WARNER BROS. DISCOVERY, INC.
CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Conversion and issuance of common stock and noncontrolling interest in connection with the acquisition of the WarnerMedia Business | | (12) | | | — | | | (739) | | | (7) | | | 2,658 | | | 27 | | | 43,173 | | | — | | | — | | | — | | | 43,193 | | | 2 | | | 43,195 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Tax settlements associated with share-based plans | | — | | | — | | | — | | | — | | | — | | | — | | | (54) | | | — | | | — | | | — | | | (54) | | | — | | | (54) | |
| Dividends paid to noncontrolling interests | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (250) | | | (250) | |
| Issuance of stock in connection with share-based plans | | — | | | — | | | 3 | | | — | | | 2 | | | — | | | 26 | | | — | | | — | | | — | | | 26 | | | — | | | 26 | |
| Redeemable noncontrolling interest adjustments to redemption value | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (4) | | | — | | | (4) | | | — | | | (4) | |
| December 31, 2022 | | — | | | $ | — | | | — | | | $ | — | | | 2,660 | | | $ | 27 | | | $ | 54,630 | | | $ | (8,244) | | | $ | 2,205 | | | $ | (1,523) | | | $ | 47,095 | | | $ | 1,254 | | | $ | 48,349 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements. |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
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, 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 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 3 and Note 4). 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 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 $1.2 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 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 the Company’s predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Annual Report on Form 10-K 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 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 2022. As of December 31, 2022, 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.
Impact of COVID-19
We continue to closely monitor the ongoing impact of COVID-19 on all aspects of our business and geographies; however, 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. Certain key sources of revenue for the Studios segment, including theatrical revenues, original television productions, 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
Basis 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. For each non-wholly owned subsidiary, the Company evaluates its ownership and other interests to determine whether it should consolidate the entity or account for its ownership interest as an unconsolidated investment. As part of its evaluation, the Company makes judgments in determining whether the entity is a VIE and, if so, whether it is the primary beneficiary of the VIE and is thus required to consolidate the entity. (See Note 10.) If it is concluded that an entity is not a VIE, then the Company considers its proportional voting interests in the entity. The Company consolidates majority-owned subsidiaries in which a controlling financial interest is maintained. A controlling financial interest is determined by majority ownership and the absence of significant third-party participating rights. Ownership interests in entities for which the Company has significant influence that are not consolidated are accounted for as equity method investments.
Intercompany accounts and transactions between consolidated entities have been eliminated.
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, the determination of ultimate revenues as they relate to amortization of capitalized content rights and accruals of participations and residuals, 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.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Foreign Currency
The reporting currency of the Company is the U.S. dollar. Financial statements of subsidiaries whose functional currency is not the U.S. dollar are translated at exchange rates in effect at the balance sheet date for assets and liabilities and at average exchange rates for revenues and expenses for the respective periods. Translation adjustments are recorded in accumulated other comprehensive loss. Cash flows from the Company’s operations in foreign countries are generally translated at the weighted average rate for the respective periods.
The Company is exposed to foreign currency risk to the extent that it enters into transactions denominated in currencies other than its subsidiaries’ respective functional currencies. Transactions denominated in currencies other than subsidiaries’ functional currencies are recorded based on exchange rates at the time such transactions arise. Such transactions include affiliate and ad sales arrangements, content licensing arrangements, equipment and other vendor purchases and intercompany transactions. Changes in exchange rates with respect to amounts recorded in the Company’s consolidated balance sheets related to these items will result in unrealized foreign currency transaction gains and losses based upon period-end exchange rates. The Company also records realized foreign currency transaction gains and losses upon settlement of the transactions. Foreign currency transaction gains and losses resulting from the conversion of the transaction currency to functional currency are included in other income (expense), net.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of 90 days or less.
Receivables
The Company’s accounts receivable balances and the related credit losses arise primarily from distribution, advertising and content revenue. Receivables include amounts billed and currently due from customers and are presented net of an estimate for credit losses. To assess collectability, the Company analyzes market trends, economic conditions, the aging of receivables and customer specific risks, and records a provision for estimated credit losses expected over the lifetime of receivables. The corresponding expense for the expected credit losses is reflected in selling, general and administrative expenses. The Company does not require collateral with respect to trade receivables.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 the sold receivables for the financial institution for a fee and pays fees to the financial institution in connection with this revolving agreement. The agreement is a continuation of the agreement the WarnerMedia Business had in place prior to the Merger. 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.
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 (See Note 8). In some cases, the Company may have collections that have not yet been remitted to the bank, resulting in a liability.
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”, as 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. The accounts receivable factoring program is separate and distinct from the revolving receivables program.
Film and Television Content Rights
The Company capitalizes costs to produce television programs and feature films, including direct production costs, production overhead, interest, acquisition costs and development costs, as well as advances for live programming rights, such as sports. Costs to acquire licensed television series and feature film programming rights are capitalized when the license period has begun and the program is accepted and available for airing. Production incentives received from various jurisdictions where the Company produces content are recorded as a reduction to capitalized production costs. All capitalized content and prepaid license fees are classified as noncurrent assets, with the exception of content acquired with an initial license period of 12 months or less and prepaid sports rights expected to air within 12 months.
The Company groups its film and television content rights by monetization strategy: content that is predominately monetized individually, and content that is predominately monetized as a group.
Content Monetized Individually
For films and television programs predominantly monetized individually, the amount of capitalized film and television production costs (net of incentives) amortized 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).
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, the Company’s 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 the Company’s DTC or linear services), the Company makes 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.
Content Monetized as a Group
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. Program costs, including licensed programming, that are predominantly monetized as a group are amortized based on projected usage, generally resulting in an accelerated or straight-line amortization pattern. Adjustments to projected usage are applied prospectively in the period of the change. Participations and residuals are generally expensed in line with the pattern of usage. Streaming content and premium pay-TV amortization for each period is recognized based on estimated viewing patterns as there are generally little to no direct revenues to associate to the individual content assets. As such, 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 the Company’s ad-supported networks), or accelerated basis for licensed original programs. The Company allocates the cost of multi-year sports programming arrangements over the contract period to each event or season based on its projected advertising revenue and an allocation of affiliate revenue (estimated relative value). If annual contractual payments related to each season approximate each season’s estimated relative value, the Company expenses the related contractual payments during the applicable season. Amortization of sports rights takes place when the content airs.
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 historical 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 revenue 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 streaming services, and program usage. Accordingly, the Company reviews its estimates and planned usage at least quarterly 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 Impairment Assessment
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, the Company utilizes 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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Game Development Costs
Game development costs are expensed as incurred before the applicable game reaches 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” on the consolidated balance sheets.
Investments
The Company holds investments in equity method investees and equity investments with and without readily determinable fair values. (See Note 10.)
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. Under this method of accounting, the Company typically records its proportionate share of the net earnings or losses of equity method investees and a corresponding increase or decrease to the investment balances. Cash payments to equity method investees such as additional investments, loans and advances and expenses incurred on behalf of investees, as well as payments from equity method investees such as dividends, distributions and repayments of loans and advances are recorded as adjustments to investment balances.
The Company evaluates its equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amounts of such investments may not be recoverable. (See “Asset Impairment Analysis” below.)
Equity Investments with Readily Determinable Fair Values
Investments in entities or other securities in which the Company has no control or significant influence and is not the primary beneficiary, and have a readily determinable fair value are recorded at fair value based on quoted market prices and are classified as equity securities or 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 income (expense), net on the consolidated statements of operations. (See Note 10 and Note 18.)
Equity Investments without Readily Determinable Fair Values
Equity investments without readily determinable fair values 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. Equity investments without readily determinable fair values are recorded at cost and adjusted for subsequent observable price changes as of the date that an observable transaction takes place. Adjustments for observable price changes are recorded in other income (expense), net. (See Note 10 and Note 18.)
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation and impairments. Internal use software costs are capitalized during the application development stage; software costs incurred during the preliminary project and post implementation stages are expensed as incurred. Repairs and maintenance expenditures that do not enhance the use or extend the life of property and equipment are expensed as incurred. Depreciation for most property and equipment is recognized using the straight-line method over the estimated useful lives of the assets. (See Note 18.)
Leases
The Company determines if an arrangement is a lease at its inception. Operating lease right-of-use (“ROU”) assets are included in other noncurrent assets. Finance lease ROU assets are included in property and equipment, net. Operating and finance lease liabilities are included in accrued liabilities and other noncurrent liabilities in the consolidated balance sheets.
A rate implicit in the lease when readily determinable is used in arriving at the present value of lease payments. As most of the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on information available at lease commencement date for most of its leases. The incremental borrowing rate is based on the Company's U.S. dollar denominated senior unsecured borrowing curves using public credit ratings adjusted down to a collateralized basis using a combination of recovery rate and credit notching approaches and translated into major contract currencies as applicable.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s lease terms may include options to extend or terminate the lease when it is reasonably certain that it will exercise that option. The Company does not separate lease components from non-lease components across all lease categories. Instead, each separate lease component and non-lease component are accounted for as a single lease component. In addition, variable lease payments that are based on an index or rate are included in measurement of ROU assets and lease liabilities at lease inception. All other variable lease payments are expensed as incurred and are not included in the measurement of ROU assets and lease liabilities. Lease expense for operating leases is recognized on a straight-line basis. For finance leases, the Company recognizes interest expense on lease liabilities using the effective interest method and amortization of ROU assets on a straight-line basis.
Defined Benefit Plans
The Company maintains defined benefit pension plans covering certain U.S. employees and several non-U.S. pension plans. Defined benefit plan obligations are based on various assumptions used by the Company’s 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.
Asset Impairment Analysis
Goodwill and Indefinite-lived Intangible Assets
Goodwill is allocated to the Company’s reporting units, which are its operating segments or one level below its operating segments. The Company evaluates goodwill and other indefinite-lived intangible assets for impairment annually as of October 1, or earlier if an event or other circumstance indicates that it may not recover the carrying value of the asset. If the Company believes that, as a result of its qualitative assessment, it is more likely than not that the fair value of a reporting unit or other indefinite-lived intangible asset is greater than its carrying amount, a quantitative impairment test is not required. If a qualitative assessment indicates that it is more likely than not that the carrying value of a reporting unit goodwill or other indefinite-lived intangible asset exceeds its fair value, a quantitative impairment test is performed. If the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment charge is recorded for the amount by which the carrying amount exceeds the fair value, not to exceed the amount of goodwill recorded for that reporting unit. The Company typically performs a quantitative impairment test every three years, irrespective of the outcome of the Company’s qualitative assessment.
Long-lived Assets
Long-lived assets such as amortizing trademarks and trade names; affiliate, advertising, and subscriber relationships; franchises and other intangible assets; and property and equipment are not required to be tested for impairment annually, but rather whenever circumstances indicate that the carrying amount of the asset may not be recoverable. If an impairment analysis is required, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale.
•If the intent is to hold the asset for continued use, the impairment test requires a comparison of undiscounted future cash flows to the carrying value of the asset. If the carrying value of the asset exceeds the undiscounted cash flows, an impairment loss would be recognized equal to the excess of the asset’s carrying value over its fair value, which is typically determined by discounting the future cash flows associated with that asset.
•If the intent is to hold the asset for sale and certain other criteria are met, the impairment test involves comparing the asset’s carrying value to its estimated fair value less costs to sell. If the carrying value of the asset exceeds the fair value, an impairment loss would be recognized equal to the difference.
Significant judgments used for long-lived asset impairment assessments include identifying the appropriate asset groupings and primary assets within those groupings, determining whether events or circumstances indicate that the carrying amount of the asset may not be recoverable, determining the future cash flows for the assets involved and assumptions applied in determining fair value, which include reasonable discount rates, growth rates, market risk premiums and other assumptions about the economic environment.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Method Investments and Equity Investments Without Readily Determinable Fair Value
Equity method investments are reviewed for indicators of other-than-temporary impairment on a quarterly basis. Equity method investments are written down to fair value if there is evidence of a loss in value that is other-than-temporary. The Company may estimate the fair value of its equity method investments by considering recent investee equity transactions, DCF analysis, recent operating results, comparable public company operating cash flow multiples and, in certain situations, balance sheet liquidation values. If the fair value of the investment has dropped below its carrying amount, management considers several factors when determining whether an other-than-temporary decline has occurred, such as the length of the time and the extent to which the estimated fair value or market value has been below the carrying value, the financial condition and the near-term prospects of the investee, the intent and ability of the Company to retain its investment in the investee for a period of time sufficient to allow for any anticipated recovery in market value, and general market conditions. The estimation of fair value and whether an other-than-temporary impairment has occurred requires the application of significant judgment and future results may vary from current assumptions. If declines in the value of the equity method investments are determined to be other-than-temporary, a loss is recorded in earnings in the current period as a component of loss from equity investees, net on the consolidated statements of operations.
For equity investments without readily determinable fair value, investments are recorded at cost and adjusted for subsequent observable price changes as of the date that an observable transaction takes place. The Company performs a qualitative assessment on a quarterly basis to determine if any observable price changes have occurred. If the qualitative assessment indicates that an observable price change has occurred, a gain or loss is recorded equal to the difference between the fair value and carrying value in the current period as a component of other income (expense), net. (See Note 10.)
Derivative Instruments
The Company uses derivative financial instruments to modify its exposure to market risks from changes in foreign currency exchange rates, interest rates, and from market volatility related to certain investments measured at fair value. At the inception of a derivative contract, the Company designates the derivative based on the Company’s intentions and expectations as to the likely effectiveness as a hedge (see Note 13), as follows:
•a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”);
•a hedge of net investments in foreign operations (“net investment hedge”); or
•an instrument with no hedging designation.
Cash Flow Hedges
The Company may designate derivative instruments as cash flow hedges to mitigate foreign currency risk arising from third-party revenue agreements, intercompany licensing agreements, production expenses and rebates, or to hedge the interest rate risk for certain senior notes and forecasted debt issuances as cash flow hedges. For instruments accounted for as cash flow hedges, the change in the fair value of the forward contract is recorded in other comprehensive (loss) income and reclassified into the statement of operations in the same line item in which the hedged item is recorded and in the same period as the hedged item affects earnings.
Net Investment Hedges
The Company may designate derivative instruments as hedges of net investments in foreign operations. The Company assesses the effectiveness of net investment hedges utilizing the spot-method. The entire change in the fair value of derivatives that qualify as net investment hedges is initially recorded in the currency translation adjustment component of other comprehensive (loss) income. While the change in fair value attributable to hedge effectiveness remains in accumulated other comprehensive loss until the net investment is sold or liquidated, the change in fair value attributable to components excluded from the assessment of hedge effectiveness (e.g., forward points, cross currency basis, etc.) is reflected as a component of interest expense, net in the current period.
No Hedging Designation
The Company may also enter into derivative instruments that do not qualify for hedge accounting or are not designated as hedges. These instruments are intended to mitigate economic exposures due to exogenous events and changes in foreign currency exchange rates, interest rates, and from market volatility related to certain investments measured at fair value. The changes in fair value of derivatives not designated as hedges are recorded in the statement of operations in the same line item where the hedged risk occurs.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Statement Presentation
Unsettled derivative contracts are recorded at their gross fair values on the consolidated balance sheets. The portion of the fair value that represents cash flows occurring within one year is classified as current, and the portion related to cash flows occurring beyond one year is classified as noncurrent.
Cash flows from designated derivative instruments used as hedges are classified in the consolidated statements of cash flows in the same section as the cash flows of the hedged item. Premiums paid for these instruments and associated settlements are reflected as components of investing cash flows. Cash flows from periodic settlement of interest on cross currency swaps and derivative contracts not designated as hedges are reported as investing activities in the consolidated statements of cash flows.
Treasury Stock
When stock is acquired for purposes other than formal or constructive retirement, the purchase price of the acquired stock is recorded in a separate treasury stock account, which is separately reported as a reduction of equity. Treasury stock held by Discovery prior to the Merger was not retired.
When stock is retired or purchased for formal or constructive retirement, the purchase price is initially recorded as a reduction to the par value of the shares repurchased, with any excess purchase price over par value recorded as a reduction to additional paid-in capital related to the series of shares repurchased and any remaining excess purchase price recorded as a reduction to retained earnings. If the purchase price exceeds the amounts allocated to par value and additional paid-in capital related to the series of shares repurchased and retained earnings, the remainder is allocated to additional paid-in capital related to other series of shares.
To determine the cost of treasury stock that is either sold or reissued, the Company uses the last in, first out method. If the proceeds from the re-issuance of treasury stock are greater than the cost, the excess is recorded as additional paid-in capital. If the proceeds from re-issuance of treasury stock are less than the cost, the excess cost first reduces any additional paid-in capital arising from previous treasury stock transactions for that class of stock, and any additional excess is recorded as a reduction of retained earnings.
