | | | $ | — | | | | |
| Work in process | | 6 | | | — | | | | |
| Finished goods | | 137 | | | 1 | | | | |
| Total inventory | | $ | 149 | | | $ | 1 | | | | |
| |
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|
Defined Benefit Plan
The Company maintains a defined benefit pension plan covering certain employees. Defined benefit plan obligations are based on various assumptions used by our actuaries in calculating these amounts. These assumptions include discount rates, compensation rate increases, expected return on plan assets, retirement rates and mortality rates. Actual results that differ from the assumptions and changes in assumptions could affect future expenses and obligations.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Accounting and Reporting Pronouncements Adopted
LIBOR
In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance providing optional expedients and exceptions for applying U.S. GAAP to contract modifications, hedging relationships, and other transactions associated with the expected market transition away from the London Interbank Offered Rate and other interbank offered rates to alternative reference rates. The guidance is for March 12, 2020 through December 31, 2022 and may not be applied to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The Company applied the relevant provisions of the guidance to hedge relationships that were subsequently terminated in the first quarter of 2022.
Convertible Instruments
In August 2020, the FASB issued guidance simplifying the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. This guidance amends the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, requires the use of the if-converted method for calculating earnings per share for convertible instruments, and makes targeted improvements to the disclosures for convertible instruments and related earnings per share guidance. The Company adopted the guidance effective January 1, 2022, and there was no material impact on its consolidated financial statements.
Accounting and Reporting Pronouncements Not Adopted
Government Assistance
In November 2021, the FASB issued guidance requiring disclosure for transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy to other guidance. The annual disclosures include terms and conditions, accounting treatment and impacted financial statement lines reflecting the impact of the transactions. The guidance is effective for annual periods beginning after December 15, 2021. While the guidance will not have an effect on the Company’s consolidated statement of operations or consolidated balance sheets, the Company is currently assessing the impact this guidance will have on its financial statement disclosures.
Supplier Finance Programs
In September 2022, the FASB 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. Early adoption is permitted. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.
NOTE 2. EQUITY AND EARNINGS PER SHARE
Common Stock Issued in Connection with the WarnerMedia Merger
In connection with the Merger, each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, and Discovery Series C common stock, was reclassified and automatically converted into one share of WBD common stock, and each issued and outstanding share of Discovery Series A-1 convertible preferred stock (“Series A-1 Preferred Stock”) and Series C-1 convertible preferred stock was reclassified and automatically converted into 13.1135 and 19.3648 shares of WBD common stock, respectively.
The Merger required the consent of Advance/Newhouse Programming Partnership under Discovery's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock. In connection with Advance/Newhouse Programming Partnership’s entry into the consent agreement and related forfeiture of the significant rights attached to the Series A-1 Preferred Stock in the reclassification of the shares of Series A-1 Preferred Stock into common stock, it received an increase to the number of shares of common stock of the Company into which the Series A-1 Preferred Stock converted. The impact of the issuance of such additional shares of common stock was $789 million and was recorded as a transaction expense in selling, general and administrative expense upon the closing of the Merger.
On April 8, 2022, the Company issued 1.7 billion shares of WBD common stock as consideration paid for the acquisition of WM. (See Note 3).
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Earnings Per Share
All share and per share amounts have been retrospectively adjusted to reflect the reclassification and automatic conversion into WBD common stock, except for Series A-1 Preferred Stock, which has not been recast because the conversion of Series A-1 Preferred Stock into WBD common stock in connection with the Merger was considered a discrete event and treated prospectively.
The table below sets forth the Company's calculated earnings per share. Earnings per share amounts may not recalculate due to rounding.
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Numerator: | | | | | | | |
| Net (loss) income | $ | (2,285) | | | $ | 197 | | | $ | (5,218) | | | $ | 1,106 | |
| Less: | | | | | | | |
| Allocation of undistributed income to Series A-1 convertible preferred stock | — | | | (17) | | | (49) | | | (104) | |
| Net income attributable to noncontrolling interests | (21) | | | (32) | | | (44) | | | (116) | |
| Net income attributable to redeemable noncontrolling interests | (2) | | | (9) | | | (8) | | | (22) | |
| | | | | | | |
| Net (loss) income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for basic and diluted net (loss) income per share | $ | (2,308) | | | $ | 139 | | | $ | (5,319) | | | $ | 864 | |
| | | | | | | |
| Add: | | | | | | | |
| Allocation of undistributed income to Series A-1 convertible preferred stockholders | $ | — | | | $ | 17 | | | $ | — | | | $ | 104 | |
| Net (loss) income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for diluted net (loss) income per share | $ | (2,308) | | | $ | 156 | | | $ | (5,319) | | | $ | 968 | |
| | | | | | | |
| Denominator — weighted average: | | | | | | | |
| Common shares outstanding — basic | 2,428 | | | 589 | | | 1,775 | | | 588 | |
| Impact of assumed preferred stock conversion | — | | | 71 | | | — | | | 71 | |
| Dilutive effect of share-based awards | — | | | 3 | | | — | | | 6 | |
| Common shares outstanding — diluted | 2,428 | | | 663 | | | 1,775 | | | 665 | |
| | | | | | | |
| Basic net (loss) income per share allocated to common stockholders | $ | (0.95) | | | $ | 0.24 | | | $ | (3.00) | | | $ | 1.47 | |
| Diluted net (loss) income per share allocated to common stockholders | $ | (0.95) | | | $ | 0.24 | | | $ | (3.00) | | | $ | 1.46 | |
The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Anti-dilutive share-based awards | | 59 | | | 32 | | | 48 | | | 10 | |
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NOTE 3. ACQUISITIONS AND DISPOSITIONS
Acquisitions
WarnerMedia
On April 8, 2022, the Company completed its Merger with the WarnerMedia Business of AT&T. The Merger was executed through a Reverse Morris Trust type transaction, under which WM was distributed to AT&T’s shareholders via a pro-rata distribution, and immediately thereafter, combined with Discovery. Discovery was deemed to be the accounting acquirer of WM.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Merger combined WM’s content library of popular and valuable intellectual property with Discovery’s global footprint, collection of local-language content and deep regional expertise across more than 220 countries and territories. The Company expects this broad, worldwide portfolio of brands, coupled with its DTC potential and the attractiveness of the combined assets, to result in increased market penetration globally. The Merger is also expected to create significant cost synergies for the Company.
