Warner Bros. Discovery, Inc 10-Q for FY2022 Q1
Warner Bros. Discovery, Inc. (WBD)
10-Q
2022-04-26
For: 2022-03-31
View Original
Added on
April 09, 2026
About this 10-Q
Warner Bros. Discovery, Inc filed this 10-Q on April 26, 2022, covering the quarter ended March 31, 2022 (FY2022 Q1).
Headline figures
Quarter ended March 31, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $3.16B
- up 13.1% from $2.79B a year earlier
- Net income
- $456M
- up 225.7% from net income of $140M a year earlier
- Diluted EPS
- $0.69
- up 228.6% from $0.21 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended March 31, 2022
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-34177
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Zip Code) | |||||||||||
| (Address of principal executive offices) | |||||||||||
(212 ) 548-5555
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
| Title of Each Class | Trading Symbols | Name of Each Exchange on Which Registered | ||||||
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes ý No ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
| ý | Accelerated filer | ¨ | |||||||||
| Non-accelerated filer | o | Smaller reporting company | |||||||||
| Emerging growth company | |||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨ | |||||||||||
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Total number of shares outstanding of each class of the Registrant’s common stock as of April 18, 2022:
| Series A Common Stock, par value $0.01 per share | |||||
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
FORM 10-Q
TABLE OF CONTENTS
| Page | |||||
3
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements.
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; in millions, except per share amounts)
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Advertising | $ | $ | |||||||||||||||||||||
| Distribution | |||||||||||||||||||||||
| Other | |||||||||||||||||||||||
| Total revenues | |||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Costs of revenues, excluding depreciation and amortization | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Depreciation and amortization | |||||||||||||||||||||||
| Restructuring and other charges | |||||||||||||||||||||||
| Total costs and expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense, net | ( | ( | |||||||||||||||||||||
| Loss from equity investees, net | ( | ( | |||||||||||||||||||||
| Other income, net | |||||||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Income tax expense | ( | ( | |||||||||||||||||||||
| Net income | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income attributable to redeemable noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income available to Warner Bros. Discovery, Inc. | $ | $ | |||||||||||||||||||||
| Net income per share allocated to Warner Bros. Discovery, Inc. Series A common stockholders: | |||||||||||||||||||||||
Basic | $ | $ | |||||||||||||||||||||
| Diluted | $ | $ | |||||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||||||||||||
4
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited; in millions)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Net income | $ | $ | ||||||||||||||||||||||||
| Other comprehensive income (loss) adjustments, net of tax: | ||||||||||||||||||||||||||
| Currency translation | ( | ( | ||||||||||||||||||||||||
| Derivatives | ( | |||||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||||
Comprehensive income attributable to noncontrolling interests | ( | ( | ||||||||||||||||||||||||
Comprehensive income attributable to redeemable noncontrolling interests | ( | ( | ||||||||||||||||||||||||
| Comprehensive income attributable to Warner Bros. Discovery, Inc. | $ | $ | ||||||||||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||||||||
5
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED BALANCE SHEETS
(unaudited; in millions, except par value)
| March 31, 2022 | December 31, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Receivables, net | |||||||||||
| Content rights and prepaid license fees, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Total current assets | |||||||||||
| Noncurrent content rights, net | |||||||||||
| Property and equipment, net | |||||||||||
| Goodwill | |||||||||||
| Intangible assets, net | |||||||||||
| Other noncurrent assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued liabilities | |||||||||||
| Deferred revenues | |||||||||||
| Current portion of debt | |||||||||||
| Total current liabilities | |||||||||||
| Noncurrent portion of debt | |||||||||||
| Deferred income taxes | |||||||||||
| Other noncurrent liabilities | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies (See Note 16) | |||||||||||
| Redeemable noncontrolling interests | |||||||||||
| Equity: | |||||||||||
| Warner Bros. Discovery, Inc. stockholders’ equity: | |||||||||||
Series A-1 convertible preferred stock: $ | |||||||||||
Series C-1 convertible preferred stock: $ | |||||||||||
Series A common stock: $ | |||||||||||
Series B convertible common stock: $ | |||||||||||
Series C common stock: $ | |||||||||||
| Additional paid-in capital | |||||||||||
Treasury stock, at cost: | ( | ( | |||||||||
| Retained earnings | |||||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total Warner Bros. Discovery, Inc. stockholders' equity | |||||||||||
| Noncontrolling interests | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||
6
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; in millions)
| Three Months Ended March 31, | |||||||||||
| 2022 | 2021 | ||||||||||
| Operating Activities | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to cash provided by operating activities: | |||||||||||
| Content rights amortization and impairment | |||||||||||
| Depreciation and amortization | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Share-based compensation expense | |||||||||||
| Equity in losses of equity method investee companies and cash distributions | |||||||||||
| Gain on sale of investments | ( | ||||||||||
| Gain from derivative instruments, net | ( | ( | |||||||||
| Other, net | ( | ||||||||||
| Changes in operating assets and liabilities, net of acquisitions and dispositions: | |||||||||||
| Receivables, net | ( | ||||||||||
| Content rights and payables, net | ( | ( | |||||||||
| Accounts payable, accrued liabilities, deferred revenues and other noncurrent liabilities | ( | ( | |||||||||
| Foreign currency, prepaid expenses and other assets, net | ( | ||||||||||
| Cash provided by operating activities | |||||||||||
| Investing Activities | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sales and maturities of investments | |||||||||||
| Investments in and advances to equity investments | ( | ( | |||||||||
| Proceeds from derivative instruments, net | |||||||||||
| Other investing activities, net | ( | ||||||||||
| Cash provided by investing activities | |||||||||||
| Financing Activities | |||||||||||
| Principal repayments of debt, including premiums to par value | ( | ( | |||||||||
| Distributions to noncontrolling interests and redeemable noncontrolling interests | ( | ( | |||||||||
| Other financing activities, net | ( | ||||||||||
| Cash used in financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | ( | |||||||||
| Net change in cash, cash equivalents, and restricted cash | ( | ||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | |||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | $ | |||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||
7
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
| Preferred Stock | Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Warner Bros. Discovery, Inc. Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2021 | $ | — | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | — | ( | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Tax settlements associated with share-based plans | — | — | — | — | ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dividends paid to noncontrolling interests | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of stock in connection with share-based plans | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Redeemable noncontrolling interest adjustments to redemption value | — | — | — | — | — | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2022 | $ | — | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
8
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
CONSOLIDATED STATEMENT OF EQUITY
(unaudited; in millions)
| Preferred Stock | Common Stock | Additional Paid-In Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Loss | Warner Bros. Discovery, Inc. Stockholders’ Equity | Noncontrolling Interests | Total Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Par Value | Shares | Par Value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| December 31, 2020 | $ | — | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net income available to Warner Bros. Discovery, Inc. and attributable to noncontrolling interests | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock conversion | ( | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Tax settlements associated with share-based compensation | — | — | — | — | ( | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Dividends paid to noncontrolling interest | — | — | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of stock in connection with share-based plans | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Redeemable noncontrolling interest adjustment to redemptions value | — | — | — | — | ( | — | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| March 31, 2021 | $ | — | $ | $ | $ | ( | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
9
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
On April 8, 2022, Discovery, Inc. (“Discovery”), a global media company that provides content across multiple distribution platforms including linear, free-to-air and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer (“DTC”) subscription products, completed its merger (the “Merger”) with the WarnerMedia business of AT&T, Inc. (the “WarnerMedia Business”) and changed its name from “Discovery, Inc.” to “Warner Bros. Discovery, Inc.” (“Warner Bros. Discovery”, “WBD”, the “Company”, “we”, “us” or “our”). On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market under the trading symbol WBD.
Warner Bros. Discovery is a leading global media and entertainment company that creates and distributes the world’s most differentiated and complete portfolio of content and brands across television, film and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.
Merger with the WarnerMedia Business of AT&T
The Merger was executed through a Reverse Morris Trust type transaction, under which the WarnerMedia Business was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. (See Note 19.) In connection with the Merger, AT&T received $40.5 billion (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia's retention of certain debt, and Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. AT&T shareholders received WBD stock in the distribution representing 71 % of the combined company and the Company's shareholders will continue 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 WarnerMedia Business for accounting purposes under U.S. generally accepted accounting principles (“U.S. GAAP”); therefore, Discovery is considered WBD’s predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD’s historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WarnerMedia Business and future results will not be comparable to historical results.
Impact of COVID-19
The Company continues to closely monitor the ongoing impact of COVID-19 on all aspects of its business and geographies, including the impact on its customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties. Certain key sources of revenue for the WarnerMedia Business, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.
The nature and full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. The consolidated financial statements reflect management’s estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries in which a controlling interest is maintained, including variable interest entities ("VIE") for which the Company is the primary beneficiary. Intercompany accounts and transactions between consolidated entities have been eliminated.
10
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Unaudited Interim Financial Statements
These consolidated financial statements are unaudited; however, in the opinion of management, they reflect all adjustments consisting only of normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the periods presented in conformity with U.S. GAAP applicable to interim periods. The results of operations for the interim periods presented are not necessarily indicative of results for the full year or future periods. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”).
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results may differ from these estimates.
Significant estimates and judgments inherent in the preparation of the consolidated financial statements include accounting for asset impairments, revenue recognition, estimated credit losses, content rights, leases, depreciation and amortization, business combinations, share-based compensation, income taxes, other financial instruments, contingencies, and the determination of whether the Company should consolidate certain entities.
Accounting and Reporting Pronouncements Adopted
LIBOR
In March 2020, the 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. This guidance amends the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions, requires the use of the if-converted method for calculating earnings per share for convertible instruments, and makes targeted improvements to the disclosures for convertible instruments and related earnings per share guidance. The Company adopted the guidance effective January 1, 2022, and there was no material impact on its consolidated financial statements.
NOTE 2. DISPOSITIONS
Dispositions
Great American Country
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.
11
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 3. INVESTMENTS
| Category | Balance Sheet Location | Ownership | March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Equity method investments: | ||||||||||||||||||||||||||
| nC+ | Other noncurrent assets | $ | $ | |||||||||||||||||||||||
| All3Media | Other noncurrent assets | |||||||||||||||||||||||||
Discovery Solar Ventures, LLC (a) | Other noncurrent assets | N/A | ||||||||||||||||||||||||
| Other | Other noncurrent assets | |||||||||||||||||||||||||
| Total equity method investments | ||||||||||||||||||||||||||
| Investments with readily determinable fair values: | ||||||||||||||||||||||||||
| Lionsgate Entertainment Corp. | Other noncurrent assets | |||||||||||||||||||||||||
| Sharecare | Prepaid expenses and other current assets | |||||||||||||||||||||||||
| Total investments with readily determinable fair values | ||||||||||||||||||||||||||
| Equity investments without readily determinable fair values: | ||||||||||||||||||||||||||
Vox Media (b) | Other noncurrent assets | |||||||||||||||||||||||||
Formula E (c) | Other noncurrent assets | |||||||||||||||||||||||||
| Philo | Other noncurrent assets | |||||||||||||||||||||||||
| Other | Other noncurrent assets | |||||||||||||||||||||||||
| Total equity investments without readily determinable fair values | ||||||||||||||||||||||||||
| Total investments | $ | $ | ||||||||||||||||||||||||
(a) Discovery Solar Ventures, LLC invests in limited liability companies that sponsor renewable energy projects related to solar energy. These investments are considered VIEs of the Company and are accounted for under the equity method of accounting using the Hypothetical Liquidation at Book Value methodology for allocating earnings. | ||||||||||||||||||||||||||
(b) Overall ownership percentage for Vox Media is calculated on an outstanding shares basis. The amount shown as of December 31, 2021 includes a $ | ||||||||||||||||||||||||||
(c) Ownership percentage for Formula E includes holdings accounted for as an equity method investment and holdings accounted for as an equity investment without a readily determinable fair value. | ||||||||||||||||||||||||||
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. The Company had impairment losses of $11 million for the three months ended March 31, 2022, because the change in value was considered other-than-temporary. The Company had no impairment losses for the three months ended March 31, 2021.
With the exception of nC+, the carrying values of the Company’s equity method investments are consistent with its ownership in the underlying net assets of the investees. For nC+, there is a basis difference of $32 million, which is attributable to finite-lived intangible assets with a remaining life of 6 years and is included in the carrying value of nC+. Earnings from nC+ were reduced by the amortization of these intangibles of $2 million and $3 million for the three months ended March 31, 2022 and 2021, respectively.
12
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Certain of the Company's other equity method investments are VIEs, for which the Company is not the primary beneficiary. As of March 31, 2022, the Company’s maximum exposure for all of its unconsolidated VIEs, including the investment carrying values and unfunded contractual commitments made on behalf of VIEs, was approximately $169 million. The Company's maximum estimated exposure excludes the non-contractual future funding of VIEs. The aggregate carrying values of these VIE investments were $105 million as of March 31, 2022 and $126 million as of December 31, 2021. The Company recognized its portion of VIE operating results with net losses of $17 million and $8 million for the three months ended March 31, 2022 and 2021, respectively.
Investments with Readily Determinable Fair Value
Investments in entities or other securities in which the Company has no control or significant influence, is not the primary beneficiary, and have a readily determinable fair value are classified as equity investments with readily determinable fair value. The investments are measured at fair value based on a quoted market price per unit in active markets multiplied by the number of units held without consideration of transaction costs (Level 1). Gains and losses are recorded in other income, net on the consolidated statements of operations.
The gains and losses related to the Company's investments with readily determinable fair values for the three months ended March 31, 2022 and 2021 are summarized in the table below (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Net gains (losses) recognized during the period on equity securities | $ | ( | $ | |||||||||||||||||||||||
| Less: Net gains recognized on equity securities sold | ||||||||||||||||||||||||||
| Unrealized gains (losses) recognized during reporting period on equity securities still held at the reporting date | $ | ( | $ | |||||||||||||||||||||||
Equity investments without readily determinable fair values assessed under the measurement alternative
Equity investments without readily determinable fair value include ownership rights that either (i) do not meet the definition of in-substance common stock or (ii) do not provide the Company with control or significant influence and these investments do not have readily determinable fair values.
During the three months ended March 31, 2022, the Company did no t invest in equity investments without readily determinable fair values and concluded that its other equity investments without readily determinable fair values had no indicators that a change in fair value had taken place. As of March 31, 2022, the Company had recorded cumulative upward adjustments of $9 million and cumulative impairments of $88 million for its equity investments without readily determinable fair values.
13
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 4. FAIR VALUE MEASUREMENTS
| Level 1 | – | Quoted prices for identical instruments in active markets. | ||||||
| Level 2 | – | Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. | ||||||
| Level 3 | – | Valuations derived from techniques in which one or more significant inputs are unobservable. | ||||||
The tables below present assets and liabilities measured at fair value on a recurring basis (in millions).
| March 31, 2022 | ||||||||||||||||||||||||||||||||
| Category | Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Time deposits | Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||||||||
| Money market funds | Cash and cash equivalents | |||||||||||||||||||||||||||||||
| Mutual funds | Prepaid expenses and other current assets | |||||||||||||||||||||||||||||||
| Company-owned life insurance contracts | Prepaid expenses and other current assets | |||||||||||||||||||||||||||||||
| Mutual funds | Other noncurrent assets | |||||||||||||||||||||||||||||||
| Company-owned life insurance contracts | Other noncurrent assets | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Deferred compensation plan | Accrued liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Deferred compensation plan | Other noncurrent liabilities | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| December 31, 2021 | ||||||||||||||||||||||||||||||||
| Category | Balance Sheet Location | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||||||
| Cash equivalents: | ||||||||||||||||||||||||||||||||
| Time deposits | Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Equity securities: | ||||||||||||||||||||||||||||||||
| Money market funds | Cash and cash equivalents | |||||||||||||||||||||||||||||||
| Mutual funds | Prepaid expenses and other current assets | |||||||||||||||||||||||||||||||
| Company-owned life insurance contracts | Prepaid expenses and other current assets | |||||||||||||||||||||||||||||||
| Mutual funds | Other noncurrent assets | |||||||||||||||||||||||||||||||
| Company-owned life insurance contracts | Other noncurrent assets | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||||||
| Deferred compensation plan | Accrued Liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Deferred compensation plan | Other noncurrent liabilities | |||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
14
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Equity securities include money market funds, time deposits, investments in mutual funds held in separate trusts, which are owned as part of the Company's supplemental retirement plans, and company-owned life insurance contracts. The fair value of Level 1 equity securities was determined by reference to the quoted market price per share in active markets multiplied by the number of shares held without consideration of transaction costs. The fair value of the deferred compensation plan liability was determined based on the fair value of the related investments elected by employees. Changes in the fair value of the investments are offset by changes in the fair value of the deferred compensation obligation. Company-owned life insurance contracts are recorded at their cash surrender value, which approximates fair value (Level 2).
In addition to the financial instruments listed in the tables above, the Company has other financial instruments, including cash deposits, accounts receivable, accounts payable, and senior notes. The carrying values for such financial instruments, other than the senior notes, each approximated their fair values as of March 31, 2022 and December 31, 2021. The estimated fair value of the Company’s outstanding senior notes using quoted prices from over-the-counter markets, considered Level 2 inputs, was $14.9 billion and $17.2 billion as of March 31, 2022 and December 31, 2021, respectively.
NOTE 5. CONTENT RIGHTS
The table below presents the components of content rights (in millions).
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Produced content rights: | ||||||||||||||
| Completed | $ | $ | ||||||||||||
| In-production | ||||||||||||||
| Coproduced content rights: | ||||||||||||||
| Completed | ||||||||||||||
| In-production | ||||||||||||||
| Licensed content rights: | ||||||||||||||
| Acquired | ||||||||||||||
| Prepaid | ||||||||||||||
| Content rights, at cost | ||||||||||||||
| Accumulated amortization | ( | ( | ||||||||||||
| Total content rights, net | ||||||||||||||
| Current portion | ( | ( | ||||||||||||
| Noncurrent portion | $ | $ | ||||||||||||
Content expense consisted of the following (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Content amortization | $ | $ | ||||||||||||||||||||||||
| Other production charges | ||||||||||||||||||||||||||
| Content impairments | ||||||||||||||||||||||||||
| Total content expense | $ | $ | ||||||||||||||||||||||||
Content expense is generally a component of costs of revenue on the consolidated statements of operations. Content impairments of $4 million are reflected in restructuring and other charges for the three months ended March 31, 2022.
15
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 6. GOODWILL
| U.S. Networks | International Networks | Total | ||||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | |||||||||||||||||||||||
| Foreign currency translation and other | ( | ( | ||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | |||||||||||||||||||||||
The carrying amount of goodwill at the U.S. Networks segment included accumulated impairments of $20 1.6
Impairment Analysis
16
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 7. DEBT
| March 31, 2022 | December 31, 2021 | |||||||||||||
| $ | $ | |||||||||||||
| Total debt | ||||||||||||||
Unamortized discount, premium and debt issuance costs, net (a) | ( | ( | ||||||||||||
| Debt, net of unamortized discount, premium and debt issuance costs | ||||||||||||||
| Current portion of debt | ( | ( | ||||||||||||
| Noncurrent portion of debt | $ | $ | ||||||||||||
.Senior Notes
During the three months ended March 31, 2022, the Company repaid in full at maturity $327 million aggregate principal amount outstanding of its 2.375 % Euro Denominated Senior Notes due March 2022.
In the third quarter of 2021, the Company redeemed in full $168 million aggregate principal amount outstanding of its 3.300 % Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of its 3.500 % Senior Notes due June 2022. In the first quarter of 2021, the Company redeemed in full $335 million aggregate principal amount outstanding of its 4.375 % Senior Notes due June 2021.
The redemptions during 2022 and 2021 resulted in an immaterial loss on extinguishment of debt.
As of March 31, 2022, all senior notes are fully and unconditionally guaranteed by the Company and Scripps Networks Interactive, Inc. ("Scripps Networks"), except for the remaining $23 million of un-exchanged Scripps Networks senior notes.
17
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Revolving Credit Facility and Commercial Paper Programs
In June 2021, Discovery Communications, LLC ("DCL") entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. DCL has the capacity to initially borrow up to $2.5 billion under the Credit Agreement. Following the closing of the Merger and subject to certain conditions, the available commitments increased by $3.5 billion, to an aggregate amount not to exceed $6 billion (the “Credit Facility”). The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. DCL may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions. Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks, and following the closing of the Merger, WarnerMedia Holdings, Inc., which was originally named Magallanes, 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 Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of March 31, 2022, DCL was in compliance with all covenants and there were no events of default under the Credit Facility.
Additionally, the Company's commercial paper program is supported by the Credit Facility. Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program.
As of March 31, 2022 and December 31, 2021, the Company had no
Credit Agreement Financial Covenants
The Credit Agreement includes 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 4.50 to 1.00, which increased to 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.
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks 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
On January 1, 2022, the Company discontinued hedge accounting for certain forward starting interest rate swap contracts with a total notional value of $2 billion. The Company recognized a gain of $33 million in accumulated other comprehensive loss that will be amortized as an adjustment to interest expense, net over the respective terms of future issuances of debt. Subsequently, the Company unwound and settled the contracts and received cash of $122 million, including an $89 million realized gain for changes in fair market value between the dedesignation date and settlement date that was recognized in other income, net in the consolidated statements of operations.
Net Investment Hedges
During the three months ended March 31, 2022, the Company unwound and settled certain fixed-to-fixed cross-currency swaps with a total notional value of $705 million associated with the Company's Euro functional subsidiaries. The Company recognized a realized gain of $10 million related to the excluded component of the hedge relationship in other income, net in the consolidated statements of operations, and recognized a gain of $6 million in accumulated other comprehensive loss.
Also during the three months ended March 31, 2022, the Company executed cross currency swaps with a notional value of $664 million with expiration dates in 2025 to replace the aforementioned swaps that matured.
No Hedging Designation
During the three months ended March 31, 2022, the Company dedesignated, unwound and settled forward starting interest rate swap contracts with a total notional value of $5.0 billion, swaption collars with a total notional value of $2.5 billion, and purchase payer swaptions with a total notional value of $7.5 billion. The Company received cash of $474 million upon settlement, including $142 million in premiums paid at execution during 2021, resulting in a gain of $332 million that was recognized in other income, net in the consolidated statements of operations.
Also during the three months ended March 31, 2022, the Company executed and subsequently settled treasury locks with a total notional value of $14.5 billion. The Company received cash of $90 million upon settlement, resulting in a gain of $90 million that was recognized in other income, net in the consolidated statements of operations.
18
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Finally, during the three months ended March 31, 2022, the Company unwound and settled a foreign exchange forward contract with a notional value of $375 million associated with the Company's Euro denominated debt that was paid in full at maturity. The Company recognized a loss of $48 million in other income, net in the consolidated statements of operations.