Revenue Recognition
Revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration that the Company expects to receive in exchange for those services or goods. Revenues do not include taxes collected from customers on behalf of taxing authorities such as sales tax and value-added tax. However, certain revenues include taxes that customers pay to taxing authorities on the Company’s behalf, such as foreign withholding tax. Revenue recognition for each source of revenue is also based on the following policies.
Advertising
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). A substantial portion of the linear and digital advertising contracts in the U.S. and certain international markets guarantee the advertiser a minimum audience level that either the program in which their advertisements are aired or the advertisement will reach. On the linear platform, the Company provides a service to deliver an advertising campaign which is satisfied by the provision of a minimum number of advertising spots in exchange for a fixed fee over a contract period of one year or less. The Company delivers spots in accordance with these contracts during a variety of day parts and programs. In the agreements governing these advertising campaigns, the Company has also promised to deliver to its customers a guaranteed minimum number of viewers (“impressions”) on a specific television network within a particular demographic (e.g. men aged 18-35). These advertising campaigns are considered to represent a single, distinct performance obligation. Revenues are recognized based on the guaranteed audience level multiplied by the average price per impression. The Company provides the advertiser with advertising until the guaranteed audience level is delivered, and invoiced advertising revenue receivables may exceed the value of the audience delivery. As such, revenues are deferred until the guaranteed audience level is delivered or the rights associated with the guarantee lapse, which is typically less than one year. Audience guarantees are initially developed internally, based on planned programming, historical audience levels, the success of pilot programs, and market trends. Actual audience and delivery information is published by independent ratings services.
Digital advertising contracts typically contain promises to deliver guaranteed impressions in specific markets against a targeted demographic during a stipulated period of time. If the specified number of impressions is not delivered, the transaction price is reduced by the number of impressions not delivered multiplied by the contractually stated price per impression. Each promise is considered a separate performance obligation. For digital contracts with an audience guarantee, advertising revenues are recognized as impressions are delivered. Actual audience delivery is typically reported by independent third parties.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For contracts without an audience guarantee, advertising revenues are recognized as each spot airs. The airing of individual spots without a guaranteed audience level are each distinct, individual performance obligations. The Company allocates the consideration to each spot based on its relative standalone selling price.
Distribution
Distribution revenues are generated from fees charged to network distributors, which include cable, direct-to-home (“DTH”) satellite, telecommunications and digital service providers, and DTC subscribers. Cable operators, DTH satellite operators and telecommunications service providers typically pay royalties via a per-subscriber fee for the right to distribute the Company’s programming under the terms of distribution contracts. The majority of the Company’s distribution fees are collected monthly throughout the year and distribution revenue is recognized over the term of the contracts based on contracted programming rates and reported subscriber levels. The amount of distribution fees due to the Company is reported by distributors based on actual subscriber levels. Such information is generally not received until after the close of the reporting period. In these cases, the Company estimates the number of subscribers receiving the Company’s programming to estimate royalty revenue. Historical adjustments to recorded estimates have not been material. Distribution revenue from fixed-fee contracts is recognized over the contract term based on the continuous delivery of the content to the affiliate. Any monetary incentives provided to distributors other than for distinct goods or services acquired at fair value are recognized as a reduction of revenue over the term.
Although the delivery of linear feeds and digital products, such as video-on-demand (“VOD”) and authenticated TVE applications, are considered distinct performance obligations within a distribution arrangement, on-demand offerings generally match the programs that are airing on the linear network. Therefore, the Company recognizes revenue for licensing arrangements as the license fee is earned and based on continuous delivery for fixed fee contracts.
Revenues associated with digital distribution arrangements are recognized when the Company transfers control of the programming and the rights to distribute the programming to the customer.
For DTC subscription services, the Company recognizes revenue as the service fee is earned over the subscription period.
Content
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.
In general, fixed payments for the licensing of intellectual property are recognized as revenue at either the inception of the license term or as sales-based royalties as underlying sales occur if the intellectual property has significant standalone functionality (“functional IP,” such as a produced film or television series), or over the corresponding license term if the licensee’s ability to derive utility is dependent upon our continued support of the intellectual property throughout the license term (“symbolic IP,” such as a character or a brand). Feature films may be produced or acquired for initial exhibition in theaters or direct release on our streaming service. Arrangements with theaters for exhibiting a film over a certain period are generally sales-based royalties and recorded as revenue as the underlying sales of the exhibitors occur.
Television programs are initially produced for broadcast networks, cable networks, premium pay services, first-run syndication or streaming services; revenues are recognized when the programs are available for use by the licensee. Fixed license fee revenues from the subsequent licensing of feature films and television programs in the off-network cable, premium pay, syndication, streaming and international television and streaming markets are also recognized upon availability of the content for use by the licensee. For television/streaming service licenses that include multiple titles with a fixed license fee across all titles, the availability of each title is considered a separate performance obligation, and the fixed fee is allocated to each title and recognized as revenue when the title is available for use by the licensee. When the term of an existing agreement is renewed or extended, revenues are recognized when the licensed content becomes available under the renewal or extension. Certain arrangements (e.g., certain pay-TV/SVOD licenses) may include variable license fees that are based on sales of the licensee; these are recognized as revenue as the applicable underlying sales occur.
Revenues from home entertainment sales of feature films and television programs in physical format are generally recognized at the later of the delivery date or the date when made widely available for sale or rental by retailers (“street date”) based on gross sales less a provision for estimated returns, rebates and pricing allowances. The provision is based on management’s estimates by analyzing vendor sales of our product, historical return trends, current economic conditions and changes in customer demand. Revenues from the licensing of television programs and films for electronic sell-through or video-on-demand are recognized when the product has been purchased by and made available to the consumer to either download or stream.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Revenues from sales of console games generally follow the same recognition methods as film and television programs in the home entertainment market. Revenues from digital sales of in-game purchases are assessed for deferral based on type of digital item purchased (e.g., consumable vs. durable) and estimated life of consumer game play and recognized upon purchase or
over time as applicable.
Revenues from the licensing of intellectual property such as characters or brands (e.g., for merchandising or theme parks) are
recognized either straight-line over the license term or as the licensee’s underlying product sales occur (sales-based royalty) depending on which method is most reflective of the earnings process.
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.
Deferred revenue primarily consists of TV/SVOD content licensing arrangements where the content has not yet been made available to the customer, consumer products and themed experience licensing arrangements with fixed payments, advance payment for DTC subscriptions, and cash received for television advertising for which the guaranteed viewership has not been provided. The amounts classified as current are expected to be earned within the next year.
Payment terms vary by the type and location of the customer and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer.
Share-Based Compensation Expense
The Company has incentive plans under which performance-based restricted stock units (“PRSUs”), service-based restricted stock units (“RSUs”), stock options, and stock appreciation rights (“SARs”) may be issued. In addition, the Company offers an Employee Stock Purchase Plan (the “ESPP”). Share-based compensation expense for all awards is recorded as a component of selling, general and administrative expense. Forfeitures for all awards are recognized as incurred. Excess tax benefits realized from the exercise of stock options and vested RSUs, PRSUs and the ESPP are reported as cash inflows from operating activities on the consolidated statements of cash flows.
PRSUs
PRSUs represent the contingent right to receive shares of WBD common stock, and vest over one year based on continuous service and the attainment of qualitative and quantitative performance targets. The number of PRSUs that vest typically ranges from 0% to 100% based on a sliding scale where achieving or exceeding the performance target will result in 100% of the PRSUs vesting and achieving less than 70% of the target will result in no portion of the PRSUs vesting. Additionally, for certain PRSUs, the Company’s Compensation Committee has discretion in determining the final number of units that vest, but may not increase the amount of any PRSU award above 100%. Upon vesting, each PRSU becomes convertible into one share of WBD common stock. Holders of PRSUs do not receive payments of dividends in the event the Company pays a cash dividend until such PRSUs are converted into shares of WBD common stock.
Compensation expense for PRSUs is based on the fair value of WBD common stock on the date of grant. Compensation expense for PRSUs that vest based on achieving subjective operating performance conditions or in situations where the executive may withhold taxes in excess of the maximum statutory requirement, is remeasured at fair value each reporting period until the award is settled. Compensation expense for all PRSUs is recognized ratably over the vesting period only when it is probable that the operating performance conditions will be achieved. The Company records a cumulative adjustment to compensation expense for PRSUs if there is a change in the determination of the probability that the operating performance conditions will be achieved.
RSUs
RSUs represent the contingent right to receive shares of WBD common stock, substantially all of which vest ratably each year over periods of three to five years based on continuous service. Compensation expense for RSUs is based on the fair value of the award on the date of grant and is recognized ratably during the vesting period.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options and SARs
Stock options are granted with an exercise price equal to or in excess of the closing market price of WBD common stock on the date of grant. Stock options vest ratably over four years from the grant date based on continuous service and expire seven years from the date of grant. Stock option awards generally provide for accelerated vesting upon retirement or after reaching a specified age and years of service. Compensation expense for stock options is based on the fair value of the award on the date of grant and is recognized ratably during the vesting period.
SARs are cash-settled and entitle the holder to receive a cash payment for the amount by which the price of WBD common stock exceeds the base price established on the grant date. Cash-settled SARs are granted with a base price equal to or greater than the closing market price of WBD common stock on the date of grant. Compensation expense for SARs is based on the fair value of the award. Because SARs are cash-settled, the Company remeasures the fair value of these awards each reporting period until settlement. Compensation expense for SARs, including changes in fair value, is recognized during the vesting period in proportion to the requisite service that has been rendered as of the reporting date. For awards with graded vesting, the Company measures fair value and records compensation expense separately for each vesting tranche.
The fair values of stock options and SARs are estimated using the Black-Scholes option-pricing model. Because the Black-Scholes option-pricing model requires the use of subjective assumptions, changes in these assumptions can materially affect the fair value of awards. For SARs, the expected term is the period from the grant date to the end of the contractual term of the award unless the terms of the award allow for cash-settlement automatically on the date the awards vest, in which case the vesting date is used. For stock options the simplified method is utilized to calculate the expected term, since the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. The simplified method considers the period from the date of grant through the mid-point between the vesting date and the end of the contractual term of the award. Expected volatility is based on a combination of implied volatilities from traded options on WBD common stock and historical realized volatility of WBD common stock. The dividend yield is assumed to be zero because the Company has no history of paying cash dividends and no present intention to pay dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the award.
ESPP
The ESPP enables eligible employees to purchase shares of WBD common stock through payroll deductions or other permitted means. The Company recognizes the fair value of the discount associated with shares purchased under the ESPP as share-based compensation expense.
Advertising Costs
Advertising costs are expensed as incurred and are presented in selling, general and administrative expenses. Advertising costs paid to third parties totaled $2,519 million, $1,247 million and $412 million for years ended December 31, 2022, 2021 and 2020, respectively.
Collaborative Arrangements
The Company’s collaborative arrangements primarily relate to arrangements entered into with third parties to jointly finance and distribute certain theatrical and television productions and an arrangement entered into with CBS Broadcasting, Inc. (“CBS”) surrounding The National Collegiate Athletic Association (the “NCAA”).
The arrangement among Turner, CBS and the NCAA provides Turner and CBS with rights to the NCAA Division I Men’s Basketball Championship Tournament (the “NCAA Tournament”) in the U.S. and its territories and possessions through 2032. The aggregate programming rights fee, production costs, advertising revenues and sponsorship revenues related to the NCAA Tournament and related programming are shared equally by the Company and CBS. However, if the amount paid for the programming rights fee and production costs in any given year exceeds advertising and sponsorship revenues for that year, CBS’ share of such shortfall is limited to specified annual caps. No amounts were recorded pursuant to the loss cap during the year ended December 31, 2022 since the most recent cap was finalized prior to the Merger. In accounting for this arrangement, the Company records advertising revenue for the advertisements aired on its networks and amortizes its share of the programming rights fee based on the estimated relative value of each season over the term of the arrangement.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Co-financing arrangements generally represent the assignment of an economic interest in a film or television series to a producing partner. The Company generally records the amounts received for the assignment of an interest as a reduction of production cost, as the partner assumes the risk for their share of the film or series asset. The substance of these arrangements is that the third-party partner owns an interest in the film or series; therefore, in each period, the Company reflects in the consolidated statements of operations either a charge or benefit to cost of revenues, excluding depreciation and amortization to reflect the estimate of the third-party partner’s interest in the profits or losses incurred on the film or series using the individual film forecast method, based on the terms of the arrangement. On occasion, the Company acquires the economic interest in a film from a producing partner; in this case, the Company capitalizes the acquisition cost as a content asset in film and television content rights and games and accounts for the third-party partner’s share in applicable distribution results as described above. For our collaborative arrangements entered into with third parties to jointly finance and distribute certain theatrical and television productions, net participation costs of $276 million were recorded in cost of revenues, excluding depreciation and amortization for the year ended December 31, 2022.
Income Taxes
Income taxes are recorded using the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred taxes are measured using rates the Company expects to apply to taxable income in years in which those temporary differences are expected to reverse. A valuation allowance is provided for deferred tax assets if it is more likely than not such assets will be unrealized.
From time to time, the Company engages in transactions in which the tax consequences may be uncertain. Significant judgment is required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities.
In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless the Company determines that such positions are more likely than not to be sustained upon examination based on their technical merits, including the resolution of any appeals or litigation processes. The Company includes interest and where appropriate, penalties, as a component of income tax expense on the consolidated statements of operations. There is significant judgment involved in determining the amount of reserve and whether positions taken on the Company’s tax returns are more likely than not to be sustained, which involve the use of significant estimates and assumptions with respect to the potential outcome of positions taken on tax returns that may be reviewed by tax authorities. The Company adjusts its tax reserve estimates periodically because of ongoing examinations by, and settlements with, various taxing authorities, as well as changes in tax laws, regulations and interpretations.
Concentrations Risk
Customers
No individual customer accounted for more than 10% of total consolidated revenues for 2022, 2021 or 2020. The Company had two customers that represented more than 10% of distribution revenue in 2022, which in aggregate totaled 26%. As of December 31, 2022 and 2021, the Company’s trade receivables do not represent a significant concentration of credit risk as the customers and markets in which the Company operates are varied and dispersed across many geographic areas.
Financial Institutions
Cash and cash equivalents are maintained with several financial institutions. The Company has deposits held with banks that exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and, therefore, bear minimal credit risk.
Counterparty Credit Risk
The Company is exposed to the risk that the counterparties to outstanding derivative financial instruments will default on their obligations. The Company manages these credit risks through the evaluation and monitoring of the creditworthiness of, and concentration of risk with, the respective counterparties. In this regard, credit risk associated with outstanding derivative financial instruments is spread across a relatively broad counterparty base of banks and financial institutions. The Company also has a limited number of arrangements where collateral is required to be posted in the instance that certain fair value thresholds are exceeded. As of December 31, 2022, the Company had posted $49 million of collateral under these arrangements. As of December 31, 2022, the Company’s exposure to counterparty credit risk included derivative assets with an aggregate fair value of $186 million. (See Note 13.)
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 (LIBOR) and other interbank offered rates to alternative reference rates. The guidance is for March 12, 2020 through December 31, 2022 and may not be applied to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. The Company applied the relevant provisions of the guidance to hedge relationships that were subsequently terminated in the first quarter of 2022.
Convertible Instruments
In August 2020, the FASB issued guidance simplifying the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. The 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.
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 the nature of the transactions, significant terms and conditions, accounting treatment and impacted financial statement lines reflecting the impact of the transactions. The Company adopted the guidance effective January 1, 2022, and no additional disclosures were required. The Company receives production incentives that are analogous to investment tax credits. (See Film and Television Content Rights policy above.)
Accounting and Reporting Pronouncements Not Yet Adopted
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 3. EQUITY AND EARNINGS PER SHARE
Common Stock Issued in Connection with the WarnerMedia Merger
Prior to the Merger, Discovery had three series of common stock authorized, issued, and outstanding - Series A common stock, Series B convertible common stock, and Series C common stock - and two series of preferred stock authorized, issued, and outstanding - Series A-1 convertible preferred stock and Series C-1 convertible preferred stock. 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 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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 4).
Repurchase Programs
Common Stock
Under the Company’s stock repurchase program, management is authorized to purchase shares of WBD common stock from time to time through open market purchases, privately negotiated transactions at prevailing prices, pursuant to one or more accelerated stock repurchase agreements, or other derivative arrangements as permitted by securities laws and other legal requirements, and subject to stock price, business and market conditions and other factors.
In February 2020, the Company’s board of directors authorized additional stock repurchases of up to $2 billion upon completion of its existing $1 billion repurchase authorization announced in May 2019. All common stock repurchases, including prepaid common stock repurchase contracts, have been made through open market transactions and have been recorded as treasury stock on the consolidated balance sheets. During the years ended December 31, 2022 and 2021, the Company did not repurchase any of its common stock. During the year ended December 31, 2020, the Company repurchased 41.6 million shares of its common stock for $965 million. Over the life of the Company’s repurchase programs and prior to the Merger and conversion of Discovery common stock to WBD common stock, the Company had repurchased 3 million and 229 million shares of Discovery Series A and Discovery Series C common stock, respectively, for the aggregate purchase price of $171 million and $8.2 billion, respectively.