Purchase Price
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) | | $ | 42,309 | |
Estimated fair value of share-based compensation awards attributable to pre-combination services (2) | | 94 | |
Settlement of preexisting relationships (3) | | (27) | |
| Purchase consideration | | $ | 42,376 | |
| | |
|
(1) The fair value of WBD common stock issued to AT&T shareholders represents approximately 1,732 million shares of the Company’s common stock multiplied by the closing share price for Discovery Series A common stock of $24.43 on the Nasdaq on the Closing Date. The number of shares of WBD common stock issued in the Merger was determined based on the number of fully diluted shares of Discovery, Inc. common stock immediately prior to the closing of the Merger, multiplied by the quotient of 71%/29%.
(2) This amount represents the value of AT&T restricted stock unit awards that were not vested and were replaced by WBD restricted stock unit awards with similar terms and conditions as the original AT&T awards. The conversion was based on the ratio of the volume-weighted average per share closing price of AT&T common stock on the ten trading days prior to the Closing Date and the volume-weighted average per share closing price of WBD common stock on the ten trading days following the Closing Date. The fair value of replacement equity-based awards attributable to pre-Merger service was recorded as part of the consideration transferred in the Merger. See Note 14 for additional information.
(3) The amount represents the effective settlement of outstanding payables and receivables between the Company and WM. No gain or loss was recognized upon settlement as amounts were determined to be reflective of fair market value.
Balances reflect rounding of dollar and share amounts to millions, which may result in differences for recalculated standalone amounts compared with the amounts presented above. In August 2022, the Company and AT&T finalized the post-closing working capital settlement process, pursuant to section 1.3 of the Separation and Distribution Agreement, which resulted in the Company receiving a $1.2 billion payment from AT&T in the third quarter of 2022.
Preliminary Purchase Price Allocation
The Company applied the acquisition method of accounting to WM, whereby the excess of the fair value of the purchase price paid over the fair value of identifiable net assets acquired and liabilities assumed was allocated to goodwill. Goodwill reflects the assembled workforce of WM as well as revenue enhancements, cost savings and operating synergies that are expected to result from the Merger. The goodwill recorded as part of the Merger has been provisionally allocated to the Studios, Networks and DTC reportable segments in the amount of $8,938 million, $7,015 million and $5,909 million, respectively, and is not deductible for tax purposes.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The purchase price allocation is preliminary and subject to change. The Company is still evaluating the fair value of film and television library, intangible assets, and income taxes, in addition to ensuring all other assets and liabilities and contingencies have been identified and recorded. The Company has estimated the preliminary fair value of assets acquired and liabilities assumed based on information currently available and will continue to adjust those estimates as additional information pertaining to events or circumstances present at the Closing Date becomes available during the measurement period. The Company reflects measurement period adjustments in the period in which the adjustments occur, and the Company will finalize its accounting for the Merger within one year of the Closing Date. The current period adjustments were primarily related to content, taxes, investments, and capitalized interest. The cumulative impact on the consolidated statements of operations for these measurement period adjustments was $129 million for the three months ended September 30, 2022. The preliminary allocation of the purchase price to the assets acquired and liabilities assumed, measurement period adjustments, and a reconciliation to total consideration transferred is presented in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary
April 8, 2022 | | Measurement Period
Adjustments | | Updated Preliminary
April 8, 2022 |
| Cash | | $ | 2,419 | | | $ | (10) | | | $ | 2,409 | |
| Accounts receivable | | 4,224 | | | (1) | | | 4,223 | |
| Other current assets | | 4,619 | | | (217) | | | 4,402 | |
| Film and television library | | 28,729 | | | (294) | | | 28,435 | |
| Property and equipment | | 4,260 | | | 17 | | | 4,277 | |
| Goodwill | | 21,513 | | | 349 | | | 21,862 | |
| Intangible assets | | 44,889 | | | — | | | 44,889 | |
| Other noncurrent assets | | 5,206 | | | 442 | | | 5,648 | |
| Current liabilities | | (10,544) | | | (14) | | | (10,558) | |
| Debt assumed | | (41,671) | | | (9) | | | (41,680) | |
| Deferred income taxes | | (13,264) | | | 107 | | | (13,157) | |
| Other noncurrent liabilities | | (8,004) | | | (370) | | | (8,374) | |
| Total consideration paid | | $ | 42,376 | | | $ | — | | | $ | 42,376 | |
| | | | | | |
|
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The fair values of the assets acquired, and liabilities assumed were preliminarily determined using the income, cost, and market approaches. The fair value measurements were primarily based on significant inputs that are not observable in the market, such as discounted cash flow analyses, and thus represent a Level 3 measurement. Significant inputs used in the discounted cash flow analyses and other areas of judgment include (i) historical and projected financial information, (ii) discount rates used to present value future cash flows, (iii) royalty rates, (iv) number of renewals for affiliate contracts, (v) synergies, including cost savings, (vi) tax rates, (vii) economic useful life of assets, and (viii) attrition rates, as relevant, that market participants would consider when estimating fair values. The following are the preliminary fair value approaches followed:
| | | | | | | | |
| Category | | Valuation Method |
| Trade names | | Relief from royalty method of the income approach |
Film and TV content library | | Multi-period excess earnings method of the income approach; net book value |
| Affiliate contracts | | Multi-period excess earnings method of the income approach |
| Franchises | | Multi-period excess earnings method of the income approach |
| Other intangible assets | | Multi-period excess earnings method of the income approach |
| Licensed content | | Net book value method |
| Licensed sports rights | | Differential method, a form of the incremental income approach |
| Recovery rate for advertiser relationships | | With-or-without method, a form of the income approach, recovery rate of 4 years |
| In-place advertising networks | | With-or-without method, a form of the income approach |
| Subscriber relationships | | Replacement cost method of the cost approach |
| Real estate, property and equipment | | Cost approach or the income approach, which estimates the value of property based on the income it generates or the market approach, which determines values based on comparable assets purchased under similar conditions |
| Current and noncurrent debt assumed comprising existing debt of WM, the Term Loan, and the Notes | | Quoted prices for identical or similar securities in active markets |
The table below presents a summary of intangible assets acquired, exclusive of content assets, and the weighted average useful life of these assets.