The following table summarizes the impact of derivative financial instruments on the Company's consolidated balance sheets (in millions). There were no
| March 31, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fair Value | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Notional | Prepaid expenses and other current assets | Other non- current assets | Accounts payable and accrued liabilities | Other non- current liabilities | Notional | Prepaid expenses and other current assets | Other non- current assets | Accounts payable and accrued liabilities | Other non- current liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash flow hedges: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net investment hedges: (a) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cross-currency swaps | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| No hedging designation: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign exchange | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swaps | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Cross-currency swaps | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||
The following table presents the pre-tax impact of derivatives designated as cash flow hedges on income and other comprehensive income (loss) (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
Gains (losses) recognized in accumulated other comprehensive loss: | ||||||||||||||||||||||||||
Foreign exchange - derivative adjustments | $ | ( | $ | |||||||||||||||||||||||
Interest rate - derivative adjustments | ||||||||||||||||||||||||||
Gains (losses) reclassified into income from accumulated other comprehensive loss: | ||||||||||||||||||||||||||
Foreign exchange - advertising revenue | ||||||||||||||||||||||||||
Foreign exchange - distribution revenue | ( | |||||||||||||||||||||||||
Foreign exchange - costs of revenues | ||||||||||||||||||||||||||
If current fair values of designated cash flow hedges as of March 31, 2022 remained static over the next twelve months, the Company would reclassify $7 million of net deferred losses from accumulated other comprehensive loss into income in the next twelve months. The maximum length of time the Company is hedging exposure to the variability in future cash flows is 33 years.
19
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| Three Months Ended March 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 | 2022 | 2021 | |||||||||||||||||||||||||||||
| Cross currency swaps | $ | $ | Interest expense, net | $ | $ | |||||||||||||||||||||||||||
| Sterling notes (foreign denominated debt) | ( | N/A | ||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Interest rate swaps | $ | $ | ||||||||||||||||||||||||
| Cross-currency swaps | ||||||||||||||||||||||||||
| Foreign exchange derivatives | ( | ( | ||||||||||||||||||||||||
Total in other income, net | $ | $ | ( | |||||||||||||||||||||||
NOTE 9. EQUITY
As a result of the Merger, each share of Discovery, Inc.'s issued, and outstanding common stock and preferred stock was reclassified and automatically converted to shares of Warner Bros. Discovery common stock (as further described in Note 19 below).
Repurchase Programs
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. Under the stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors.
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 sheet. Over the life of the Company's repurchase programs and as of March 31, 2022, the Company had repurchased 3 million and 229 million shares of its historical Series A and Series C common stock, respectively, for an aggregate purchase price of $171 million and $8.2 billion, respectively. There were no
Preferred Stock
During the three months ended March 31, 2021, Advance Newhouse Programming Partnership converted 0.6 million of its Series C-1 convertible preferred stock into 11.0 million shares of Series C common stock.
20
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Other Comprehensive Income (Loss) Adjustments
| Three Months Ended March 31, 2022 | Three Months Ended March 31, 2021 | ||||||||||||||||||||||||||||||||||
Pretax | Tax benefit (expense) | Net-of-tax | Pretax | Tax benefit (expense) | Net-of-tax | ||||||||||||||||||||||||||||||
Currency translation adjustments: | |||||||||||||||||||||||||||||||||||
| Unrealized gains (losses): | |||||||||||||||||||||||||||||||||||
Foreign currency | $ | ( | $ | $ | ( | $ | ( | $ | $ | ( | |||||||||||||||||||||||||
Net investment hedges | ( | ||||||||||||||||||||||||||||||||||
| Reclassifications: | |||||||||||||||||||||||||||||||||||
| Gain on disposition | ( | ( | |||||||||||||||||||||||||||||||||
Total currency translation adjustments | ( | ( | ( | ( | ( | ||||||||||||||||||||||||||||||
Derivative adjustments: | |||||||||||||||||||||||||||||||||||
| Unrealized gains (losses) | ( | ( | ( | ||||||||||||||||||||||||||||||||
| Reclassifications from other comprehensive income to net income | ( | ( | ( | ||||||||||||||||||||||||||||||||
Total derivative adjustments | ( | ( | ( | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss) adjustments | $ | ( | $ | ( | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||
Accumulated Other Comprehensive Loss
The table below presents the changes in the components of accumulated other comprehensive loss, net of taxes (in millions).
| Three Months Ended March 31, 2022 | |||||||||||||||||||||||
| Currency Translation | Derivatives | Pension Plan and SERP Liability | Accumulated Other Comprehensive Loss | ||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Other comprehensive income (loss) before reclassifications | ( | ( | ( | ||||||||||||||||||||
Reclassifications from accumulated other comprehensive loss to net income | ( | ( | ( | ||||||||||||||||||||
Other comprehensive income (loss) | ( | ( | ( | ||||||||||||||||||||
Ending balance | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
| Three Months Ended March 31, 2021 | |||||||||||||||||||||||||||||
| Currency Translation | Derivatives | Pension Plan and SERP Liability | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
Other comprehensive income (loss) before reclassifications | ( | ||||||||||||||||||||||||||||
Reclassifications from accumulated other comprehensive loss to net income | |||||||||||||||||||||||||||||
Other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||
Ending balance | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||
21
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 10. REVENUES AND ACCOUNTS RECEIVABLE
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.
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Networks | International Networks | Corporate, inter-segment eliminations, and other | Total | U.S. Networks | International Networks | Corporate, inter-segment eliminations, and other | Total | ||||||||||||||||||||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||||||||||||||||||||||||||
| Advertising | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||
| Distribution | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
Accounts Receivable and Credit Losses
Receivables include amounts currently due from customers and are presented net of an estimate for lifetime expected credit losses. Allowance for credit losses is measured using historical loss rates for the respective risk categories and incorporating forward-looking estimates. 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’s accounts receivable balances and the related credit losses arise primarily from distribution and advertising revenue. The Company monitors ongoing credit exposure through active review of customers’ financial conditions, aging of receivable balances, historical collection trends, and expectations about relevant future events that may significantly affect collectability. The allowance for credit losses increased from $54 million at December 31, 2021 to $61 million at March 31, 2022. The activity in the allowance for credit losses for the three months ended March 31, 2022 was not material.
Contract Liability
A contract liability, such as deferred revenue, is recorded when cash is received in advance of the Company's performance. Total deferred revenues, including both current and noncurrent, were $401 million and $573 million at March 31, 2022 and December 31, 2021, respectively. Noncurrent deferred revenue is a component of other noncurrent liabilities on the consolidated balance sheets. The change in deferred revenue for the three months ended March 31, 2022 was primarily due to revenue recognized during the period, of which $295 million was included in the deferred revenue balance at December 31, 2021, partially offset by cash payments received for which the performance obligation was not satisfied prior to the end of the period. Revenue recognized for the three months ended March 31, 2021 related to the deferred revenue balance at December 31, 2020 was $99 million.
Transaction Price Allocated to Remaining Performance Obligations
Most of the Company's distribution contracts are licenses of functional intellectual property where revenue is derived from royalty-based arrangements, for which the guidance allows the application of a practical expedient to record revenues as a function of royalties earned to date instead of estimating incremental royalty contract revenue. Accordingly, in these instances revenue is recognized based upon the royalties earned to date. However, there are certain other distribution arrangements that are fixed price or contain minimum guarantees that extend beyond one year. The Company recognizes revenue for fixed fee distribution contracts on a monthly basis based on minimum monthly fees; by calculating one twelfth of annual license fees specified in its distribution contracts; or based on the pro-rata fees earned calculated on the license fees specified in the distribution contract. The transaction price allocated to remaining performance obligations within these fixed price or minimum guarantee distribution revenue contracts was $1.4 billion as of March 31, 2022 and is expected to be recognized over the next five years .
The Company's content licensing contracts and sports sublicensing deals are licenses of functional intellectual property. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $606 million as of March 31, 2022 and is expected to be recognized over the next five years .
22
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company's brand licensing contracts are licenses of symbolic intellectual property. Certain of these arrangements extend beyond one year. The transaction price allocated to remaining performance obligations on these long-term contracts was $84 million as of March 31, 2022 and is expected to be recognized over the next eleven years .
The value of unsatisfied performance obligations disclosed above does not include: (i) contracts involving variable consideration for which revenues are recognized in accordance with the usage-based royalty exception, and (ii) contracts with an original expected length of one year or less, such as advertising contracts.
NOTE 11. SHARE-BASED COMPENSATION
The Company has various incentive plans under which performance-based restricted stock units ("PRSUs"), service-based restricted stock units ("RSUs"), stock options, and stock appreciation rights ("SARs") have been issued.
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| PRSUs | $ | $ | ||||||||||||||||||||||||
| RSUs | ||||||||||||||||||||||||||
| Stock options | ||||||||||||||||||||||||||
| SARs | ||||||||||||||||||||||||||
| Total share-based compensation expense | $ | $ | ||||||||||||||||||||||||
| Tax benefit recognized | $ | $ | ||||||||||||||||||||||||
The Company recorded total liabilities for cash-settled and other liability-settled share-based compensation awards of $7 million and $22 million as of March 31, 2022 and December 31, 2021, respectively. The current portion of the liability for cash-settled and other liability-settled awards was $5 million and $17 million as of March 31, 2022 and December 31, 2021, respectively.
| Three Months Ended March 31, 2022 | ||||||||||||||
| Awards | Weighted-Average Grant Price | |||||||||||||
| Awards granted: | ||||||||||||||
| PRSUs | $ | |||||||||||||
| RSUs | $ | |||||||||||||
| Stock options | $ | |||||||||||||
| Unrecognized Compensation Cost | Weighted-Average Amortization Period (years) | |||||||||||||
| PRSUs | $ | |||||||||||||
| RSUs | ||||||||||||||
| Stock options | ||||||||||||||
| Total unrecognized compensation cost | $ | |||||||||||||
23
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 12. INCOME TAXES
Income tax expense was $201 million and $106 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in the three months ended March 31, 2022 was primarily attributable to an increase in pre-tax book income. Income tax expense for the three months ended March 31, 2022 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations and state and local income taxes.
The Company's reserves for uncertain tax positions as of March 31, 2022 and December 31, 2021 totaled $510 million and $420 million, respectively. 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 $93 million within the next twelve months as a result of ongoing audits, lapses of statutes of limitations or regulatory developments.
As of March 31, 2022 and December 31, 2021, the Company had accrued approximately $58 million and $60 million, respectively, of total interest and penalties payable related to unrecognized tax benefits. The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense.
NOTE 13. EARNINGS PER SHARE
All share and per share amounts have been retrospectively adjusted to reflect the reclassification and automatic conversion of each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, Discovery Series C common stock, into one share of Warner Bros. Discovery common stock, and each issued and outstanding share of Discovery Series C-1 preferred stock was reclassified and automatically converted into 19.3648 shares of Warner Bros. Discovery common stock. Discovery Series A-1 preferred stock and per share data has not been recast because the conversion to Warner Bros. Discovery common stock in connection with the Merger was considered a discrete event and treated prospectively.
The table below sets forth the Company's calculated earnings per share. Earnings per share amounts may not recalculate due to rounding.
| Three Months Ended March 31, | |||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | $ | |||||||||||||||||||||
| Less: | |||||||||||||||||||||||
| Allocation of undistributed income to Series A-1 convertible preferred stock | ( | ( | |||||||||||||||||||||
| Net income attributable to noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income attributable to redeemable noncontrolling interests | ( | ( | |||||||||||||||||||||
| Net income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for basic net income per share | $ | $ | |||||||||||||||||||||
| Add: | |||||||||||||||||||||||
| Allocation of undistributed income to Series A-1 convertible preferred stockholders | |||||||||||||||||||||||
| Net income allocated to Warner Bros. Discovery, Inc. Series A common stockholders for diluted net income per share | $ | $ | |||||||||||||||||||||
| Denominator — weighted average: | |||||||||||||||||||||||
| Common shares outstanding — basic | |||||||||||||||||||||||
| Impact of assumed preferred stock conversion | |||||||||||||||||||||||
| Dilutive effect of share-based awards | |||||||||||||||||||||||
| Common shares outstanding — diluted | |||||||||||||||||||||||
| Basic net income per share allocated to common stockholders | $ | $ | |||||||||||||||||||||
| Diluted net income per share allocated to common stockholders | $ | $ | |||||||||||||||||||||
24
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The table below presents the details of share-based awards that were excluded from the calculation of diluted earnings per share (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
Anti-dilutive share-based awards | ||||||||||||||||||||||||||
NOTE 14. SUPPLEMENTAL DISCLOSURES
The following tables present supplemental information related to the consolidated financial statements (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Foreign currency gain, net | $ | $ | ||||||||||||||||||||||||
| Gains (losses) on derivative instruments, net | ( | |||||||||||||||||||||||||
| Gain on sale of investment with readily determinable fair value | ||||||||||||||||||||||||||
| Change in the value of investments with readily determinable fair value | ( | |||||||||||||||||||||||||
| Gain on sale of equity method investments | ||||||||||||||||||||||||||
| Loss on extinguishment of debt | ( | |||||||||||||||||||||||||
| Interest income | ||||||||||||||||||||||||||
Total other income, net | $ | $ | ||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash paid for taxes, net | $ | $ | ||||||||||||
| Cash paid for interest, net | ||||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||
| Accrued purchases of property and equipment | ||||||||||||||
| Assets acquired under finance lease and other arrangements | ||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||||||||||||||
| Restricted cash - other current assets | ||||||||||||||||||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | ||||||||||||||||||||||||
NOTE 15. RELATED PARTY TRANSACTIONS
25
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Revenues and service charges: | ||||||||||||||||||||||||||
| Liberty Group | $ | $ | ||||||||||||||||||||||||
| Equity method investees | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total revenues and service charges | $ | $ | ||||||||||||||||||||||||
| Expenses | $ | ( | $ | ( | ||||||||||||||||||||||
| Distributions to noncontrolling interests and redeemable noncontrolling interests | $ | ( | $ | ( | ||||||||||||||||||||||
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Receivables | $ | $ | ||||||||||||
| Payables | $ | $ | ||||||||||||
NOTE 16. COMMITMENTS AND CONTINGENCIES
Put Rights
The Company has granted put rights to certain consolidated subsidiaries.
Legal Matters
NOTE 17. REPORTABLE SEGMENTS
The Company’s operating segments are determined based on: (i) financial information reviewed by its chief operating decision maker, the Chief Executive Officer ("CEO"), (ii) internal management and related reporting structure, and (iii) the basis upon which the CEO makes resource allocation decisions. The Company expects to reevaluate its segment presentation and reportable segments following the Merger during the quarter ending June 30, 2022.
26
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company evaluates the operating performance of its operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration costs, and (viii) other items impacting comparability. 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 OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. The Company excludes employee share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. The Company also excludes the depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. GAAP.
The tables below present summarized financial information for each of the Company's reportable segments and corporate, inter-segment eliminations, and other (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| U.S. Networks | $ | $ | ||||||||||||||||||||||||
| International Networks | ||||||||||||||||||||||||||
| Corporate, inter-segment eliminations and other | ( | ( | ||||||||||||||||||||||||
| Total revenues | $ | $ | ||||||||||||||||||||||||
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| U.S. Networks | $ | $ | ||||||||||||||||||||||||
| International Networks | ||||||||||||||||||||||||||
| Corporate, inter-segment eliminations and other | ( | ( | ||||||||||||||||||||||||
| Adjusted OIBDA | $ | $ | ||||||||||||||||||||||||
27
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Net income available to Warner Bros. Discovery, Inc. | $ | $ | ||||||||||||||||||||||||
| Net income attributable to redeemable noncontrolling interests | ||||||||||||||||||||||||||
Net income attributable to noncontrolling interests | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Other income, net | ( | ( | ||||||||||||||||||||||||
| Loss from equity investees, net | ||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Restructuring and other charges | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Employee share-based compensation | ||||||||||||||||||||||||||
| Transaction and integration costs | ||||||||||||||||||||||||||
| Adjusted OIBDA | $ | $ | ||||||||||||||||||||||||
NOTE 18. RESTRUCTURING AND OTHER CHARGES
Restructuring and other charges by reportable segments and corporate, inter-segment eliminations, and other were as follows (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| International Networks | $ | $ | ||||||||||||||||||||||||
| Corporate, inter-segment eliminations, and other | ||||||||||||||||||||||||||
| Total restructuring and other charges | $ | $ | ||||||||||||||||||||||||
| U.S. Networks | International Networks | Corporate, inter-segment eliminations, and other | Total | |||||||||||||||||||||||
| December 31, 2021 | $ | $ | $ | $ | ||||||||||||||||||||||
| Employee termination accruals, net | ( | ( | ||||||||||||||||||||||||
| Cash paid | ||||||||||||||||||||||||||
| March 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||
NOTE 19. SUBSEQUENT EVENTS
Merger with the WarnerMedia Business of AT&T
On April 8, 2022, the Company completed its Merger with the WarnerMedia Business of AT&T, Inc. The Merger was executed through a Reverse Morris Trust type transaction, under which the WarnerMedia Business was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. In connection with the Merger, AT&T received $40.5 billion (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia's retention of certain debt, and Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. AT&T shareholders received WBD stock in the distribution representing 71 % of the combined company and the Company's shareholders will continue to own 29 % of the combined company, in each case on a fully diluted basis.
28
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Immediately prior to the consummation of the Merger, each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, and Discovery Series C common stock, was reclassified and automatically converted into one 19.3648 shares of WBD common stock. For earnings per share purposes, all share and per share amounts of the aforesaid share classes have been retroactively adjusted for all periods presented to give effect to this reclassification and conversion. Additionally, each issued and outstanding share of Discovery Series A-1 preferred stock was reclassified and automatically converted into 13.1135 shares of WBD common stock. Discovery Series A-1 preferred stock and earnings per share data has not been recast because the conversion to WBD common stock in connection with the Merger was considered a discrete event and treated prospectively. Other than earnings per share presentation, the reclassification and conversion of all share classes to WBD common stock will be adjusted in the period the transaction took place.
Discovery was deemed to be the accounting acquirer of the WarnerMedia Business for accounting purposes under U.S. GAAP. In identifying Discovery as the accounting acquirer, Discovery’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 as part of its disposition of the WarnerMedia Business, (3) the current Chief Executive Officer of Discovery will continue as Chief Executive Officer of WBD for a substantial period of time after the Merger and was primarily responsible for appointing the rest of the executive management team of WBD, and the current Chief Financial Officer of Discovery will serve as Chief Financial Officer of WBD, (4) no stockholder or group of stockholders will hold a controlling interest in WBD after the completion of the Merger and a key Discovery stockholder has the largest minority interest in WBD, and (5) AT&T has no input on the strategic direction and management of WBD 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 own a majority of WBD common stock on a fully diluted basis and associated voting rights after the Merger.
As the accounting acquirer, Discovery is considered WBD's predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD's historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WarnerMedia Business and future results will not be comparable to historical results.
The Merger required the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock. 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 upon the closing of the Merger.
Discovery and WarnerMedia employee share-based awards, issued and outstanding immediately prior to the Merger, were converted into equity-based awards on comparable terms and conditions with respect to shares of WBD stock. 70 % of Chief Executive Officer David M. Zaslav's unvested stock options vested upon closing of the Merger according to the terms of his amended and restated employment agreement. The remaining 30 % of such options will remain outstanding and continue to vest as provided by the prior employment agreement.
In anticipation of the Merger, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan (the "Term Loan") and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transaction and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan or the Credit Facility, and will rank equally with all of the Company's other unsecured senior debt.
Due to the limited time between the transaction date and the Company's filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial accounting for the business combination is incomplete and the Company is not yet able to disclose the provisional amounts to be recognized as of the acquisition date for assets acquired and liabilities assumed. The Company expects to provide preliminary purchase price allocation information in the Quarterly Report on Form 10-Q for the quarter ending June 30, 2022.
Dispositions
In April 2022, the Company completed the sale of a minority interest for a sale price of $138 million and recorded a gain of $133 million.
29
WARNER BROS. DISCOVERY, INC.
(formerly known as Discovery, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
CNN+
In April 2022, the Company announced that CNN+ will cease operations effective April 30, 2022, and it is evaluating the impact this will have on its consolidated financial statements.
30
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Management’s discussion and analysis of financial condition and results of operations is a supplement to and should be read in conjunction with the accompanying consolidated financial statements and related notes. This section provides additional information regarding our businesses, current developments, results of operations, cash flows and financial condition. Additional context can also be found in our 2021 Annual Report on Form 10-K.
BUSINESS OVERVIEW
On April 8, 2022, Discovery, Inc. (“Discovery”), a global media company that provides content across multiple distribution platforms including linear, free-to-air and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements and direct-to-consumer (“DTC”) subscription products (the “Discovery Business”), completed its merger (the “Merger”) with the WarnerMedia business of AT&T, Inc. (“the WarnerMedia Business”) and changed its name from “Discovery, Inc.” to “Warner Bros. Discovery, Inc.” On April 11, 2022, the Company’s shares started trading on the Nasdaq Global Select Market under the trading symbol WBD.
Warner Bros. Discovery is a leading global media and entertainment company that creates and distributes the world’s most differentiated and complete portfolio of content and brands across television, film and streaming. Available in more than 220 countries and territories and 50 languages, Warner Bros. Discovery inspires, informs and entertains audiences worldwide through its iconic brands and products including: Discovery Channel, discovery+, CNN, DC, Eurosport, HBO, HBO Max, HGTV, Food Network, OWN, Investigation Discovery, TLC, Magnolia Network, TNT, TBS, truTV, Travel Channel, MotorTrend, Animal Planet, Science Channel, Warner Bros. Pictures, Warner Bros. Television, Warner Bros. Games, New Line Cinema, Cartoon Network, Adult Swim, Turner Classic Movies, Discovery en Español, Hogar de HGTV and others.
In this Quarterly Report on Form 10-Q, unless the context indicates otherwise, references to “Warner Bros. Discovery,” “the Company,” “we,” “us,” or “our” refer to Discovery, Inc. as a standalone company prior to April 8, 2022, the date we completed the Merger with the WarnerMedia Business, and on and after April 8, 2022 refer to the combined company as a result of the Merger.
In 2021, we launched discovery+, our aggregated DTC product, in the U.S. across several streaming platforms and entered into a partnership with Verizon. Since launch, discovery+ has expanded internationally including in the U.K., Canada, the Philippines, Brazil, Italy, and India. As of March 31, 2022, we had 24 million total paid DTC subscribers.1 discovery+ currently has an extensive content library including original series and documentaries. The service is available with ads or on an ad-free tier, providing us with dual revenue streams.
Although we utilize certain brands and content globally, as of March 31, 2022, we classified our operations in two reportable segments: U.S. Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting primarily of international television networks and digital content services. Our segment presentation aligned with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments. We expect to reevaluate our segment presentation and reportable segments following the Merger during the quarter ending June 30, 2022.
During the three months ended March 31, 2022, we exited our operations in Russia and removed all of our channels and services from the market. We do not expect these actions will have a material effect on our consolidated financial statements.
Merger with the WarnerMedia Business of AT&T
On April 8, 2022, the Company completed its Merger with the WarnerMedia Business of AT&T, Inc. The Merger was executed through a Reverse Morris Trust type transaction, under which the WarnerMedia Business was distributed to AT&T’s shareholders via a pro rata distribution, and immediately thereafter, combined with Discovery. In connection with the Merger, AT&T received $40.5 billion (subject to working capital and other adjustments) in a combination of cash, debt securities, and WarnerMedia's retention of certain debt, and Discovery transferred purchase consideration of $42.4 billion in equity to AT&T shareholders. AT&T shareholders received WBD stock in the distribution representing 71% of the combined company and the Company's shareholders will continue to own 29% of the combined company, in each case on a fully diluted basis.