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 (in millions). Earnings per share amounts may not recalculate due to rounding. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Numerator: | | | | | | |
| Net (loss) income | | $ | (7,297) | | | $ | 1,197 | | | $ | 1,355 | |
| Less: | | | | | | |
| Allocation of undistributed income to Series A-1 convertible preferred stock | | (49) | | | (110) | | | (128) | |
| Net income attributable to noncontrolling interests | | (68) | | | (138) | | | (124) | |
| Net income attributable to redeemable noncontrolling interests | | (6) | | | (53) | | | (12) | |
| Redeemable noncontrolling interest adjustments of carrying value to redemption value (redemption value does not equal fair value) | | — | | | 16 | | | — | |
| Net (loss) income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for basic and diluted net (loss) income per share | | $ | (7,420) | | | $ | 912 | | | $ | 1,091 | |
| | | | | | |
| Add: | | | | | | |
| Allocation of undistributed income to Series A-1 convertible preferred stockholders | | — | | | 110 | | | 128 | |
| Net (loss) income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for diluted net (loss) income per share | | $ | (7,420) | | | $ | 1,022 | | | $ | 1,219 | |
| | | | | | |
| Denominator — weighted average: | | | | | | |
| Common shares outstanding — basic | | 1,940 | | | 588 | | | 599 | |
| Impact of assumed preferred stock conversion | | — | | | 71 | | | 71 | |
| Dilutive effect of share-based awards | | — | | | 5 | | | 2 | |
| Common shares outstanding — diluted | | 1,940 | | | 664 | | | 672 | |
| | | | | | |
| Basic net (loss) income per share allocated to common stockholders | | $ | (3.82) | | | $ | 1.55 | | | $ | 1.82 | |
| Diluted net (loss) income per share allocated to common stockholders | | $ | (3.82) | | | $ | 1.54 | | | $ | 1.81 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Anti-dilutive share-based awards | | 49 | | | 17 | | | 24 | |
| | | | | | |
| | | | | | |
| | | | | | |
NOTE 4. 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. In identifying Discovery as the accounting acquirer, the Company’s conclusion was based primarily upon the following facts: (1) Discovery initiated the Merger, was the legal acquirer of Magallanes, Inc., (“Spinco”), and transferred equity consideration to Spinco stockholders, (2) AT&T received $40.5 billion of consideration (subject to working capital and other adjustments) as part of its disposition of the WarnerMedia Business, (3) the Chief Executive Officer of Discovery continued as Chief Executive Officer of the combined Company after the Merger and was primarily responsible for appointing the rest of the executive management team of the combined Company, and the Chief Financial Officer of Discovery continued as Chief Financial Officer of the combined Company, (4) no stockholder or group of stockholders held a controlling interest in WBD and a key Discovery stockholder was the largest minority interest in WBD after the completion of the Merger, and (5) AT&T had no input on the strategic direction and management of the combined Company after the completion of the Merger. The above facts were deemed to outweigh the fact that the holders of shares of Spinco common stock that received shares of WBD common stock in the Merger in the aggregate owned a majority of WBD common stock on a fully diluted basis and associated voting rights after the Merger.
The Merger combined WM’s premium entertainment, sports, and news assets with Discovery’s leading non-fiction and international entertainment and sports businesses. 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 WBD common stock multiplied by the closing share price for Discovery Series A common stock of $24.43 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 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 15 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. The working capital settlement was recorded in other current assets in the preliminary purchase price allocation.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 amounts of $9,047 million, $7,076 million and $5,618 million, respectively, and is not deductible for tax purposes.
The purchase price allocation is preliminary and subject to change. The Company is still refining certain estimates related to income taxes and other limited areas. 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 measurement period adjustments were primarily related to content, taxes, investments, capitalized interest and the true-up of accrued liabilities. 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 | | | (62) | | | 4,162 | |
| Other current assets | | 4,619 | | | (148) | | | 4,471 | |
| Film and television library | | 28,729 | | | (343) | | | 28,386 | |
| Property and equipment | | 4,260 | | | 13 | | | 4,273 | |
| Goodwill | | 21,513 | | | 228 | | | 21,741 | |
| Intangible assets | | 44,889 | | | 100 | | | 44,989 | |
| Other noncurrent assets | | 5,206 | | | 337 | | | 5,543 | |
| Current liabilities | | (10,544) | | | (1) | | | (10,545) | |
| Debt assumed | | (41,671) | | | (9) | | | (41,680) | |
| Deferred income taxes | | (13,264) | | | 532 | | | (12,732) | |
| Other noncurrent liabilities | | (8,004) | | | (637) | | | (8,641) | |
| Total consideration paid | | $ | 42,376 | | | $ | — | | | $ | 42,376 | |
| | | | | | |
|
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair values of the assets acquired and liabilities assumed were 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) projected revenue attributable to affiliate contracts and related renewals, (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 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 relationships | | 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 | | | 34 | | | |
| Affiliate, advertising and subscriber relationships | | 14,800 | | | 6 | | | |
| Franchises | | 7,900 | | | 35 | | | |
| Other intangible assets | | 1,205 | | | | | | |
| Total intangible assets acquired | | $ | 44,989 | | | | | | |
| |
| | | | | | | |
|
The Company incurred transaction-related costs of $406 million for the year ended December 31, 2022. 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 3.)
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).
| | | | | | | | |
| | Year Ended December 31, 2022 |
| Revenues: | | |
| Advertising | | $ | 2,849 | |
| Distribution | | 10,980 | |
| Content | | 10,001 | |
| Other | | 720 | |
| Total revenues | | 24,550 | |
| Inter-segment eliminations | | (2,225) | |
| Net revenues | | $ | 22,325 | |
| Net loss available to Warner Bros. Discovery, Inc. | | $ | (7,202) | |
| | |
|
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 loss (in millions).
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| | | | |
| Revenues | | $ | 43,095 | | | $ | 45,326 | |
| Net loss available to Warner Bros. Discovery, Inc. | | (5,359) | | | (3,750) | |
| | | | |
| | | | |
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 October 2022, the Company sold its 49% stake in Golden Maple Limited (known as Tencent Video VIP) for proceeds of $143 million and recorded a gain of $55 million, and in April 2022 completed the sale of its minority interest in Discovery Education for proceeds of $138 million and recorded a gain of $133 million.
Also, 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 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
NOTE 5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The carrying value and changes in the carrying value of goodwill attributable to each business unit were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | U.S.
Networks | | International
Networks | | Studios | | Networks | | DTC | | | | Total |
| December 31, 2020 | | $ | 10,813 | | | $ | 2,257 | | | $ | — | | | $ | — | | | $ | — | | | | | $ | 13,070 | |
| | | | | | | | | | | | | | |
Dispositions (See Note 4) | | — | | | (3) | | | — | | | — | | | — | | | | | (3) | |
| | | | | | | | | | | | | | |
| Foreign currency translation and other adjustments | | — | | | (155) | | | — | | | — | | | — | | | | | (155) | |
| December 31, 2021 | | $ | 10,813 | | | $ | 2,099 | | | $ | — | | | $ | — | | | $ | — | | | | | $ | 12,912 | |
Segment recast (See Note 23) | | (10,813) | | | (2,059) | | | — | | | 10,555 | | | 2,317 | | | | | — | |
Acquisitions (See Note 4) | | — | | | — | | | 9,047 | | | 7,081 | | | 5,618 | | | | | 21,746 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Foreign currency translation and other adjustments | | — | | | (40) | | | (84) | | | (79) | | | (17) | | | | | (220) | |
| December 31, 2022 | | $ | — | | | $ | — | | | $ | 8,963 | | | $ | 17,557 | | | $ | 7,918 | | | | | $ | 34,438 | |
The carrying amount of goodwill at the Networks segment included accumulated impairments of $1.6 billion as of December 31, 2022 and 2021. The Studios and DTC segments did not include any accumulated impairments as of December 31, 2022 and 2021.
Intangible Assets
Finite-lived intangible assets subject to amortization consisted of the following (in millions, except years).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted
Average
Amortization
Period (Years) | | December 31, 2022 | | December 31, 2021 |
| Gross | | Accumulated
Amortization | | Net | | Gross | | Accumulated
Amortization | | Net |
| Trademarks and trade names | 32 | | $ | 22,876 | | | $ | (1,494) | | | $ | 21,382 | | | $ | 1,716 | | | $ | (858) | | | $ | 858 | |
| Affiliate, advertising and subscriber relationships | 8 | | 24,136 | | | (9,458) | | | 14,678 | | | 9,433 | | | (4,303) | | | 5,130 | |
| Franchises | 35 | | 7,900 | | | (164) | | | 7,736 | | | — | | | — | | | — | |
| Character rights | 14 | | 995 | | | (53) | | | 942 | | | — | | | — | | | — | |
| Other | 6 | | 568 | | | (324) | | | 244 | | | 395 | | | (227) | | | 168 | |
| Total | | | $ | 56,475 | | | $ | (11,493) | | | $ | 44,982 | | | $ | 11,544 | | | $ | (5,388) | | | $ | 6,156 | |
Amortization expense for finite-lived intangible assets reflects the pattern in which the assets’ economic benefits are consumed over their estimated useful lives. During the fourth quarter of 2021, the Company reassessed the useful lives and amortization methods for acquired customer relationships and concluded the economic benefits would be consumed in greater proportion earlier in their life with gradual decline; accordingly, we changed the amortization method for these assets from the straight-line method to the sum of the months’ digits method effective October 1, 2021. This change was considered a change in estimate, was accounted for prospectively, and resulted in incremental amortization expense of $196 million in 2021. Amortization expense related to finite-lived intangible assets was $6.2 billion, $1.3 billion and $1.1 billion for the years ended December 31, 2022, 2021 and 2020, 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). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Amortization expense | | $ | 6,510 | | | $ | 4,989 | | | $ | 3,614 | | | $ | 2,608 | | | $ | 1,965 | | | $ | 25,296 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Indefinite-lived intangible assets not subject to amortization (in millions): | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Trademarks | | $ | — | | | $ | 161 | |
Impairment Analysis
Significant judgments and assumptions for all quantitative goodwill tests performed include discount rates, control premiums, terminal growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows, including revenue growth rates and profit margins.
2022 Impairment Analysis
As of October 1, 2022, the Company performed a quantitative goodwill impairment assessment for all reporting units consistent with the Company’s accounting policy. The estimated fair value of each reporting unit exceeded its carrying value and, therefore, no impairment was recorded. Due to declining levels of global GDP growth and execution risk associated with anticipated growth in the Company’s DTC reporting unit, which is the DTC segment, the Company will continue to monitor its reporting units for changes that could impact recoverability.
2021 Impairment Analysis
For the 2021 annual impairment test, the Company performed a qualitative goodwill impairment assessment for all reporting units 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.
2020 Impairment Analysis
For the 2020 annual impairment test, the Company performed its annual qualitative goodwill impairment assessment for all reporting units and determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values, except for its Europe and Asia-Pacific reporting units. For its Europe and Asia-Pacific reporting units, the Company performed a quantitative goodwill impairment analysis for each using a DCF valuation model. A market-based valuation model was not weighted in the analysis due to significant volatility in the reporting units’ equity markets.
The quantitative goodwill impairment analysis for the Company’s Europe reporting unit indicated that its estimated fair value exceeded its carry value by approximately 20% and, therefore, no impairment was recorded.
The quantitative impairment analysis for the Company’s Asia-Pacific reporting unit indicated that its estimated fair value did not exceed its carrying value, which resulted in a pre-tax impairment charge to write-off the $121 million goodwill balance, of which $36 million was written off in the second quarter of 2020. The impairment charge was not deductible for tax purposes. The determination of fair value of the Company’s Asia-Pacific reporting unit represented a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs.
NOTE 6. RESTRUCTURING
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 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.
Restructuring by reportable segment and corporate, inter-segment eliminations, and other were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Studios | | $ | 1,050 | | | $ | — | | | $ | 6 | |
| Networks | | 1,003 | | | 30 | | | 84 | |
| DTC | | 1,551 | | | 2 | | | 1 | |
| Corporate | | 195 | | | — | | | — | |
| Inter-segment eliminations | | (42) | | | — | | | — | |
| Total restructuring | | $ | 3,757 | | | $ | 32 | | | $ | 91 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2022, restructuring charges primarily included charges related to strategic content programming initiatives, inclusive of content impairments, content development costs and write-offs, content contract terminations, and other content related charges of $3,133 million. In addition, there were restructuring charges related to organization restructuring of $607 million and facility consolidation activities and other contract terminations of $17 million.
During the years ended December 31, 2021 and December 31, 2020, restructuring charges primarily included charges related to employee relocation and termination costs. During 2020, the Company implemented various cost-saving initiatives as a result of the COVID-19 pandemic.
Changes in restructuring and other liabilities recorded in accrued liabilities and other noncurrent 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, 2020 | | $ | 23 | | | $ | 20 | | | $ | — | | | $ | — | | | $ | — | | | $ | 15 | | | $ | 58 | |
| Employee termination accruals, net | | 4 | | | 26 | | | — | | | — | | | — | | | 2 | | | 32 | |
| Cash paid | | (23) | | | (33) | | | — | | | — | | | — | | | (15) | | | (71) | |
| December 31, 2021 | | 4 | | | 13 | | | — | | | — | | | — | | | 2 | | | 19 | |
Segment recast (See Note 23 ) | | (4) | | | (13) | | | — | | | 15 | | | — | | | 2 | | | — | |
Acquisitions (See Note 4 ) | | — | | | — | | | 40 | | | — | | | 14 | | | 55 | | | 109 | |
| Contract termination accruals, net | | — | | | — | | | 36 | | | 168 | | | 121 | | | — | | | 325 | |
| Employee termination accruals, net | | — | | | — | | | 114 | | | 213 | | | 87 | | | 184 | | | 598 | |
| | | | | | | | | | | | | | |
| Cash paid | | — | | | — | | | (34) | | | (35) | | | (34) | | | (84) | | | (187) | |
| December 31, 2022 | | $ | — | | | $ | — | | | $ | 156 | | | $ | 361 | | | $ | 188 | | | $ | 159 | | | $ | 864 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. REVENUES
Disaggregated Revenue
The following table presents the Company’s revenues disaggregated by revenue source (in millions). Management uses these categories of revenue to evaluate the performance of its businesses and to assess its financial results and forecasts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Advertising | $ | 15 | | | $ | 8,224 | | | $ | 371 | | | $ | (86) | | | $ | 8,524 | |
| Distribution | 12 | | | 9,759 | | | 6,371 | | | — | | | 16,142 | |
| Content | 9,156 | | | 1,120 | | | 522 | | | (2,438) | | | 8,360 | |
| Other | 548 | | | 245 | | | 10 | | | (12) | | | 791 | |
| Totals | $ | 9,731 | | | $ | 19,348 | | | $ | 7,274 | | | $ | (2,536) | | | $ | 33,817 | |
| | | | | | | | | |
| Year Ended December 31, 2021 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Advertising | $ | — | | | $ | 6,063 | | | $ | 131 | | | $ | — | | | $ | 6,194 | |
| Distribution | — | | | 4,486 | | | 716 | | | — | | | 5,202 | |
| Content | 20 | | | 706 | | | 11 | | | — | | | 737 | |
| Other | — | | | 56 | | | 2 | | | — | | | 58 | |
| Totals | $ | 20 | | | $ | 11,311 | | | $ | 860 | | | $ | — | | | $ | 12,191 | |
| | | | | | | | | |
| Year Ended December 31, 2020 |
| Studios | | Networks | | DTC | | Corporate and Inter-segment Eliminations | | Total |
| Revenues: | | | | | | | | | |
| Advertising | $ | — | | | $ | 5,547 | | | $ | 25 | | | $ | — | | | $ | 5,572 | |
| Distribution | — | | | 4,496 | | | 190 | | | — | | | 4,686 | |
| Content | 12 | | | 340 | | | 3 | | | — | | | 355 | |
| Other | — | | | 56 | | | 2 | | | — | | | 58 | |
| Totals | $ | 12 | | | $ | 10,439 | | | $ | 220 | | | $ | — | | | $ | 10,671 | |
Accounts Receivable and Credit Losses
The allowance for credit losses was not material at December 31, 2022 and 2021.