| | | | | | | | | | | | | | | | | |
| | Fair Value | | Weighted Average Useful Life in Years | | | |
| Trade names | | $ | 21,084 | | | 25 | | | |
| Affiliate, advertising and subscriber relationships | | 14,700 | | | 6 | | | |
| Franchises | | 7,900 | | | 35 | | | |
| Other intangible assets | | 1,205 | | | | | | |
| Total intangible assets acquired | | $ | 44,889 | | | | | | |
| |
| | | | | | | |
|
The Company incurred transaction-related costs of $59 million and $340 million for the three and nine months ended September 30, 2022, respectively. These costs were associated with legal and professional services and were recognized as operating expenses on the consolidated statement of operations. Additionally, the expense related to the issuance of additional shares of common stock in connection with the conversion of Advance/Newhouse Programming's Series A-1 Preferred Stock was $789 million and was recorded as a transaction expense in selling, general and administrative expense upon the closing of the Merger. (See Note 2.)
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As a result of the Merger, WM's assets, liabilities, and operations were included in the Company's consolidated financial statements from the Closing Date. The following table presents WM revenue and earnings as reported within the consolidated financial statements (in millions). | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | | Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 |
| Revenues: | | | | | | |
| Advertising | | $ | 1,163 | | | $ | 761 | | | $ | 1,924 | |
| Distribution | | 3,526 | | | 3,730 | | | 7,256 | |
| Content | | 2,835 | | | 3,147 | | | 5,982 | |
| Other | | 208 | | | 245 | | | 453 | |
| Total revenues | | 7,732 | | | 7,883 | | | 15,615 | |
| Inter-segment eliminations | | (840) | | | (699) | | | (1,539) | |
| Net revenues | | $ | 6,892 | | | $ | 7,184 | | | $ | 14,076 | |
| Net loss available to Warner Bros. Discovery, Inc. | | $ | (3,020) | | | $ | (2,135) | | | $ | (5,155) | |
| | | | | | |
|
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).
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
| Revenues | | | | $ | 10,980 | | | $ | 32,087 | | | $ | 32,913 | |
| Net loss available to Warner Bros. Discovery, Inc. | | | | (659) | | | (4,132) | | | (2,795) | |
| | | | | | | | |
| | | | | | | | |
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 2022, the Company sold 75% 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 no cash consideration exchanged in the transaction. The Company recorded an immaterial gain and retained a 12.5% 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 $138 million and recorded a gain of $133 million.
In June 2021, the Company completed the sale of its Great American Country network to Hicks Equity Partners for a sale price of $90 million and recorded a gain of $76 million.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The carrying value and changes in the carrying value of goodwill attributable to each reportable segment were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S.
Networks | | International
Networks | | Studios | | Networks | | DTC | | Total | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| December 31, 2021 | | $ | 10,813 | | | $ | 2,099 | | | $ | — | | | $ | — | | | $ | — | | | $ | 12,912 | | |
Segment recast (See Note 20) | | (10,813) | | | (2,059) | | | — | | | 10,555 | | | 2,317 | | | — | | |
Acquisitions (See Note 3) | | — | | | — | | | 8,938 | | | 7,015 | | | 5,909 | | | 21,862 | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Foreign currency translation and other | | — | | | (40) | | | (16) | | | (220) | | | (48) | | | (324) | | |
| September 30, 2022 | | $ | — | | | $ | — | | | $ | 8,922 | | | $ | 17,350 | | | $ | 8,178 | | | $ | 34,450 | | |
The Networks segment included accumulated goodwill impairments of $1.6 billion as of September 30, 2022 and December 31, 2021. The Studios and DTC segments did not include any accumulated goodwill impairments as of September 30, 2022 and December 31, 2021.
Intangible Assets
Finite-lived intangible assets consisted of the following (in millions, except years).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted
Average
Amortization
Period (Years) | | September 30, 2022 | | December 31, 2021 |
| Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| Intangible assets subject to amortization: | | | | | | | | | | | | | |
| Trademarks and trade names | 32 | | $ | 22,872 | | | $ | (1,246) | | | $ | 21,626 | | | $ | 1,716 | | | $ | (858) | | | $ | 858 | |
| Affiliate, advertising and subscriber relationships | 8 | | 23,927 | | | (7,839) | | | 16,088 | | | 9,433 | | | (4,303) | | | 5,130 | |
| Franchises | 35 | | 7,900 | | | (108) | | | 7,792 | | | — | | | — | | | — | |
| Character rights | 14 | | 995 | | | (35) | | | 960 | | | — | | | — | | | — | |
| Other | 6 | | 544 | | | (266) | | | 278 | | | 395 | | | (227) | | | 168 | |
| Total | | | $ | 56,238 | | | $ | (9,494) | | | $ | 46,744 | | | $ | 11,544 | | | $ | (5,388) | | | $ | 6,156 | |
Amortization expense relating to finite-lived intangible assets was $1,937 million and $266 million for the three months ended September 30, 2022 and 2021, respectively, and $4,376 million and $814 million for the nine months ended September 30, 2022 and 2021, respectively.