1 We define a DTC subscription as (i) a subscription to a direct-to-consumer product for which we have recognized subscription revenue from a direct-to-consumer platform; (ii) a subscription received through wholesale arrangements for which we receive a fee for the distribution of our direct-to-consumer platforms, as well as subscriptions provided directly or through third-party platforms; and (iii) a subscription recognized by certain joint venture partners and affiliated parties. We may refer to the aggregate number of subscriptions across our direct-to-consumer services as subscribers. A subscription is only counted if it is on a paying status, and excludes users on free trials. At the end of each quarter, the subscription count includes the actual number of users that rolled to pay up to seven days immediately following quarter end. Our quarterly subscriber count continues to include Ukraine subscribers to discovery+ who are temporarily receiving the service for free, the total of which is not material. .
31
Immediately prior to the consummation of the Merger, each issued and outstanding share of Discovery Series A common stock, Discovery Series B common stock, and Discovery Series C common stock, was reclassified and automatically converted into one share of WBD common stock, and each issued and outstanding share of Discovery Series C-1 preferred stock was reclassified and automatically converted into 19.3648 shares of WBD common stock. For earnings per share purposes, all share and per share amounts of the aforesaid share classes have been retroactively adjusted for all periods presented to give effect to this reclassification and conversion. Additionally, each issued and outstanding share of Discovery Series A-1 preferred stock was reclassified and automatically converted into 13.1135 shares of WBD common stock. Discovery Series A-1 preferred stock and earnings per share data has not been recast because the conversion to WBD common stock in connection with the Merger was considered a discrete event and treated prospectively. Other than earnings per share presentation, the reclassification and conversion of all share classes to WBD common stock will be adjusted in the period the transaction took place.
Discovery was deemed to be the accounting acquirer of the WarnerMedia Business for accounting purposes under U.S. GAAP. In identifying Discovery as the accounting acquirer, Discovery’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 as part of its disposition of the WarnerMedia Business, (3) the current Chief Executive Officer of Discovery will continue as Chief Executive Officer of WBD for a substantial period of time after the Merger and was primarily responsible for appointing the rest of the executive management team of WBD, and the current Chief Financial Officer of Discovery will serve as Chief Financial Officer of WBD, (4) no stockholder or group of stockholders will hold a controlling interest in WBD after the completion of the Merger and a key Discovery stockholder has the largest minority interest in WBD, and (5) AT&T has no input on the strategic direction and management of WBD 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 own a majority of WBD common stock on a fully diluted basis and associated voting rights after the Merger.
As the accounting acquirer, Discovery is considered WBD's predecessor and the historical financial statements of Discovery prior to April 8, 2022, are reflected in this Quarterly Report on Form 10-Q as WBD's historical financial statements. Accordingly, the financial results of WBD as of and for any periods prior to April 8, 2022 do not include the financial results of the WarnerMedia Business and future results will not be comparable to historical results.
The Merger required the consent of Advance/Newhouse Programming Partnership under the Company's certificate of incorporation as the sole holder of the Series A-1 Preferred Stock. 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 upon the closing of the Merger.
Discovery and WarnerMedia employee share-based awards, issued and outstanding immediately prior to the Merger, were converted into equity-based awards on comparable terms and conditions with respect to shares of WBD stock. 70% of Chief Executive Officer David M. Zaslav's unvested stock options vested upon closing of the Merger according to the terms of his amended and restated employment agreement. The remaining 30% of such options will remain outstanding and continue to vest as provided by the prior employment agreement.
In anticipation of the Merger, Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan (the "Term Loan") and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transaction and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan or the Credit Facility, and will rank equally with all of the Company's other unsecured senior debt.
Due to the limited time between the transaction date and the Company's filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial accounting for the business combination is incomplete and the Company is not yet able to disclose the provisional amounts to be recognized as of the acquisition date for assets acquired and liabilities assumed. The Company expects to provide preliminary purchase price allocation information in the Quarterly Report on Form 10-Q for the quarter ending June 30, 2022.
32
Impact of COVID-19
We continue to closely monitor the ongoing impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties. Certain key sources of revenue for the WarnerMedia Business, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.
The nature and full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others. Our consolidated financial statements reflect management’s estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented. Actual results may differ significantly from these estimates and assumptions.
33
RESULTS OF OPERATIONS
Except as expressly stated, the financial condition and results of operations discussed throughout Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Quarterly Report on Form 10-Q are those of Warner Bros. Discovery, Inc. and its consolidated subsidiaries prior to the Merger.
Foreign Exchange Impacting Comparability
The impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results. For example, our international revenues are favorably impacted as the U.S. dollar weakens relative to other foreign currencies, and unfavorably impacted as the U.S. dollar strengthens relative to other foreign currencies. We believe the presentation of results on a constant currency basis ("ex-FX"), in addition to results reported in accordance with U.S. GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results. The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with U.S. GAAP.
The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts. The ex-FX change is calculated as the difference between the current year amounts translated at a baseline rate, which is a spot rate for each of our currencies determined early in the fiscal year as part of our forecasting process (the “2022 Baseline Rate”), and the prior year amounts translated at the same 2022 Baseline Rate. In addition, consistent with the assumption of a constant currency environment, our ex-FX results exclude the impact of our foreign currency hedging activities, as well as realized and unrealized foreign currency transaction gains and losses. Results on a constant currency basis, as we present them, may not be comparable to similarly titled measures used by other companies.
Consolidated Results of Operations
The table below presents our consolidated results of operations (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | % Change | % Change (ex-FX) | |||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||
| Advertising | $ | 1,482 | $ | 1,415 | 5 | % | 7 | % | ||||||||||||||||||
| Distribution | 1,422 | 1,310 | 9 | % | 10 | % | ||||||||||||||||||||
| Other | 255 | 67 | NM | NM | ||||||||||||||||||||||
| Total revenues | 3,159 | 2,792 | 13 | % | 15 | % | ||||||||||||||||||||
| Costs of revenues, excluding depreciation and amortization | 1,236 | 969 | 28 | % | 31 | % | ||||||||||||||||||||
| Selling, general and administrative | 1,040 | 1,051 | (1) | % | — | % | ||||||||||||||||||||
| Depreciation and amortization | 525 | 361 | 45 | % | 48 | % | ||||||||||||||||||||
| Restructuring and other charges | 5 | 15 | (67) | % | (64) | % | ||||||||||||||||||||
| Total costs and expenses | 2,806 | 2,396 | 17 | % | 20 | % | ||||||||||||||||||||
| Operating income | 353 | 396 | (11) | % | (12) | % | ||||||||||||||||||||
| Interest expense, net | (153) | (163) | (6) | % | ||||||||||||||||||||||
| Loss from equity investees, net | (14) | (4) | NM | |||||||||||||||||||||||
| Other income, net | 490 | 68 | NM | |||||||||||||||||||||||
| Income before income taxes | 676 | 297 | NM | |||||||||||||||||||||||
| Income tax expense | (201) | (106) | 90 | % | ||||||||||||||||||||||
| Net income | 475 | 191 | NM | |||||||||||||||||||||||
| Net income attributable to noncontrolling interests | (16) | (46) | (65) | % | ||||||||||||||||||||||
| Net income attributable to redeemable noncontrolling interests | (3) | (5) | (40) | % | ||||||||||||||||||||||
| Net income available to Warner Bros. Discovery, Inc. | $ | 456 | $ | 140 | NM | |||||||||||||||||||||
NM - Not meaningful
Revenues
Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, market demand, the mix in sales of commercial time between the upfront and scatter markets, and economic conditions. These factors impact the pricing and volume of our advertising inventory.
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Advertising revenue increased 5% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, advertising revenue increased 7% for the three months ended March 31, 2022, respectively. The increase for the three months ended March 31, 2022 was primarily attributable to an increase at U.S. Networks due to higher pricing and the continued monetization of content offerings on our next generation initiatives, partially offset by secular declines in the pay-TV ecosystem, and to a lesser extent, lower overall ratings.
Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from subscription video on demand content licensing and DTC subscription services.
Distribution revenue increased 9% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, distribution revenue increased 10% for the three months ended March 31, 2022. The increase for the three months ended March 31, 2022 was primarily attributable to an increase at U.S. Networks due to the growth of discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers.
Other revenue increased $188 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, other revenue increased $193 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increase for the three months ended March 31, 2022 was primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.
Revenue for our segments is discussed separately below under the heading “Segment Results of Operations.”
Costs of Revenues
The Company's principal component of costs of revenues is content expense. Content expense includes television series, television specials, films, sporting events, and digital products. The costs of producing a content asset and bringing that asset to market consist of film costs, participation costs, exploitation costs, and production costs.
Costs of revenues increased 28% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, cost of revenues increased 31% for the three months ended March 31, 2022. The increase for the three months ended March 31, 2022, was primarily attributable to costs related to the Olympics at International Networks and higher content amortization at U.S. Networks.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy and back office support fees.
Selling, general and administrative expenses decreased 1% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses was flat for the three months ended March 31, 2022. The decrease for the three months ended March 31, 2022 was primarily attributable to lower marketing-related expenses at U.S. Networks for discovery+ due to its launch in January 2021, partially offset by an increase in transaction and integration costs related to the Merger at corporate, inter-segment eliminations, and other.
Depreciation and Amortization
Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets. Depreciation and amortization increased 45% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, depreciation and amortization increased 48% for the three months ended March 31, 2022. The increase for the three months ended March 31, 2022 was primarily attributable to a change in amortization method from the straight-line method to the sum of the years digits method for acquired customer relationships that was effective October 1, 2021.
Restructuring and Other Charges
Restructuring and other charges were $5 million for the three months ended March 31, 2022, as compared to $15 million for the three months ended March 31, 2021. Restructuring and other charges primarily include employee relocation, termination costs, and content impairments during the three months ended March 31, 2022 and 2021. (See Note 18 to the accompanying consolidated financial statements.)
Interest Expense, net
Interest expense, net decreased 6% for the three months ended March 31, 2022 compared to the prior year period. (See Note 7 and Note 8 to the accompanying consolidated financial statements.)
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Loss From Equity Investees, net
We reported losses from our equity method investees of $14 million for the three months ended March 31, 2022, as compared to losses of $4 million for the three months ended March 31, 2021. The changes are attributable to our share of earnings and losses from our equity investees. (See Note 3 to the accompanying consolidated financial statements.)
Other Income, net
The table below presents the details of other income, net (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||||||||
| Foreign currency gain, net | $ | 11 | $ | 52 | ||||||||||||||||||||||
| Gains (losses) on derivative instruments, net | 497 | (20) | ||||||||||||||||||||||||
| Gain on sale of investment with readily determinable fair value | — | 16 | ||||||||||||||||||||||||
| Change in the value of investments with readily determinable fair value | (20) | 17 | ||||||||||||||||||||||||
| Gain on sale of equity method investments | — | 5 | ||||||||||||||||||||||||
| Loss on extinguishment of debt | — | (3) | ||||||||||||||||||||||||
| Interest income | 2 | 1 | ||||||||||||||||||||||||
Total other income, net | $ | 490 | $ | 68 | ||||||||||||||||||||||
Income Tax Expense
Income tax expense was $201 million and $106 million for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in the three months ended March 31, 2022 was primarily attributable to an increase in the pre-tax book income. Income tax expense for the three months ended March 31, 2022 reflects an effective income tax rate that differs from the federal statutory tax rate primarily attributable to the effect of foreign operations and state and local income taxes.
Segment Results of Operations
We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA. Adjusted OIBDA is defined as operating income excluding: (i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration costs, and (viii) other items impacting comparability. We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment. We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses. We exclude employee share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods. We also exclude the depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period. Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives. Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S. GAAP.
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The table below presents our reconciliation of consolidated net income available to Warner Bros. Discovery, Inc. to Adjusted OIBDA and Adjusted OIBDA by segment (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||
| 2022 | 2021 | % Change | ||||||||||||||||||
| Net income available to Warner Bros. Discovery, Inc. | $ | 456 | $ | 140 | NM | |||||||||||||||
| Net income attributable to redeemable noncontrolling interests | 3 | 5 | (40) | % | ||||||||||||||||
| Net income attributable to noncontrolling interests | 16 | 46 | (65) | % | ||||||||||||||||
| Income tax expense | 201 | 106 | 90 | % | ||||||||||||||||
| Income before income taxes | 676 | 297 | NM | |||||||||||||||||
| Other income, net | (490) | (68) | NM | |||||||||||||||||
| Loss from equity investees, net | 14 | 4 | NM | |||||||||||||||||
| Interest expense, net | 153 | 163 | (6) | % | ||||||||||||||||
| Operating income | 353 | 396 | (11) | % | ||||||||||||||||
| Restructuring and other charges | 5 | 15 | (67) | % | ||||||||||||||||
| Depreciation and amortization | 525 | 361 | 45 | % | ||||||||||||||||
| Employee share-based compensation | 57 | 61 | (7) | % | ||||||||||||||||
| Transaction and integration costs | 87 | 4 | NM | |||||||||||||||||
| Adjusted OIBDA | $ | 1,027 | $ | 837 | 23 | % | ||||||||||||||
| Adjusted OIBDA | ||||||||||||||||||||
| U.S. Networks | $ | 1,025 | $ | 823 | 25 | % | ||||||||||||||
| International Networks | 161 | 151 | 7 | % | ||||||||||||||||
| Corporate, inter-segment eliminations, and other | (159) | (137) | (16) | % | ||||||||||||||||
| Adjusted OIBDA | $ | 1,027 | $ | 837 | 23 | % | ||||||||||||||
The table below presents the calculation of Adjusted OIBDA (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||
| U.S. Networks | $ | 1,932 | $ | 1,806 | 7 | % | ||||||||||||||||||||||||||||||||
| International Networks | 1,229 | 987 | 25 | % | ||||||||||||||||||||||||||||||||||
| Corporate, inter-segment eliminations, and other | (2) | (1) | NM | |||||||||||||||||||||||||||||||||||
| Total revenues | 3,159 | 2,792 | 13 | % | ||||||||||||||||||||||||||||||||||
| Costs of revenues, excluding depreciation and amortization | 1,236 | 969 | 28 | % | ||||||||||||||||||||||||||||||||||
Selling, general and administrative (a) | 896 | 986 | (9) | % | ||||||||||||||||||||||||||||||||||
| Adjusted OIBDA | $ | 1,027 | $ | 837 | 23 | % | ||||||||||||||||||||||||||||||||
(a) Selling, general and administrative expenses excludes employee share-based compensation and third-party transaction and integration costs. | ||||||||||||||||||||||||||||||||||||||
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U.S. Networks
The table below presents, for our U.S. Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||
| Advertising | $ | 1,025 | $ | 980 | 5 | % | ||||||||||||||||||||||||||||||||
| Distribution | 886 | 796 | 11 | % | ||||||||||||||||||||||||||||||||||
| Other | 21 | 30 | (30) | % | ||||||||||||||||||||||||||||||||||
| Total revenues | 1,932 | 1,806 | 7 | % | ||||||||||||||||||||||||||||||||||
| Costs of revenues, excluding depreciation and amortization | 489 | 428 | 14 | % | ||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 418 | 555 | (25) | % | ||||||||||||||||||||||||||||||||||
| Adjusted OIBDA | $ | 1,025 | $ | 823 | 25 | % | ||||||||||||||||||||||||||||||||
| Depreciation and amortization | 385 | 224 | ||||||||||||||||||||||||||||||||||||
| Transaction and integration costs | 1 | — | ||||||||||||||||||||||||||||||||||||
| Inter-segment eliminations | 12 | — | ||||||||||||||||||||||||||||||||||||
| Operating income | $ | 627 | $ | 599 | ||||||||||||||||||||||||||||||||||
Revenues
Advertising revenue increased 5% for the three months ended March 31, 2022, compared to the prior year period. The increase was primarily attributable to higher pricing and the continued monetization of content offerings on our next generation initiatives, partially offset by secular declines in the pay-TV ecosystem, and to a lesser extent, lower overall ratings.
Distribution revenue increased 11% for the three months ended March 31, 2022, compared to the prior year period. The increase was primarily attributable to the growth of discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers. Total subscribers to our linear networks at March 31, 2022 were 8% lower than at March 31, 2021, while subscribers to our fully distributed linear networks were 4% lower than the prior year. Excluding the impact of the sale of our Great American Country linear network, total subscribers to our linear networks at March 31, 2022 were 4% lower than at March 31, 2021.
Other revenues decreased $9 million for the three months ended March 31, 2022, compared to the prior year period.
Costs of Revenues
Costs of revenues increased 14% for the three months ended March 31, 2022, compared to prior year. The increase was primarily attributable to higher content amortization at discovery+, which launched in January 2021, and our linear networks.
Content expense was $418 million and $364 million for the three months ended March 31, 2022 and 2021, respectively.
Selling, General and Administrative
Selling, general and administrative expenses decreased 25% for the three months ended March 31, 2022, compared to the prior year period. The decrease was primarily attributable to lower marketing-related expenses for discovery+ due to its launch in January 2021.
Adjusted OIBDA
Adjusted OIBDA increased 25% for the three months ended March 31, 2022, compared to the prior year period.
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International Networks
The following tables present, for our International Networks segment, revenues by type, certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating income (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | % Change (ex-FX) | |||||||||||||||||||||||||||||||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Advertising | $ | 457 | $ | 435 | 5 | % | 11 | % | ||||||||||||||||||||||||||||||||||||||||||
| Distribution | 536 | 514 | 4 | % | 8 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Other | 236 | 38 | NM | NM | ||||||||||||||||||||||||||||||||||||||||||||||
| Total revenues | 1,229 | 987 | 25 | % | 30 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Costs of revenues, excluding depreciation and amortization | 751 | 543 | 38 | % | 45 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 317 | 293 | 8 | % | 14 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Adjusted OIBDA | 161 | 151 | 7 | % | 9 | % | ||||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 101 | 104 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Restructuring and other charges | 4 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Transaction and integration costs | 1 | 4 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Inter-segment eliminations | (7) | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Operating income | $ | 62 | $ | 28 | ||||||||||||||||||||||||||||||||||||||||||||||
Revenues
Advertising revenue increased 5% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, advertising revenue increased 11% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to the broadcast of the Winter Olympics across Europe.
Distribution revenue increased 4% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, distribution revenue increased 8% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to an increase in next generation revenues due to subscriber growth for discovery+, partially offset by lower contractual affiliate rates in some European markets.
Other revenue increased $198 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, other revenue increased $203 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.
Costs of Revenues
Costs of revenues increased 38% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, costs of revenues increased 45% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to costs related to the Olympics.
Content expense, excluding the impact of foreign currency fluctuations, was $559 million and $368 million for the three months ended March 31, 2022 and 2021, respectively.
Selling, General and Administrative
Selling, general and administrative expenses increased 8% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, selling, general and administrative expenses increased 14% for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to higher personnel costs and marketing-related expenses to support discovery+ and the Olympics.
Adjusted OIBDA
Adjusted OIBDA increased $10 million for the three months ended March 31, 2022. Excluding the impact of foreign currency fluctuations, Adjusted OIBDA increased $13 million for the three months ended March 31, 2022.
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Corporate, Inter-segment Eliminations, and Other
The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating loss (in millions).
| Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | % Change | ||||||||||||||||||||||||||||||||||||
Revenues | $ | (2) | $ | (1) | NM | |||||||||||||||||||||||||||||||||
| Costs of revenues, excluding depreciation and amortization | (4) | (2) | NM | |||||||||||||||||||||||||||||||||||
| Selling, general and administrative | 161 | 138 | 17 | % | ||||||||||||||||||||||||||||||||||
| Adjusted OIBDA | (159) | (137) | (16) | % | ||||||||||||||||||||||||||||||||||
| Employee share-based compensation | 57 | 61 | ||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 39 | 33 | ||||||||||||||||||||||||||||||||||||
| Restructuring and other charges | 1 | — | ||||||||||||||||||||||||||||||||||||
| Transaction and integration costs | 85 | — | ||||||||||||||||||||||||||||||||||||
| Inter-segment eliminations | (5) | — | ||||||||||||||||||||||||||||||||||||
| Operating loss | $ | (336) | $ | (231) | ||||||||||||||||||||||||||||||||||
Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation, and third-party transaction and integration costs.
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FINANCIAL CONDITION
Liquidity
Sources of Cash
Historically, we have generated a significant amount of cash from operations. During the three months ended March 31, 2022, we funded our working capital needs primarily through cash flows from operations. As of March 31, 2022, we had $4.2 billion of cash and cash equivalents on hand. We are a well-known seasoned issuer and have the ability to conduct registered offerings of securities, including debt securities, common stock, and preferred stock, on short notice, subject to market conditions. Access to sufficient capital from the public market is not assured. As of March 31, 2022, we also had a $2.5 billion revolving credit facility, which has subsequently been increased to $6.0 billion and a $1.5 billion commercial paper program, as described below. In connection with the closing of the Merger on April 8, 2022, we incurred a substantial amount of additional third-party indebtedness, which has significantly increased our future financial commitments, including aggregate interest payments.
•Debt
Revolving Credit Facility and Commercial Paper
In June 2021, we entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended. We had the capacity to initially borrow up to $2.5 billion under the Credit Agreement. Upon completion of the Merger, the available commitments increased by $3.5 billion, to an aggregate amount not to exceed $6.0 billion. The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit. We may also request additional commitments up to $1.0 billion from the lenders upon satisfaction of certain conditions. Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks, and upon completion of the Merger, WarnerMedia Holdings, Inc., which was originally named Magallanes, Inc.
The Credit Agreement will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent. The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants. As of March 31, 2022, DCL was in compliance with all covenants and there were no events of default under the Credit Facility.
Additionally, our commercial paper program is supported by the Credit Facility. Under the commercial paper program, we may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings. Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program.
As of March 31, 2022 and December 31, 2021, we had no outstanding borrowings under the Credit Facility or the commercial paper program.
•Derivatives
We received investing proceeds of $639 million and financing proceeds of $33 million during the three months ended March 31, 2022 from the unwind and settlement of derivative instruments. (See Note 8 to the accompanying consolidated financial statements.)
Uses of Cash
Our primary uses of cash include the creation and acquisition of new content, business acquisitions, repurchases of our capital stock, income taxes, personnel costs, costs to develop and market discovery+ and HBO Max, principal and interest payments on our outstanding senior notes, and funding for various equity method and other investments.
•Content Acquisition
We plan to continue to invest significantly in the creation and acquisition of new content. Prior to the Merger, contractual commitments to acquire content had not materially changed as set forth in "Material Cash Requirements from Known Contractual and Other Obligations" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Form 10-K. Our contractual commitments to acquire content have increased significantly subsequent to the Merger.
41
•Debt
Senior Notes
During the three months ended March 31, 2022, we repaid in full at maturity $327 million aggregate principal amount outstanding of our 2.375% Euro Denominated Senior Notes due March 2022. In addition, we have $796 million and $192 million of senior notes coming due in March and April 2023, respectively, and $182 million of senior notes assumed in the Merger coming due in September 2023.
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly known as Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transaction and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan or the Credit Facility, and will rank equally with all of the Company's other unsecured senior debt.
We also assumed an additional $1.6 billion of senior notes (includes accrued interest) from the WarnerMedia Business that existed prior to the Merger.