Contract Assets and Liabilities
The following table presents contract liabilities on the consolidated balance sheets (in millions).
| | | | | | | | | | | | | | | | | | | | |
| Category | | Balance Sheet Location | | December 31, 2022 | | December 31, 2021 |
| | | | | | |
| | | | | | |
| Contract liabilities | | Deferred revenues | | $ | 1,694 | | | $ | 478 | |
| Contract liabilities | | Other noncurrent liabilities | | 361 | | | 95 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The change in deferred revenue for the year ended December 31, 2022 primarily reflects an increase of $1,476 million related to the Merger and cash payments received or contracted billings recorded for which the performance obligations were not satisfied prior to the end of the period, partially offset by $411 million of revenues recognized that were included in the deferred revenue balance at December 31, 2021. Revenue recognized for the year ended December 31, 2021 related to the deferred revenue balance at December 31, 2020 was $456 million. Contract assets were not material as of December 31, 2022 and 2021.
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 revenues are recorded as a function of royalties earned to date instead of estimating incremental royalty contract revenue. Accordingly, revenue for these arrangements is recognized based on 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 $4.8 billion as of December 31, 2022 and is expected to be recognized through 2031.
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 $4.6 billion as of December 31, 2022 and is expected to be recognized through 2025.
The Company’s brand licensing contracts are licenses of symbolic intellectual property. The transaction price allocated to remaining performance obligations on these contracts was $2.3 billion as of December 31, 2022 and is expected to be recognized through 2043.
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 $646 million as of December 31, 2022 and is expected to be recognized through 2025.
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 8. SALES OF RECEIVABLES
Revolving Receivables Program
Our bankruptcy-remote consolidated subsidiary held $3,468 million of pledged receivables as of December 31, 2022 in connection with the Company’s revolving receivables program. For the year ended December 31, 2022, the Company recognized $256 million in selling, general and administrative expense from the revolving receivables program in the consolidated statements of operations. The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $5,366 million as of December 31, 2022.
The following table presents a summary of receivables sold (in millions).
| | | | | | | | | | | |
| Year Ended December 31, 2022 | | | | | | |
| Gross receivables sold/cash proceeds received | $ | 9,857 | | | | | | | |
| Collections reinvested under revolving agreement | (10,491) | | | | | | | |
| Net cash proceeds received | $ | (634) | | | | | | | |
| Net receivables sold | $ | 9,797 | | | | | | | |
| Obligations recorded | $ | 377 | | | | | | | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents a summary of the amounts transferred or pledged (in millions):
| | | | | | | |
| December 31, 2022 | | |
| Gross receivables pledged as collateral | $ | 3,468 | | | |
| Restricted cash pledged as collateral | $ | 150 | | | |
| Balance sheet classification: | | | |
| | | |
| Receivables, net | $ | 3,015 | | | |
| Prepaid expenses and other current assets | $ | 150 | | | |
| | | |
| Other noncurrent assets | $ | 453 | | | |
Accounts Receivable Factoring
Total trade accounts receivable sold under the Company’s factoring arrangements was $477 million as of December 31, 2022. The impact to the consolidated statements of operations was immaterial for the year ended December 31, 2022.
NOTE 9. CONTENT RIGHTS
For purposes of amortization and impairment, capitalized content costs are comprised of produced content grouped based on predominant monetization strategy: individually or as a group. Programming rights include content licensed from third parties, such as film, television, and sports rights. The table below presents the components of content rights (in millions).
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
| Theatrical film production costs: | | | | | | |
| Released, less amortization | | $ | 3,544 | | | $ | — | | | $ | 3,544 | |
| Completed and not released | | 507 | | | — | | | 507 | |
| In production | | 1,700 | | | — | | | 1,700 | |
| In development | | 95 | | | — | | | 95 | |
| | | | | | |
| Television production costs: | | | | | | |
| Released, less amortization | | 2,200 | | | 6,513 | | | 8,713 | |
| Completed and not released | | 939 | | | 310 | | | 1,249 | |
| In production | | 427 | | | 4,424 | | | 4,851 | |
| In development | | 30 | | | 15 | | | 45 | |
| Total theatrical film and television production costs | | $ | 9,442 | | | $ | 11,262 | | | $ | 20,704 | |
| | | | | | |
| | | | | | |
| Programming rights, less amortization | | | | | | 5,843 | |
| Game development costs, less amortization | | | | | | 650 | |
| Total film and television content rights and games | | | | | | 27,197 | |
| Less: Current content rights and prepaid license fees, net | | | | | | (545) | |
| Total noncurrent film and television content rights and games | | | | | | $ | 26,652 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | Predominantly Monetized Individually | | Predominantly Monetized as a Group | | Total |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Television production costs: | | | | | | |
| Released, less amortization | | $ | 9 | | | $ | 2,495 | | | $ | 2,504 | |
| | | | | | |
| In production | | — | | | 770 | | | 770 | |
| In development | | — | | | 17 | | | 17 | |
| Total television production costs | | $ | 9 | | | $ | 3,282 | | | $ | 3,291 | |
| | | | | | |
| | | | | | |
Programming rights, less amortization | | | | | | 786 | |
| | | | | | |
Total film and television content rights (a) | | | | | | 4,077 | |
| Less: Current content rights and prepaid license fees, net | | | | | | (245) | |
Total noncurrent film and television content rights (a) | | | | | | $ | 3,832 | |
(a) As of December 31, 2021, the Company had no theatrical film production or game development costs.
Content amortization consisted of the following (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | | | | | |
| Predominately monetized individually | | $ | 5,175 | | | $ | 541 | | | $ | 55 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| Predominately monetized as a group | | 8,935 | | | 2,955 | | | 2,853 | |
| | | | | | |
| | | | | | |
| Total content amortization | | $ | 14,110 | | | $ | 3,496 | | | $ | 2,908 | |
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 year ended December 31, 2022, total content impairments were $2,807 million, of which $2,756 million was due to the strategic realignment of content following the Merger and are reflected in restructuring. (See Note 6.) Content impairments of $5 million and $48 million for the years ending December 31, 2021 and December 31, 2020, respectively, were recorded as cost of revenues in the consolidated statements of operations. No content impairments were recorded as a component of restructuring for the years ended December 31, 2021 and 2020.
Additionally, there were $377 million of content development costs/write-offs, content contract terminations, and other content related charges for the year ended December 31, 2022 in connection with the strategic realignment of content following the Merger that are reflected in restructuring. (See Note 6.)
The table below presents the expected future amortization expense of the Company’s investment in film and television content and programming rights as of December 31, 2022 (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ending December 31, |
| | 2023 | | 2024 | | 2025 |
| Released investment in films and television content: | | | | | | |
| Monetized individually | | $ | 2,736 | | | $ | 1,700 | | | $ | 966 | |
| Monetized as a group | | 2,937 | | | 1,416 | | | 776 | |
| Programming rights | | 1,586 | | | 1,216 | | | 866 | |
| | | | | | |
| Completed and not released investment in films and television content: | | | | | | |
| Monetized individually | | $ | 1,235 | | | | | |
| Monetized as a group | | 58 | | | | | |
At December 31, 2022, acquired film and television libraries are being amortized using straight-line or other accelerated amortization methods through 2033.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. 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 | | December 31, 2022 | | December 31, 2021 |
| Equity method investments: | | | | | | | | |
| The Chernin Group (TCG) 2.0-A, LP | | Other noncurrent assets | | 44% | | $ | 313 | | | $ | — | |
| nC+ | | Other noncurrent assets | | 32% | | 135 | | | 151 | |
| Other | | Other noncurrent assets | | | | 614 | | | 390 | |
| Total equity method investments | | | | | | 1,062 | | | 541 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total investments with readily determinable fair values | | Other noncurrent assets (a) | | | | 28 | | | 120 | |
| | | | | | | | |
| | | | | | | | |
| Investments without readily determinable fair values | | Other noncurrent assets (a) | | | | 498 | | | 496 | |
| Total investments | | | | | | $ | 1,588 | | | $ | 1,157 | |
(a) Investments with readily determinable values include $40 million as of December 31, 2021 that were included in prepaid expense and other current assets. Investments without readily determinable fair values include $10 million as of December 31, 2022 that were included in prepaid expenses and other current assets.
Equity Method Investments
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 were not material for the years ended December 31, 2022, 2021 and 2020.
During the year ended December 31, 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. The Company has determined the joint venture is a VIE and 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. As of December 31, 2022, the carrying value of the joint venture was $96 million.
As of December 31, 2022, the Company’s maximum exposure for all its unconsolidated VIEs, including the investment carrying values and unfunded contractual commitments made on behalf of VIEs, was approximately $744 million. The Company’s maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $720 million and $126 million as of December 31, 2022 and 2021, respectively. The Company’s portion of VIE operating results for the years ended December 31, 2022, 2021 and 2020 was not material and is included in loss from equity investees, net, on the consolidated statements of operations.
Investments with Readily Determinable Fair Value
The gains and losses related to the Company's investments with readily determinable fair values for the years ended December 31, 2022, 2021 and 2020 are summarized in the table below (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Net (losses) gains recognized during the period on equity securities | | $ | (78) | | | $ | 9 | | | $ | 129 | |
| Less: Net gains recognized on equity securities sold | | — | | | 15 | | | 101 | |
| Unrealized (losses) gains recognized during reporting period on equity securities still held at the reporting date | | $ | (78) | | | $ | (6) | | | $ | 28 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Investments Without Readily Determinable Fair Values Assessed Under the Measurement Alternative
During 2022, the Company concluded that its other equity method investments without readily determinable fair values had decreased $142 million 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 as a result of observable price change is recorded in other income (expense), net on the consolidated statements of operations. (See Note 18). As of December 31, 2022, the Company had recorded cumulative impairments of $229 million for its equity method investments without readily determinable fair values.
NOTE 11. DEBT
The table below presents the components of outstanding debt (in millions). | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | Weighted-Average
Interest Rate as of
December 31, 2022 | | 2022 | | 2021 |
| Term loans with maturities of 3 years or less | | 5.42 | % | | $ | 4,000 | | | $ | — | |
| Floating rate senior notes with maturities of 5 years or less | | 5.08 | % | | 500 | | | — | |
| Senior notes with maturities of 5 years or less | | 3.65 | % | | 12,759 | | | 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 | | | | 49,276 | | | 15,187 | |
| Unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting, net | | | | (277) | | | (428) | |
| Debt, net of unamortized discount, premium, debt issuance costs, and fair value adjustments for acquisition accounting | | | | 48,999 | | | 14,759 | |
| Current portion of debt | | | | (365) | | | (339) | |
| Noncurrent portion of debt | | | | $ | 48,634 | | | $ | 14,420 | |
During the year ended December 31, 2022, in connection with the Merger, the Company assumed $41.5 billion of senior notes (at par value) and term loans.
During the year ended December 31, 2022, the Company repaid $6.0 billion of aggregate principal amount outstanding of its term loans prior to the due dates of October 2023 and April 2025 and repaid in full at maturity $327 million of aggregate principal amount outstanding of its 2.375% Euro Denominated Senior Notes due March 2022. In addition, the Company redeemed in full and prior to maturity all $192 million of aggregate principal amount outstanding of its 3.250% senior notes due in 2023 and all $796 million of aggregate principal amount outstanding of its 2.950% senior notes due 2023 (collectively the “2023 Notes”). The 2023 Notes were redeemed in December 2022 for an aggregate redemption price of $988 million, plus accrued interest.
For the year ended December 31, 2021, the Company redeemed in full and prior to maturity all $168 million of aggregate principal amount outstanding of 3.300% Senior Notes due May 2022 and $62 million of aggregate principal amount outstanding of its 3.500% Senior Notes due June 2022 (collectively, the “2022 Notes”). The 2022 Notes were redeemed in July 2021 for an aggregate redemption price of $235 million, plus accrued interest. In addition, the Company redeemed in full all $335 million of aggregate principal amount outstanding of its 4.375% Senior Notes due June 2021 (the “2021 Notes”). The 2021 Notes were redeemed in March 2021 for an aggregate redemption price of $339 million, plus accrued interest.
The redemptions during 2022 and 2021 resulted in an immaterial loss on extinguishment of debt.
As of December 31, 2022, 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 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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, among DCL, the Company, certain lenders from time to time party thereto, and Bank of America, N.A., as administrative agent. 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 the 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 December 31, 2022 and 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 December 31, 2022, DCL and WarnerMedia Holdings, Inc. were in compliance with all covenants and there were no events of default under the Credit Agreements.
Long-term Debt Repayment Schedule
The following table presents a summary of scheduled debt and estimated interest payments, excluding the revolving credit facility and commercial paper borrowings, for the next five years based on the amount of the Company's debt outstanding as of December 31, 2022 (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2023 | | 2024 | | 2025 | | 2026 | | 2027 | | Thereafter |
| Long-term debt repayments | | $ | 363 | | | $ | 4,267 | | | $ | 7,147 | | | $ | 789 | | | $ | 4,693 | | | $ | 32,017 | |
| Interest payments | | $ | 2,267 | | | $ | 2,183 | | | $ | 1,870 | | | $ | 1,730 | | | $ | 1,634 | | | $ | 25,853 | |
NOTE 12. LEASES
The Company has operating and finance leases for transponders, office space, studio facilities, and other equipment. The Company’s leases were reflected in the Company’s consolidated balance sheets as follows (in millions).
| | | | | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Operating Leases | Location on Balance Sheet | | | | |
| Operating lease right-of-use assets | Other noncurrent assets | | $ | 3,189 | | | $ | 535 | |
| | | | | |
| Operating lease liabilities (current) | Accrued liabilities | | $ | 345 | | | $ | 62 | |
| Operating lease liabilities (noncurrent) | Other noncurrent liabilities | | 2,990 | | | 567 | |
| Total operating lease liabilities | | | $ | 3,335 | | | $ | 629 | |
| | | | | |
| Finance Leases | | | | | |
| Finance lease right-of-use assets | Property and equipment, net | | $ | 244 | | | $ | 249 | |
| | | | | |
| Finance lease liabilities (current) | Accrued liabilities | | $ | 82 | | | $ | 58 | |
| Finance lease liabilities (noncurrent) | Other noncurrent liabilities | | 186 | | | 197 | |
| Total finance lease liabilities | | | $ | 268 | | | $ | 255 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Weighted average remaining lease term (in years): | | | | |
| Operating leases | | 12 | | 12 |
| Finance leases | | 5 | | 5 |
| | | | |
| Weighted average discount rate | | | | |
| Operating leases | | 4.13 | % | | 2.94 | % |
| Finance leases | | 3.23 | % | | 3.57 | % |
The Company’s 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 cancellable prior to their expiration. In conjunction with the Merger, the Company acquired $2,493 million and $47 million of operating and finance lease right-of-use assets, respectively.
The components of lease cost were as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| Operating lease cost | | $ | 372 | | | $ | 103 | |
| | | | |
| Finance lease cost: | | | | |
| Amortization of right-of-use assets | | $ | 78 | | | $ | 61 | |
| Interest on lease liabilities | | 8 | | | 7 | |
| Total finance lease cost | | $ | 86 | | | $ | 68 | |
| | | | |
| Variable lease cost | | $ | 66 | | | $ | 7 | |
| Total lease cost | | $ | 524 | | | $ | 178 | |
Supplemental cash flow information related to leases was as follows (in millions):
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | |
| Operating cash flows from operating leases | | $ | (360) | | | $ | (107) | |
| Operating cash flows from finance leases | | $ | (15) | | | $ | (7) | |
| Financing cash flows from finance leases | | $ | (70) | | | $ | (65) | |
| | | | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | |
| Operating leases | | $ | 490 | | | $ | 53 | |
| Finance leases | | $ | 39 | | | $ | 104 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of lease liabilities as of December 31, 2022 were as follows (in millions):
| | | | | | | | | | | | | | |
| | Operating Leases | | Finance Leases |
| 2023 | | $ | 465 | | | $ | 82 | |
| 2024 | | 427 | | | 67 | |
| 2025 | | 367 | | | 49 | |
| 2026 | | 338 | | | 33 | |
| 2027 | | 318 | | | 25 | |
| Thereafter | | 2,389 | | | 26 | |
| Total lease payments | | 4,304 | | | 282 | |
| Less: Imputed interest | | (969) | | | (14) | |
| Total | | $ | 3,335 | | | $ | 268 | |
As of December 31, 2022, the Company has additional leases that have not yet commenced with total minimum lease payments of approximately $474 million, primarily related to facility leases. The remaining leases will commence in fiscal year 2023, have lease terms of 3 to 17 years, and include options to extend the terms for up to 10 additional years.
NOTE 13. DERIVATIVE FINANCIAL INSTRUMENTS
The Company employs a variety of derivative financial instruments to manage its exposure to market risks primarily from changes in foreign currency exchange rates and interest rates. The Company does not enter into or hold derivative financial instruments for speculative trading purposes.