Amortization expense relating to intangible assets subject to amortization for each of the next five years and thereafter is estimated to be as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Thereafter |
| Amortization expense | | $ | 1,845 | | | $ | 6,479 | | | $ | 4,967 | | | $ | 3,595 | | | $ | 2,592 | | | $ | 27,266 | |
Indefinite-lived intangible assets not subject to amortization (in millions):
| | | | | | | | | | | | | | | | |
| | | September 30, 2022 | | December 31, 2021 | | |
| Trademarks | | $ | — | | | $ | 161 | | | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Impairment Analysis
During the second quarter of 2022, the Company performed a qualitative goodwill impairment assessment for all reporting units in conjunction with the change in its segment presentation, and determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values; therefore, no quantitative goodwill impairment analysis was performed. Due to global macro-economic conditions, the Company will continue to monitor its reporting units for changes that could impact recoverability.
NOTE 5. 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. The Company finalized the framework supporting its ongoing restructuring and transformation initiatives during the three months ended September 30, 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, including the strategic analysis of content programming, the restructuring program is expected to be substantially completed by the end of 2024.
Restructuring and other charges by reportable segments and corporate were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2022 | | 2021 | | 2022 | | 2021 |
| Studios | | $ | 562 | | | $ | — | | | $ | 762 | | | $ | — | |
| Networks | | 354 | | | 6 | | | 666 | | | 27 | |
| DTC | | 517 | | | 1 | | | 992 | | | 2 | |
| Corporate | | 93 | | | — | | | 162 | | | — | |
| Inter-segment eliminations | | (5) | | | — | | | (23) | | | — | |
| Total restructuring and other charges | | $ | 1,521 | | | $ | 7 | | | $ | 2,559 | | | $ | 29 | |
Total restructuring charges for the three months ended September 30, 2022 included content impairments of $891 million, organization restructuring costs of $238 million, other content development costs and write-offs of $377 million, and contract terminations costs of $15 million, and for the nine months ended September 30, 2022 included content impairments of $1,392 million, organization restructuring costs of $446 million, other content development costs and write-offs of $706 million, and contract terminations costs of $15 million.
Changes in restructuring and other liabilities recorded in accrued liabilities by major category and by reportable segment and corporate were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S. Networks | | International Networks | | Studios | | Networks | | DTC | | Corporate and Inter-Segment Eliminations | | Total |
| December 31, 2021 | | $ | 4 | | | $ | 13 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2 | | | $ | 19 | |
Segment recast (See Note 20) | | (4) | | | (13) | | | — | | | 15 | | | — | | | 2 | | | — | |
| Acquisitions (See Note 3) | | — | | | — | | | 40 | | | — | | | 14 | | | 55 | | | 109 | |
| | | | | | | | | | | | | | |
| Employee termination accruals, net | | — | | | — | | | 88 | | | 95 | | | 45 | | | 218 | | | 446 | |
| | | | | | | | | | | | | | |
| Cash paid | | — | | | — | | | (19) | | | (15) | | | (13) | | | (48) | | | (95) | |
| September 30, 2022 | | $ | — | | | $ | — | | | $ | 109 | | | $ | 95 | | | $ | 46 | | | $ | 229 | | | $ | 479 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6. REVENUES
The following table presents the Company’s revenues disaggregated by revenue source (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Advertising | $ | 8 | | | $ | 1,944 | | | $ | 106 | | | $ | (16) | | | $ | 2,042 | |
| Distribution | 4 | | | 2,924 | | | 2,062 | | | — | | | 4,990 | |
| Content | 2,884 | | | 277 | | | 145 | | | (775) | | | 2,531 | |
| Other | 192 | | | 69 | | | 4 | | | (5) | | | 260 | |
| Total | $ | 3,088 | | | $ | 5,214 | | | $ | 2,317 | | | $ | (796) | | | $ | 9,823 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Three Months Ended September 30, 2021 |
| | | | | | | | | | | Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | | | | | | | | | | | |
| Advertising | | | | | | | | | | | $ | — | | | $ | 1,416 | | | $ | 37 | | | $ | — | | | $ | 1,453 | |
| Distribution | | | | | | | | | | | — | | | 1,118 | | | 210 | | | — | | | 1,328 | |
| Content | | | | | | | | | | | 6 | | | 339 | | | 7 | | | — | | | 352 | |
| Other | | | | | | | | | | | — | | | 16 | | | 1 | | | — | | | 17 | |
| Total | | | | | | | | | | | $ | 6 | | | $ | 2,889 | | | $ | 255 | | | $ | — | | | $ | 3,150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2022 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Advertising | $ | 18 | | | $ | 5,998 | | | $ | 248 | | | $ | (25) | | | $ | 6,239 | |
| Distribution | 8 | | | 6,885 | | | 4,287 | | | — | | | 11,180 | |
| Content | 5,525 | | | 813 | | | 279 | | | (1,699) | | | 4,918 | |
| Other | 338 | | | 133 | | | 9 | | | (8) | | | 472 | |
| Total | $ | 5,889 | | | $ | 13,829 | | | $ | 4,823 | | | $ | (1,732) | | | $ | 22,809 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2021 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Advertising | $ | — | | | $ | 4,409 | | | $ | 87 | | | $ | — | | | $ | 4,496 | |
| Distribution | — | | | 3,399 | | | 499 | | | — | | | 3,898 | |
| Content | 13 | | | 541 | | | 10 | | | — | | | 564 | |
| Other | — | | | 44 | | | 2 | | | — | | | 46 | |
| Total | $ | 13 | | | $ | 8,393 | | | $ | 598 | | | $ | — | | | $ | 9,004 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Reserves for Credit Losses
Reserves for accounts receivable reflect expected credit losses, which are estimated based on historical experience, as well as current and expected economic conditions and industry trends. The allowance for credit losses was $126 million at September 30, 2022 and $54 million at December 31, 2021. The increase was primarily attributable to the acquisition of existing WM receivables in the Merger with WM. The corresponding expense for the expected credit losses is reflected in selling, general and administrative expenses.