•Capital Expenditures and Investments in Next Generation Initiatives
We effected capital expenditures of $85 million during the three months ended March 31, 2022, including amounts capitalized to support our next generation platforms, such as discovery+. In addition, we expect to continue to incur significant costs to develop and market discovery+ and HBO Max streaming products in the future.
•Investments and Business Combinations
Our uses of cash have included investments in equity method investments and equity investments without readily determinable fair value. (See Note 3 to the accompanying consolidated financial statements.) We provide funding to our investees from time to time. During the three months ended March 31, 2022, we contributed $42 million for investments in and advances to our investees.
In April 2022, we completed the Merger with the WarnerMedia Business. We expect to incur significant, one-time transaction and integration costs during the first year following the Merger. Due to the limited time between the transaction date and our filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2022, initial accounting for the business combination is incomplete and we are not yet able to disclose the provisional amounts to be recognized as of the acquisition date for assets acquired and liabilities assumed. We expect to provide preliminary purchase price allocation information in our Quarterly Report on Form 10-Q for the quarter ending June 30, 2022.
•Redeemable Noncontrolling Interest and Noncontrolling Interest
Due to business combinations, we have redeemable equity balances of $335 million at March 31, 2022, which may require the use of cash in the event holders of noncontrolling interests put their interests to us. Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $224 million and $183 million for the three months ended March 31, 2022 and 2021, respectively.
•Common Stock Repurchases
Historically, we have funded our stock repurchases through a combination of cash on hand, cash generated by operations, and the issuance of debt. In February 2020, our Board of Directors authorized additional stock repurchases of up to $2 billion upon completion of our existing $1 billion authorization announced in May 2019. Under the new stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors. (See Note 9 to the accompanying consolidated financial statements.) During the three months ended March 31, 2022, we did not repurchase any of our common stock.
•Income Taxes and Interest
We expect to continue to make payments for income taxes and interest on our outstanding senior notes. During the three months ended March 31, 2022, we made cash payments of $97 million and $186 million for income taxes and interest on our outstanding debt, respectively. We expect cash required for interest payments to increase significantly as a result of the Merger.
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Cash Flows
The following table presents changes in cash and cash equivalents (in millions).
| Three Months Ended March 31, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash, cash equivalents, and restricted cash, beginning of period | $ | 3,905 | $ | 2,122 | ||||||||||
| Cash provided by operating activities | 323 | 269 | ||||||||||||
| Cash provided by investing activities | 529 | 156 | ||||||||||||
| Cash used in financing activities | (587) | (469) | ||||||||||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | (5) | (70) | ||||||||||||
| Net change in cash, cash equivalents, and restricted cash | 260 | (114) | ||||||||||||
| Cash, cash equivalents, and restricted cash, end of period | $ | 4,165 | $ | 2,008 | ||||||||||
Operating Activities
Cash provided by operating activities was $323 million and $269 million during the three months ended March 31, 2022 and 2021, respectively. The increase in cash provided by operating activities was primarily attributable to an increase in net income excluding non-cash items, partially offset by a negative fluctuation in working capital activity.
Investing Activities
Cash provided by investing activities was $529 million and $156 million during the three months ended March 31, 2022 and 2021, respectively. The increase in cash provided by investing activities was primarily attributable to proceeds received from the unwind and settlement of derivative instruments, partially offset by a reduction in cash received from the sales and maturities of investments during the three months ended March 31, 2022.
Financing Activities
Cash used in financing activities was $587 million and $469 million during the three months ended March 31, 2022 and 2021, respectively. The increase in cash used in financing activities was primarily attributable to an increase in distributions to noncontrolling interests and redeemable noncontrolling interests during the three months ended March 31, 2022.
Capital Resources
As of March 31, 2022, capital resources were comprised of the following (in millions).
| March 31, 2022 | ||||||||||||||||||||||||||
| Total Capacity | Outstanding Indebtedness | Unused Capacity | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 4,162 | $ | — | $ | 4,162 | ||||||||||||||||||||
| Revolving credit facility and commercial paper program | 2,500 | — | 2,500 | |||||||||||||||||||||||
Senior notes (a) | 14,824 | 14,824 | — | |||||||||||||||||||||||
| Total | $ | 21,486 | $ | 14,824 | $ | 6,662 | ||||||||||||||||||||
(a) Interest on the senior notes is paid annually or semi-annually. Our senior notes outstanding as of March 31, 2022 had interest rates that ranged from 1.90% to 6.35% and will mature between 2023 and 2055. | ||||||||||||||||||||||||||
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly known as Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan and issued $30 billion aggregate principal amount of senior unsecured notes. The proceeds were used to fund the cash payments to AT&T and to otherwise fund the transaction and pay fees and expenses. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor under the Term Loan or the Credit Facility, and will rank equally with all of the Company's other unsecured senior debt.
We also assumed an additional $1.6 billion of senior notes (includes accrued interest) from the WarnerMedia Business that existed prior to the Merger.
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We expect that our cash balance, cash generated from operations and availability under the Credit Facility will be sufficient to fund our cash needs for both the short-term and the long-term. Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios.
As of March 31, 2022, we held $437 million of our $4.2 billion of cash and cash equivalents in our foreign subsidiaries. The 2017 Tax Act features a participation exemption regime with current taxation of certain foreign income and imposes a mandatory repatriation toll tax on unremitted foreign earnings. Notwithstanding the U.S. taxation of these amounts, we intend to continue to reinvest these funds outside of the U.S. Our current plans do not demonstrate a need to repatriate them to the U.S. However, if these funds are needed in the U.S., we would be required to accrue and pay non-U.S. taxes to repatriate them. The determination of the amount of unrecognized deferred income tax liability with respect to these undistributed foreign earnings is not practicable.
Summarized Guarantor Financial Information
Basis of Presentation
As of March 31, 2022 and December 31, 2021, all of the Company’s outstanding registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company and guaranteed by the Company and Scripps Networks, except for $23 million of senior notes outstanding as of March 31, 2022 that have been issued by Scripps Networks and are not guaranteed. (See Note 7 to the accompanying consolidated financial statements.) DCL primarily includes the Discovery Channel and TLC networks in the U.S. DCL is a wholly owned subsidiary of the Company. Scripps Networks is also 100% owned by the Company.
In anticipation of the Merger, WarnerMedia Holdings, Inc., formerly known as Magallanes, Inc., a wholly owned subsidiary of AT&T Inc., entered into a $10 billion term loan and $30 billion aggregate principal amount of senior unsecured notes. Upon completion of the Merger, AT&T was released from all obligations and the debt was unconditionally guaranteed on a senior unsecured basis by WBD and each wholly owned domestic subsidiary of WBD that is a borrower or considered a subsidiary guarantor (currently DCL and Scripps Networks, and subsequent to the Merger, Discovery Communications Benelux B.V.), and will rank equally with all of the Company's other unsecured senior debt.
The tables below present the summarized financial information as combined for Warner Bros. Discovery, Inc. (the “Parent”), Scripps Networks, and DCL (collectively, the “Obligors”), and do not include the WarnerMedia Business. All guarantees of DCL's senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes. The tables below do not include WarnerMedia.
Note Guarantees issued by Scripps Networks or any subsidiary of the Parent that in the future issues a Note Guarantee (each, a “Subsidiary Guarantor”) may be released and discharged (i) concurrently with any direct or indirect sale or disposition of such Subsidiary Guarantor or any interest therein, (ii) at any time that such Subsidiary Guarantor is released from all of its obligations under its guarantee of payment by DCL, (iii) upon the merger or consolidation of any Subsidiary Guarantor with and into DCL or the Parent or another Subsidiary Guarantor, or upon the liquidation of such Subsidiary Guarantor and (iv) other customary events constituting a discharge of the Obligors’ obligations.
Summarized Financial Information
The Company has included the accompanying summarized combined financial information of the Obligors after the elimination of intercompany transactions and balances among the Obligors and the elimination of equity in earnings from and investments in any subsidiary of the Parent that is a non-guarantor (in millions).
| March 31, 2022 | December 31, 2021 | |||||||||||||
| Current assets | $ | 4,843 | $ | 4,452 | ||||||||||
| Non-guarantor intercompany trade receivables, net | 120 | 85 | ||||||||||||
| Noncurrent assets | 5,925 | 5,969 | ||||||||||||
| Current liabilities | 1,342 | 1,018 | ||||||||||||
| Noncurrent liabilities | 14,888 | 15,778 | ||||||||||||
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| Three Months Ended March 31, 2022 | ||||||||||||||
| Revenues | $ | 542 | ||||||||||||
| Operating income | 137 | |||||||||||||
| Net income | 390 | |||||||||||||
| Net income available to Warner Bros. Discovery, Inc. | 388 | |||||||||||||
COMMITMENTS
In the normal course of business, we enter into commitments for the purchase of goods or services that require us to make payments or provide funding in the event certain circumstances occur. The nature of our contractual commitments is evolving with the launch and our support of discovery+. Prior to the Merger, total contractual commitments had not increased materially as set forth in "Material Cash Requirements from Known Contractual and Other Obligations" in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2021 Annual Report on Form 10-K. Our contractual commitments have increased significantly subsequent to the Merger.
RELATED PARTY TRANSACTIONS
In the ordinary course of business, we enter into transactions with related parties, primarily the Liberty Group and our equity method investees. (See Note 15 to the accompanying consolidated financial statements.)
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our critical accounting policies and estimates have not changed since December 31, 2021. For a discussion of each of our critical accounting estimates listed below, including information and analysis of estimates and assumptions involved in their application, see "Critical Accounting Policies and Estimates" included in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our 2021 Annual Report on Form 10-K:
•Uncertain tax positions;
•Goodwill and intangible assets;
•Content rights;
•Consolidation; and
•Revenue recognition
NEW ACCOUNTING AND REPORTING PRONOUNCEMENTS
We adopted certain new accounting and reporting standards during the three months ended March 31, 2022. (See Note 1 to the accompanying consolidated financial statements.)
CAUTIONARY NOTE CONCERNING FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-Q, as well as in other public statements we may make, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, anticipated sources and uses of capital and our recently completed acquisition of the WarnerMedia Business. Words such as “anticipate,” “assume,” “believe,” “continue,” “estimate,” “expect,” “forecast,” “future,” “intend,” “plan,” “potential,” “predict,” “project,” “strategy,” “target” and similar terms, and future or conditional tense verbs like “could,” “may,” “might,” “should,” “will” and “would,” among other terms of similar substance used in connection with any discussion of future operating or financial performance identify forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be accomplished. The following is a list of some, but not all, of the factors that could cause actual results or events to differ materially from those anticipated:
•the effects of our recently completed acquisition of the WarnerMedia Business;
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•changes in the distribution and viewing of television programming, including the continuing expanded deployment of personal video recorders, subscription video on demand, internet protocol television, mobile personal devices, personal tablets and user-generated content and their impact on television advertising revenue;
•continued consolidation of distribution customers and production studios;
•a failure to secure affiliate agreements or the renewal of such agreements on less favorable terms;
•rapid technological changes;
•the inability of advertisers or affiliates to remit payment to us in a timely manner or at all;
•general economic and business conditions, including the impact of the ongoing COVID-19 pandemic;
•industry trends, including the timing of, and spending on, feature film, television and television commercial production;
•spending on domestic and foreign television advertising;
•disagreements with our distributors or other business partners over contract interpretation;
•fluctuations in foreign currency exchange rates, political unrest and regulatory changes in international markets, including any proposed or adopted regulatory changes that impact the operations of our international media properties and/or modify the terms under which we offer our services and operate in international markets;
•market demand for foreign first-run and existing content libraries;
•the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
•uncertainties regarding the financial performance of our investments in unconsolidated entities;
•our ability to complete, integrate, maintain and obtain the anticipated benefits and synergies from our proposed business combinations and acquisitions, including our recently completed acquisition of the WarnerMedia Business, on a timely basis or at all;
•uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies, and the success of our discovery+ and HBO Max streaming products;
•realizing direct-to-consumer subscriber goals;
•future financial performance, including availability, terms, and deployment of capital;
•the ability of suppliers and vendors to deliver products, equipment, software, and services;
•the outcome of any pending or threatened or potential litigation, including any litigation that has been or may be instituted against us relating to our recently completed acquisition of the WarnerMedia Business;
•availability of qualified personnel and recruiting, motivating and retaining talent;
•the possibility or duration of an industry-wide strike or other job action affecting a major entertainment industry union or others involved in the development and production of our television programming, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements;
•changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission and similar authorities internationally and data privacy regulations and adverse outcomes from regulatory proceedings;
•changes in income taxes due to regulatory changes or changes in our corporate structure;
•changes in the nature of key strategic relationships with partners, distributors and equity method investee partners;
•competitor responses to our products and services and the products and services of the entities in which we have interests;
•threatened or actual cyber-attacks and cybersecurity breaches;
•threatened terrorist attacks and military action, including the intensification or expansion of the conflict in Ukraine;
•service disruptions or the failure of communications satellites or transmitter facilities;
•theft of our content and unauthorized duplication, distribution and exhibition of such content;
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•changes in existing U.S. and foreign laws and regulations, as well as possible private rights of action, regarding intellectual property rights protection and privacy, personal data protection and user consent;
•potential changes to the electromagnetic spectrum currently used for broadcast television and satellite distribution being considered by the Federal Communications Commission could negatively impact our WarnerMedia Business's ability to deliver pay-TV network feeds of our domestic pay-TV programming networks to our affiliates, and, in some cases, to produce high-value news and entertainment programming on location;
•our level of debt, including the significant indebtedness incurred in connection with the acquisition of the WarnerMedia Business, and our future compliance with debt covenants;
•reduced access to capital markets or significant increases in costs to borrow, including as a result of higher interest rates and perceived, potential or actual inflation; and
•a reduction of advertising revenue associated with unexpected reductions in the number of subscribers.
These risks have the potential to impact the recoverability of the assets recorded on our balance sheets, including goodwill or other intangibles. Additionally, many of these risks are currently amplified by and may, in the future, continue to be amplified by the prolonged impact of the COVID-19 pandemic. For additional risk factors, refer to Item 1A, “Risk Factors,” in our 2021 Annual Report on Form 10-K and Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Quantitative and qualitative disclosures about our existing market risk are set forth in Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in the 2021 Form 10-K. Our exposures to market risk have not changed materially since December 31, 2021.
ITEM 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2022. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of March 31, 2022, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting
During the three months ended March 31, 2022, there were no changes in our internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f), that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In the normal course of business, we experience routine claims and legal proceedings. It is the opinion of our management, based on information available at this time, that none of the current claims and proceedings will have a material adverse effect on our consolidated financial position, results of operations or cash flows. See Note 16 to the accompanying consolidated financial statements.
As of April 1, 2022, eight lawsuits have been filed by alleged Discovery stockholders against Discovery and the Discovery Board related to the Merger. A complaint captioned Rahman v. Discovery Inc. et al., Case No. 1:21-cv-09785 (the “Rahman Complaint”), was filed in the United States District Court for the Southern District of New York on November 23, 2021. A complaint captioned Chiao v. Discovery Inc. et al., Case No. 1:21-cv-10409, was filed in the United States District Court for the Southern District of New York on December 6, 2021. A complaint captioned Whitfield v. Discovery Inc. et al., Case No. 1:21-cv-10514 (the “Whitfield Complaint”), was filed by Matthew Whitfield in the United States District Court for the Southern District of New York on December 8, 2021. A complaint captioned Solakian v. Discovery Inc. et al., Case No. 1:21-cv-06806, was filed in the United States District Court for the Eastern District of New York on December 8, 2021. A complaint captioned Finger v. Discovery Inc. et al., Case No. 2:21-cv-09799, was filed in the United States District Court for the Central District of California on December 20, 2021. A complaint captioned Ciccotelli v. Discovery Inc. et al., Case No. 2:21-cv-05566, was filed in the United States District Court for the Eastern District of Pennsylvania on December 21, 2021. A complaint captioned Kent v. Discovery Inc. et al., Case No. 1:22-cv-00033-UNA, was filed by Michael Kent in the United States District Court for the District of Delaware on January 7, 2022. A complaint captioned Jones v. Discovery Inc. et al., Case No. 1:22-cv-00204, was filed by Brian Jones in the United States District Court for the Southern District of New York on January 10, 2022. Each of the above complaints name as defendants Discovery and members of the Discovery Board. The Whitfield Complaint and the Rahman Complaint also name as defendants AT&T, Inc. and Drake Subsidiary, Inc. The Whitfield Complaint names Magallanes, Inc. as an additional defendant. Each of the complaints alleges violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule 14a-9 promulgated thereunder. The complaints generally allege that the respective defendants filed a materially incomplete and misleading preliminary proxy statement with the SEC. Each of the complaints seeks injunctive relief, damages and other relief.
ITEM 1A. Risk Factors
Investors should carefully review and consider the information regarding certain factors that could materially affect our business, results of operations, financial condition and cash flows as set forth under Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”), and as supplemented by the additional risk factors described below under “Risk Related to our Acquisition of the WarnerMedia Business”. In addition, the risks described in our Form 10-K under “Risks Related to Corporate Structure” as well as risks related to COVID-19 are amended and restated as set forth below.
Additional risks and uncertainties not presently known to us or that we currently believe not to be material may also adversely impact our business, results of operations, financial position and cash flows.
Risk Related to our Acquisition of the WarnerMedia Business
We expect to incur significant costs during the first year following the Merger.
On April 8, 2022, we completed the previously announced transaction (the “Merger”) in which we acquired the business, operations and activities that constitute the WarnerMedia segment of AT&T, Inc., subject to certain exceptions (the “WarnerMedia Business”). We have incurred significant costs in connection with the signing and closing of the Merger, and expect to continue to incur significant additional one-time cash costs during the first year following the Merger which costs we believe will be necessary to realize the anticipated cost synergies from the Merger. Additional unanticipated costs may also be incurred in connection with the integration of the legacy business, operations and activities of Discovery, Inc. prior to the Merger (the “Discovery Business”) and the WarnerMedia Business. No assurances of the timing or amount of synergies able to be captured, or the timing or amount of costs necessary to achieve those synergies, can be provided. Some of the factors affecting the costs associated in the integration phase of the Merger include the resources required in integrating the WarnerMedia Business with the Discovery Business and the length of time during which transition services are provided to us by AT&T. The amount and timing of any such charges could materially adversely affect our business, financial condition and results of operations.
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We could be required to recognize impairment charges related to goodwill and other intangible assets.
The Merger added a significant amount of goodwill and other intangible assets to our consolidated balance sheet. In accordance with GAAP, management periodically assesses these assets to determine if they are impaired. Significant negative industry or economic trends, including the ongoing effects of the COVID-19 pandemic, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may impair goodwill and other intangible assets. Any charges relating to such impairments could materially adversely affect our results of operations in the periods recognized.
We may be unable to provide (or obtain from third parties) the same types and level of services to the WarnerMedia Business that historically have been provided by AT&T or may be unable to provide (or obtain) them at the same cost.
Prior to the Merger, as part of a separate reporting segment of AT&T, the WarnerMedia Business was able to receive services from AT&T. Following the Merger, we have replaced these services either by providing them internally from our existing services or by obtaining them from unaffiliated third parties, including AT&T. These services include AT&T bundling HBO Max with some of its wireless and broadband offerings, and certain administrative and operating functions of which effective and appropriate performance is critical to the operations of the WarnerMedia Business and the Company as a whole following the Merger. AT&T is providing certain services on a transitional basis pursuant to a Transition Services Agreement (the “TSA”) with us. The duration of such services is subject to a limited term set out in the Services Schedule to the TSA. We may be unable to replace these services in a timely manner or on terms and conditions as favorable as those the WarnerMedia Business currently receives from AT&T. The costs for these services could in the aggregate be higher than the combination of our historical costs and those reflected in the historical financial statements of the WarnerMedia Business. If we are unable to replace the services provided by AT&T or are unable to replace them at the same cost or are delayed in replacing the services provided by AT&T, our results of operations may be materially adversely impacted.
Following the Merger, we will need to replace or renegotiate certain contracts that the WarnerMedia Business is party to. If we cannot negotiate terms that are as favorable as those AT&T had been able to negotiate, our business, financial condition and results of operations may be adversely affected.
Prior to the Merger, as a separate reporting segment of AT&T, the WarnerMedia Business was able to receive benefits from being a part of AT&T and had been able to benefit from AT&T’s financial strength, extensive business relationships and purchasing power. Following the Merger, the WarnerMedia Business is not able to leverage AT&T’s financial strength, does not have access to all of AT&T’s extensive business relationships and may not have purchasing power similar to what the WarnerMedia Business benefited from by being a part of AT&T prior to the Merger. In addition, certain contracts that AT&T or its subsidiaries are a party to on behalf of the WarnerMedia Business may have required consents of third parties in order to transfer them to us in connection with the Merger. We may not be able to obtain those consents, enter into new agreements with respect to those contracts if consents are not obtained or arrange for a lawful alternative arrangement to provide the WarnerMedia Business with the rights and obligations under such contracts. Additionally, some of those contracts may contain termination rights in connection with the Merger or the transactions contemplated thereby, and some third parties may exercise this right. It is therefore possible, whether as a result of routine renegotiations of terms in the ordinary course of business, or as part of a request for consent or a replacement of a contract where consent has not been obtained, or in connection with the termination of such contracts, that we may not be able to negotiate terms as favorable as those AT&T received previously for one or more contracts, and in the aggregate the loss or renegotiation of contracts in connection with the foregoing could materially adversely affect our business, financial condition and results of operations by increasing costs or decreasing revenues.
The success of the Company depends on relationships with third parties and existing customers of both the Discovery Business and the WarnerMedia Business, which relationships may be affected by customer or third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect our business, financial condition and results of operations.
Our success will depend on our ability to maintain and renew relationships with existing customers, business partners and other third parties of both the Discovery Business and the WarnerMedia Business, and our ability to establish new relationships. There can be no assurance that the combined business of the Discovery Business and the WarnerMedia Business will be able to maintain and renew existing contracts and other business relationships, or that we will be able to enter into or maintain new contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition and results of operations.
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If the results of operations of the WarnerMedia Business following the Merger are below management’s expectations, the Company may not achieve the increases in revenues and net earnings that management expects as a result of the Merger.
Management projected that the Discovery Business and WarnerMedia Business combined will derive a majority of its revenues and net earnings from the WarnerMedia Business after the Merger. Therefore, if the results of operations of the WarnerMedia Business following the Merger are below management’s expectations, the Company may not achieve the consolidated results of operations that were expected as a result of the Merger. Some of the significant factors that could negatively impact the results of operations of the WarnerMedia Business, and therefore harm the results of operations of the Company, include:
•more intense competitive pressure from existing or new competitors;
•fluctuations in the exchange rates in the jurisdictions in which the WarnerMedia Business operates;
•increases in promotional and operating costs for the WarnerMedia Business;
•a decline in the viewership or consumption of content provided by the WarnerMedia Business; and
•material variations in the results of operations of the WarnerMedia Business from expectations or projections of such results of operations, which were based on estimates and assumptions developed by our management, any or all of which may prove to be incorrect or inaccurate.
Service disruptions or the failure of communications satellites or transmitter facilities we rely upon could adversely impact our business, financial condition and results of operations.