Cash Flow Hedges
The Company is exposed to foreign currency risk related to revenues, production rebates and production expenses. As such, we have entered into foreign exchange forward contracts designated as cash flow hedges to mitigate this risk. These cash flow hedges are carried at fair market value on the Company’s consolidated balance sheets. Hedge effectiveness is assessed using the spot method, with fair market value changes recorded in other comprehensive (loss) income until the hedged item affects earnings. Excluded components, including forward points, are included in current earnings.
The Company is exposed to foreign currency risk associated with its British Pound Sterling denominated debt. During 2022, the Company executed a fixed-to-fixed cross-currency swap to mitigate this risk.
The Company is exposed to interest rate risk associated with future issuances of debt and has unwound the forward starting swap derivatives designated as hedging instruments to mitigate this risk in 2022. The realized gain from these derivatives will remain in other comprehensive (loss) income until the debt is issued during the hedging window, which extends through 2025, and interest payments are made.
Net Investment Hedges
The Company is exposed to foreign currency risk associated with the net assets of non-USD functional entities and entered into fixed-to-fixed cross currency swaps to mitigate this risk. The Company is also exposed to foreign currency risk stemming from foreign denominated debt. In connection with the Merger, the Company acquired Euro denominated debt that was designated as the hedging instrument in a net investment hedge. Additionally, the Company de-designated its British Pound Sterling denominated debt that was previously designated as a net investment hedge. Subsequently, the Company executed the aforementioned fixed-to-fixed cross currency swap to mitigate the foreign currency exchange risk associated with this debt issuance.
No Hedging Designation
Prior to the Merger, the Company was exposed to interest rate risk associated with the expected issuance of debt related to the Merger. Prior to the Merger, the Company unwound all interest rate derivatives entered into during 2021 and entered into new treasury lock derivatives, which were subsequently unwound to mitigate this risk. The Company does not have any interest rate derivatives as of December 31, 2022.
As part of the Merger, the Company acquired deferred compensation plans that have risk related to the fair market 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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Once production spend is completed, the aforementioned forward contracts designated as cash flow hedges for production rebates and production expenses are de-designated. After de-designation, gains and losses on these derivatives directly impact earnings in the same line as the hedged risk.
The following table summarizes the impact of derivative financial instruments on the Company's consolidated balance sheets (in millions). There were no amounts eligible to be offset under master netting agreements as of December 31, 2022 and 2021. The fair value of the Company's derivative financial instruments at December 31, 2022 and 2021 was determined using a market-based approach (Level 2). | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | Fair Value | | | | Fair Value |
| Notional | | Prepaid expenses and other current assets | | Other non-
current assets | | Accrued liabilities | | Other non-
current liabilities | | Notional | | Prepaid expenses and other current assets | | Other non-
current assets | | Accrued liabilities | | Other non-
current liabilities |
| Cash flow hedges: | | | | | | | | | | | | | | | | | | | |
Foreign exchange | $ | 1,382 | | | $ | 49 | | | $ | 35 | | | $ | 42 | | | $ | 25 | | | $ | 777 | | | $ | 14 | | | $ | — | | | $ | 2 | | | $ | — | |
| Cross-currency swaps | 482 | | | 3 | | | 58 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 2,000 | | | 44 | | | — | | | 11 | | | — | |
Net investment hedges: (a) | | | | | | | | | | | | | | | | | | | |
Cross-currency swaps | 1,778 | | | 20 | | | 12 | | | — | | | 73 | | | 3,512 | | | 54 | | | 61 | | | 20 | | | 76 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| No hedging designation: | | | | | | | | | | | | | | | | | | | |
| Foreign exchange | 976 | | | 5 | | | 1 | | | 3 | | | 96 | | | 1,020 | | | — | | | — | | | 34 | | | 66 | |
Cross-currency swaps | 139 | | | 3 | | | — | | | — | | | 3 | | | 139 | | | 3 | | | — | | | — | | | 5 | |
| Interest rate swaps | — | | | — | | | — | | | — | | | — | | | 15,000 | | | 126 | | | 28 | | | 9 | | | 5 | |
| Total return swaps | 291 | | | — | | | — | | | 13 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Total | | | $ | 80 | | | $ | 106 | | | $ | 58 | | | $ | 197 | | | | | $ | 241 | | | $ | 89 | | | $ | 76 | | | $ | 152 | |
(a) Excludes €164 million of euro-denominated notes ($174 million equivalent at December 31, 2022) designated as net investment hedges and £400 million of sterling notes designated as a net investment hedges at December 31, 2021 (dedesignated in 2022). (See Note 11.)
The following table presents the pretax impact of derivatives designated as cash flow hedges on income and other comprehensive (loss) income (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Gains (losses) recognized in accumulated other comprehensive loss: | | | | | | |
| Foreign exchange - derivative adjustments | | $ | 7 | | | $ | 57 | | | $ | 14 | |
| Interest rate - derivative adjustments | | — | | | 112 | | | (124) | |
Gains (losses) reclassified into income from accumulated other comprehensive loss: | | | | | | |
| Foreign exchange - advertising revenue | | 1 | | | 1 | | | 1 | |
| Foreign exchange - distribution revenue | | (1) | | | 4 | | | 30 | |
| Foreign exchange - costs of revenues | | 25 | | | — | | | 2 | |
| | | | | | |
| | | | | | |
| Interest rate - interest expense, net | | (2) | | | (2) | | | 1 | |
| Foreign exchange - other income (expense), net | | — | | | 30 | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
If current fair values of designated cash flow hedges as of December 31, 2022 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 33 years.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table presents the pretax impact of derivatives designated as net investment hedges on other comprehensive (loss) income (in millions). Other than amounts excluded from effectiveness testing, there were no other gains (losses) reclassified from accumulated other comprehensive loss to income during the years ended December 31, 2022, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
| | Amount of gain (loss) recognized in AOCI | | | | | | Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing) |
| | 2022 | | 2021 | | 2020 | | | | | | | | 2022 | | 2021 | | 2020 |
| Cross currency swaps | | $ | 46 | | | $ | 114 | | | $ | (61) | | | | | | | | | Interest expense, net | | $ | 33 | | | $ | 42 | | | $ | 43 | |
| Foreign exchange contracts | | — | | | 5 | | | (2) | | | | | | | | | Other income (expense), net | | — | | | — | | | — | |
| Euro denominated notes (foreign denominated debt) | | 4 | | | — | | | — | | | | | | | | | N/A | | — | | | — | | | — | |
| Sterling notes (foreign denominated debt) | | 112 | | | 6 | | | (20) | | | | | | | | | N/A | | — | | | — | | | — | |
| Total | | $ | 162 | | | $ | 125 | | | $ | (83) | | | | | | | | | | | $ | 33 | | | $ | 42 | | | $ | 43 | |
The following table presents the pretax gains (losses) on derivatives not designated as hedges and recognized in other income (expense), net and selling, general and administrative costs in the consolidated statements of operations (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Interest rate swaps | | $ | 512 | | | $ | (2) | | | $ | — | |
| Cross-currency swaps | | — | | | 8 | | | (10) | |
| Foreign exchange derivatives | | (37) | | | (39) | | | 32 | |
| Equity | | — | | | — | | | 7 | |
Total in other income (expense), net | | $ | 475 | | | $ | (33) | | | $ | 29 | |
| Total return swaps (Selling, general and administrative expense) | | 5 | | | — | | | — | |
| Total | | $ | 480 | | | $ | (33) | | | $ | 29 | |
NOTE 14. FAIR VALUE MEASUREMENTS
Fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants. Assets and liabilities carried at fair value are classified in the following three categories: | | | | | | | | |
| Level 1 | – | Quoted prices for identical instruments in active markets. |
| Level 2 | – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. |
| Level 3 | – | Valuations derived from techniques in which one or more significant inputs are unobservable. |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents assets and liabilities measured at fair value on a recurring basis (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2022 |
| Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | |
| Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 50 | | | $ | — | | | $ | 50 | |
| Equity securities: | | | | | | | | | | |
| Money market funds | | Cash and cash equivalents | | 20 | | | — | | | — | | | 20 | |
| Mutual funds | | Prepaid expenses and other current assets | | 14 | | | — | | | — | | | 14 | |
| Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 1 | | | — | | | 1 | |
| Mutual funds | | Other noncurrent assets | | 243 | | | — | | | — | | | 243 | |
| Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 94 | | | — | | | 94 | |
| Time deposits | | Other noncurrent assets | | — | | | 8 | | | — | | | 8 | |
| Total | | | | $ | 277 | | | $ | 153 | | | $ | — | | | $ | 430 | |
| Liabilities | | | | | | | | | | |
| Deferred compensation plan | | Accrued liabilities | | $ | 73 | | | $ | — | | | $ | — | | | $ | 73 | |
| Deferred compensation plan | | Other noncurrent liabilities | | 590 | | | — | | | — | | | 590 | |
| Total | | | | $ | 663 | | | $ | — | | | $ | — | | | $ | 663 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | December 31, 2021 |
| Category | | Balance Sheet Location | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | |
| Cash equivalents: | | | | | | | | | | |
| Time deposits | | Cash and cash equivalents | | $ | — | | | $ | 426 | | | $ | — | | | $ | 426 | |
| | | | | | | | | | |
| Equity securities: | | | | | | | | | | |
| Money market funds | | Cash and cash equivalents | | 425 | | | — | | | — | | | 425 | |
| | | | | | | | | | |
| Mutual funds | | Prepaid expenses and other current assets | | 12 | | | — | | | — | | | 12 | |
| Company-owned life insurance contracts | | Prepaid expenses and other current assets | | — | | | 1 | | | — | | | 1 | |
| Mutual funds | | Other noncurrent assets | | 215 | | | — | | | — | | | 215 | |
| Company-owned life insurance contracts | | Other noncurrent assets | | — | | | 32 | | | — | | | 32 | |
| Total | | | | $ | 652 | | | $ | 459 | | | $ | — | | | $ | 1,111 | |
| Liabilities | | | | | | | | | | |
| Deferred compensation plan | | Accrued liabilities | | $ | 21 | | | $ | — | | | $ | — | | | $ | 21 | |
| Deferred compensation plan | | Other noncurrent liabilities | | 238 | | | — | | | — | | | 238 | |
| Total | | | | $ | 259 | | | $ | — | | | $ | — | | | $ | 259 | |
Equity securities include money market funds, time deposits, investments in mutual funds held in separate trusts, which are owned as part of the Company’s supplemental retirement plans, and company-owned life insurance contracts. (See Note 17.) The fair value of Level 1 equity securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. Changes in the fair value of the investments are recorded in other (expense) income, net and changes in the deferred compensation liability are recorded in selling, general and administrative expense. Company-owned life insurance contracts are recorded at their cash surrender value, which approximates fair value (Level 2).
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 31, 2022 and 2021. 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 $38.0 billion and $17.2 billion as of December 31, 2022 and 2021, respectively.
The Company’s derivative financial instruments are discussed in Note 13, its investments with readily determinable fair value are discussed in Note 10, and the obligation for its revolving receivable program is discussed in Note 8.
NOTE 15. SHARE-BASED COMPENSATION
The Company has various incentive plans under which PRSUs, RSUs, stock options, and SARs have been issued. In connection with the Merger, AT&T RSUs subject to time or performance based vesting and restricted stock held by WM employees were replaced with WBD RSUs granted on comparable terms (other than any performance based vesting requirements) upon the closing of the Merger, increasing RSU expense, grants and unrecognized compensation expense for the year ended December 31, 2022 compared to the years ended December 31, 2021 and 2020. As of December 31, 2022, the Company has reserved a total of 237 million shares of its common stock for future exercises, vesting, and grants of stock options, stock-settled SARs, PRSUs, and RSUs. Upon exercise or vesting of stock awards, the Company issues new shares from its existing authorized but unissued shares. As of December 31, 2022, there were 173 million shares of common stock in reserves that were available for future issuance under the incentive plans.
Share-Based Compensation Expense
The table below presents the components of share-based compensation expense (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| PRSUs | | $ | 2 | | | $ | 10 | | | $ | 8 | |
| RSUs | | 337 | | | 110 | | | 76 | |
| Stock options | | 71 | | | 58 | | | 30 | |
| SARs | | 2 | | | — | | | (4) | |
| | | | | | |
| Total share-based compensation expense | | $ | 412 | | | $ | 178 | | | $ | 110 | |
| Tax benefit recognized | | $ | 79 | | | $ | 29 | | | $ | 18 | |
Liability-classified share-based compensation awards include certain PRSUs and SARs. The Company recorded total liabilities for cash-settled and other liability-classified share-based compensation awards of $6 million and $22 million as of December 31, 2022 and 2021, respectively. The current portion of the liability for cash-settled and other liability-classified awards was $4 million and $17 million as of December 31, 2022 and 2021, respectively.
Share-Based Award Activity
PRSUs
The table below presents PRSU activity (in millions, except years and weighted-average grant price).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | PRSUs | | Weighted-
Average
Grant
Date Fair Value | | Weighted-Average
Remaining
Contractual
Term
(years) | | Aggregate
Fair
Value |
| Outstanding as of December 31, 2021 | | 0.9 | | | $ | 34.84 | | | 0.0 | | $ | 20 | |
| Granted | | 0.4 | | | $ | 28.11 | | | | | |
| Converted | | (0.6) | | | $ | 32.42 | | | | | $ | 16 | |
| | | | | | | | |
| Outstanding as of December 31, 2022 | | 0.7 | | | $ | 32.80 | | | 0.0 | | $ | 6 | |
| Vested and expected to vest as of December 31, 2022 | | 0.7 | | | $ | 32.80 | | | 0.0 | | $ | 6 | |
| Convertible as of December 31, 2022 | | 0.2 | | | $ | 41.36 | | | 0.0 | | $ | 2 | |
As of December 31, 2022, there was no unrecognized compensation cost related to PRSUs.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RSUs
The table below presents RSU activity (in millions, except years and weighted-average grant price).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
RSUs | | Weighted-
Average
Grant
Date Fair Value | | Weighted-Average
Remaining
Contractual
Term
(years) | | Aggregate
Fair
Value |
| Outstanding as of December 31, 2021 | | 8.1 | | | $ | 35.56 | | | 2.3 | | $ | 192 | |
| Granted | | 33.5 | | | $ | 23.51 | | | | | |
| Vested | | (7.0) | | | $ | 29.31 | | | | | $ | 139 | |
| Forfeited | | (3.4) | | | $ | 25.25 | | | | | |
| Outstanding as of December 31, 2022 | | 31.2 | | | $ | 25.14 | | | 2.3 | | $ | 296 | |
| Vested and expected to vest as of December 31, 2022 | | 31.2 | | | $ | 25.14 | | | 2.3 | | $ | 296 | |
As of December 31, 2022, there was $498 million of unrecognized compensation cost related to RSUs, of which $36 million is related to cash settled RSUs. Stock settled RSUs are expected to be recognized over a weighted-average period of 1.9 years, and cash settled RSUs are expected to be recognized over a weighted-average period of 2.5 years.
Stock Options
The table below presents stock option activity (in millions, except years and weighted-average exercise price).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stock Options | | Weighted-
Average
Exercise
Price | | Weighted-
Average
Remaining
Contractual
Term
(years) | | Aggregate
Intrinsic
Value |
| Outstanding as of December 31, 2021 | | 30.4 | | | $ | 34.93 | | | 5.0 | | $ | 0.4 | |
| Granted | | 0.3 | | | $ | 32.90 | | | | | |
| | | | | | | | |
| Forfeited | | (0.2) | | | $ | 30.46 | | | | | |
| Outstanding as of December 31, 2022 | | 30.5 | | | $ | 34.95 | | | 4.0 | | $ | — | |
| Vested and expected to vest as of December 31, 2022 | | 30.5 | | | $ | 34.95 | | | 4.0 | | $ | — | |
| Exercisable as of December 31, 2022 | | 12.0 | | | $ | 29.87 | | | 2.6 | | $ | — | |
The Company received cash payments from the exercise of stock options totaling $1 million, $159 million, and $8 million during 2022, 2021 and 2020, respectively. As of December 31, 2022, there was $158 million of unrecognized compensation cost related to stock options, which is expected to be recognized over a weighted-average period of 3.3 years.
The fair value of stock options is estimated using the Black-Scholes option-pricing model. The weighted-average assumptions used to determine the fair value of stock options as of the date of grant during 2022, 2021 and 2020 were as follows.