Contract Assets and Liabilities
A contract asset is recorded when revenue is recognized in advance of the Company's right to bill and receive consideration and that right is conditioned upon something other than the passage of time. A contract liability, such as deferred revenue, is recorded when the Company has recorded billings in conjunction with its contractual right or when cash is received in advance of the Company's performance.
The following table presents contract assets and liabilities on the consolidated balance sheets (in millions).
| | | | | | | | | | | | | | | | | | | | |
| Category | | Balance Sheet Location | | September 30, 2022 | | December 31, 2021 |
| Contract assets | | Prepaid expenses and other current assets | | $ | 15 | | | $ | — | |
| Contract assets | | Other noncurrent assets | | 32 | | | — | |
| Contract liabilities | | Deferred revenues | | 1,688 | | | 478 | |
| Contract liabilities | | Other noncurrent liabilities | | 296 | | | 95 | |
The change in deferred revenue for the nine months ended September 30, 2022 primarily reflects an increase of $1,476 million related to the Merger and cash payments received for which the performance obligation was not satisfied prior to the end of the period, partially offset by $376 million of revenues recognized that were included in the deferred revenue balance at December 31, 2021. Revenue recognized for the nine months ended September 30, 2021 related to the deferred revenue balance at December 31, 2020 was $414 million.
Transaction Price Allocated to Remaining Performance Obligations
Most of the Company's distribution contracts are licenses of functional intellectual property where revenue is derived from royalty-based arrangements, for which the guidance allows the application of a practical expedient to record revenues as a function of royalties earned to date instead of estimating incremental royalty contract revenue. Accordingly, in these instances revenue is recognized based upon the royalties earned to date. However, there are certain other distribution arrangements that are fixed price or contain minimum guarantees that extend beyond one year. The Company recognizes revenue for fixed fee distribution contracts on a monthly basis based on minimum monthly fees; by calculating one twelfth of annual license fees specified in its distribution contracts; or based on the pro-rata fees earned calculated on the license fees specified in the distribution contract. The transaction price allocated to remaining performance obligations within these fixed price or minimum guarantee distribution revenue contracts was $4.9 billion as of September 30, 2022 and is expected to be recognized over the next seven years.
The Company's content licensing contracts and sports sublicensing deals are licenses of functional intellectual property. The transaction price allocated to remaining performance obligations on these contracts was $5.3 billion as of September 30, 2022 and is expected to be recognized over the next eight years.
The Company's brand licensing contracts are licenses of symbolic intellectual property. The transaction price allocated to remaining performance obligations on these contracts was $2.4 billion as of September 30, 2022 and is expected to be recognized over the next 21 years.
The Company's advertising contracts are principally generated from the sale of advertising campaigns comprised of multiple commercial units. In contracts with guaranteed impressions, we have identified the overall advertising campaign as the performance obligation to be satisfied over time, and impressions delivered against the satisfaction of our guarantee as the measure of progress. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $569 million as of September 30, 2022 and is expected to be recognized over the next three years.
The value of unsatisfied performance obligations disclosed above does not include: (i) contracts involving variable consideration for which revenues are recognized in accordance with the sales or usage-based royalty exception, and (ii) contracts with an original expected length of one year or less, such as most advertising contracts; however for content licensing revenues, including revenues associated with the licensing of theatrical and television product for television and streaming services, the Company has included all contracts regardless of duration.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7. SALES OF RECEIVABLES
Revolving Receivables Program
The Company has a revolving agreement to transfer up to $5,700 million of certain receivables through its bankruptcy-remote subsidiary Warner Bros. Discovery Receivables Funding, LLC to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred. The Company services sold receivables for a fee and pays fees to the financial institution in connection with this revolving agreement. This agreement is subject to renewal on an annual basis and the transfer limit may be expanded or reduced from time to time. As customers pay their balances, the Company’s available capacity under this revolving agreement increases and typically the Company transfers additional receivables into the program. Our bankruptcy-remote consolidated subsidiary held $3,242 million of pledged receivables as of September 30, 2022 in connection with this revolving agreement. The gross value of the proceeds received results in derecognition of receivables and the obligations assumed are recorded at fair value. The obligations assumed when proceeds are received relate to expected credit losses on sold receivables and estimated fee payments made on outstanding sold receivables already transferred. The obligations are subsequently adjusted for changes in estimated expected credit losses and interest rates, which are considered Level 3 fair value measurements since the inputs are unobservable. In some cases, the Company may have collections that have not yet been remitted to the bank, resulting in a liability. For the three and nine months ended September 30, 2022, the Company has recognized a $93 million and $134 million net loss in selling, general and administrative expense from the revolving receivables program in the consolidated statements of operations, respectively. The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $5,191 million as of September 30, 2022.
The following table presents a summary of receivables sold (in millions).
| | | | | | | | | | | | | |
| Three Months Ended September 30, 2022 | | Nine Months Ended September 30, 2022 | | |
| Gross receivables sold/cash proceeds received | $ | 3,283 | | | $ | 6,488 | | | |
| Collections reinvested under revolving agreement | (3,792) | | | (7,297) | | | |
Net cash proceeds received (a) | $ | (509) | | | $ | (809) | | | |
| Net receivables sold | $ | 3,272 | | | $ | 6,470 | | | |
| Obligations recorded | $ | 129 | | | $ | 227 | | | |
(a) Includes the collections on receivables sold but not remitted of $236 million at period end.