The WarnerMedia Business relies on communications satellites and transmitter facilities and other technical infrastructure, including fiber, to transmit their programming to affiliates and other distributors. Shutdowns of communications satellites and transmitter facilities or service disruptions pose significant risks to the WarnerMedia Business’s operations and will pose significant risks to our operations. Such disruptions may be caused by power outages, natural disasters, extreme weather, terrorist attacks, war, failures or impairments of communications satellites or on-ground uplinks or downlinks or other technical facilities and services used to transmit programming, failure of service providers to meet contractual requirements, or other similar events. If a communications satellite or other transmission means (e.g., fiber) is not able to transmit our programming, or if any material component thereof fails or becomes inoperable, we may not be able to secure an alternative communications path in a timely manner because, among other factors, there are a limited number of communications satellites and other means available for the transmission of programming, and any alternatives may require lead time and additional technical resources and infrastructure to implement. If such an event were to occur, there could be a disruption in the delivery of our programming, which could harm our reputation and materially adversely affect our business, financial condition and results of operations.
Our participation in multiemployer defined benefit pension plans could subject the Company to liabilities that could adversely affect our business, financial condition and results of operations.
The WarnerMedia Business contributes to various multiemployer defined benefit pension plans (the “multiemployer plans”) under the terms of collective bargaining agreements that cover certain of its union-represented employees. Following the Merger, we assumed certain of the obligations under these multiemployer plans with respect to transferred employees from the WarnerMedia Business. The risks of participation in these multiemployer plans are different from single-employer pension plans in that: (1) contributions made by the Company to the multiemployer plans may be used to provide benefits to employees of other participating employers; (2) if we choose to stop participating or substantially reduce participation in certain of these multiemployer plans, we 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 (3) actions taken by any participating employer that lead to a deterioration of the financial health of a multiemployer plan may result in the unfunded obligations of the multiemployer plan being borne by its remaining participating employers, including the Company. While we do not expect any of the multiemployer plans to which we contribute to be individually significant to the Company as a whole, as of December 31, 2021, the WarnerMedia Business was, and the Company could be, an employer that provides more than 5% of total contributions to certain of the multiemployer plans in which it participates or the Company will participate.
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To the extent that U.S.-registered multiemployer plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980 (collectively, “ERISA”), may subject the Company to substantial liabilities in the event of a complete or partial withdrawal from, or upon termination of, such plans. The WarnerMedia Business currently contributes to, and in the past has contributed to, multiemployer plans that are underfunded, and, therefore, could have potential liability associated with a voluntary or involuntary withdrawal from, or termination of, such plans. In addition, for a multiemployer plan in endangered, seriously endangered or critical status, additional required contributions, generally in the form of surcharges on contributions otherwise required, and benefit reductions may apply if such plan is determined to be underfunded, which could adversely affect our business, financial condition and results of operations if we are unable to adequately mitigate these costs.
As of December 31, 2021, two of the multiemployer plans in which the WarnerMedia Business participates were underfunded, but neither plan was considered to be in endangered, seriously endangered or critical status. The amount of funds the Company may be obligated to contribute to multiemployer plans in the future cannot be estimated, as these amounts are based on future levels of work of the union-represented employees covered by the multiemployer plans, investment returns and the funding status of such plans. The WarnerMedia Business does not currently intend to withdraw from the multiemployer plans in which it participates, and it is not aware of circumstances that would reasonably lead to material claims against the Company in connection with the multiemployer plans in which the Company will participate. There can be no assurance, however, that the Company will not be assessed liabilities in the future. Potential withdrawal liabilities, requirements to pay increased contributions, and/or surcharges in connection with any multiemployer plans in which the Company will participate could materially adversely affect our business, financial condition and results of operations.
Our businesses may be subject to labor disruption.
We and some of our suppliers and business partners retain the services of writers, directors, actors, announcers, athletes, technicians, trade employees and others involved in the development and production of our television programming, feature films and interactive entertainment (e.g., games) who are covered by collective bargaining agreements. If negotiations to renew expiring collective bargaining agreements are not successful or become unproductive, the affected unions could take actions such as strikes, work slowdowns or work stoppages. Strikes, work slowdowns, work stoppages or the possibility of such actions could result in delays in the production of our television programming, feature films and interactive entertainment. We could also incur higher costs from such actions, enter into new collective bargaining agreements or renew collective bargaining agreements on less favorable terms. Many of the collective bargaining agreements that cover individuals providing services to the Company are industry-wide agreements, and we may lack practical control over the negotiations and terms of these agreements. Union or labor disputes or player lock-outs relating to certain professional sports leagues may preclude us from producing and telecasting scheduled games or events and could negatively impact our promotional and marketing opportunities. Depending on their duration, union or labor disputes or player lock-outs could have a material adverse effect on our business, financial condition and results of operations.
Risk Related to COVID-19
The COVID-19 pandemic has caused substantial disruption in theatrical and television production, financial markets and economies worldwide, which could result in adverse effects on the market price of our common stock and our business, operations and ability to raise capital.
The COVID-19 pandemic has negatively impacted the global economy and continues to create significant volatility and disruption in the credit and financial markets, and while some economic disruption may ease from time to time, such disruption is expected to continue and may worsen for an undetermined period of time. There is a significant degree of uncertainty and lack of visibility as to the extent and duration of the global economic disruption caused by COVID-19; however, a prolonged disruption, slowdown or recession could materially adversely affect the market price of our common stock and our credit ratings, ability to access capital on favorable terms and ability to meet its liquidity needs and could have a material adverse effect on our business, financial condition and results of operations.
The Discovery Business and the WarnerMedia Business, as with other businesses globally, have been significantly affected by the COVID-19 pandemic both domestically and internationally, including as a result of governmentally imposed shutdowns, workforce realignments, labor and supply chain interruptions, and quarantines and travel restrictions, among other factors. Certain key sources of revenue for the WarnerMedia Business, including theatrical revenues, television production, studio operations and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks. Shutdowns and/or restrictions relating to television and theatrical production activity have impacted, and may continue to impact, various aspects of project scheduling, completion and budgets, as well as revenue streams tied to projected release or availability dates. All such impacts may continue for an indefinite length of time.
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Our actions to limit the adverse effects of COVID-19 on our financial condition may not be successful, as the extent and duration of the adverse effects of the pandemic are not determinable and depend on future developments, which are highly uncertain and cannot be predicted. Events resulting from the effects of COVID-19 may negatively impact our ability to comply with its financial covenants. Also, additional funding may not be available to us on acceptable terms or at all. If adequate funding is not available, we may be required to reduce expenditures, including curtailing our growth strategies and reducing our product development efforts, or forego acquisition opportunities.
Risks Related to Domestic and Foreign Laws and Regulations and Other Risks Related to International Operations
Changes in domestic and foreign laws and regulations and other risks related to international operations could adversely impact our business, financial condition and results of operations.
Programming services like the Discovery Business and the WarnerMedia Business, and the distributors of our services, including cable operators, satellite operators and other multi-channel video programming distributors, are regulated by U.S. federal laws and regulations issued and administered by various federal agencies, including the Federal Communications Commission (the “FCC”), as well as by state and local governments, in ways that will affect the daily conduct of our video content business. These obligations and regulations, among other things, require closed captioning of programming for the hearing impaired, require certain content providers to make available audio descriptions of programming for the visually impaired, limit the amount and content of commercial matter that may be shown during programming aimed primarily at an audience of children aged 12 and under, and require the identification of (or the maintenance of lists of) sponsors of political advertising. The U.S. Congress, the FCC and the courts currently have under consideration, and may adopt or interpret in the future, new laws, regulations and policies regarding a wide variety of matters that could, directly or indirectly, affect the operations of our U.S. media properties or modify the terms under which we offer our services and operate.
Similarly, the foreign jurisdictions in which the Discovery Business and the WarnerMedia Business networks are offered have, in varying degrees, laws and regulations that govern our business. The Discovery Business and the WarnerMedia Business have operations through which we offer for sale and distribute programming and other goods and services outside of the United States. As a result, our business will be subject to certain risks inherent in international business, many of which are beyond our control. These risks include:
•laws and policies affecting trade and taxes, including laws and policies relating to the repatriation of funds and withholding taxes, and changes in these laws;
•local regulatory requirements (and any changes to such requirements), including restrictions on content, censorship, imposition of local content quotas, local production levies and restrictions or prohibitions on foreign ownership, outsourcing, consumer protection, intellectual property and related rights, including copyright and rightsholder rights and remuneration;
•our ability to obtain the appropriate licenses and other regulatory approvals we need to broadcast content in foreign countries;
•differing degrees of protection for intellectual property and varying attitudes towards the piracy of intellectual property;
•significant fluctuations in foreign currency value;
•currency exchange and central banking controls;
•the instability of foreign economies and governments;
•the potential for political, social, or economic unrest, terrorism, hostilities, cyber-attacks or war, including the conflict between Russia and Ukraine;
•anti-corruption laws and regulations such as the Foreign Corrupt Practices Act and the U.K. Bribery Act that impose stringent requirements on how we conduct our foreign operations and changes in these laws and regulations;
•sanction laws and regulations such as those administered by the Office of Foreign Assets Control that restrict our dealings with certain sanctioned countries, territories, individuals and entities; these laws and regulations are complex, frequently changing, and increasing in number, and may impose additional prohibitions or compliance obligations on our dealings in certain countries and territories, including sanctions imposed on Russia and certain Ukrainian territories;
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•foreign privacy and data protection laws and regulations and changes in these laws; and
•shifting consumer preferences regarding the viewing of video programming.
Events or developments related to these and other risks associated with international trade could adversely affect our revenues from non-U.S. sources, which could have a material adverse effect on our business, financial condition and results of operations. Acts of terrorism, hostilities, imposition of sanctions or financial, political, economic or other uncertainties could lead to a reduction in revenue or loss of investment, which could materially adversely affect our results of operations. Furthermore, some foreign markets where the Discovery Business, the WarnerMedia Business and our partners operate may be more adversely affected by current economic conditions than the United States. We also may incur substantial expense as a result of changes, including the imposition of new restrictions, in the existing regulatory, economic or political environment in the regions where we do business.
This is of particular concern in Poland, where we own and operate TVN, a portfolio of free-to-air and pay-TV lifestyle, entertainment, and news networks. On December 17, 2021, a proposed amendment to the Polish Broadcasting Act commonly referred to as “LEX TVN” was presented to the lower chamber of the Polish Parliament (the “Sejm”) for consideration and was subsequently passed by the Sejm. LEX TVN would prohibit the granting of licenses for television and radio broadcasting channels in Poland, such as the TVN portfolio of channels, to broadcasters with more than 49% of their share capital directly or indirectly controlled by an entity with a registered seat outside of the European Economic Area, essentially precluding non-European Economic Area ownership of media entities in Poland. LEX TVN was presented to the President of Poland for consideration and, on December 27, 2021, the President of Poland vetoed LEX TVN. In the future, if legislation similar to LEX TVN is enacted, it could, directly or indirectly, affect the future operations of our Polish media properties and/or modify the terms under which we offer our services and operate in that market in the future.
The evolving regulatory environment in international markets may also impact strategy, costs and results of operations, including with respect to local programming investment obligations, satisfaction of local content quotas, access to local production incentive schemes, such as film subsidies, and direct and indirect digital taxes or levies on internet-based programming services.
Risks Related to Corporate Structure
We have directors in common with those of Liberty Media Corporation (“Liberty Media”), Liberty Global plc (“Liberty Global”), Qurate Retail Group f/k/a Liberty Interactive Corporation (“Qurate Retail”), Liberty Broadband Corporation ("Liberty Broadband"), Liberty Latin America Ltd ("LLA") and Liberty Media Acquisition Corp (“LMAC”), which may result in the diversion of business opportunities or other potential conflicts.
Liberty Media, Liberty Global, Qurate Retail, Liberty Broadband and LLA (together, the "Liberty Entities") own interests in various U.S. and international companies, such as Charter Communications, Inc. ("Charter"), that have subsidiaries that own or operate domestic or foreign content services that may compete with the content services we offer. We have no rights in respect of U.S. or international content opportunities developed by or presented to the subsidiaries of any Liberty Entities, and the pursuit of these opportunities by such subsidiaries may adversely affect our interests and those of our stockholders. Because we and the Liberty Entities have overlapping directors, the pursuit of business opportunities may serve to intensify the conflicts of interest or appearance of conflicts of interest faced by the respective management teams. Our charter provides that none of our directors or officers will be liable to us or any of our subsidiaries for breach of any fiduciary duty by reason of the fact that such individual directs a corporate opportunity to another person or entity (including any Liberty Entities), for which such individual serves as a director or officer, or does not refer or communicate information regarding such corporate opportunity to us or any of our subsidiaries, unless (a) such opportunity was expressly offered to such individual solely in his or her capacity as a director or officer of us or any of our subsidiaries and (b) such opportunity relates to a line of business in which we or any of our subsidiaries is then directly engaged.
We have directors that are also related persons of Advance/Newhouse and that overlap with those of the Liberty Entities, which may lead to conflicting interests for those tasked with the fiduciary duties of our board.
Following the Merger, Advance/Newhouse owns shares representing approximately 8% of our outstanding common stock.
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Our thirteen-person board of directors includes Steven A. Miron, the Chief Executive Officer of Advance/Newhouse Programming Partnership (“Advance/Newhouse”) and Steven O. Newhouse, Co-President of Advance Publications, Inc., which holds interests in Advance/Newhouse and Charter. Pursuant to a consent agreement entered into between Advance/Newhouse and the Company in connection with the Merger, the Company designated Mr. Miron and Mr. Newhouse to our board of directors with terms ending on the third annual meeting following the Merger. In addition, our board of directors includes two persons who are currently members of the board of directors of Liberty Media, two persons who are currently members of the board of directors of Liberty Global, one person who is currently a member of the board of directors of Qurate Retail, one person who is currently a member of the board of directors of Liberty Broadband, one person who is currently a member of the board of directors of Charter, of which Liberty Broadband owns an equity interest, one person who is currently a member of the board of directors of LLA, and one person who is currently a member of the board of directors of LMAC. John C. Malone is the Chairman of the boards of all of the Liberty Entities other than LLA and Qurate Retail. The parent company of Advance/Newhouse and the Liberty Entities own interests in a range of media, communications and entertainment businesses.
None of the Liberty Entities own any interest in us. Mr. Malone beneficially owns: shares of Liberty Media representing approximately 48% of the aggregate voting power of its outstanding stock, shares representing approximately 30% of the aggregate voting power of Liberty Global, shares representing approximately 6% of the aggregate voting power of Qurate Retail, shares representing approximately 49% of the aggregate voting power of Liberty Broadband and, following the Merger, shares representing less than 1% of our outstanding common stock. Our directors who are also directors of the Liberty Entities hold stock and stock-based compensation in the Liberty Entities and hold our stock and stock-based compensation.
These ownership interests and/or business positions could create, or appear to create, potential conflicts of interest when these individuals are faced with decisions that could have different implications for us, Advance/Newhouse and/or the Liberty Entities. For example, there may be the potential for a conflict of interest when we, on the one hand, or Advance/Newhouse and/or one or more of the Liberty Entities, on the other hand, consider acquisitions and other corporate opportunities that may be suitable for the other.
The members of our board of directors have fiduciary duties to us and our stockholders. Likewise, those persons who serve in similar capacities at Advance/Newhouse or a Liberty Entity have fiduciary duties to those companies. Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting both respective companies, and there can be no assurance that the terms of any transactions will be as favorable to us or our subsidiaries as would be the case in the absence of a conflict of interest.
It may be difficult for a third party to acquire us, even if such acquisition would be beneficial to our stockholders.
Certain provisions of our charter and bylaws may discourage, delay or prevent a change in control that a stockholder may consider favorable. These provisions include the following:
•authorizing the issuance of “blank check” preferred stock, which could be issued by our Board of Directors to increase the number of outstanding shares and thwart a takeover attempt;
•classifying our Board of Directors with staggered three-year terms until the election of directors at our 2025 annual meeting of stockholders, which may lengthen the time required to gain control of our Board of Directors;
•limiting who may call special meetings of stockholders;
•prohibiting stockholder action by written consent (subject to certain exceptions), thereby requiring stockholder action to be taken at a meeting of the stockholders;
•establishing advance notice requirements for nominations of candidates for election to our Board of Directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
•the existence of authorized and unissued stock which would allow our Board of Directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of us.
In addition, under our charter, we have not opted out of the protections of Section 203 of the Delaware General Corporation Law, and we are therefore governed by Section 203. Accordingly, it is expected that Section 203 will have an anti-takeover effect with respect to transactions that the Board does not approve in advance and that Section 203 may discourage takeover attempts that might result in a premium over the market price of WBD capital stock.
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If Advance/Newhouse were to sell its shares following the exercise of its registration rights, it may cause a significant decline in our stock price, even if our business is doing well.
Advance/Newhouse and Advance Newhouse Partnership (“ANP”) have been granted registration rights covering all of the shares of common stock now held or hereafter acquired by them. The registration rights, which are immediately exercisable subject to certain customary “blackout periods”, are transferable with the sale or transfer by them to their affiliates and successors, as well as a specified family foundation. The registration rights have been partially exercised, and this exercise or any other exercise of the registration rights, and subsequent sale of possibly large amounts of our common stock in the public market, could materially and adversely affect the market price of our common stock.
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ITEM 6. Exhibits.
| Exhibit No. | Description | ||||||||||
| 3.1 | |||||||||||
| 3.2 | |||||||||||
| 4.1 | |||||||||||
| 4.2 | |||||||||||
| 4.3 | |||||||||||
| 4.4 | |||||||||||
| 4.5 | |||||||||||
| 4.6 | |||||||||||
| 10.1 | |||||||||||
| 10.2 | |||||||||||
| 10.3 | |||||||||||
| 22 | |||||||||||
| 31.1 | |||||||||||
| 31.2 | |||||||||||
| 32.1 | |||||||||||
| 32.2 | |||||||||||
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| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | ||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document (filed herewith)† | ||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)† | ||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)† | ||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)† | ||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)† | ||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||||||||
* Indicates management contract or compensatory plan, contract or arrangement.
†Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021, (ii) Consolidated Statements of Operations for the three months ended March 31, 2022 and 2021, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021, (iv) Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021, (v) Consolidated Statement of Equity for the three months ended March 31, 2022 and 2021, and (vi) Notes to Consolidated Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WARNER BROS. DISCOVERY, INC. (Registrant) | ||||||||||||||||||||
| Date: April 26, 2022 | By: | /s/ David M. Zaslav | ||||||||||||||||||
| David M. Zaslav | ||||||||||||||||||||
| President and Chief Executive Officer | ||||||||||||||||||||
| Date: April 26, 2022 | By: | /s/ Gunnar Wiedenfels | ||||||||||||||||||
| Gunnar Wiedenfels | ||||||||||||||||||||
| Chief Financial Officer | ||||||||||||||||||||
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DISCOVERY COMMUNICATIONS, LLC SUPPLEMENTAL DEFERRED COMPENSATION PLAN
(Amended and Restated Effective as of March 11, 2022)
ARTICLE I ESTABLISHMENT AND PURPOSE
Discovery Communications, LLC (the “Company”) hereby amends and restates the Discovery Communications, LLC Supplemental Deferred Compensation Plan (the “Plan”) in its entirety as set forth herein, effective as of March 11, 2022. Except as otherwise provided herein, this amendment and restatement applies to all amounts previously or hereafter deferred under the Plan, including amounts deferred under the Plan prior to January 1, 2005.
The purpose of the Plan is to attract and retain key employees by providing Participants with an opportunity to defer receipt of a portion of their salary, bonus, and other specified compensation. The Plan is not intended to meet the qualification requirements of Section 401(a) of the Code, but is intended to meet the requirements of Section 409A of the Code, and shall be operated and interpreted consistent with that intent.
The Plan constitutes an unsecured promise by a Participating Employer to pay benefits in the future. Participants in the Plan shall have the status of general unsecured creditors of the Company or the Adopting Employer, as applicable. Each Participating Employer shall be solely responsible for payment of the benefits of its employees and their beneficiaries. The Plan is unfunded for federal tax purposes and is intended to be an unfunded arrangement for eligible employees who are part of a select group of management or highly compensated employees of the Employer within the meaning of Sections 201(2), 301(a)(3), and 401(a)(1) of ERISA. Any amounts set aside to defray the liabilities assumed by the Company or an Adopting Employer will remain the general assets of the Company or the Adopting Employer and shall remain subject to the claims of the Company’s or the Adopting Employer’s creditors until such amounts are distributed to the Participants.
ARTICLE II DEFINITIONS
For purposes of the Plan, the following words and phrases shall have the meanings set forth below, unless their context clearly requires a different meaning:
2.1“Account” means the bookkeeping account maintained by the Committee on behalf of each Participant pursuant to this Plan. The Account shall be a bookkeeping entry only and shall be used solely as a device to measure and determine the amounts, if any, to be paid to a Participant or the Participant’s Beneficiary under the Plan. A Participant’s account may include one or more sub-accounts, including, but not limited to, one or more sub-accounts attributable to deferrals for Plan Years before 2021. Accounts are intended to constitute unfunded obligations within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
2.2“Adopting Employer” means a member of the Affiliate Group that, with the consent of the Company, has adopted the Plan (or has been deemed to adopt this Plan) pursuant to Section 10.3 hereof for the benefit of its Eligible Employees.
2.3“Affiliated Group” means (a) the Company, and (b) all entities with whom the Company would be considered a single employer under Sections 414(b) and 414(c) of the Code, such that in applying Section 1563(a)(1), (2), and (3) of the Code for purposes of determining a controlled group of corporations under Section 414(b) of the Code, the language “at least 80 percent” shall be used each place it appears in Section 1563(a)(1), (2), and (3), and in applying Treasury Regulation Section 1.414(c)-2 for purposes of determining trades or businesses (whether or not incorporated) that are under common control for purposes of Section 414(c), the language “at least 80 percent” shall be used each place it appears in that regulation.
2.4“Base Salary” means the base “compensation” as defined in the Qualified Plan payable by the Employer to an Eligible Employee in cash during a Plan Year, determined without regard to the limitation of the amount of compensation that may be recognized under the Qualified Plan due to the application of Section 401(a)(17) of the Code.
2.5“Beneficiary” or “Beneficiaries” means the person or persons, including one or more trusts, designated by a Participant in accordance with the Plan to receive payment of the remaining balance of the Participant's Account in the event of the death of the Participant prior to the Participant's receipt of the entire amount credited to the Participant’s Account.
2.6“Beneficiary Designation” means a Participant’s written designation of one or more Beneficiaries, made in such manner (which may include an electronic format or a paper form) as designated by Committee.
2.7“Business Day” means each day on which the United States securities markets are open for business.
2.8“Change in Control” means a “change in control event” within the meaning Treasury Regulation 1.409A-3(i)(5).
2.9“Claimant” Claimant means a Participant or Beneficiary filing a claim under Section 8.2 of this Plan.
2.10“Code” means the Internal Revenue Code of 1986, as amended.
2.11“Committee” means the Retirement Plan Committee or such other committee appointed by the Board of Directors of Discovery Communications, Inc. (or the appropriate committee of such board) to administer the Plan. If no designation is in effect, the Senior Executive Vice President of Human Resources of the Company or his or her delegate shall have and exercise the powers of the Committee.
2.12“Compensation” means the total of Base Compensation and Incentive Compensation, to the extent such amounts constitute U.S.-source income. Compensation shall not include any compensation that has been previously deferred under this Plan or any other arrangement subject to Code Section 409A.