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Risk-free interest rate | | 1.46 | % | | 1.03 | % | | 0.89 | % |
| Expected term (years) | | 5.0 | | 5.9 | | 5.0 |
| Expected volatility | | 42.15 | % | | 42.45 | % | | 31.86 | % |
| Dividend yield | | — | | | — | | | — | |
The weighted-average grant date fair value of options granted during 2022, 2021 and 2020 was $9.60, $14.08 and $7.57, respectively, per option. The total intrinsic value of options exercised during 2022, 2021 and 2020 was $0 million, $145 million and $3 million, respectively.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SARs
The table below presents SAR award activity (in millions, except years and weighted-average grant price).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | SARs | | Weighted-
Average
Grant
Price | | Weighted-
Average
Remaining
Contractual
Term
(years) | | Aggregate
Intrinsic
Value |
| Outstanding as of December 31, 2021 | | 0.9 | | | $ | 22.46 | | | 0.1 | | $ | 1 | |
| | | | | | | | |
| Settled | | (0.9) | | | $ | 22.37 | | | | | $ | 3 | |
| | | | | | | | |
| Outstanding as of December 31, 2022 | | — | | | $ | — | | | 0.0 | | $ | — | |
| | | | | | | | |
Employee Stock Purchase Plan
The ESPP enables eligible employees to purchase shares of WBD common stock through payroll deductions or other permitted means. Unless otherwise determined by the Company’s Compensation Committee, the purchase price for shares offered under the ESPP is 85% of the closing price of WBD common stock on the purchase date. The Company’s board of directors has authorized 8 million shares of WBD common stock to be issued under the ESPP. During the years ended December 31, 2022, 2021 and 2020 the Company issued 526 thousand, 203 thousand and 254 thousand shares under the ESPP, respectively, and received cash totaling $7 million, $6 million and $5 million, respectively.
NOTE 16. INCOME TAXES
The income tax balances as of December 31, 2022 are inclusive of the WM Business as a result of the Merger.
The domestic and foreign components of (loss) income before income taxes were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Domestic | | $ | (8,747) | | | $ | 1,598 | | | $ | 1,916 | |
| Foreign | | (213) | | | (165) | | | (188) | |
| (Loss) income before income taxes | | $ | (8,960) | | | $ | 1,433 | | | $ | 1,728 | |
The components of the provision for income taxes were as follows (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Current: | | | | | | |
| Federal | | $ | 629 | | | $ | 451 | | | $ | 422 | |
| State and local | | 143 | | | 130 | | | 12 | |
| Foreign | | 407 | | | 166 | | | 125 | |
| | 1,179 | | | 747 | | | 559 | |
| Deferred: | | | | | | |
| Federal | | (2,367) | | | (250) | | | (14) | |
| State and local | | (418) | | | 6 | | | (24) | |
| Foreign | | (57) | | | (267) | | | (148) | |
| | (2,842) | | | (511) | | | (186) | |
| Income tax (benefit) expense | | $ | (1,663) | | | $ | 236 | | | $ | 373 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reconciles the Company's effective income tax rates to the U.S. federal statutory income tax rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Pre-tax income at U.S. federal statutory income tax rate | | $ | (1,881) | | | 21 | % | | $ | 301 | | | 21 | % | | $ | 363 | | | 21 | % |
| State and local income taxes, net of federal tax benefit | | (218) | | | 3 | % | | 108 | | | 7 | % | | (10) | | | — | % |
| Effect of foreign operations | | 246 | | | (3) | % | | 25 | | | 2 | % | | 58 | | | 3 | % |
| Preferred stock conversion premium charge | | 166 | | | (2) | % | | — | | | — | % | | — | | | — | % |
| UK Finance Act legislative change | | — | | | — | % | | (155) | | | (11) | % | | (51) | | | (3) | % |
| Noncontrolling interest adjustment | | (17) | | | — | % | | (40) | | | (3) | % | | (29) | | | (2) | % |
| | | | | | | | | | | | |
| Impairment of goodwill | | — | | | — | % | | — | | | — | % | | 25 | | | 2 | % |
| Deferred tax adjustment | | — | | | — | % | | — | | | — | % | | (22) | | | (1) | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Other, net | | 41 | | | — | % | | (3) | | | — | % | | 39 | | | 2 | % |
| Income tax (benefit) expense | | $ | (1,663) | | | 19 | % | | $ | 236 | | | 16 | % | | $ | 373 | | | 22 | % |
Income tax (benefit) expense was $(1,663) million and $236 million, and the Company’s effective tax rate was 19% and 16% for 2022 and 2021, respectively. The decrease in the tax expense for the year ended December 31, 2022, was primarily attributable to a decrease in pre-tax book income, partially offset by an unfavorable tax adjustment related to the 2022 preferred stock conversion transaction expense that was not deductible for tax purposes (see Note 3), as well as the effect of foreign operations, including taxation and allocation of income and losses across multiple foreign jurisdictions. The decrease for the year ended December 31, 2022 was further offset by a deferred tax benefit of $155 million recorded in the year ended December 31, 2021 resulting from the UK Finance Act 2021 enacted in June 2021.
Income tax expense was $236 million and $373 million, and the Company's effective tax rate was 16% and 22% for 2021 and 2020, respectively. The decrease in income tax expense for the year ended December 31, 2021 was primarily attributable to a decrease in pre-tax book income and an increase in the deferred tax benefit from the UK Finance Act 2021 that was enacted in June 2021. Those decreases were partially offset by an increase in the state and local income tax expense recorded in 2021.
Components of deferred income tax assets and liabilities were as follows (in millions).
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Deferred income tax assets: | | | | |
| Accounts receivable | | $ | (78) | | | $ | 8 | |
| Tax attribute carry-forward | | 2,557 | | | 445 | |
| | | | |
| Accrued liabilities and other | | 1,274 | | | 548 | |
| Total deferred income tax assets | | 3,753 | | | 1,001 | |
| Valuation allowance | | (1,849) | | | (305) | |
| Net deferred income tax assets | | 1,904 | | | 696 | |
| Deferred income tax liabilities: | | | | |
| Intangible assets | | (9,509) | | | (395) | |
| Content rights | | (1,389) | | | (138) | |
| Equity method and other investments in partnerships | | (522) | | | (413) | |
| Noncurrent portion of debt | | (6) | | | (87) | |
| | | | |
| Other | | (803) | | | (133) | |
| Total deferred income tax liabilities | | (12,229) | | | (1,166) | |
| Net deferred income tax liabilities | | $ | (10,325) | | | $ | (470) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2022, the tax attribute carry-forward balance includes $1,105 million of net operating loss deferred tax assets established in Luxembourg during the year. Prior to 2022, the Company concluded that the likelihood of utilizing these net operating losses was remote and the deferred tax assets associated with these operating losses were worthless, leading to no deferred tax assets established for these net operating losses. However, as a result of recent changes in the company’s global tax profile upon the Merger, the Company believes the likelihood that these net operating losses would be utilized is no longer remote and has established deferred tax assets of $1,105 million during the year ended December 31, 2022 for the cumulative balance of these net operating losses. The Company also recorded a full valuation allowance of $1,105 million to offset the associated deferred tax assets after weighing all available evidence for realizability.
The Company’s net deferred income tax assets and liabilities were reported on the consolidated balance sheets as follows (in millions).
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| Noncurrent deferred income tax assets (included within other noncurrent assets) | | $ | 689 | | | $ | 755 | |
| Deferred income tax liabilities | | (11,014) | | | (1,225) | |
| Net deferred income tax liabilities | | $ | (10,325) | | | $ | (470) | |
The Company’s loss carry-forwards were reported on the consolidated balance sheets as follows (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Federal | | State | | Foreign |
| Loss carry-forwards | | $ | 129 | | | $ | 1,194 | | | $ | 7,842 | |
| Deferred tax asset related to loss carry-forwards | | 27 | | | 61 | | | 1,948 | |
| Valuation allowance against loss carry-forwards | | (6) | | | (58) | | | (1,477) | |
| Earliest expiration date of loss carry-forwards | | 2028 | | 2023 | | 2023 |
A reconciliation of the beginning and ending amounts of unrecognized tax benefits (without related interest and penalty amounts) is as follows (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | 420 | | | $ | 348 | | | $ | 375 | |
| Additions based on tax positions related to the current year | | 302 | | | 68 | | | 31 | |
| Additions for tax positions of prior years | | 35 | | | 64 | | | 4 | |
| Additions for tax positions acquired in business combinations | | 1,353 | | | — | | | — | |
| Reductions for tax positions of prior years | | (114) | | | (27) | | | (5) | |
| Settlements | | (20) | | | (5) | | | (9) | |
| Reductions due to lapse of statutes of limitations | | (34) | | | (25) | | | (51) | |
| Changes due to foreign currency exchange rates | | (13) | | | (3) | | | 3 | |
| Ending balance | | $ | 1,929 | | | $ | 420 | | | $ | 348 | |
On April 8, 2022, the Company completed its Merger with the WM Business. In connection with the Merger, the Company entered into a tax matters agreement (“TMA”) with AT&T. Pursuant to the TMA, the Company is responsible for tax liabilities of the WM Business related to the periods prior to AT&T's ownership of the WM Business (June 14, 2018), and AT&T is responsible for tax liabilities of the WM Business related to the period for which they owned the WM Business (June 15, 2018 through April 8, 2022). The Company is indemnified by AT&T for any tax liabilities of the WM Business arising for the period June 15, 2018 through April 8, 2022. As of December 31, 2022, the Company has recorded reserves for uncertain tax positions and the associated interest and penalties payable related to the WM Business of $1,353 million and $322 million, respectively, through purchase accounting. Indemnification receivables of $388 million were also recorded through purchase accounting during the year ended December 31, 2022.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
With respect to uncertain tax positions related to jurisdictions that have joint and several liability among members of the AT&T tax filing group during the AT&T ownership period, the Company recognizes only the amount they expect to pay to the taxing authorities after considering the TMA with AT&T and AT&T’s ability to settle any disputed positions with the taxing authorities. As of December 31, 2022, the Company has not recorded any liabilities for uncertain tax positions or indemnification receivables related to matters that were attributable to jurisdictions that have joint and several liability among members of the AT&T filing group since AT&T was determined to be the primary obligor.
The balances as of December 31, 2022, 2021 and 2020 included $1,929 million, $420 million, and $348 million, respectively, of unrecognized tax benefits that, if recognized, would reduce the Company’s income tax expense and effective tax rate after giving effect to interest deductions and offsetting benefits from other tax jurisdictions. The increase in the reserve for unrecognized tax benefits for the year ended December 31, 2022 was primarily attributable to the Merger.
The Company and its subsidiaries file income tax returns in the U.S. and various state and foreign jurisdictions. The Company is currently under audit by the Internal Revenue Service for its 2011 to 2019 consolidated federal income tax returns. It is difficult to predict the final outcome or timing of resolution of any particular tax matter. With few exceptions, the Company is no longer subject to audit by any jurisdiction for years prior to 2008. Adjustments that arose from the completion of audits for certain tax years have been included in the change in uncertain tax positions in the table above.
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 $316 million within the next twelve months as a result of ongoing audits, foreign judicial proceedings, lapses of statutes of limitations, or regulatory developments.
As of December 31, 2022, 2021 and 2020, the Company had accrued approximately $413 million, $60 million, and $53 million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The increase in the accrual for interest and penalties payable at December 31, 2022 is primarily attributable to the Merger. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
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.
In August 2022, the U.S. government enacted the Inflation Reduction Act (“IRA”), which, among other changes, created a new corporate alternative minimum tax (“CAMT”) of 15% for corporations whose average annual adjusted financial statement income for any consecutive 3 tax year periods ending after December 31, 2021, and preceding the tax year exceeds $1 billion, and a 1% excise tax on stock repurchases made by publicly traded U.S. corporations. The effective date of these provisions was January 1, 2023. The Company will continue to monitor for additional IRA guidance to determine whether there is a material impact to the Company’s financial statements.
NOTE 17. RETIREMENT SAVINGS PLANS
The Company has defined contribution, defined benefit, and other savings plans for the benefit of its employees that meet eligibility requirements.
Defined Contribution Plans
Eligible employees may contribute a portion of their compensation to the plans, which may be subject to certain statutory limitations. For these plans, the Company also makes contributions, including discretionary contributions, subject to plan provisions, which vest immediately. The Company made total contributions of $188 million, $50 million, and $47 million for the years ended December 31, 2022, 2021 and 2020, respectively. The Company’s contributions were recorded in cost of revenues and selling, general and administrative expense on the consolidated statements of operations.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Executive Deferred Compensation Plans
The Company has deferred compensation plans through which certain senior-level employees may elect to defer a portion of their eligible compensation. Distributions from the deferred compensation plans are generally made following separation from service or other events as specified in the plan. While these plans are unfunded, the Company has established separate rabbi trusts used to provide for certain of these benefits. The accounts of the separate rabbi trusts are included in the Company’s consolidated financial statements. The investments are included in prepaid expenses and other current assets and other noncurrent assets on the consolidated balance sheets. The deferred compensation obligation is included in accrued liabilities and other noncurrent liabilities in the consolidated balance sheets. The values of the investments and deferred compensation obligation are recorded at fair value. Changes in the fair value of the investments are included as a component of other income (expense), net, on the consolidated statements of operations. Changes in the fair value of the deferred compensation obligation are recorded in earnings as a component of selling, general and administrative expenses on the consolidated statements of operations. (See Note 14 and Note 18.)
Multiemployer Benefit Plans
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of our union-represented employees. The risks of participating in these multiemployer pension plans are different from single-employer pension plans in that (i) contributions made by the Company to the multiemployer pension plans may be used to provide benefits to employees of other participating employers; (ii) if the Company chooses to stop participating in certain of these multiemployer pension plans, it may be required to pay those plans an amount based on the underfunded status of the plan, which is referred to as a withdrawal liability; and (iii) actions taken by a participating employer that lead to a deterioration of the financial health of a multiemployer pension plan may result in the unfunded obligations of the multiemployer pension plan being borne by its remaining participating employers. While no multiemployer pension plan that the Company contributed to is individually significant to it, the Company was listed on certain Form 5500s as providing more than 5% of total contributions based on the current information available. The financial health of a multiemployer plan is indicated by the zone status, as defined by the Pension Protection Act of 2006, which represents the funded status of the plan as certified by the plan’s actuary. In general, plans in the red zone are less than 65% funded, plans in the yellow zone are between 65% and 80% funded, and plans in the green zone are at least 80% funded. We are listed as providing more than 5% of total contributions to the Motion Picture Industry Pension Plan (the “MPI Plan”) and the Directors Guild of America Producer Pension Plan (the “DGA Plan”). The DGA Plan was funded at 90.7% for the most recent available plan year. The MPI Plan and the Screen Actors Guild – Producers Pension Plan were funded at 68.9% and 74.7%, respectively, for the most recent available plan year, but neither of these plans was considered to be in endangered, critical, or critical and declining status in the most recent plan year. Total contributions made by us to multiemployer pension plans for the year ended December 31, 2022 were $112 million. Our share of contributions to plans whose zone status is below green is not material. Since these plans were acquired as part of the Merger, there were no contributions for the years ended December 31, 2021 and 2020.
We also contribute to various other multiemployer benefit plans that provide health and welfare benefits to active and retired participants. Total contributions made by us to these other multiemployer benefit plans for the year ended December 31, 2022 were $182 million.
Defined Benefit Plans
The Company has defined benefit pension plans that cover certain U.S. based employees (the “U.S. Pension Plans”) and a non-qualified unfunded Supplemental Executive Retirement Plan (“SERP”) that provides defined pension benefits to eligible executives.
Under the existing Scripps Networks Interactive pension plan, no additional service benefits have been earned by participants since December 31, 2009, and the amount of eligible compensation that is used to calculate a plan participant’s pension benefit includes compensation earned by the employee through December 31, 2019, after which time all plan participants have a frozen pension benefit.
In connection with the Merger, the Company assumed four U.S. nonqualified pension plans that are noncontributory and unfunded and several non-U.S. pension plans. The acquired U.S. pension plans consist of the Time Warner Excess Benefit Plan (the “Excess plan”), the Retirement Accumulation Plan (“RAP”), the Supplemental Executive Retirement Plan (“SERP”) and the Wealth Accumulation Plan (“WAP”). The acquired U.S. pension plans were closed to new entrants during 2010. The Excess plan and RAP are both frozen to new benefit accruals. SERP and WAP only have retirees remaining. The pension formula for the Excess plan captured pay above compensation limits or benefit limits. RAP is a cash balance type formula and now provides only interest credits.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company also holds net assets and net liabilities on behalf of other U.S. and non-U.S. pension plans. The plan provisions vary by plan and by country. Some of these plans are unfunded and all are noncontributory. Assets are recorded in other noncurrent assets, and liabilities are recorded in accrued liabilities and other noncurrent liabilities on the consolidated balance sheets.