The following table presents a summary of the amounts transferred or pledged (in millions):
| | | | | | | |
| September 30, 2022 | | |
| Gross receivables pledged as collateral | $ | 3,242 | | | |
| | | |
| Balance sheet classification: | | | |
| | | |
| Receivables, net | $ | 3,041 | | | |
| | | |
| | | |
| Other noncurrent assets | $ | 201 | | | |
Accounts Receivable Factoring
The Company has a factoring agreement to sell certain of its non-U.S. trade accounts receivable on a non-recourse basis to a third-party financial institution. The Company accounts for these transactions as sales in accordance with ASC 860, “Transfers and Servicing”, when its continuing involvement subsequent to the transfer is limited to providing certain servicing and collection actions on behalf of the purchaser of the designated trade accounts receivable. Proceeds from amounts factored are recorded as an increase to cash and cash equivalents and a reduction to receivables, net in the consolidated balance sheets. Cash received is also reflected as cash provided by operating activities in the consolidated statements of cash flows. Total trade accounts receivable sold under the factoring arrangements was $38 million as of September 30, 2022. The impact to the consolidated statements of operations was immaterial for the three and nine months ended September 30, 2022. This accounts receivable factoring agreement is separate and distinct from the revolving receivables program.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 8. CONTENT RIGHTS
For purposes of amortization and impairment, capitalized content costs are grouped based on their predominant monetization strategy: individually or as a group. Programming rights include internally developed and licensed content predominately monetized as a group by our Networks and DTC segments. The table below presents the components of content rights (in millions).
| | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
Theatrical film production costs: | | | | | | |
| Released, less amortization | | $ | 3,196 | | | $ | — | | | $ | 3,196 | |
| Completed and not released | | 588 | | | — | | | 588 | |
| In production | | 1,875 | | | — | | | 1,875 | |
| Development and pre-production | | 96 | | | — | | | 96 | |
| | | | | | |
| Television production costs: | | | | | | |
| Released, less amortization | | 908 | | | 6,560 | | | 7,468 | |
| Completed and not released | | 978 | | | 491 | | | 1,469 | |
| In production | | 453 | | | 3,773 | | | 4,226 | |
| Development and pre-production | | 45 | | | 20 | | | 65 | |
| Total theatrical film and television production costs | | $ | 8,139 | | | $ | 10,844 | | | $ | 18,983 | |
| | | | | | |
| Programming rights, less amortization | | | | | | 9,196 | |
| Game development costs, less amortization | | | | | | 724 | |
| Total film and television content rights and games | | | | | | 28,903 | |
| Less: Current content rights and prepaid license fees, net | | | | | | (615) | |
| Total noncurrent film and television content rights and games, net | | | | | | $ | 28,288 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
Theatrical film production costs: | | | | | | |
| Released, less amortization | | $ | — | | | $ | — | | | $ | — | |
| Completed and not released | | — | | | — | | | — | |
| In production | | — | | | — | | | — | |
| Development and pre-production | | — | | | — | | | — | |
| | | | | | |
| Television production costs: | | | | | | |
| Released, less amortization | | 9 | | | 2,432 | | | 2,441 | |
| Completed and not released | | — | | | — | | | — | |
| In production | | — | | | 770 | | | 770 | |
| Development and pre-production | | — | | | 17 | | | 17 | |
| Total theatrical film and television production costs | | $ | 9 | | | $ | 3,219 | | | $ | 3,228 | |
| | | | | | |
| Programming rights, less amortization | | | | | | 849 | |
| Game development costs, less amortization | | | | | | — | |
| Total film and television content rights | | | | | | 4,077 | |
| Less: Current content rights and prepaid license fees, net | | | | | | (245) | |
| Total noncurrent film and television content rights, net | | | | | | $ | 3,832 | |
| | | | | | |
| | | | | | |
| | | | | | |
|
Content expense consisted of the following (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Monetized individually | | | | | | | | |
| Content amortization | | $ | 1,357 | | | $ | 469 | | | $ | 3,534 | | | $ | 518 | |
| | | | | | | | |
| Content impairments | | 322 | | | — | | | 416 | | | — | |
| Total content expense monetized individually | | $ | 1,679 | | | $ | 469 | | | $ | 3,950 | | | $ | 518 | |
| | | | | | | | |
| Monetized as a group | | | | | | | | |
| Content amortization | | $ | 2,584 | | | $ | 748 | | | $ | 6,492 | | | $ | 2,214 | |
| | | | | | | | |
| Content impairments | | 587 | | | 2 | | | 999 | | | 3 | |
| Total content expense monetized as a group | | $ | 3,171 | | | $ | 750 | | | $ | 7,491 | | | $ | 2,217 | |
| Total content expense | | $ | 4,850 | | | $ | 1,219 | | | $ | 11,441 | | | $ | 2,735 | |
Content expense includes amortization, impairments, and development expense and is generally a component of costs of revenues on the consolidated statements of operations. Content impairments for the three and nine months ended September 30, 2022 of $891 million and $1,392 million, respectively, and content development write-offs for the three and nine months ended September 30, 2022 of $234 million and $563 million, respectively, were due to the abandonment of certain content categories in connection with the strategic realignment of content following the Merger and are reflected in restructuring and other charges in the Studios, Networks and DTC segments. No content impairments were recorded as a component of restructuring and other charges for the three and nine months ended September 30, 2021.