2.13“Company” means Discovery Communications, LLC.
2.14“Deferral Election” means a Participant's written election, made in such manner as designated by the Committee (which may include an electronic format or a paper form), to defer a portion of the Participant’s Base Salary and/or Incentive Compensation in accordance with the provisions of Article IV, which deferral election, once it has become effective, shall be irrevocable with respect to the Plan Year to which it applies.
2.15“Discretionary Company Credit” means a credit by the Employer to a Participant’s Account in accordance with the provisions of Article V of the Plan, whether as a match of Participant deferrals or otherwise. Discretionary Company Credits, if any, shall be credited at the sole discretion of the Employer, and the fact that a Discretionary Company Credit may be credited to a Participant’s Account in one year shall not obligate the Employer to continue to make any such Discretionary Company Credit in any subsequent year.
2.16“Effective Date” means January 1, 2021.
2.17“Employer” means, with respect to Employees it employs, the Company and each Affiliate.
2.18“Eligible Employee” has the meaning given to such term in Section 3.1 hereof.
2.19“Employee” means an active employee of a Participating Employer who is classified as a regular full-time or regular part-time employee of a Participating Employer and is paid by the Participating Employer and issued a W-2 by the Participating Employer with respect to those wages. For this purpose, a regular part-time employee is an employee who is classified as benefits eligible and is regularly scheduled to work at least 30 hours per week.
2.20“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.
2.21“Incentive Compensation” means any incentive compensation, including commissions under sales incentive plans, payable in cash to an Eligible Employee pursuant to any incentive compensation plan or program in which Eligible Employees of an Employer are participants and that is designated by the Committee as an eligible source of compensation for deferral under this Plan.
2.22“Participant” means any Eligible Employee who (a) at any time has elected to defer the receipt of Base Salary and/or Incentive Compensation in accordance with the Plan or (b) whose Account has been credited with a Discretionary Company Credit, and who, in any case, has not received complete payment of the amount credited to the Participant’s Account.
2.23“Participating Employer” means the Company and each Adopting Employer.
2.24“Performance-Based Compensation” means Incentive Compensation that is based on services performed over a period of at least 12 months and that constitutes “performance- based compensation” within the meaning of Section 409A of the Code. In general, for purposes of Section 409A of the Code, “performance-based compensation” means compensation the amount of which, or the entitlement to which, is contingent on the satisfaction of pre-established organizational or individual performance criteria relating to a performance period of at least 12
consecutive months. For such purposes, organizational or individual performance criteria are considered pre-established if established in writing by not later than 90 days after the commencement of the period of service to which the criteria relate, provided that the outcome is substantially uncertain at the time the criteria are established. Performance-Based Compensation does not include any amount or portion of any amount that will be paid either regardless of performance or based upon a level of performance that is substantially certain to be met at the time the criteria are established.
2.25“Plan” means this Discovery Communications, LLC Supplemental Deferred Compensation Plan, as it may be amended from time to time.
2.26“Plan Year” means the calendar year.
2.27“Qualified Plan” means the Discovery Communications, LLC Retirement Savings Plan, as amended from time to time.
2.28“Separation from Service” means a Participant’s termination of employment or service with the Affiliated Group, other than as a result of the Participant’s death, in such a manner as to constitute a “separation from service” as defined under Section 409A of the Code.
2.29“Specified Employee” means a “specified employee” as determined by the Company in accordance with Section 409A of the Code.
2.30“Unforeseeable Emergency” means an “unforeseeable emergency” as defined under Section 409A of the Code. In general, for purposes of Section 409A of the Code, an “unforeseeable emergency” means a severe financial hardship to a Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in Section 152 of the Code, without regard to Sections 152(b)(1), (b)(2), and (d)(1)(B)); loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, not as a result of a natural disaster); or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.
ARTICLE III ELIGIBILITY AND PARTICIPATION
3.1Eligibility and Participation. Participation in the Plan is limited to any employee of an Employer who (i) is selected by the Committee, in its sole discretion, as eligible to participate in the Plan, and (ii) is a member of a “select group of management or highly compensated employees,” within the meaning of Sections 201, 301 and 401 of ERISA (each an “Eligible Employee”). In lieu of designating individual Eligible Employees for Plan participation, the Committee may establish eligibility criteria (consistent with the requirements of this Section 3.1) providing for participation of all Eligible Employees who satisfy such criteria. The Committee may at any time, in its sole discretion, change the eligibility criteria for Eligible Employees, or determine that one or more Participants will cease to be an Eligible Employee. An Employee so selected shall become an Eligible Employee effective on the first day of the month immediately following the month in which the Employee is designated by the Committee or satisfies the
eligibility criteria established by the Committee. An Eligible Employee becomes a Participant upon the earlier to occur of: (i) a credit of a Discretionary Company Credit under Article V, or (ii) the date that the Eligible Employee’s initial election to defer Base Salary and/or Incentive Compensation to the Plan becomes irrevocable. An Eligible Employee who receives a credit of a Discretionary Company Credit shall not be eligible to defer Compensation to the Plan unless the Participant receives notice that he or she is eligible to defer.
3.2Enrollment Requirements. Except as otherwise determined by the Committee, as a condition to participation, each Eligible Employee shall make a Deferral Election no later than the date or dates specified by the Committee in accordance with the Plan. In addition, the Committee may establish from time to time such other enrollment requirements as it determines in its sole discretion are necessary.
3.3Commencement Date. Except as otherwise may be provided by the Committee pursuant to Section 4.1, each Eligible Employee first shall be eligible to commence participation in accordance with the terms and conditions of this Plan effective as of January 1 of the Plan Year next following the Plan Year in which he or she becomes an Eligible Employee pursuant to Section
3.1. Notwithstanding the foregoing, the Committee, in its sole discretion, may permit an Eligible Employee to commence participation in the Plan upon such earlier date as may be specified by the Committee, consistent with the Plan and Section 409A of the Code.
3.4Duration of Participation. A Participant shall be eligible to defer Base Salary and Incentive Compensation and, to the extent determined by the Employer, in its discretion, receive allocations of Discretionary Company Credits, subject to the terms of the Plan, for as long as such Participant remains an Eligible Employee. A Participant who is no longer an Eligible Employee but has not incurred a Separation from Service may not defer Base Salary or Incentive Compensation under the Plan beyond the Plan Year in which he or she became ineligible but may otherwise exercise all of the rights of a Participant under the Plan with respect to his or her Account(s). On and after a Separation from Service, a Participant shall remain a Participant as long as the balance of his or her Account is greater than zero (0), and during such time may continue to make allocation elections as provided in Article VI. An individual shall cease being a Participant in the Plan when all benefits under the Plan to which he or she is entitled have been paid.
3.5Delay in or Suspension of Status as Eligible Employee. An individual who would otherwise be in a category of Eligible Employees selected for participation by the Committee shall not be treated as an Eligible Employee for purposes of a Deferral Election under Section 4.1 or Section 4.2 if initially eligible in connection with a promotion that is coupled with a work assignment outside of the United States that is designated as “long-term” (under the Company’s normal procedures with respect to non-U.S. employment) but will be treated as eligible for election under Section 4.1 when repatriated to the United States (if otherwise eligible for such status pursuant to Treas. Reg. § 1.409A-2(a)(7) as someone not previously or recently eligible to defer). An individual who is otherwise an Eligible Employee may not make an election under of Section 4.2 with respect to the following calendar year if he or she is expected to be on a “long- term” work assignment outside of the United States during that year.
ARTICLE IV DEFERRAL ELECTIONS
4.1Certain Newly Eligible Participants. Except as otherwise determined by the Committee, in its sole discretion, newly Eligible Employees shall not be permitted to make a Deferral Election with respect to Base Salary and/or Incentive Compensation earned during the Plan Year in which the Eligible Employee is first eligible to participate in the Plan. However, notwithstanding the foregoing, the Committee, in its sole discretion, may permit any Eligible Employee to make a Deferral Election with respect to Base Salary earned for services performed during the Plan Year in which the Eligible Employee is first eligible to participate in the Plan (and in any other plan that would be aggregated with the Plan under Section 409A of the Code), as determined in accordance with Treasury Regulation Section 1.409A-2(a)(7); provided, however, that such Deferral Election (a) is made and becomes irrevocable no later than the 30th day (or such earlier date as specified by the Committee) after the effective date that the Employee first becomes an Eligible Employee pursuant to Section 3.1 of the Plan, and (b) shall apply only to Base Salary earned for services performed after the date that the Deferral Election becomes irrevocable, as determined by the Committee in accordance with Section 409A.
4.2Annual Deferral Elections. Unless the Committee determines to permit an election pursuant to Section 4.1, and except as otherwise determined by the Committee, each Eligible Employee may elect to defer Base Salary and/or Incentive Compensation for a Plan Year by filing a Deferral Election with the Committee only in accordance with the following rules:
(a)Base Salary. The Deferral Election with respect to Base Salary must be made by such date as specified by the Committee that is not later than December 31 of the Plan Year immediately preceding the Plan Year for which such Base Salary is earned.
(b)Incentive Compensation.
(i)In General. With respect to any Incentive Compensation to which neither Section 4.1 nor Section 4.2(b)(ii) applies, a Participant’s Deferral Election must be made by such date as specified by the Committee that is not later than December 31 of the Plan Year immediately preceding the Plan Year for which such Incentive Compensation is earned (meaning the Plan Year in which or with which the applicable performance period begins, or, in the case of Incentive Compensation consisting of sales commissions within the meaning of Treasury Regulation 1.409A-2(a)(12)(i), the Plan Year in which the applicable sale occurs).
(ii)Certain Elections with Respect to Performance-Based Compensation. To the extent permitted by the Committee in its sole discretion, a Deferral Election with respect to Incentive Compensation that constitutes Performance-Based Compensation may be made by such date as specified by the Committee that is not later than the date that is six (6) months before the end of the applicable performance period, provided that in no event may such Deferral Election be made after such Incentive Compensation has become "readily ascertainable" within the meaning of Section 409A of the Code. In order to make a Deferral Election under this Section 4.2(b)(ii), the Participant must perform services continuously from the later of the
beginning of the performance period or the date the performance criteria are established through the date the Deferral Election is made under this Section 4.2(b)(ii). A Deferral Election made under this Section 4.2(b)(ii) shall not apply to any Incentive Compensation that becomes payable to a Participant without regard to the satisfaction of the applicable performance criteria.
4.3Amount Deferred. A Participant shall designate on a Deferral Election, as applicable, the portion of his or her Base Salary and/or the portion of his or her Incentive Compensation that is to be deferred with respect to the applicable Plan Year (or other applicable performance period) in accordance with this Article IV. The Participant may specify a different portion to be deferred for each element of his or her deferrable Compensation (Base Salary and Incentive Compensation). For each Plan Year, an Eligible Employee may defer (in 1% increments) up to 50% of his or her Base Salary, and for each Plan Year (or other applicable performance period), an Eligible Employee may defer (in 1% increments) up to 50% of his or her Incentive Compensation. Deferrals of Compensation shall be calculated with respect to the gross cash Compensation payable to the Participant prior to any deductions or withholdings, but shall be reduced by the Committee as necessary so as not to exceed 100% of the cash Compensation of the Participant remaining after deduction of all required income and employment taxes, 401(k) and other employee benefit deductions, and other deductions required by law. Changes to payroll withholdings that affect the amount of Compensation being deferred to the Plan shall be allowed only to the extent permissible under Section 409A of the Code.
4.4Elections as to Time and Form of Payment. Each Deferral Election will specify the time and form of payment for each element of Compensation (Base Salary and Incentive Compensation) deferred by the Participant for the applicable Plan Year, subject to the provisions of Article VII, as elected by the Participant from the following alternatives:
(a)Payment Following Separation from Service. A Participant may elect to receive payment of the amount deferred pursuant to the Deferral Election for a Plan Year in a single lump sum payment, in sixty (60) substantially equal monthly installments, or in one hundred twenty (120) substantially equal monthly installments, paid or commencing within ninety (90) days after:
(i)the Participant’s Separation from Service,
(ii)the first (1st) anniversary of the Participant’s Separation from Service, or
(ii) the fifth (5th) anniversary of the Participant’s Separation from
Service.
(b)In-Service Payments. A Participant may elect to receive payment of the amount deferred pursuant to the Deferral Election for a Plan Year following the earlier of:
(i)the first day of a specified month of a calendar year that is at least two (2) calendar years after the Plan Year for which such Deferral Election is made, in which case payment will be made or commence within ninety (90) days thereafter in a single lump sum
payment or in substantially equal annual installments over a period of from two (2) to five (5) years, as elected by the Participant in the applicable Deferral Election; or
(ii)the Participant’s Separation from Service, in which case payment will be made in a single lump sum payment, in sixty (60) substantially equal monthly installments, or in one hundred twenty (120) substantially equal monthly installments, paid or commencing within ninety (90) days after the Participant’s Separation from Service, the first (1st) anniversary of the Participant’s Separation from Service, or the fifth (5th) anniversary of the Participant’s Separation from Service, as elected by the Participant in the applicable Deferral Election.
(c)Default Time and Form of Payment. To the extent that a Participant does not designate the time and form of payment on a Deferral Election as provided in Section 4.4 (or such designation does not comply with the terms of the Plan), the Participant’s deferrals pursuant to the applicable Deferral Election shall be paid, subject to the provisions of Article VII, in a single lump sum payment within ninety (90) days after the Participant’s Separation from Service.
4.5Duration and Cancellation of Deferral Elections.
(a)Duration. Once irrevocable, a Deferral Election shall be effective for the Plan Year (or other applicable performance period, as the case may be) with respect to which such election was timely filed with the Committee. Notwithstanding the preceding sentence, the Committee may provide, in its sole discretion, that any Deferral Elections shall continue to be applied to future Deferral Election periods, until terminated or modified prospectively by a Participant in accordance with the terms of this Article IV.
(b)Cancellation.
(i)The Committee may, in its sole discretion, cancel a Participant’s Deferral Election where such cancellation occurs by the later of the end of the Plan Year in which the Participant incurs a “disability” or the 15th day of the third month following the date the Participant incurs a “disability.” For purposes of this Section 4.5(b)(i), a “disability” refers to any medically determinable physical or mental impairment resulting in the Participant’s inability to perform the duties of his or her position or any substantially similar position, where such impairment can be expected to result in death or can be expected to last for a continuous period of not less than six months.
(ii)The Committee may, in its sole discretion, cancel a Participant’s Deferral Election due to an Unforeseeable Emergency, a hardship distribution pursuant to Treasury Regulation Section 1.401(k)-1(d)(3), or such other event or condition as may be permitted under Section 409A of the Code pursuant to generally applicable guidance published in the Internal Revenue Bulletin.
(iii)If a Participant’s Deferral Election is cancelled with respect to a particular Plan Year in accordance with this Section 4.5(b), such Participant may make a new Deferral Election for a subsequent Plan Year, as the case may be, only in accordance with Section
4.2 hereof.
4.6 Vesting. Each Participant shall at all times have a fully vested interest in 100% of the deferrals of Base Salary and Incentive Compensation credited to his or her Account.
ARTICLE V DISCRETIONARY COMPANY CREDITS
5.1In General. In any Plan Year, the Employer, in its sole and absolute discretion, may, but shall not be required to, credit Discretionary Company Credits to a Participant’s Account in any amount determined by the Employer.
5.2Vesting. Except as otherwise may be provided in a vesting schedule established by the Employer, in its sole and absolute discretion, any Discretionary Company Credits shall be 100% vested as of the date credited to a Participant’s Account. In any event, notwithstanding any vesting schedule that may be established hereunder with respect to Discretionary Company Credits, any such unvested Discretionary Company Credits shall become fully vested upon the occurrence of a Change in Control.
5.3Time and Form of Payment. Except as otherwise may be determined by the Employer no later than the time of crediting to the Participant’s Account, any vested Discretionary Company Credits contributed to a Participant’s Account for a Plan Year shall be payable, in accordance with the default time and form of payment set out in Section 4.4(c), in a single lump sum payment within ninety (90) days after the Participant’s Separation from Service.
ARTICLE VI
CREDITING OF GAINS, LOSSES AND EARNINGS TO ACCOUNTS
Each Participant’s Account will be credited with gains, losses and earnings based on notional investment directions made by the Participant in accordance with notional investment crediting options and procedures established from time to time by the Committee in its sole discretion. The Committee specifically retains the right in its sole discretion to change the notional investment crediting options and procedures from time to time. By electing to defer any amount under the Plan, each Participant acknowledges and agrees that the Company is not and shall not be required to make any investment in connection with the Plan, nor is it required to follow the Participant’s notional investment directions in any actual investment it may make or acquire in connection with the Plan. Any amounts credited to a Participant’s Account with respect to which a Participant does not provide notional investment direction shall be credited with gains, losses and earnings as if such amounts were invested in a notional investment option selected by the Committee in its sole discretion.
ARTICLE VII PAYMENTS
7.1Payment of Participant Accounts. Except as otherwise provided in this Article VII or Section 5.2, a Participant’s vested Account shall commence to be paid in accordance with
the applicable time and form of payment specified in the Participant’s Deferral Election for the applicable Plan Year pursuant to Section 4.4.
7.2Mandatory Six-Month Delay for Specified Employees. Notwithstanding any other provision of this Plan to the contrary, in no event may payments triggered by the Separation from Service of a Specified Employee be paid or commence prior to the first Business Day of the seventh month following the Specified Employee’s Separation from Service (or if earlier, within 90 days after the Specified Employee’s death), with such benefits being paid (if in a lump sum) or commencing (if in substantially equal monthly installments) as soon as administratively practicable after such date.
7.3Death of Participant. Notwithstanding any other provision of this Plan, in the event of the Participant’s death, the vested balance of the Participant’s Account shall be paid to the Participant’s Beneficiary or Beneficiaries in accordance with the Participant’s Beneficiary Designation (or, if there is no such Beneficiary, to the Participant’s estate) in a single lump sum as soon as administratively practicable following the date of the Participant’s death. A Participant’s Beneficiary Designation may be changed at any time prior to his or her death by the execution and delivery of a new Beneficiary Designation. The Beneficiary Designation on file with the Committee that bears the latest date at the time of the Participant’s death shall govern. If a Participant fails to properly designate a Beneficiary in accordance with this Section 7.3 or if all designated Beneficiaries have predeceased the Participant, then payment pursuant to this Section
7.3 shall be made to the Participant’s surviving spouse, if living, or if none, to the Participant’s estate.
7.4Unforeseeable Emergency. The Committee may, in its sole discretion, provide for payment of the portion of a Participant’s vested Account that is reasonably necessary to satisfy a need due to an Unforeseeable Emergency pursuant to Treasury Regulation Section 1.401(k)- 3(i)(3)(iii). Any distributions because of Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need (which may include amounts necessary to pay any federal, state, local, or foreign income taxes or penalties reasonably anticipated to result from the distribution), determined by taking into account the additional compensation upon cancellation of the Participant’s Deferral Election pursuant to Section 4.5(b).
7.5Payment of Pre-2021 Deferrals. Notwithstanding any other provisions of the Plan (other than Sections 7.6 and 7.7), any deferrals credited to a Participant’s Account with respect to any Plan Year prior to 2021 (which deferrals, for example, may be credited to sub-accounts for “Retirement/Termination Accounts,” “Specified Date Accounts,” “Five Year Vesting Accounts” and “DAP Transfer Accounts”) (“Pre-2021 Deferrals”) will remain subject to the payment terms and Deferral Elections in effect under the terms of the Plan as in effect immediately prior to the Effective Date.
7.6Subsequent Deferral Elections. A Participant may elect, subject to such administrative rules as may be prescribed by the Committee in accordance with this Section 7.6, to change the time and/or form of payment with respect to one or more of his or her Deferral Elections for a Plan Year, to a later time in accordance with this Section 7.6 (a “Subsequent Deferral Election”). A Participant may make no more than one (1) Subsequent Deferral Election with respect to each such Deferral Election. Any such Subsequent Deferral Election must be filed
with the Committee at least twelve (12) months prior to the date that the payment would otherwise have been paid pursuant to the Deferral Election. On each such Subsequent Deferral Election, the Participant must delay the payment date for a period of at least five (5) years after the date that the amount pursuant to the Deferral Election would otherwise have been paid under the Plan, except with respect to payment in the event of the Participant’s death.
7.7Small Balances of Pre-2021 Deferrals. Solely with respect to Pre-2021 Deferrals, to the extent a Participant has elected to receive payment of his or her Retirement/ Termination Accounts in installments, then, as of the date payment from such Account is scheduled to begin,
(i) the initial installment shall be no less than twenty-five thousand dollars ($25,000) or, if less, the balance of such Account and each subsequent installment shall be no less than one thousand dollars ($1,000) or, if less, the balance of such Account. In the event the balance of the Retirement/Termination Account as of the date of Separation from Service does not exceed twenty-five thousand dollars ($25,000), then such balance shall be paid in a single lump sum within ninety (90) days following Separation from Service or, with respect to a Participant who is a Specified Employee as of the date such Participant incurs a Separation from Service, in the seventh month following the month in which such Separation from Service occurs, if later. This Section
7.7shall have no application to any deferrals for Plan Years after 2020.
7.8Discretionary Acceleration of Payments. The Committee may, in its sole discretion, accelerate the time or schedule of a payment under the Plan to a time or form otherwise permitted under Section 409A of the Code in accordance with the requirements, restrictions and limitations of Treasury Regulation Section 1.409A-3(j); provided that in no event may a payment to a Specified Employee be accelerated following the Specified Employee’s Separation from Service to a date that is prior to the first Business Day of the seventh month following the Specified Employee’s Separation from Service (or if earlier, within 90 days after the Specified Employee’s death) unless otherwise permitted under Section 409A of the Code.
7.9Discretionary Delay of Payments. The Committee may, in its sole discretion, delay the time or form of a payment under the Plan to a time or form otherwise permitted under Section 409A of the Code in accordance with the requirements, restrictions and limitations of Treasury Regulation Section 1.409A-2(b)(7).
7.10Actual Date of Payment. To the extent permitted by Section 409A of the Code, the Committee, in its sole discretion, may cause any payment under this Plan to be made or commence on any later date that occurs in the same calendar year as the date on which payment otherwise would be required to be made under this Plan, or, if later, by the 15th day of the third month after the date on which payment would otherwise be required to be made under this Plan. Further, to the extent permitted by Section 409A of the Code, the Committee may delay payment in the event that it is not administratively possible to make payment on the date (or within the periods) specified in this Article VII, or if making the payment would jeopardize the ability of the Company (or any entity which would be considered to be a single employer with the Company under Section 414(b) or Section 414(c) of the Code) to continue as a going concern. Notwithstanding the foregoing, payment must be made no later than the latest possible date permitted under Section 409A of the Code.
7.11Calculation of Installment Payments. In the event that any of the Participant’s Account is paid in installments: (i) the first installment shall commence at the time specified pursuant to Section 4.4(b), (ii) each subsequent installment shall be paid on or as soon as practicable after the applicable anniversary of the payment commencement date, (iii) the amount of each installment shall equal the quotient obtained by dividing the applicable portion of the Participant’s vested Account balance as of the date of such installment payment (or as of such earlier date as may be reasonably determined by the Committee to facilitate the administration of the Plan) by the number of installment payments remaining to be paid at the time of the calculation; and (iv) the amount remaining unpaid shall continue to be credited with gains, losses and earnings as provided in Article VI hereof. For purposes of Section 409A of the Code, each series of installment payments under the Plan shall be treated as right to a single payment.