Discount rates, long-term rate of return on plan assets, increases in compensation levels, and mortality rates are key assumptions used in determining the benefit obligation. The table below describes how the assumptions are determined.
| | | | | | | | |
| Assumption | | Description |
| Discount rate | | Based on a bond portfolio approach that includes high-quality debt instruments with maturities matching the Company's expected benefit payments from the plans. |
| Long-term rate of return on plan assets | | Based on the weighted-average expected rate of return and capital market forecasts for each asset class employed and also considers the Company's historical compounded return on plan assets for 10 and 15-year periods. |
| Increase in compensation levels | | Based on past experience and the near-term outlook. |
| Mortality | | Various mortality tables adjusted and projected using mortality improvement rates. |
Net Periodic Pension Cost
Expense recognized in relation to the Pension Plans and SERP is based upon actuarial valuations. Inherent in those valuations are key assumptions, including discount rates and, where applicable, expected returns on assets. The service cost component of net periodic pension cost is recorded in operating expenses on the consolidated statements of operations, while the remaining components are recorded in other income (expense), net. Net periodic pension cost was not material for the years ended December 31, 2022, 2021 and 2020.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Obligations and Funded Status
The following tables present information about plan assets and obligations of the Pension Plan and SERP based upon a valuation as of December 31, 2022 and 2021, respectively (in millions).
| | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 |
| | Pension Plan | | SERP |
| Accumulated benefit obligation | | $ | 746 | | | $ | 16 | |
| Change in projected benefit obligation: | | | | |
| Projected benefit obligation at beginning of year | | $ | 82 | | | $ | 22 | |
| Amounts assumed upon acquisition (See Note 4) | | 907 | | | 1 | |
| Service cost | | 2 | | | — | |
| Interest cost | | 21 | | | — | |
| Benefits paid | | (35) | | | (1) | |
| Actuarial gains | | (225) | | | (6) | |
| | | | |
| Settlement charges | | (6) | | | — | |
| Projected benefit obligation at end of year | | 746 | | | 16 | |
| Plan assets: | | | | |
| Fair value at beginning of year | | 63 | | | — | |
| Amounts assumed upon acquisition (See Note 4) | | 756 | | | — | |
| Actual return on plan assets | | (268) | | | — | |
| Company contributions | | 23 | | | 1 | |
| Benefits paid | | (35) | | | (1) | |
| Settlement charges | | (6) | | | — | |
| Fair value at end of year | | 533 | | | — | |
| Under funded status | | $ | (213) | | | $ | (16) | |
| Amounts recognized as assets and liabilities on the consolidated balance sheets: | | | | |
| Other noncurrent assets | | $ | 92 | | | $ | — | |
| Accrued liabilities | | (27) | | | (2) | |
| Other noncurrent liabilities | | (278) | | | (14) | |
| Total | | $ | (213) | | | $ | (16) | |
| Amounts recognized in accumulated other comprehensive (gain) loss consist of: | | | | |
| Net loss (gain) | | $ | 97 | | | $ | (3) | |
The weighted average assumptions used to determine benefit obligations were as follows.
| | | | | | | | | | | |
| December 31, 2022 |
| Pension | | SERP |
| Discount rate | 4.70 | % | | 5.03 | % |
| Rate of compensation increases | 3.11 | % | | — | % |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Pension Plan | | SERP |
| Accumulated benefit obligation | | $ | 82 | | | $ | 22 | |
| Change in projected benefit obligation: | | | | |
| Projected benefit obligation at beginning of year | | $ | 94 | | | $ | 25 | |
| | | | |
| Interest cost | | 2 | | | 1 | |
| Benefits paid | | (1) | | | — | |
| Actuarial gains | | (3) | | | (1) | |
| | | | |
| Settlement charges | | (10) | | | (3) | |
| Projected benefit obligation at end of year | | 82 | | | 22 | |
| Plan assets: | | | | |
| Fair value at beginning of year | | 70 | | | — | |
| Actual return on plan assets | | 1 | | | — | |
| Company contributions | | 3 | | | 3 | |
| Benefits paid | | (1) | | | — | |
| Settlement charges | | (10) | | | (3) | |
| Fair value at end of year | | 63 | | | — | |
| Under funded status | | $ | (19) | | | $ | (22) | |
| Amounts recognized as assets and liabilities on the consolidated balance sheets: | | | | |
| Accrued liabilities | | $ | — | | | $ | (2) | |
| Other noncurrent liabilities | | (19) | | | (20) | |
| Total | | $ | (19) | | | $ | (22) | |
| Amounts recognized in accumulated other comprehensive (gain) loss consist of: | | | | |
| Net loss | | $ | 14 | | | $ | 4 | |
The weighted average assumptions used to determine benefit obligations were as follows.
| | | | | | | | | | | |
| December 31, 2021 |
| Pension | | SERP |
| Discount rate | 2.42 | % | | 2.13 | % |
Rate of compensation increases (a) | N/A | | N/A |
(a) The Scripps Networks Interactive pension plan reached their scheduled freeze date on December 31, 2019.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan Assets
The Company's investment policy is to maximize the total rate of return on plan assets to meet the long-term funding obligations of the pension plans. There are no restrictions on the types of investments held in the pension plans, which are invested using a combination of active management and passive investment strategies. Risk is controlled through diversification among multiple asset classes, managers, styles, and securities. Risk is further controlled both at the manager and asset class levels by assigning return targets and evaluating performance against these targets. The following table presents the pension plans asset allocations by asset category (in millions).
| | | | | | | | | | | | | | |
| | December 31, 2022 |
| Investment Type | | Target | | Actual |
| | | | |
| Equity securities | | 12 | % | | 13 | % |
| Fixed income securities | | 75 | % | | 74 | % |
| | | | |
| Multi-asset credit fund | | 5 | % | | 4 | % |
| Real assets | | 4 | % | | 4 | % |
| Hedge funds | | 2 | % | | 4 | % |
| Cash | | 2 | % | | 1 | % |
| Total | | 100 | % | | 100 | % |
Fair Value Measurements
Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. See Note 14 for a discussion of the fair value hierarchy that prioritizes the inputs to the valuation techniques used to measure fair value (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
| Equity securities | | $ | 69 | | | $ | 34 | | | $ | 35 | | | $ | — | |
| Fixed income securities | | 532 | | | 14 | | | 446 | | | 72 | |
| Multi-asset credit fund | | 21 | | | — | | | 21 | | | — | |
| | | | | | | | |
| Cash | | 5 | | | 5 | | | — | | | — | |
| Total plan assets measured at fair value | | $ | 627 | | | $ | 53 | | | $ | 502 | | | $ | 72 | |
| Assets held at net asset value practical expedient | | | | | | | | |
| Real assets | | $ | 22 | | | | | | | |
| Hedge funds | | 20 | | | | | | | |
| Total assets held at net asset value practical expedient | | $ | 42 | | | | | | | |
| Liabilities: | | | | | | | | |
| Derivatives | | (136) | | | — | | | (136) | | | — | |
| Total plan assets | | $ | 533 | | | | | | | |
The table below sets forth a summary of changes in the fair value of the Level 3 pension assets for the year ended December 31, 2022 (in millions).
| | | | | |
| Fixed income funds |
| Fair value at beginning of year | $ | 98 | |
| Unrealized losses | (26) | |
| |
| Balance at end of year | $ | 72 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
| | | | | | | | |
| Equity Securities | | $ | 48 | | | $ | 48 | | | $ | — | | | $ | — | |
| Fixed income securities | | 12 | | | 12 | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Cash | | 3 | | | 3 | | | — | | | — | |
| | | | | | | | |
| Total plan assets measured at fair value | | $ | 63 | | | $ | 63 | | | $ | — | | | $ | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Estimated Benefit Payments
The following table presents the estimated future benefit payments expected to be paid out for the defined benefits plans over the next ten years (in millions).
| | | | | | | | | | | | | | |
| | Pension Plan | | SERP |
| 2023 | | $ | 46 | | | $ | 2 | |
| 2024 | | 44 | | | 2 | |
| 2025 | | 46 | | | 2 | |
| 2026 | | 45 | | | 2 | |
| 2027 | | 46 | | | 2 | |
| Thereafter | | 238 | | | 4 | |
NOTE 18. SUPPLEMENTAL DISCLOSURES
Property and equipment
Property and equipment consisted of the following (in millions).
| | | | | | | | | | | | | | | | | |
| | | | December 31, |
| | Useful Lives | | 2022 | | 2021 |
| | | | | |
Equipment, furniture, fixtures and other (a) | 3 - 5 years | | $ | 1,682 | | | $ | 1,139 | |
| Capitalized software costs | 2 - 5 years | | 1,855 | | | 904 | |
Land, buildings and leasehold improvements (b) | 15- 39 years | | 3,251 | | | 481 | |
| Property and equipment, at cost | | | 6,788 | | | 2,524 | |
| Accumulated depreciation | | | (2,055) | | | (1,329) | |
| | | 4,733 | | | 1,195 | |
| Assets under construction | | | 568 | | | 141 | |
| Property and equipment, net | | | $ | 5,301 | | | $ | 1,336 | |
| | | | | |
(a) Property and equipment includes assets acquired under finance lease arrangements. Assets acquired under finance lease arrangements are amortized using the straight-line method over the lesser of the estimated useful lives of the assets or the terms of the related leases. (See Note 12.) |
| | | | | |
(b) Land has an indefinite life and is not depreciated. Leasehold improvements generally have an estimated useful life equal to the lease term. |
Capitalized software costs are for internal use. The net book value of capitalized software costs was $949 million and $371 million as of December 31, 2022 and 2021, respectively.
Depreciation expense for property and equipment totaled $957 million, $311 million and $267 million for the years ended December 31, 2022, 2021 and 2020, respectively.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prepaid expenses and other current assets
Prepaid expenses and other current assets consisted of the following (in millions).
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Production receivables | $ | 1,231 | | | $ | — | |
| Other current assets | 2,657 | | | 913 | |
| Total prepaid expenses and other current assets | $ | 3,888 | | | $ | 913 | |
Accrued liabilities
Accrued liabilities consisted of the following (in millions).
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| Accrued participation and residuals | $ | 2,986 | | | $ | — | |
| | | |
| Accrued production and content rights payable | 3,153 | | | 776 | |
| Accrued payroll and related benefits | 2,292 | | | 533 | |
| Other accrued liabilities | 3,073 | | | 921 | |
| Total accrued liabilities | $ | 11,504 | | | $ | 2,230 | |
Other income (expense), net
Other income (expense), net, consisted of the following (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| Foreign currency (losses) gains, net | | $ | (150) | | | $ | 93 | | | $ | (115) | |
| Gains (losses) on derivative instruments, net | | 475 | | | (33) | | | 29 | |
| Gain on sale of investment with readily determinable fair value | | — | | | 15 | | | 101 | |
| Change in the value of investments with readily determinable fair value | | (105) | | | (6) | | | 28 | |
| Change in the value of equity investments without readily determinable fair value | | (142) | | | (13) | | | — | |
| Gain on sale of equity method investments | | 195 | | | 4 | | | 2 | |
| Loss on extinguishment of debt | | — | | | (10) | | | (76) | |
| | | | | | |
| Other income (expense), net | | 74 | | | 22 | | | (3) | |
| Total other income (expense), net | | $ | 347 | | | $ | 72 | | | $ | (34) | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Cash Flow Information
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Cash paid for taxes, net | | $ | 1,027 | | | $ | 643 | | | $ | 641 | |
| Cash paid for interest | | 1,539 | | | 664 | | | 673 | |
| Non-cash investing and financing activities: | | | | | | |
| Equity issued for the acquisition of WarnerMedia | | 42,309 | | | — | | | — | |
Receivable from sale of fuboTV Inc. shares | | — | | | — | | | 124 | |
| Non-cash consideration related to the sale of The CW Network | | 126 | | | — | | | — | |
| Accrued consideration for the joint venture with BT | | 90 | | | — | | | — | |
| Accrued purchases of property and equipment | | 66 | | | 34 | | | 48 | |
| Assets acquired under finance lease and other arrangements | | 53 | | | 134 | | | 91 | |
| Equity exchange with Harpo for step acquisition of OWN | | — | | | — | | | 59 | |
| | | | | | |
Cash, Cash Equivalents, and Restricted Cash
| | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, 2022 | | December 31, 2021 |
| Cash and cash equivalents | | | | | | $ | 3,731 | | | $ | 3,905 | |
Restricted cash - other current assets (a) | | | | | | 199 | | | — | |
| Total cash, cash equivalents, and restricted cash | | | | | | $ | 3,930 | | | $ | 3,905 | |
| | | | | | | | |
(a) Restricted cash primarily includes cash posted as collateral related to the Company’s revolving receivables and hedging programs. (See Note 8 and Note 13). |
Assets Held for Sale
As of December 31, 2022, the Company classified its Ranch Lot and Knoxville office building and land as assets held for sale. The Company reclassified $209 million to prepaid expenses and other current assets on the consolidated balance sheet at December 31, 2022 and stopped recording depreciation on the assets. An immaterial write-down to the estimated fair value, less costs to sell, was recorded during the year ended December 31, 2022, and is included in impairment and loss (gain) on disposition and disposal groups in the consolidated statements of operations.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other Comprehensive (Loss) Income
The table below presents the tax effects related to each component of other comprehensive (loss) income and reclassifications made in the consolidated statements of operations (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
|
Pretax | | Tax Benefit (Expense) | |
Net-of-tax | |
Pretax | | Tax Benefit (Expense) | |
Net-of-tax | |
Pretax | | Tax Benefit (Expense) | |
Net-of-tax |
Currency translation adjustments: | | | | | | | | | | | | | | | | | |
| Unrealized gains (losses): | | | | | | | | | | | | | | | | | |
| Foreign currency | $ | (743) | | | $ | 2 | | | $ | (741) | | | $ | (404) | | | $ | 17 | | | $ | (387) | | | $ | 357 | | | $ | 33 | | | $ | 390 | |
| Net investment hedges | 145 | | | (55) | | | 90 | | | 105 | | | (8) | | | 97 | | | (109) | | | 11 | | | (98) | |
Reclassifications: | | | | | | | | | | | | | | | | | |
Gain on disposition | (2) | | | — | | | (2) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | | | | |
Total currency translation adjustments | (600) | | | (53) | | | (653) | | | (299) | | | 9 | | | (290) | | | 248 | | | 44 | | | 292 | |
Derivative adjustments: | | | | | | | | | | | | | | | | | |
Unrealized gains (losses) | 7 | | | (3) | | | 4 | | | 169 | | | (35) | | | 134 | | | (110) | | | 24 | | | (86) | |
| Reclassifications from other comprehensive income to net income | (23) | | | 5 | | | (18) | | | (33) | | | 8 | | | (25) | | | (34) | | | 7 | | | (27) | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Total derivative adjustments | (16) | | | 2 | | | (14) | | | 136 | | | (27) | | | 109 | | | (144) | | | 31 | | | (113) | |
Pension plan and SERP liability: | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Unrealized gains (losses) | (47) | | | 21 | | | (26) | | | 3 | | | (1) | | | 2 | | | (10) | | | 2 | | | (8) | |
Other comprehensive (loss) income adjustments | $ | (663) | | | $ | (30) | | | $ | (693) | | | $ | (160) | | | $ | (19) | | | $ | (179) | | | $ | 94 | | | $ | 77 | | | $ | 171 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes (in millions). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Currency Translation | | Derivative Adjustments | | Pension Plan and SERP Liability | | Accumulated
Other
Comprehensive Income (Loss) |
| December 31, 2019 | | $ | (847) | | | $ | 32 | | | $ | (7) | | | $ | (822) | |
Other comprehensive income (loss) before reclassifications | | 292 | | | (86) | | | (8) | | | 198 | |
Reclassifications from accumulated other comprehensive loss to net income | | — | | | (27) | | | — | | | (27) | |
| Other comprehensive income (loss) | | 292 | | | (113) | | | (8) | | | 171 | |
| | | | | | | | |
| | | | | | | | |
| December 31, 2020 | | (555) | | | (81) | | | (15) | | | (651) | |
| Other comprehensive income (loss) before reclassifications | | (290) | | | 134 | | | 2 | | | (154) | |
Reclassifications from accumulated other comprehensive loss to net income | | — | | | (25) | | | — | | | (25) | |
| Other comprehensive income (loss) | | (290) | | | 109 | | | 2 | | | (179) | |
| | | | | | | | |
| | | | | | | | |
| December 31, 2021 | | (845) | | | 28 | | | (13) | | | (830) | |
| Other comprehensive income (loss) before reclassifications | | (651) | | | 4 | | | (26) | | | (673) | |
Reclassifications from accumulated other comprehensive loss to net income | | (2) | | | (18) | | | — | | | (20) | |
| Other comprehensive income (loss) | | (653) | | | (14) | | | (26) | | | (693) | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| December 31, 2022 | | $ | (1,498) | | | $ | 14 | | | $ | (39) | | | $ | (1,523) | |
NOTE 19. REDEEMABLE NONCONTROLLING INTERESTS
Redeemable noncontrolling interests are presented outside of permanent equity on the Company’s consolidated balance sheets when the put right is outside of the Company's control. Redeemable noncontrolling interests reflected as of the balance sheet date are the greater of the noncontrolling interest balances adjusted for comprehensive income items and distributions or the redemption values remeasured at the period end foreign exchange rates. Adjustments to the carrying amount of redeemable noncontrolling interests to redemption value as a result of changes in exchange rates are reflected in currency translation adjustments, a component of other comprehensive (loss) income. Such currency translation adjustments to redemption value are allocated to the Company’s stockholders only. Redeemable noncontrolling interest adjustments of carrying value to redemption value are reflected in retained earnings. The adjustment of carrying value to the redemption value that reflects a redemption in excess of fair value is included as an adjustment to income from continuing operations available to the Company’s stockholders in the calculation of earnings per share. (See Note 3.) The table below summarizes the Company's redeemable noncontrolling interests balances (in millions).