Other content development costs not previously capitalized as content assets for the three and nine months ended September 30, 2022 were $220 million and $292 million, respectively, of which $143 million for the three and nine months ended September 30, 2022 was due to the abandonment of certain content categories in connection with the strategic realignment of content following the Merger and is reflected in restructuring and other charges in the Studios, Networks, and DTC segments.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 9. INVESTMENTS
The Company’s equity investments consisted of the following, net of investments recorded in other noncurrent liabilities (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Category | | Balance Sheet Location | | Ownership | | September 30, 2022 | | December 31, 2021 |
| Equity method investments: | | | | | | | | |
| The Chernin Group (TCG) 2.0-A, LP | | Other noncurrent assets | | 44% | | $ | 327 | | | $ | — | |
| nC+ | | Other noncurrent assets | | 32% | | 115 | | | 151 | |
| Other | | Other noncurrent assets | | | | 703 | | | 390 | |
| Total equity method investments | | | | | | 1,145 | | | 541 | |
| | | | | | | | |
| | | | | | | | |
| Investments with readily determinable fair values | | Other noncurrent assets | | | | 36 | | | 80 | |
| Investments with readily determinable fair values | | Prepaid expenses and other current assets | | | | — | | | 40 | |
| Total investments with readily determinable fair values | | | | | | 36 | | | 120 | |
| | | | | | | | |
| | | | | | | | |
| Investments without readily determinable fair values | | Other noncurrent assets | | | | 635 | | | 496 | |
| Total investments | | | | | | $ | 1,816 | | | $ | 1,157 | |
| | | | | | | | |
|
| | | | | | | | |
|
| | | | | | | | |
|
Equity Method Investments
Investments in equity method investees are those for which the Company has the ability to exercise significant influence but does not control and is not the primary beneficiary or the entity is not a VIE and the Company does not have a controlling financial interest. In connection with the Merger, the Company acquired $807 million of equity method investments. Impairment losses are recorded in loss from equity investees, net on the consolidated statements of operations. Impairment losses for the three and nine months ended September 30, 2022 were not material.
During the three months ended September 30, 2022, the Company entered into an agreement with British Telecommunications Plc (“BT”) to form a 50:50 joint venture to create a new premium sports offering for the United Kingdom and Ireland, with each party directly contributing or sublicensing its respective operating business and related sports rights and distribution to the joint venture. The Company has determined the joint venture is a VIE, as the Company and BT have equal governance and voting rights and the Company’s 50% equity interest in the joint venture gives it the ability to exercise significant influence over the entity’s operating and financial policies; however, BT is the primary beneficiary given its disproportionate share of earnings compared to its voting rights during the first four years of the joint venture. Accordingly, the Company accounts for its investment in the joint venture as an equity method investment. Additionally, the Company has a call option to obtain the remaining 50% equity interest in September 2024 and September 2026, at the then fair market value plus the expected earnings that BT would have received in the two years following the call option.
Certain of the Company's other equity method investments are VIEs, for which the Company is not the primary beneficiary. As of September 30, 2022, the Company’s maximum exposure for all of its unconsolidated VIEs, including the investment carrying values and unfunded contractual commitments made on behalf of VIEs, was approximately $867 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $827 million as of September 30, 2022 and $126 million as of December 31, 2021. VIE gains and losses are recorded in loss from equity investees, net on the consolidated statements of operations, and were not material for the three and nine months ended September 30, 2022 and 2021.
Investments with Readily Determinable Fair Value
Investments in entities or other securities in which the Company has no control or significant influence, is not the primary beneficiary, and have a readily determinable fair value are classified as equity investments with readily determinable fair value. The investments are measured at fair value based on a quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs (Level 1). Gains and losses are recorded in other (expense) income, net on the consolidated statements of operations.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The gains and losses related to the Company's investments with readily determinable fair values for the three and nine months ended September 30, 2022 and 2021 are summarized in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| Net (losses) gains recognized during the period on equity securities | | $ | (9) | | | $ | (31) | | | $ | (70) | | | $ | 31 | |
| Less: Net gains recognized on equity securities sold | | — | | | — | | | — | | | 16 | |
| Unrealized (losses) gains recognized during reporting period on equity securities still held at the reporting date | | $ | (9) | | | $ | (31) | | | $ | (70) | | | $ | 15 | |
Equity investments without readily determinable fair values assessed under the measurement alternative
Equity investments without readily determinable fair value include ownership rights that either (i) do not meet the definition of in-substance common stock or (ii) do not provide the Company with control or significant influence and these investments do not have readily determinable fair values.
In connection with the Merger, the Company acquired $156 million in equity method investments without readily determinable fair values. During the nine months ended September 30, 2022, the Company did not invest in any material equity investments without readily determinable fair values and concluded there were no indicators that a change in fair value had taken place. As of September 30, 2022, the Company had recorded cumulative upward adjustments of $9 million and cumulative impairments of $88 million for its equity investments without readily determinable fair values.
NOTE 10. DEBT
The table below presents the components of outstanding debt (in millions).
| | | | | | | | | | | | | | | | | | | | | |
| | Weighted-Average
Interest Rate as of
September 30, 2022 | | September 30, 2022 | | December 31, 2021 | |
| Term loans with maturities of 3 years or less | | 3.83 | % | | $ | 4,000 | | | $ | — | | |
| Floating rate senior notes with maturities of 5 years or less | | 4.71 | % | | 500 | | | — | | |
| Senior notes with maturities of 5 years or less | | 3.62 | % | | 13,627 | | | 4,314 | | |
| Senior notes with maturities between 5 and 10 years | | 4.25 | % | | 10,373 | | | 4,128 | | |
| Senior notes with maturities greater than 10 years | | 5.11 | % | | 21,644 | | | 6,745 | | |
| Total debt | | | | 50,144 | | | 15,187 | | |
| Unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net | | | | (275) | | | (428) | | |
| Debt, net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting | | | | 49,869 | | | 14,759 | | |
| Current portion of debt | | | | (1,257) | | | (339) | | |
| Noncurrent portion of debt | | | | $ | 48,612 | | | $ | 14,420 | | |
During the three months ended September 30, 2022, the Company repaid $2.5 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 $3.5 billion of aggregate principal amount outstanding of its term loans prior to the due dates of October 2023 and April 2025. The Company also assumed $41.5 billion of senior notes (at par value) and term loans during the Merger.