7.12Discharge of Obligations. The payment to a Participant (or to his or her Beneficiary, surviving spouse or estate) of an Account in a single lump sum or the number of installments as provided pursuant to this Plan shall discharge all obligations of the Company and any other Employer to such Participant (and such Participant’s Beneficiary, surviving spouse or estate) under the Plan with respect to the Participant’s Account. The Committee may require such Participant, surviving spouse or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect. In the event that a Participant, surviving spouse or Beneficiary is required to execute a release and the period to consider and revoke the release straddles two calendar years, payment shall be made in the second calendar year in accordance with Article VII of the Plan.
ARTICLE VIII ADMINISTRATION AND CLAIMS PROCEDURES
8.1General. The Committee shall be responsible for the general administration of the Plan and shall have the full power, discretion and authority to carry out the provisions of the Plan. Without limiting the foregoing, the Committee shall have full discretion to (a) interpret all provisions of the Plan; (b) resolve all questions relating to eligibility for participation in the Plan and the amount in the Account of any Participant and all questions pertaining to claims for benefits and procedures for claim review; (c) resolve all other questions arising under the Plan, including any factual questions and questions of construction; (d) determine all claims for benefits; and (e) adopt such rules, regulations or guidelines for the administration of the Plan and take such further action as the Company shall deem advisable in the administration of the Plan. Without limiting the foregoing, to the extent permitted by Section 409A of the Code, the Committee may, in its sole discretion, modify the rules applicable to Deferral Elections to the extent necessary to satisfy the requirements of the Uniformed Service Employment and Reemployment Rights Act of 1994, as amended, 38 U.S.C. 4301-4334. The actions taken and the decisions made by the Committee hereunder shall be final, conclusive, and binding on all persons, including the Company, all other Employers, Eligible Employees, Participants, and their estates and Beneficiaries. The Committee may delegate to one or more officers of the Company, subject to such terms as the Committee shall determine, the authority to administer all or any portion of the Plan, or the authority to perform certain functions, including administrative functions. In the event of such delegation, all references to the Committee in this Plan (other than such references in the immediately preceding
sentence) shall be deemed references to such officers as it relates to those aspects of the Plan that have been delegated.
8.2Claims Procedure.
(a)Filing a Claim. Any controversy or claim arising out of or relating to the Plan shall be filed in writing with the Committee which shall make all determinations concerning such claim. Any claim filed with the Committee and any decision by the Committee denying such claim shall be in writing and shall be delivered to the Participant or Beneficiary filing the claim (the "Claimant").
(i)In General. Notice of a denial of benefits will be provided within 90 days of the Committee's receipt of the Claimant's claim for benefits. If the Committee determines that it needs additional time to review the claim, the Committee will provide the Claimant with a notice of the extension before the end of the initial 90-day period. The extension will not be more than 90 days from the end of the initial 90-day period and the notice of extension will explain the special circumstances that require the extension and the date by which the Committee expects to make a decision.
(ii)Contents of Notice. If a claim for benefits is completely or partially denied, notice of such denial shall be in writing and shall set forth the reasons for denial in plain language. The notice shall: (A) cite the pertinent provisions of the Plan document, and (B) explain, where appropriate, how the Claimant can perfect the claim, including a description of any additional material or information necessary to complete the claim and why such material or information is necessary. The claim denial also shall include an explanation of the claims review procedures and the time limits applicable to such procedures, including a statement of the Claimant's right to bring a civil action under Section 502(a) of ERISA following an adverse decision on review.
(b)Appeal of Denied Claims. A Claimant whose claim has been completely or partially denied shall be entitled to appeal the claim denial by filing a written appeal with the Committee. A Claimant who timely requests a review of the denied claim (or his or her authorized representative) may review, upon request and free of charge, copies of all documents, records and other information relevant to the denial and may submit written comments, documents, records and other information relevant to the claim to the Committee. All written comments, documents, records, and other information shall be considered "relevant" if the information: (x) was relied upon in making a benefits determination, (y) was submitted, considered or generated in the course of making a benefits decision regardless of whether it was relied upon to make the decision, or (z) demonstrates compliance with administrative processes and safeguards established for making benefit decisions. The Committee may, in its sole discretion and if it deems appropriate or necessary, decide to hold a hearing with respect to the claim appeal.
(i)In General. Appeal of a denied benefits claim must be filed in writing with the Committee no later than 60 days after receipt of the written notification of such claim denial. The Committee shall make its decision regarding the merits of the denied claim within 60 days following receipt of the appeal (or within 120 days after such receipt, in a case
where there are special circumstances requiring extension of time for reviewing the appealed claim). If an extension of time for reviewing the appeal is required because of special circumstances, written notice of the extension shall be furnished to the Claimant prior to the commencement of the extension. The notice will indicate the special circumstances requiring the extension of time and the date by which the Committee expects to render the determination on review. The review will take into account comments, documents, records and other information submitted by the Claimant relating to the claim without regard to whether such information was submitted or considered in the initial benefit determination.
(ii)Contents of Notice. If a benefits claim is completely or partially denied on review, notice of such denial shall be in writing and shall set forth the reasons for denial in plain language. The decision on review shall set forth: (A) the specific reason or reasons for the denial, (B) specific references to the pertinent Plan provisions on which the denial is based,
(C) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to and copies of all documents, records, or other information relevant (as defined above) to the Claimant's claim, and (D) a statement describing any voluntary appeal procedures offered by the plan and a statement of the Claimant's right to bring an action under Section 502(a) of ERISA.
(c)Legal Action. A Claimant may not bring any legal action, including commencement of any arbitration, relating to a claim for benefits under the Plan unless and until the Claimant has followed the claims procedures under the Plan and exhausted his or her administrative remedies under such claims procedures. Any such legal action must be commenced within one year of a final determination hereunder with respect to such claim, and Claimant shall be prohibited from presenting in any such legal action any evidence that was not timely presented to the Committee as part of the Plan’s administrative review process pursuant to the claims procedures set forth herein. If a Participant or Beneficiary prevails in a legal proceeding brought under the Plan to enforce the rights of such Participant or any other similarly situated Participant or Beneficiary, in whole or in part, the Participating Employer shall reimburse such Participant or Beneficiary for all legal costs, expenses, attorneys' fees and such other liabilities incurred as a result of such proceedings.
(d)Discretion of Committee. All interpretations, determinations and decisions of the Committee with respect to any claim shall be made in its sole discretion, and shall be final and conclusive.
(e)Arbitration. If any claim or controversy between a Participating Employer and a Participant or Beneficiary is not resolved through the claims procedure set forth in the preceding provisions of this Section 8.2, such claim shall be submitted to and resolved exclusively by expedited binding arbitration by a single arbitrator. Arbitration shall be conducted in accordance with the following procedures:
The complaining party shall promptly send written notice to the other party identifying the matter in dispute and the proposed remedy. Following the giving of such notice, the parties shall meet and attempt in good faith to resolve the matter. In the event the parties are unable to resolve the matter within 21 days, the parties shall meet and attempt in good faith to select a single arbitrator acceptable to both parties. If a single arbitrator is not selected by mutual consent within ten
Business Days following the giving of the written notice of dispute, an arbitrator shall be selected from a list of nine persons each of whom shall be an attorney who is either engaged in the active practice of law or recognized arbitrator and who, in either event, is experienced in serving as an arbitrator in disputes between employers and employees, which list shall be provided by the main office of either JAMS, the American Arbitration Association ("AAA") or the Federal Mediation and Conciliation Service. If, within three Business Days of the parties' receipt of such list, the parties are unable to agree on an arbitrator from the list, then the parties shall each strike names alternatively from the list, with the first to strike being determined by the flip of a coin. After each party has had four strikes, the remaining name on the list shall be the arbitrator. If such person is unable to serve for any reason, the parties shall repeat this process until an arbitrator is selected.
Unless the parties agree otherwise, within 60 days of the selection of the arbitrator, a hearing shall be conducted before such arbitrator at a time and a place agreed upon by the parties. In the event the parties are unable to agree upon the time or place of the arbitration, the time and place shall be designated by the arbitrator after consultation with the parties. Within 30 days of the conclusion of the arbitration hearing, the arbitrator shall issue an award, accompanied by a written decision explaining the basis for the arbitrator's award.
In any arbitration hereunder, the Participating Employer shall pay all administrative fees of the arbitration and all fees of the arbitrator. Each party shall pay its own attorneys' fees, costs, and expenses, unless the arbitrator orders otherwise. The prevailing party in such arbitration, as determined by the arbitrator, and in any enforcement or other court proceedings, shall be entitled, to the extent permitted by law, to reimbursement from the other party for all of the prevailing party's costs (including but not limited to the arbitrator's compensation), expenses, and attorneys' fees. The arbitrator shall have no authority to add to or to modify this Plan, shall apply all applicable law, and shall have no lesser and no greater remedial authority than would a court of law resolving the same claim or controversy. The arbitrator shall, upon an appropriate motion, dismiss any claim without an evidentiary hearing if the party bringing the motion establishes that it would be entitled to summary judgment if the matter had been pursued in court litigation.
Subject to Section 8.2(c) above, the parties shall be entitled to discovery as follows: Each party may take no more than three depositions. The Participating Employer may depose the Participant or Beneficiary plus two other witnesses, and the Participant or Beneficiary may depose the Participating Employer, pursuant to Rule 30(b)(6) of the Federal Rules of Civil Procedure, plus two other witnesses. Each party may make such reasonable document discovery requests as are allowed in the discretion of the arbitrator.
The decision of the arbitrator shall be final, binding, and non-appealable, and may be enforced as a final judgment in any court of competent jurisdiction.
This arbitration provision of the Plan shall extend to claims against any parent, subsidiary, or affiliate of each party, and, when acting within such capacity, any officer, director, shareholder, Participant, Beneficiary, or agent of any party, or of any of the above, and shall apply as well to claims arising out of state and federal statutes and local ordinances as well as to claims arising under the common law or under this Plan.
Notwithstanding the foregoing, and unless otherwise agreed between the parties, either party may apply to a court for provisional relief, including a temporary restraining order or preliminary injunction, on the ground that the arbitration award to which the applicant may be entitled may be rendered ineffectual without provisional relief.
Any arbitration hereunder shall be conducted in accordance with the Federal Arbitration Act: provided, however, that, in the event of any inconsistency between the rules and procedures of the Act and the terms of this Plan, the terms of this Plan shall prevail.
If any of the provisions of this Section 8.2(e) are determined to be unlawful or otherwise unenforceable, in the whole part, such determination shall not affect the validity of the remainder of this section and this section shall be reformed to the extent necessary to carry out its provisions to the greatest extent possible and to insure that the resolution of all conflicts between the parties, including those arising out of statutory claims, shall be resolved by neutral, binding arbitration. If a court should find that the provisions of this Section 8.2(e) are not absolutely binding, then the parties intend any arbitration decision and award to be fully admissible in evidence in any subsequent action, given great weight by any finder of fact and treated as determinative to the maximum extent permitted by law.
The parties do not agree to arbitrate any putative class action or any other representative action. The parties agree to arbitrate only the claims(s) of a single Participant or Beneficiary.
ARTICLE IX AMENDMENT AND TERMINATION
9.1Amendment. The Company reserves the right to amend, terminate or freeze the Plan, in whole or in part. In no event shall any such action by the Company reduce the vested amount credited to any Participant’s Account, or result in any change in the timing or manner of payment of the amount of any Account (except as otherwise permitted under the Plan, including under Sections 7.8, 7.9 and 7.10), without the consent of the Participant, unless the Company determines in good faith that such action is necessary to ensure compliance with Section 409A of the Code. Notwithstanding the foregoing, the Plan may not be terminated and liquidated within twelve (12) months after a Change in Control (and, for purposes of clarity, such limitation on termination and liquidation of the Plan shall not prevent the Company from otherwise amending or freezing the Plan at any time, including within twelve (12) months after a Change in Control).
9.2Payments Upon Termination of Plan. Except as otherwise provided pursuant to Sections 7.8, 7.9 and 7.10, in the event that the Plan is terminated, the amounts credited to a Participant’s Account shall be paid to the Participant or the Participant’s Beneficiary, as applicable, on the dates on which the Participant or his or her Beneficiary would otherwise receive payments hereunder without regard to the termination of the Plan.
ARTICLE X MISCELLANEOUS
10.1 Non-Alienation of Deferred Compensation. Except as permitted by the Plan, no right or interest under the Plan of any Participant or Beneficiary shall, without the written consent of the Company, be (a) assignable or transferable in any manner, (b) subject to alienation, anticipation, sale, pledge, encumbrance, attachment, garnishment or other legal process, or (c) in any manner liable for or subject to the debts or liabilities of the Participant or Beneficiary. Notwithstanding the foregoing, to the extent permitted by Section 409A of the Code and Sections
7.8 and 7.9 hereof, the Committee shall honor a judgment, order or decree from a state domestic relations court which requires the payment of part or all of a Participant’s or Beneficiary’s interest under this Plan to an “alternate payee” as defined in Section 414(p) of the Code.
10.2Compliance with Section 409A of the Code. It is intended that the Plan comply with the provisions of Section 409A of the Code, so as to prevent the inclusion in gross income of any amounts deferred hereunder in a taxable year that is prior to the taxable year or years in which such amounts would otherwise actually be paid or made available to Participants (or their Beneficiaries or estates). Although the Committee shall use its best efforts to avoid the imposition of taxation, interest and penalties under Section 409A of the Code, the tax treatment of deferrals under this Plan is not warranted or guaranteed. Neither the Company nor any other Employer nor the Committee shall be held liable for any taxes, interest, penalties or other monetary amounts owed by any Participant, Beneficiary or other taxpayer as a result of the Plan. Any reference in this Plan to Section 409A of the Code will also include any proposed, temporary or final regulations, or any other guidance, promulgated with respect to such Section 409A by the U.S. Department of Treasury or the Internal Revenue Service. For purposes of the Plan, the phrase “permitted by Section 409A of the Code,” or words or phrases of similar import, shall mean that the event or circumstance shall only be permitted to the extent it would not cause an amount deferred or payable under the Plan to be includible in the gross income of a Participant or Beneficiary under Section 409A(a)(1) of the Code.
10.3Participation by Employees of Other Members of the Affiliated Group. Any member of the Affiliated Group other than the Company may, by action of the Adopting Employer’s board of directors or equivalent governing body and with the consent of the Committee, adopt the Plan; provided that the Committee may waive the requirement that such board of directors or equivalent governing body of the Adopting Employer effect such adoption. By its adoption of or participation in the Plan, such Adopting Employer shall be deemed to appoint the Company its exclusive agent to exercise on its behalf all of the power and authority conferred by the Plan upon the Company and accept the delegation to the Committee of all the power and authority conferred upon it by the Plan. The authority of the Company to act as such agent shall continue until the Plan is terminated as to the Adopting Employer. An Eligible Employee who is employed by an Adopting Employer and who elects to participate in the Plan shall participate on the same basis as an Eligible Employee of the Company. The Account of a Participant employed by an Adopting Employer shall be paid in accordance with the Plan solely by such member to the extent attributable to the Compensation that would have been paid by such Adopting Employer in the absence of deferral pursuant to the Plan, unless the Committee otherwise determines that the Company shall be the obligor.
10.4Interest of Participant. The obligation of the Company and any participating Employer under the Plan to make payment of amounts reflected in an Account merely constitutes
the unsecured promise of the Company (or, if applicable, the participating Employer) to make payments from their general assets, and no Participant or Beneficiary shall have any interest in, or a lien or prior claim upon, any property of Company or any other Employer. Nothing in the Plan shall be construed as guaranteeing continued employment to any Eligible Employee. It is the intention of the Company that the Plan be unfunded for tax purposes and for purposes of Title I of ERISA. The Company may, but shall not be required to, create a trust to hold funds to be used in payment of benefits under the Plan, and may fund such trust; provided, however, that any funds contained therein shall remain liable for the claims of the general creditors of the Company and the other participating Employers, and no assets shall be transferred to any such trust at a time or in a manner that would cause an amount to be included in the income of a Participant pursuant to Section 409A(b) of the Code.
10.5Claims of Other Persons. The provisions of the Plan shall in no event be construed as giving any other person any legal or equitable right as against the Company or any other Employer or against the officers, employees or directors of the Company or any other Employer, except any such rights as are specifically provided for in the Plan or are hereafter created in accordance with the terms and provisions of the Plan.
10.6Severability. The invalidity and unenforceability of any particular provision of the Plan shall not affect any other provision hereof, and the Plan shall be construed in all respects as if such invalid or unenforceable provision were omitted.
10.7Governing Law. Except to the extent preempted by federal law, the provisions of the Plan shall be governed, construed and interpreted in accordance with the laws of the State of Maryland, without reference to any conflicts or choice of law rule or principle that might otherwise refer governance, construction or interpretation of the Plan to the law of another jurisdiction.
10.8Successors. The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume this Plan. This Plan shall be binding upon and inure to the benefit of the Company and any successor of or to the Company, including without limitation any persons acquiring directly or indirectly all or substantially all of the business and/or assets of the Company whether by sale, merger, consolidation, reorganization or otherwise (and such successor shall thereafter be deemed the “Company” for the purposes of this Plan), and the heirs, beneficiaries, executors and administrators of each Participant.
10.9Withholding of Taxes. The Company or any other Employer may withhold or cause to be withheld from any amounts payable under the Plan, or to the extent permitted pursuant to Section 409A of the Code and Section 7.8 of the Plan, from any amounts deferred under the Plan, all federal, state, local and other taxes as shall be legally required to be withheld. Further, the Company and each other Employer shall have the right to (a) require a Participant to pay or provide for payment of the amount of any taxes that the Company other Employer may be required to withhold with respect to amounts credited to a Participant’s Account under the Plan, or (b) deduct from any amount otherwise payable in cash to the Participant the amount of any taxes that the Company or other Employer may be required to withhold with respect to amounts credited to a Participant’s Account under the Plan.
10.1Electronic or Other Media. Notwithstanding any other provision of the Plan to the contrary, including any provision that requires the use of a written instrument, the Committee may establish procedures for the use of electronic or other media in communications and transactions between the Plan or the Committee and Participants and Beneficiaries. Electronic or other media may include, but are not limited to, e-mail, the Internet, intranet systems and automated telephonic response systems.
10.2Headings; Interpretation. Headings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof. Unless the context clearly requires otherwise, the masculine pronoun wherever used herein shall be construed to include the feminine pronoun.
10.3Participants Deemed to Accept Plan. By accepting any benefit under the Plan, each Participant and each person claiming under or through any such Participant shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, all of the terms and conditions of the Plan and any action taken under the Plan by the Committee, the Company and each other Employer, in any case in accordance with the terms and conditions of the Plan.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its undersigned duly authorized officer, to be effective as of March 11, 2022.
DISCOVERY COMMUNICATIONS, LLC
By: /s/ Ralph Beidelman
Name: Ralph Beidelman Title: SVP, Global Total Rewards
Discovery, Inc.
INCENTIVE COMPENSATION PROGRAM
Adopted effective January 1, 2009,
as amended in 2010, 2011, 2012, 2013, 2015, 2016, 2018, 2019, 2020, and 2022
ELIGIBILITY AND TERMS
Employees of Discovery, Inc. or a Participating Subsidiary (“the Company”) who are classified as regular full-time employees of the Company are eligible to participate in the annual Incentive Compensation Program (the “ICP”), subject to the discretion of management. Eligibility for part-time, less-than-full time and temporary employees of the Company will be subject to the discretion of management and/or determined by local legislation, country by country, as appropriate. The determination of participation by any particular employee or subsidiary is made by the Company in its discretion. An employee who is eligible for another Company sales or annual incentive award program generally is not eligible to participate in the ICP, nor is an employee who begins employment in an ICP-eligible position on or after October 1 of the Program Year. In this document, an employee who meets these eligibility requirements is referred to as an “Eligible Employee.” “Participating Subsidiary” includes entities at least 80% of the voting equity is owned by Discovery, Inc. or one or more of its 100% owned direct or indirect subsidiaries.
The ICP is an annual cash bonus program that rewards Eligible Employees for their individual performance contribution and Company performance (measured and treated separately in relation to revenue and profitability) for the entire Program Year, subject to the proration provisions set forth below. The target award opportunity is expressed as a percentage of base salary. The Company performance metrics may reflect Company-wide performance or a combination of overall Company performance and performance of a specific Company division or business unit. An Eligible Employee’s payout, if any, is based on the applicable Company performance measures (both revenue and profitability, measured separately) and any other measures that may be applicable to an employee’s job level or role. The calculated payout may be reduced if warranted by the employee’s individual performance or other individual factors.
The ICP begins on January 1 and ends on December 31 each year (the “Program Year”). The Company will comply with local legal requirements and any applicable contractual provisions in implementing these Terms and Conditions; if a legal or contractual provision conflicts with this document, the legal or contractual requirement will govern. The payout, if any, under the ICP will occur in the first quarter of the calendar year following the Program Year and, in the United States, on or before March 15.