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Discovery Family | | $ | 173 | | | $ | 213 | |
| MotorTrend Group LLC (“MTG”) | | 112 | | | 114 | |
| Other | | 33 | | | 36 | |
| Total | | $ | 318 | | | $ | 363 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below presents the reconciliation of changes in redeemable noncontrolling interests (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 | | 2020 |
| Beginning balance | | $ | 363 | | | $ | 383 | | | $ | 442 | |
| | | | | | |
| | | | | | |
| Cash distributions to redeemable noncontrolling interests | | (50) | | | (11) | | | (31) | |
| Equity exchange with Harpo for step acquisition of OWN | | — | | | — | | | (50) | |
| Redemption of redeemable noncontrolling interest | | — | | | (26) | | | — | |
| Comprehensive income adjustments: | | | | | | |
Net income attributable to redeemable noncontrolling interests | | 6 | | | 53 | | | 12 | |
| | | | | | |
| Currency translation on redemption values | | (5) | | | (5) | | | 3 | |
| Retained earnings adjustments: | | | | | | |
| Adjustments of carrying value to redemption value (redemption value does not equal fair value) | | — | | | (16) | | | — | |
| Adjustments of carrying value to redemption value (redemption value equals fair value) | | 4 | | | (15) | | | 7 | |
| | | | | | |
| Ending balance | | $ | 318 | | | $ | 363 | | | $ | 383 | |
The significant arrangements for redeemable noncontrolling interests are described below:
Discovery Family
Hasbro Inc. (“Hasbro”) had the right to put the entirety of its remaining 40% interest in Discovery Family to the Company at any time during the one-year period beginning December 31, 2021, or in the event the Company’s performance obligation related to Discovery Family is not met. Embedded in the redeemable noncontrolling interest is also a Warner Bros. Discovery call right that is exercisable for one year after December 31, 2021. Neither the put nor call was exercised in 2022. In December 2022, Hasbro and WBD signed an amendment to the previous agreement extending the put-call election to the period January 31, 2025 to March 31, 2025. Upon the exercise of the put or call options, the price to be paid for the redeemable noncontrolling interest is a function of the then-current fair market value of the redeemable noncontrolling interest, to which certain discounts and redemption floor values may apply in specified situations depending upon the party exercising the put or call and the basis for the exercise of the put or call.
MTG
GoldenTree acquired a put right exercisable during 30-day windows beginning on each of March 25, 2021, September 25, 2022 and March 25, 2024, that requires the Company to either purchase all of GoldenTree's noncontrolling 32.5% interest in the joint venture at fair value or participate in an initial public offering for the joint venture. In 2022, GoldenTree exercised its irrevocable put right and the Company is required to purchase GoldenTree’s 32.5% noncontrolling interest. The Company performed an analysis of the redemption value as of December 31, 2022, and both parties have begun the process of determining a fair market value based on their own appraisals. The Company does not expect this process, which is one of potentially several steps to agreeing to a redemption value, will be completed until later in 2023, a date that is not certain. Accordingly, there has been no change in the classification of MTG as mezzanine equity since the date of the put is not certain.
NOTE 20. NONCONTROLLING INTEREST
The Company has a controlling interest in the TV Food Network Partnership (the “Partnership”), which includes the Food Network and Cooking Channel. Food Network and Cooking Channel are operated and organized under the terms of the Partnership. The Company holds 80% of the voting interest and 68.7% of the economic interest in the Partnership. During the fourth quarter of 2022, the Partnership agreement was extended and specifies a dissolution date of December 31, 2023. If the term of the Partnership is not extended prior to the dissolution date of December 31, 2023, the Partnership agreement permits the Company, as holder of 80% of the applicable votes, to reconstitute the Partnership and continue its business. If for some reason the Partnership is not continued, it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests. Ownership interests attributable to the noncontrolling owner are presented as noncontrolling interests on the Company's consolidated financial statements. Under the terms of the Partnership agreement, the noncontrolling owner cannot force a redemption outside of the Company’s control. As such, the noncontrolling interests in the Partnership are reflected as a component of permanent equity in the Company's consolidated financial statements.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. RELATED PARTY TRANSACTIONS
In the normal course of business, the Company enters into transactions with related parties. Related parties include entities that share common directorship, such as Liberty Global plc (“Liberty Global”), Liberty Broadband Corporation (“Liberty Broadband”) and their subsidiaries (collectively the “Liberty Group”). The Company’s board of directors includes Dr. John Malone, who is Chairman of the Board of Liberty Global and Liberty Broadband and beneficially owns approximately 30% and 48% of the aggregate voting power with respect to the election of directors of Liberty Global 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.
The table below presents a summary of the transactions with related parties (in millions).
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Revenues and service charges: | | | | | | |
| Liberty Group | | $ | 1,758 | | | $ | 671 | | | $ | 686 | |
| Equity method investees | | 464 | | | 253 | | | 223 | |
| Other | | 311 | | | 169 | | | 103 | |
| Total revenues and service charges | | $ | 2,533 | | | $ | 1,093 | | | $ | 1,012 | |
| | | | | | |
| Expenses | | $ | 406 | | | $ | 238 | | | $ | 244 | |
| Distributions to noncontrolling interests and redeemable noncontrolling interests | | $ | 300 | | | $ | 251 | | | $ | 254 | |
The table below presents receivables due from and payables due to related parties (in millions).
| | | | | | | | | | | | | | |
| | December 31, |
| | 2022 | | 2021 |
| Receivables | | $ | 338 | | | $ | 172 | |
| Payables | | $ | 38 | | | $ | 23 | |
In September 2022, the Company sold 75% of its interest in The CW Network to Nexstar, a related party, and recorded an immaterial gain not included in the table above. (See Note 4.)
NOTE 22. COMMITMENTS, CONTINGENCIES, AND GUARANTEES
Commitments
In the normal course of business, the Company enters into various commitments, which primarily include programming and talent arrangements, operating and finance leases (see Note 12), arrangements to purchase various goods and services, long-term debt (see Note 11), pension funding and payments (see Note 17), and future funding commitments to equity method investees (see Note 10) (in millions).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ending December 31, | | Content | | Other Purchase Obligations | | Other Employee Obligations | | Total |
| 2023 | | $ | 7,969 | | | $ | 1,597 | | | $ | 453 | | | $ | 10,019 | |
| 2024 | | 5,484 | | | 756 | | | 253 | | | 6,493 | |
| 2025 | | 3,966 | | | 352 | | | 112 | | | 4,430 | |
| 2026 | | 2,566 | | | 161 | | | 52 | | | 2,779 | |
| 2027 | | 2,448 | | | 90 | | | 20 | | | 2,558 | |
| Thereafter | | 7,299 | | | 91 | | | 9 | | | 7,399 | |
| Total | | $ | 29,732 | | | $ | 3,047 | | | $ | 899 | | | $ | 33,678 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Content purchase obligations include commitments and liabilities associated with third-party producers and sports associations for content that airs on our television networks and DTC services. Production and licensing contracts generally require the purchase of a specified number of episodes, payments during production or over the term of a license, and include both programs that have been delivered and are available for airing and programs that have not yet been produced or sporting events that have not yet taken place. The commitments disclosed above exclude content liabilities recognized on the consolidated balance sheets.
Other purchase obligations include agreements with certain vendors and suppliers for the purchase of goods and services whereby the underlying agreements are enforceable, legally binding, and specify all significant terms. Significant purchase obligations include transmission services, television rating services, marketing commitments and research, equipment purchases, and information technology and other services. Some of these contracts do not require the purchase of fixed or minimum quantities and generally may be terminated with a 30-day to 60-day advance notice without penalty, and are not included in the table above past the 30-day to 60-day advance notice period. The commitments disclosed above exclude liabilities recognized on the consolidated balance sheets. Other purchase obligations also includes future funding commitments to equity method investees. Although the Company had funding commitments to equity method investees as of December 31, 2022, the Company may also provide uncommitted additional funding to its equity method investments in the future. (See Note 10.)
Other employee obligations are primarily related to employment agreements with creative talent for the WM broadcast networks.
Six Flags Guarantee
In connection with WM’s former investment in the Six Flags (as defined below) theme parks located in Georgia and Texas (collectively, the “Parks”), in 1997, certain subsidiaries of the Company agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including annual payments made to the Parks or to the limited partners and additional obligations at the end of the respective terms for the Partnerships in 2027 and 2028 (the “Guaranteed Obligations”). The aggregate gross undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) are $544 million. To date, no payments have been made by the Company pursuant to the Six Flags Guarantee.
Six Flags Entertainment Corporation (formerly known as Six Flags, Inc. and Premier Parks Inc.) (“Six Flags”), which has the controlling interest in the Parks, has agreed, pursuant to a subordinated indemnity agreement (the “Subordinated Indemnity Agreement”), to guarantee the performance of the Guaranteed Obligations when due and to indemnify the Company, among others, if the Six Flags Guarantee is called upon. If Six Flags defaults on its indemnification obligations, the Company has the right to acquire control of the managing partner of the Parks. Six Flags’ obligations to the Company are further secured by its interest in all limited partnership units held by Six Flags.
Based the Company’s evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, it is unable to predict the loss, if any, that may be incurred under the Guaranteed Obligations, and no liability for the arrangements has been recognized as of December 31, 2022. Because of the specific circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of financial guarantee, the Company is unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.
Contingencies
Other Contingent Commitments
Other contingent commitments primarily include contingent payments for post-production term advance obligations on certain co-financing arrangements, as well as operating lease commitment guarantees, letters of credit, bank guarantees, and surety bonds, which generally support performance and payments for a wide range of global contingent and firm obligations, including insurance, litigation appeals, real estate leases, and other operational needs.
The Company's other contingent commitments at December 31, 2022 were $283 million, with $279 million estimated to be due in 2026. For other contingent commitments where payment obligations are outside our control, the timing of amounts represents the earliest period in which the payment could be requested. For the remaining other contingent commitments, the timing of the amounts presented represents when the maximum contingent commitment will expire but does not mean that we expect to incur an obligation to make any payments within that time period. In addition, these amounts do not reflect the effects of any indemnification rights we might possess.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Put Rights
The Company has granted put rights to certain consolidated subsidiaries, but the Company is unable to reasonably predict the ultimate amount or timing of any payment. (See Note 19.)
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.
Guarantees
There were no guarantees recorded under ASC 460 as of December 31, 2022 and 2021.
In the normal course of business, the Company may provide or receive indemnities that are intended to allocate certain risks associated with business transactions. Similarly, the Company may remain contingently liable for certain obligations of a divested business in the event that a third party does not fulfill its obligations under an indemnification obligation. The Company records a liability for its indemnification obligations and other contingent liabilities when probable and estimable. There were no material amounts for indemnifications or other contingencies recorded as of December 31, 2022 and 2021.
NOTE 23. REPORTABLE SEGMENTS
The Company’s operating segments are determined based on: (i) financial information reviewed by its chief operating decision maker, the Chief Executive Officer (“CEO”), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. In connection with the Merger, the Company reevaluated and changed its segment presentation and reportable segments during the quarter ended June 30, 2022. As of June 30, 2022, we classified our operations in three reportable segments: Studios, primarily consisting of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/DTC services, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical and digital), related consumer products and themed experience licensing, and interactive gaming; Networks, consisting primarily of our domestic and international television networks; and DTC, consisting primarily of our premium pay-TV and streaming services. Goodwill was reallocated to the new reporting units based on relative fair value. Prior periods have been recast to conform to the current period presentation.
The accounting policies of the reportable segments are the same as the Company’s, except that certain inter-segment transactions that are eliminated for consolidation are not eliminated at the segment level. Inter-segment transactions primarily include advertising and content licenses. The Company records inter-segment transactions of content licenses at the gross amount. Prior year amounts have been recast to reflect the current presentation. The Company does not report assets by segment because it is not used to allocate resources or evaluate segment performance.
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.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company also excludes the depreciation of fixed assets and amortization of intangible assets, amortization of purchase accounting fair value step-up for content, and amortization of capitalized interest for content, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted EBITDA should be considered in addition to, but not a substitute for, operating income, net income, and other measures of financial performance reported in accordance with U.S. GAAP.
The tables below present summarized financial information for each of the Company’s reportable segments and corporate, inter-segment eliminations, and other (in millions).
Revenues
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Studios | | $ | 9,731 | | | $ | 20 | | | $ | 12 | |
| Networks | | 19,348 | | | 11,311 | | | 10,439 | |
| DTC | | 7,274 | | | 860 | | | 220 | |
| Corporate | | 30 | | | — | | | — | |
| Inter-segment eliminations | | (2,566) | | | — | | | — | |
| Total revenues | | $ | 33,817 | | | $ | 12,191 | | | $ | 10,671 | |
Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Studios | | $ | 1,772 | | | $ | 14 | | | $ | 1 | |
| Networks | | 8,725 | | | 5,533 | | | 5,101 | |
| DTC | | (1,596) | | | (1,345) | | | (544) | |
| Corporate | | (1,200) | | | (385) | | | (362) | |
| Inter-segment eliminations | | 17 | | | — | | | — | |
| Adjusted EBITDA | | $ | 7,718 | | | $ | 3,817 | | | $ | 4,196 | |
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Reconciliation of Net Income (Loss) Available to Warner Bros. Discovery, Inc, to Adjusted EBITDA
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Net (loss) income available to Warner Bros. Discovery, Inc. | | $ | (7,371) | | | $ | 1,006 | | | $ | 1,219 | |
| Net income attributable to redeemable noncontrolling interests | | 6 | | | 53 | | | 12 | |
| Net income attributable to noncontrolling interests | | 68 | | | 138 | | | 124 | |
| Income tax (benefit) expense | | (1,663) | | | 236 | | | 373 | |
| (Loss) income before income taxes | | (8,960) | | | 1,433 | | | 1,728 | |
| Other (income) expense, net | | (347) | | | (72) | | | 34 | |
| Loss from equity investees, net | | 160 | | | 18 | | | 105 | |
| | | | | | |
| Interest expense, net | | 1,777 | | | 633 | | | 648 | |
| Operating (loss) income | | (7,370) | | | 2,012 | | | 2,515 | |
| Impairment and loss (gain) on disposition and disposal groups | | 117 | | | (71) | | | 126 | |
| Restructuring | | 3,757 | | | 32 | | | 91 | |
| Depreciation and amortization | | 7,193 | | | 1,582 | | | 1,359 | |
| Employee share-based compensation | | 410 | | | 167 | | | 99 | |
| Transaction and integration costs | | 1,195 | | | 95 | | | 6 | |
| | | | | | |
| Amortization of fair value step-up for content | | 2,416 | | | — | | | — | |
| Adjusted EBITDA | | $ | 7,718 | | | $ | 3,817 | | | $ | 4,196 | |
Content Amortization and Impairment Expense
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Studios | | $ | 5,950 | | | $ | — | | | $ | — | |
| Networks | | 6,171 | | | 2,991 | | | 2,694 | |
| DTC | | 6,800 | | | 510 | | | 262 | |
| Corporate | | (1) | | | — | | | — | |
| Inter-segment eliminations | | (1,951) | | | — | | | — | |
| Total content amortization and impairment expense | | $ | 16,969 | | | $ | 3,501 | | | $ | 2,956 | |
Content expense is generally a component of costs of revenue on the consolidated statements of operations (see Note 9.)
Revenues by Geography
| | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2022 | | 2021 | | 2020 |
| U.S. | | $ | 22,697 | | | $ | 7,728 | | | $ | 7,025 | |
| Non-U.S. | | 11,120 | | | 4,463 | | | 3,646 | |
| Total revenues | | $ | 33,817 | | | $ | 12,191 | | | $ | 10,671 | |
Revenues are attributed to each country based on the customer or viewer location.
WARNER BROS. DISCOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment by Geography
| | | | | | | | | | | | | | |
| | | December 31, |
| | | 2022 | | 2021 |
| U.S. | | $ | 3,785 | | | $ | 834 | |
| U.K. | | 1,002 | | | 164 | |
| | | | |
| Other non-U.S. | | 514 | | | 338 | |
| Total property and equipment, net | | $ | 5,301 | | | $ | 1,336 | |