During the three months ended March 31, 2022, the Company repaid in full at maturity $327 million aggregate principal amount outstanding of its 2.375% Euro Denominated Senior Notes due March 2022.
During the three months ended September 30, 2021, the Company redeemed in full $168 million aggregate principal amount outstanding of its 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of its 3.500% Senior Notes due June 2022. In the first quarter of 2021, the Company redeemed in full $335 million aggregate principal amount outstanding of its 4.375% Senior Notes due June 2021.
The redemptions during 2022 and 2021 resulted in an immaterial loss on extinguishment of debt.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of September 30, 2022, all senior notes are fully and unconditionally guaranteed by the Company, Scripps Networks Interactive, Inc. (“Scripps Networks”), Discovery Communications, LLC (“DCL”) (to the extent it is not the primary obligor on such senior notes), and WarnerMedia Holdings, Inc. (to the extent it is not the primary obligor on such senior notes), except for $1.5 billion of senior notes of the legacy WarnerMedia Business assumed by the Company in connection with the Merger and $23 million of un-exchanged senior notes issued by Scripps Networks. Additionally, the term loans of WarnerMedia Holdings, Inc., made under the $10.0 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
In June 2021, DCL entered into a multicurrency revolving credit agreement (the “Revolving Credit Agreement”), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. Following the Merger, DCL has the capacity to borrow up to $6.0 billion under the Revolving Credit Agreement (the “Credit Facility”). The Revolving Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. DCL may also request additional commitments up to $1.0 billion from the lenders upon satisfaction of certain conditions. Obligations under the Revolving Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks, and WarnerMedia Holdings, Inc. The Credit Facility will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent. The Revolving Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants.
Additionally, the Company's commercial paper program is supported by the Credit Facility. Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program.
As of September 30, 2022 and December 31, 2021, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.
Credit Agreement Financial Covenants
The Revolving Credit Agreement and Term Loan Credit Agreement (together, the “Credit Agreements”) include financial covenants that require the Company to maintain a minimum consolidated interest coverage ratio of 3.00 to 1.00 and a maximum adjusted consolidated leverage ratio of 5.75 to 1.00 following the closing of the Merger, with step-downs to 5.00 to 1.00 and 4.50 to 1.00 on the first and second anniversaries of the closing, respectively. As of September 30, 2022, DCL and WarnerMedia Holdings, Inc. were in compliance with all covenants and there were no events of default under the Credit Agreements.
NOTE 11. LEASES
The Company has operating and finance leases for transponders, office space, studio facilities, and other equipment. Our leases have remaining lease terms of up to 30 years, some of which include options to extend the leases for up to 10 years. Most leases are not cancelable prior to their expiration. In connection with the Merger, the Company acquired $2,493 million and $47 million of operating and finance lease right-of-use assets, respectively.
The components of lease cost were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
| Operating lease cost | $ | 116 | | | $ | 25 | | | $ | 254 | | | $ | 78 | |
| | | | | | | |
| Finance lease cost: | | | | | | | |
| Amortization of right-of-use assets | $ | 21 | | | $ | 16 | | | $ | 58 | | | $ | 44 | |
| Interest on lease liabilities | 2 | | | 2 | | | 6 | | | 6 | |
| Total finance lease cost | $ | 23 | | | $ | 18 | | | $ | 64 | | | $ | 50 | |
| | | | | | | |
| Variable lease cost | $ | 43 | | | $ | 2 | | | $ | 50 | | | $ | 6 | |
| Total lease cost | $ | 182 | | | $ | 45 | | | $ | 368 | | | $ | 134 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Supplemental cash flow information related to leases was as follows (in millions): | | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash flows from operating leases | $ | (250) | | | $ | (86) | |
| Operating cash flows from finance leases | $ | (11) | | | $ | (6) | |
| Financing cash flows from finance leases | $ | (54) | | | $ | (49) | |
| | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | |
| Operating leases | $ | 428 | | | $ | 39 | |
| Finance leases | $ | 30 | | | $ | 87 | |
Supplemental balance sheet information related to leases was as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | |
| Category | | Location on
Balance Sheet | | September 30, 2022 | | December 31, 2021 | | |
| Operating Leases | | | | | | | | |
| Operating lease right-of-use assets | | Other noncurrent assets | | $ | 3,222 | | | $ | 535 | | | |
| | | | | | | | |
| Operating lease liabilities (current) | | Accrued liabilities | | $ | 337 | | | $ | 62 | | | |
| Operating lease liabilities (noncurrent) | | Other noncurrent liabilities | | 3,003 | | | 567 | | | |
| Total operating lease liabilities | | | | $ | 3,340 | | | $ | 629 | | | |
| | | | | | | | |
| Finance Leases | | | | | | | | |
| Finance lease right-of-use assets | | Property and equipment, net | | $ | 246 | | | $ | 249 | | | |
| | | | | | | | |
| Finance lease liabilities (current) | | Accrued liabilities | | $ | 81 | | | $ | 58 | | | |
| Finance lease liabilities (noncurrent) | | Other noncurrent liabilities | | 187 | | | 197 | | | |
| Total finance lease liabilities | | | | $ | 268 | | | $ | 255 | | | |
| | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 | | |
| Weighted average remaining lease term (in years): | | | | | | |
| Operating leases | | 12 | | 12 | | |
| Finance leases | | 5 | | 5 | | |
| | | | | | |
| Weighted average discount rate: | | | | | | |
| Operating leases | | 4.10 | % | | 2.94 | % | | |
| Finance leases | | 3.19 | % | | 3.57 | % | | |