TERMS AND CONDITIONS
1.Proration of Target or Payout: An Eligible Employee must be employed for the entire Program Year (i.e. from January 1 up to and including to December 31) to be eligible for a payout, unless one of the following exceptions applies to permit a prorated payout. The eligibility for and amount of any payout will continue to be subject to the other terms and conditions of the ICP and the applicable Company performance measures.
a.New Hires: An employee who is hired into a role that is ICP-eligible before October 1 of the Program Year, will be eligible for a prorated payout under the ICP based on the date of hire, subject to the terms and conditions of the ICP. An employee hired on or after October 1 of the Program Year, will not be eligible to participate in that Program Year’s ICP.
b.Part-Time Employees: An Eligible Employee who works part-time or less-than- full time or who is hired during the Program Year and who otherwise meets the eligibility requirements of the Program will be eligible for an ICP target that is based on the percentage of applicable salary, at the part-time level, during the Program Year.
c.Leave of Absence: An Eligible Employee who is in leave status for more than 90 consecutive days during the Program Year will be eligible for a prorated ICP payout, subject to the terms and conditions of the ICP. The proration calculation will be based on the number of days that the Eligible Employee was actively working (including leave for 90 days or less). An Eligible Employee who is in leave status for 90 consecutive days or less will not be subject to proration under this subsection.
d.Termination for Cause: If an Eligible Employee’s employment with the Company terminates prior to the date the ICP for the Program Year is actually paid out, for “Cause,” the Eligible Employee will not be eligible for any payout, prorated or otherwise. “Cause” shall mean under this paragraph: (i) the conviction of, or nolo contendere or guilty plea, to a felony (whether any right to appeal has been or may be exercised); (ii) conduct constituting embezzlement, material misappropriation or fraud, whether or not related to the Eligible Employee’s employment with the Company; (iii) conduct constituting a financial crime, material act of dishonesty or conduct in violation of Company’s Code of Business Conduct and Ethics; (iv) improper conduct substantially prejudicial to the Company’s business; (v) willful unauthorized disclosure or use of Company confidential information; (vi) material improper destruction of Company property; (vii) willful misconduct in connection with the performance of Executive's duties; and (vii) any other conduct that constitutes Cause under the Company’s policies and procedures.
e.Resignation: If an Eligible Employee resigns from their employment (and their employment ends) at any time in the Program Year, no payout prorated or otherwise shall be paid. For these purposes, unless an Eligible Employee who is working under a fixed term employment contract otherwise falls within one of the above exceptions set forth in these terms and conditions (as applied to a resignation), a separation at the end of a fixed-term assignment because of the natural expiration of the assignment shall be considered a resignation.
f.Death, Disability, Retirement or Termination without Cause: If an Eligible Employee separates before December 31 due to death, disability, retirement, or to accept immediate employment with an “Affiliate,” the employee will be eligible for a prorated payout if the employee was an Eligible Employee for 180 days or more during the Program Year. For these purposes, “retirement” means separation from the Company for any reason other than Cause at a point at which an Eligible Employee is at least age 55 and has been employed by the Company, or any of its subsidiaries for at least ten years, where the Eligible Employee’s period of service is determined using the Company’s Prior Employment Service Policy or a successor policy chosen by the Administrator. Special treatment upon retirement shall be subject to local laws in those countries subject to any EU Directive on Discrimination. If an Eligible Employee’s employment is terminated by the Company without Cause, the employee will be eligible for a prorated payout if the employee (a) was an Eligible Employee for 270 days or more during the Program Year, and (b) if applicable, meets any requirement to sign a release of claims under a Company-sponsored severance benefit plan or other applicable employment agreement or arrangement, provided that the arrangement does not exclude the payout of the ICP. For purposes of this Section, an “Affiliate” is an entity in which the Company has an ownership interest of 50% or more but which is not considered a Participating Subsidiary under the ICP (e.g., OWN LLC).
g.Termination and Rehire During a Single Program Year: If an Eligible Employee’s employment is terminated by the Company without Cause and the Eligible Employee is rehired within the same Program Year, the employee will be eligible for a prorated payout for that Program Year provided that (i) the Eligible Employee has met any requirement to sign a release of claims associated with the termination, and (ii) the Eligible Employee was actively employed for 180 days or more during the Program Year, including service prior to the termination and after the rehire date. The Company will determine the applicable Company performance metrics based on the facts and circumstances of the Eligible Employee’s role(s) and duties during the Program Year.
h.Transfer into Role under Separate Bonus Plan: If an Eligible Employee moves into a role that is not ICP-eligible because the role is covered by another bonus plan (e.g., an advertising sales role), the employee will be eligible for a prorated payout for that Program Year based on the length of time that the Eligible Employee was in the ICP-eligible role.
2.No Additional Rights: The ICP shall not confer or be deemed to confer any right with respect to continuance of employment by the Company, nor interfere in any way with the right of the Company to separate an employee from employment.
3.Discretionary Program: Unless contrary to the express and unequivocal terms of applicable law, regulations, or co determination rights, any ICP payout is a strictly discretionary and conditional payout, is made subject to the terms and conditions of these guidelines and the applicable ICP Company performance measures (based on revenue and profitability) for each Eligible Employee, and does not form a part of an employee’s regular base salary compensation. The operation or continuance of the ICP through a Program Year gives no right or expectation to any ICP payout,
whether in same or similar form or at all, in any future Program Year. Company management also reserves the sole discretion to determine the design, applicable criteria and the actual payout percentages for each component of each target grid as it deems appropriate.
4.Profit Sharing: For those countries that legally require participation in profit sharing programs, an addendum to these guidelines will be published. It is acknowledged that, for all countries, any ICP payout is funded by two separate elements: a) corporate revenue and b) a share of profits.
5.Timing of Payout: If an Eligible Employee terminates employment with the Company before the scheduled payout date of the ICP and is eligible for a prorated payout, the timing of any payout, if legally allowable, will be determined under the normal course of the ICP and delivered on the scheduled payment date for other Eligible Employees who remain employed by the Company. If local laws do not permit a delay of the payment until the scheduled payment date under the ICP, the Company at its sole discretion will determine the payment under the Program to be included in the pay for the last month of employment.
6.Administration: The Senior Vice President for Total Rewards (“Administrator”) has the full power and authority to construe, interpret and administer the ICP and the determinations of the Administrator are final, conclusive and binding on all persons unless any such determination is otherwise expressly and unequivocally prohibited by local laws and regulations of co determination rights. For participants employed in the United States, the ICP shall be construed, administered and governed under the laws of the State of Maryland, without regard to its conflict of law rules.
7.Amendment, Modification, and Termination: The Company reserves the right to amend, modify or terminate the ICP at any time in its sole discretion and will implement those changes respecting the terms and conditions of local laws, works agreements or codetermination rights that expressly and unequivocally conflict, in whole or in part, with any such action or decision. The ICP will be implemented subject to and in accordance with local laws and regulations, which may require certain actions in particular circumstances.
8.Clawback Policy: In addition to any other remedies available to the Company (but subject to applicable law), if the Board, or the Compensation Committee, determines that an employee has engaged in fraud or misconduct that resulted in a financial restatement, the Company may recover, in whole or in part, any incentive compensation, equity award, and/or profit realized from the sale of Company securities, including any payment under the ICP, made or received in the 12 months after the filing of the financial statement that was found to be inaccurate.
DISCOVERY, INC.
PERFORMANCE RESTRICTED STOCK UNIT GRANT AGREEMENT
FOR DAVID ZASLAV
Discovery, Inc. (the “Company”) has granted you a performance restricted stock unit (the “PRSU”) under the Discovery Communications, Inc. 2013 Incentive Plan (the “Plan”). The PRSU lets you receive a specified number of shares (“Shares”) of the Company’s Series A Common Stock (the “Series A PRSU Shares”) upon satisfaction of the conditions to receipt.
The individualized communication you received (the “Cover Letter”) provides the details of your PRSU award. It specifies the number of PRSU Shares, the Date of Grant, the schedule for vesting, and the Vesting Date.
The PRSU is subject in all respects to the applicable provisions of the Plan. This Grant Agreement does not cover all of the rules that apply to the PRSU under the Plan; please refer to your 2021 Employment Agreement and the Plan document. Capitalized terms are defined either in the Cover Letter, further below in this grant agreement (the “Grant Agreement”), in the 2021 Employment Agreement, or in the Plan.
The Plan document is available on the Fidelity web site. The Prospectus for the Plan, the Company’s S-8, Annual Report on Form 10-K, and other filings the Company makes with the Securities and Exchange Commission are available for your review on the Company’s web site. You may also obtain paper copies of these documents upon request to the Company’s People & Culture department.
Neither the Company nor anyone else is making any representations or promises regarding the duration of your service, vesting of the PRSU, the value of the Company's stock or of this PRSU, or the Company's prospects. The Company is not providing any advice regarding tax consequences to you or regarding your decisions regarding the PRSU. You agree to rely only upon your own personal advisors.
No one may sell, transfer, or distribute the PRSU or the securities that may be received under it without an effective registration statement relating thereto or an opinion of counsel satisfactory to Discovery, Inc. or other information and representations satisfactory to it that such registration is not required.
In addition to the Plan’s terms and restrictions, the following terms and restrictions apply:
1. Vesting Schedule. Your PRSU becomes nonforfeitable (“Vested”) as provided in the Cover Letter and the Grant Agreement assuming you remain employed by the Company until December 31, 2022 and the performance metric(s) for the one year period beginning January 1, 2022 and ending December 31, 2022 (the “Performance Period”) are satisfied. For purposes of this Grant Agreement, employment with the Company will include employment with any Subsidiary whose employees are then eligible to receive Awards under the Plan (provided that a later transfer of employment to an ineligible Subsidiary will not terminate employment unless the Compensation Committee of the Board of Directors (the “Committee” of the “Board”)) determines otherwise).
If your employment is terminated by the Company without “Cause” or by you for “Good Reason”, in each case before the Vesting Date, the PRSU will become Vested on the original vesting schedule as though you remained working through the Vesting Date, subject to any applicable performance conditions. Payments under this PRSU as a result of termination will be subject to the Release requirements in the 2021 Employment Agreement, where applicable in connection with a termination without Cause, resignation for Good Reason, Change in Control or Disability. The PRSU will be frozen, if not already fully Vested, between the date your employment ends and the date your Release requirement is met (or the deadline for providing the Release expires), at which point the PRSU will be forfeited if the Release has not become irrevocable. Any Distribution Date falling between the date your employment ends and the deadline for providing an irrevocable Release will be delayed until the last day of the period for providing an irrevocable Release.
If your employment ends as a result of death or as a result of your Disability, you will become Vested, subject to any applicable performance conditions, and the payout will be prorated based on actual performance through the date of separation. In the case of death, the results will be certified by the Committee as soon as practicable after the date of death, with the date of potentially accelerated certification being the Vesting Date for this purpose. To be eligible for a prorated payout, the prorated performance must be at least 70% of the prorated target.
“Cause,” “Good Reason,” and “Disability” have the meanings provided in your 2021 Employment Agreement.
2. Change in Control. Notwithstanding the Plan’s provisions, if a “Change in Control” (as defined in the 2021 Employment Agreement) occurs before the PRSU is vested and before December 31, 2022, the PRSU shall be treated as follows. If you remain employed by the Company (or its successor) for thirty (30) days following a Change in Control, then the outstanding PRSUs (for which the performance period has not expired) will become fully vested as of the thirtieth day following the Change in Control and the PRSUs shall be earned regardless of actual performance. In the event your employment is terminated (i) other than for Cause or for Good Reason within sixty (60) days following a Change in Control, or (ii) you resign voluntarily within the 30 calendar days commencing on the thirty-first day following a Change in Control, then the outstanding PRSUs (for which the performance period has not expired) will become fully vested as of thirty days after the Change in Control, regardless of actual performance and the PRSUs shall be distributed immediately to the extent permissible under IRC 409A (“Section 409A”).
3. Distribution Date. Subject to any overriding provisions in the Plan or Section 2 above, you will receive a distribution of the Shares equivalent to your Vested PRSU Shares based on the following schedule (each such delivery date being a “Distribution Date”) unless, in each case, the Committee determines that you may make a timely deferral election to defer distribution to a later date and you have made such an election (in which case the deferred date will be the Distribution Date):
(a)70% of your Vested PRSU Shares will be paid in 2023, after the performance conditions are determined to be satisfied (pursuant to Appendix A); and
(b)30% of your Vested PRSU Shares will be paid in 2024, as soon as practicable after the beginning of the year.
If the Vesting Date occurs because of your death, your designated beneficiary or estate will receive the PRSU Shares earned (i) no later than end of the calendar year in which your death occurs, if your death occurs on or before June 30 of such year, and (ii) in the following calendar year, for any later death.
4. Adjustments. Notwithstanding the foregoing, if within five years of the close of the Performance Period, the Company’s audited financial statement for the Performance Period is restated, the Committee shall determine whether, and the extent to which, the performance conditions described in Appendix A were satisfied based on the restated financial statements. If the Committee determines that the Company delivered too few Shares to you on the original Distribution Date(s), you will be entitled to receive (without interest or other adjustment for the passage of time) additional Shares; such Shares, together with any previously distributed Shares, shall not exceed the total number of PRSU Shares granted under this Grant Agreement. If the Committee determines that the Company delivered too many Shares to you on the original Distribution Date(s), you will be required to deliver to the Company (without interest or other adjustment for the passage of time) the excess Shares previously delivered as soon as practicable after notice by the Committee. In the event the person (either you or the Company) required to deliver Shares under the foregoing provisions is entitled to receive future payments (other than payments constituting “deferred compensation” under Section 409A) from the person entitled to receive delivery of Shares under the foregoing provisions, then the person required to make the delivery of Shares under the foregoing provisions may reduce the number of Shares due under the foregoing provisions by a number of Shares which have a fair market value equal to the value of the future payment to be received from the other person. If you receive any additional Vested PRSU Shares pursuant to this section, such Shares will be distributed to you within 30 days after the Committee’s determination based on the restated audited financial statements.
5. Clawback. Notwithstanding the provisions in Section 4 with respect to Adjustments, if the Company’s Board of Directors or the Committee determines, in its sole discretion, that you engaged in fraud or misconduct as a result of which or in connection with which the Company is required to or decides to restate its financial statements, the Committee may, in its sole discretion, impose any or all of the following:
(a) Immediate expiration of the PRSU, whether vested or not, if granted within the first 12 months after issuance or filing of any financial statement that is being restated (the “Recovery Measurement Period”); and
(b) Payment or transfer to the Company of the Gain from the PRSU, where the “Gain” consists of the greatest of (i) the value of the PRSU Shares on the applicable Distribution Date on which you received them within the Recovery Measurement Period, (ii) the value of PRSU Shares received during the Recovery Measurement Period, as determined on the date of the request by the Committee to pay or transfer, (iii) the gross (before tax) proceeds you received from any sale of the PRSU Shares during the Recovery Measurement Period, and (iv) if transferred without sale during the Recovery Measurement Period, the value of the PRSU Shares when so transferred. The amount paid or transferred to the Company shall be adjusted to reflect any adjustment to the number of Shares finally awarded after application of the “Adjustments” provisions above.
This remedy is in addition to any other remedies that the Company may have available in law or equity.
Payment is due in cash or cash equivalents within 10 days after the Committee provides notice to you that it is enforcing this Clawback. Payment will be calculated on a gross basis, without reduction for taxes or commissions. The Company may, but is not required to, accept retransfer of Shares in lieu of cash payments.
6. Restrictions and Forfeiture. You may not sell, assign, pledge, encumber, or otherwise transfer any interest (“Transfer”) in the PRSU Shares until the PRSU Shares are distributed to you. Any attempted Transfer that precedes the Distribution Date is invalid.
Unless the Board determines otherwise or the Grant Agreement provides otherwise, if your employment or service with the Company terminates for any reason before your PRSU is Vested, then you will forfeit the PRSU (and the Shares to which they relate) to the extent that the PRSU does not otherwise vest on or after your termination, pursuant to the rules in the Vesting Schedule section. You forfeit any unvested portions of the PRSU immediately if the Company terminates your employment for Cause or if you resign your employment other than for Good Reason. You also forfeit any unvested portion of the PRSU immediately upon the date for certification of the performance metrics for the Performance Period if and to the extent the performance metrics are not then satisfied and no Change in Control has occurred. The forfeited portions of the PRSU will then immediately revert to the Company. You will receive no payment for the PRSU if you forfeit it.
7. Limited Status. You understand and agree that the Company will not consider you a shareholder for any purpose with respect to the PRSU Shares, unless and until the PRSU Shares have been issued to you on the Distribution Date. You will not receive dividends with respect to the PRSU.
8. Voting. You may not vote the PRSU. You may not vote the PRSU Shares unless and until the Shares are distributed to you.
9. Taxes and Withholding. The PRSU provides tax deferral, meaning that the PRSU Shares are not taxable until you actually receive the PRSU Shares on or around the Distribution Date. You will then owe taxes at ordinary income tax rates as of the Distribution Date at the PRSU Shares' value. As an employee of the Company, you may owe FICA and HI (Social Security and Medicare) taxes before the Distribution Date.
Issuing the Shares under the PRSU is contingent on your satisfaction of all obligations with respect to required tax or other required withholdings (for example, in the U.S., Federal, state, and local taxes). You may satisfy the obligations by directing the Company to reduce the number of PRSU Shares to be issued to you by up to that number of PRSU Shares (valued at their Fair Market Value on the Distribution Date) that would equal all taxes required to be withheld (at their minimum withholding levels or such higher level as you request (up to 5% in excess of the minimum withholding level or your estimated marginal tax rate for the year of payment, whichever is greater)), providing that any minimum withholding requirements not satisfied in the foregoing manner must be satisfied in a manner acceptable to the Committee, which could include accepting payment of the withholdings from a broker in connection with a sale of the PRSU Shares or directly from you. If a fractional share remains after deduction for required withholding, the Company will pay you the value of the fraction in cash.
10. Compliance with Law. The Company will not issue the PRSU Shares if doing so would violate any applicable Federal or state securities laws or other laws or regulations. You may not sell or otherwise dispose of the PRSU Shares in violation of applicable law.
11. Additional Conditions to Receipt. The Company may postpone issuing and delivering any PRSU Shares for so long as the Company determines to be advisable to satisfy the following:
(a) its completing or amending any securities registration or qualification of the PRSU Shares or its or your satisfying any exemption from registration under any Federal or state law, rule, or regulation;
(b) its receiving proof it considers satisfactory that a person seeking to receive the PRSU Shares after your death is entitled to do so;
(c) your complying with any requests for representations under the Plan; and
(d) your complying with any Federal, state, or local tax withholding obligations.
12. Additional Representations from You. If the vesting provisions of the PRSU are satisfied and you are entitled to receive PRSU Shares at a time when the Company does not have a current registration statement (generally on Form S-8) under the Securities Act of 1933 (the “Act”) that covers issuances of shares to you, you must comply with the following before the Company will issue the PRSU Shares to you. You must:
(a) represent to the Company, in a manner satisfactory to the Company’s counsel, that you are acquiring the PRSU Shares for your own account and not with a view to reselling or distributing the PRSU Shares; and
(b) agree that you will not sell, transfer, or otherwise dispose of the PRSU Shares unless:
(i) a registration statement under the Act is effective at the time of disposition with respect to the PRSU Shares you propose to sell, transfer, or otherwise dispose of; or
(ii) the Company has received an opinion of counsel or other information and representations it considers satisfactory to the effect that, because of Rule 144 under the Act or otherwise, no registration under the Act is required.
13. No Effect on Employment or Other Relationship. Nothing in this Grant Agreement restricts the Company’s rights or those of any of its affiliates to terminate your employment or other relationship at any time and for any or no reason. The termination of employment or other relationship, whether by the Company or any of its affiliates or otherwise, and regardless of the reason for such termination, has the consequences provided for under the Plan and any applicable employment or severance agreement or plan.
14. No Effect on Running Business. You understand and agree that the existence of the PRSU will not affect in any way the right or power of the Company or its stockholders to make or authorize any adjustments, recapitalizations, reorganizations, or other changes in the Company’s capital structure or its business, or any merger or consolidation of the Company, or any issuance of bonds, debentures, preferred or other stock, with preference ahead of or convertible into, or otherwise affecting the Company’s common stock or the rights thereof, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether or not of a similar character to those described above.
15. Section 409A. The PRSU is intended to comply with the requirements of Section 409A and must be construed consistently with that section. Notwithstanding anything in the Plan or this Grant Agreement to the contrary, if the PRSU Vests in connection with your “separation from service” within the meaning of Section 409A, as determined by the Company), and if (x) you are then a “specified employee” within the meaning of Section 409A at the time of such separation from service (as determined by the Company, by which determination you agree you are bound) and (y) the distribution of PRSU Shares under such accelerated PRSU will result in the imposition of additional tax under Section 409A if distributed to you within the six month period following your separation from service, then the distribution under such accelerated PRSU will not be made until the earlier of (i) the date six months and one day following the date of your separation from service or (ii) the 10th day after your date of death. Neither the Company nor you shall
have the right to accelerate or defer the delivery of any such PRSU Shares or benefits except to the extent specifically permitted or required by Section 409A. In no event may the Company or you defer the delivery of the PRSU Shares beyond the date specified in the Distribution Date section, unless such deferral complies in all respects with Treasury Regulation Section 1.409A-2(b) related to subsequent changes in the time or form of payment of nonqualified deferred compensation arrangements, or any successor regulation. In any event, the Company makes no representations or warranty and shall have no liability to you or any other person, if any provisions of or distributions under this Grant Agreement are determined to constitute deferred compensation subject to Section 409A but not to satisfy the conditions of that section.
16. Unsecured Creditor. The PRSU creates a contractual obligation on the part of the Company to make a distribution of the PRSU Shares at the time provided for in this Grant Agreement. Neither you nor any other party claiming an interest in deferred compensation hereunder shall have any interest whatsoever in any specific assets of the Company. Your right to receive distributions hereunder is that of an unsecured general creditor of Company.
17. Governing Law. The laws of the State of Delaware will govern all matters relating to the PRSU, without regard to the principles of conflict of laws.
18. Notices. Any notice you give to the Company must follow the procedures then in effect. If no other procedures apply, you must send your notice in writing by hand or by mail to the office of the Company’s Secretary (or to the Chair of the Committee). If mailed, you should address it to the Company’s Secretary (or the Chair of the Committee) at the Company’s then corporate headquarters, unless the Company directs PRSU holders to send notices to another corporate department or to a third-party administrator or specifies another method of transmitting notice. The Company and the Board will address any notices to you using its standard electronic communications methods or at your office or home address as reflected on the Company’s personnel or other business records. You and the Company may change the address for notice by like notice to the other, and the Company can also change the address for notice by general announcements to PRSU holders.
19. Amendment. Subject to any required action by the Board or the stockholders of the Company, the Company may cancel the PRSU and provide a new Award under the Plan in its place, provided that the Award so replaced will satisfy all of the requirements of the Plan as of the date such new Award is made and no such action will adversely affect the PRSU to the extent then Vested.
20. Plan Governs. Wherever a conflict may arise between the terms of this Grant Agreement and the terms of the Plan, the terms of the Plan will control. The Board may adjust the number of PRSU Shares and other terms of the PRSU from time to time as the Plan provides.
Exhibit 22
| Registered Senior Notes Issued Under | Issuer | Guarantors | ||||||||||||
| Indenture dated August 19, 2009 | Discovery Communications, LLC | Discovery, Inc., Scripps Networks Interactive, Inc. | ||||||||||||
EXHIBIT 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a - 14(a) AND RULE 15d - 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, David M. Zaslav, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Warner Bros. Discovery, Inc., formerly known as Discovery, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: April 26, 2022 | By: | /s/ David M. Zaslav | ||||||||||||||||||
| David M. Zaslav | ||||||||||||||||||||
| President and Chief Executive Officer | ||||||||||||||||||||
EXHIBIT 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a - 14(a) AND RULE 15d - 14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gunnar Wiedenfels, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Warner Bros. Discovery, Inc., formerly known as Discovery, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
| Date: April 26, 2022 | By: | /s/ Gunnar Wiedenfels | |||||||||||||||
| Gunnar Wiedenfels | |||||||||||||||||
Chief Financial Officer | |||||||||||||||||
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Warner Bros. Discovery, Inc. (“Warner Bros. Discovery”), formerly known as Discovery, Inc., on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David M. Zaslav, President and Chief Executive Officer of Warner Bros. Discovery, certify that to my knowledge:
| 1 | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||||
| 2 | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Warner Bros. Discovery. | ||||
| Date: April 26, 2022 | By: | /s/ David M. Zaslav | ||||||||||||||||||
| David M. Zaslav | ||||||||||||||||||||
| President and Chief Executive Officer | ||||||||||||||||||||
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Warner Bros. Discovery, Inc. (“Warner Bros. Discovery”), formerly known as Discovery, Inc., on Form 10-Q for the quarter ended March 31, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Gunnar Wiedenfels, Senior Executive Vice President and Chief Financial Officer of Warner Bros. Discovery, certify that to my knowledge:
| 1 | the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||||
| 2 | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Warner Bros. Discovery. | ||||
| Date: April 26, 2022 | By: | /s/ Gunnar Wiedenfels | ||||||||||||||||||
| Gunnar Wiedenfels | ||||||||||||||||||||
Chief Financial Officer | ||||||||||||||||||||