e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2009
OR
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o |
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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
DISCOVERY COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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35-2333914
(I.R.S. Employer
Identification No.) |
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One Discovery Place
Silver Spring, Maryland
(Address of principal executive offices)
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20910
(Zip Code) |
(240) 662-2000
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report.)
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Total number of shares outstanding of each class of the Registrants common stock as of April
30, 2009:
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Series A
Common Stock, $0.01 par value |
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134,032,336 |
Series B Common Stock, $0.01 par value |
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6,598,161 |
Series C Common Stock, $0.01 par value |
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140,630,478 |
DISCOVERY COMMUNICATIONS, INC.
INDEX TO FORM 10-Q
2
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
DISCOVERY COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited; amounts in millions, except per share amounts)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(recast) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
142 |
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$ |
100 |
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Receivables, net of allowances of $17 and $16, respectively |
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740 |
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780 |
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Content rights, net |
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80 |
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73 |
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Prepaid expenses and other current assets |
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150 |
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156 |
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Total current assets |
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1,112 |
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1,109 |
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Noncurrent content rights, net |
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1,192 |
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1,163 |
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Property and equipment, net |
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384 |
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395 |
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Goodwill |
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6,889 |
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6,891 |
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Intangible assets, net |
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702 |
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716 |
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Other noncurrent assets |
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196 |
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210 |
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Total assets |
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$ |
10,475 |
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$ |
10,484 |
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LIABILITIES, REDEEMABLE INTERESTS IN SUBSIDIARIES, AND EQUITY |
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Current liabilities: |
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Accounts payable and accrued liabilities |
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$ |
371 |
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$ |
421 |
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Current portion of long-term debt |
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586 |
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458 |
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Other current liabilities |
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217 |
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191 |
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Total current liabilities |
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1,174 |
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1,070 |
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Long-term debt |
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3,137 |
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3,331 |
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Other noncurrent liabilities |
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438 |
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473 |
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Total liabilities |
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4,749 |
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4,874 |
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Commitments and contingencies (Note 18) |
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Redeemable interests in subsidiaries |
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49 |
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49 |
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Equity: |
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Series A preferred stock, $0.01 par value; authorized 75 shares; issued and
outstanding 71 shares at March 31, 2009 and 70 shares at December 31, 2008 |
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1 |
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1 |
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Series C preferred stock, $0.01 par value; authorized 75 shares; issued and
outstanding 71 shares at March 31, 2009 and 70 shares at December 31, 2008 |
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1 |
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1 |
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Series A
common stock, $0.01 par value; authorized 1,700 shares; issued and outstanding
134 shares at March 31, 2009 and December 31, 2008 |
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1 |
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1 |
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Series B common stock, $0.01 par value; authorized 100 shares; issued and outstanding 7
shares at March 31, 2009 and December 31, 2008 |
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Series C
common stock, $0.01 par value; authorized 2,000 shares; issued and outstanding
141 shares at March 31, 2009 and December 31, 2008 |
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2 |
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2 |
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Additional paid-in capital |
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6,550 |
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6,545 |
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Accumulated deficit |
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(817 |
) |
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(936 |
) |
Accumulated other comprehensive loss |
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(85 |
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(78 |
) |
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Equity attributable to Discovery Communications, Inc. |
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5,653 |
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5,536 |
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Equity attributable to non-controlling interests |
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24 |
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25 |
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Total equity |
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5,677 |
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5,561 |
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Total liabilities, redeemable interests in subsidiaries, and equity |
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$ |
10,475 |
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$ |
10,484 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DISCOVERY COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited; amounts in millions, except per share amounts)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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(recast) |
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Revenues: |
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Distribution |
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$ |
425 |
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$ |
402 |
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Advertising |
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301 |
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304 |
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Other |
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91 |
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103 |
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Total revenues |
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817 |
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809 |
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Operating costs and expenses: |
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Cost of revenues, excluding depreciation and amortization listed below |
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253 |
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242 |
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Selling, general and administrative |
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281 |
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251 |
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Depreciation and amortization |
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38 |
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47 |
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Exit and restructuring charges |
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3 |
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Total operating costs and expenses |
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575 |
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540 |
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Operating income |
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242 |
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269 |
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Interest expense |
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(57 |
) |
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(69 |
) |
Other non-operating income (expense), net |
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8 |
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(16 |
) |
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Income before income taxes |
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193 |
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184 |
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Provision for income taxes |
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(70 |
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(110 |
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Net income |
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123 |
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74 |
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Less: Net income attributable to non-controlling interests |
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(4 |
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(40 |
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Net income attributable to Discovery Communications, Inc. |
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$ |
119 |
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$ |
34 |
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Net income per share attributable to Discovery Communications, Inc. stockholders: |
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Basic |
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$ |
0.28 |
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$ |
0.12 |
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Diluted |
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$ |
0.28 |
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$ |
0.12 |
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Weighted average number of shares outstanding: |
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Basic |
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422 |
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282 |
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Diluted |
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422 |
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282 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DISCOVERY COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited; amounts in millions)
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Three Months Ended |
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March 31, |
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2009 |
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2008 |
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(recast) |
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Operating Activities |
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Net income |
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$ |
123 |
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$ |
74 |
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Adjustments to reconcile net income to cash provided by operating activities: |
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Share-based compensation expense (benefit) |
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37 |
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(36 |
) |
Depreciation and amortization |
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38 |
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63 |
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Deferred income taxes |
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(22 |
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46 |
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Other noncash expenses, net |
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10 |
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37 |
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Changes in operating assets and liabilities, net of discontinued operations: |
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Receivables, net |
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28 |
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(26 |
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Accounts payable and accrued liabilities |
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(55 |
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(79 |
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Other, net |
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(19 |
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(12 |
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Cash provided by operating activities |
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140 |
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67 |
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Investing Activities |
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Purchases of property and equipment |
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(20 |
) |
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(22 |
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Net cash acquired from Newhouse Transaction |
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45 |
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Business acquisitions, net of cash acquired |
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(3 |
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Proceeds from sale of securities |
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24 |
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Cash (used in) provided by investing activities |
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(20 |
) |
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44 |
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Financing Activities |
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Net borrowings from revolver loan |
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3 |
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159 |
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Principal repayments of long-term debt |
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(66 |
) |
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(184 |
) |
Principal repayments of capital lease obligations |
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(3 |
) |
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(2 |
) |
Cash distribution to non-controlling interest |
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(5 |
) |
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Other financing activities, net |
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(3 |
) |
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(10 |
) |
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Cash used in financing activities |
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(74 |
) |
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(37 |
) |
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Effect of exchange rate changes on cash and cash equivalents |
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(4 |
) |
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9 |
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Change in cash and cash equivalents |
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42 |
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83 |
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Cash and cash equivalents of continuing operations, beginning of period |
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100 |
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8 |
|
Cash and cash equivalents of discontinued operations, beginning of period |
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201 |
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Cash and cash equivalents, end of period |
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$ |
142 |
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$ |
292 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DISCOVERY COMMUNICATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(unaudited; amounts in millions)
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Three
Months Ended March
31, 2009 |
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Three Months Ended
March
31, 2008 |
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Discovery |
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Discovery |
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Communications, |
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Non-controlling |
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Communications, |
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Non-controlling |
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Inc. |
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Interests |
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Total Equity |
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Inc. |
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Interests |
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Total Equity |
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(recast) |
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(recast) |
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(recast) |
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Balance as of beginning of period |
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$ |
5,536 |
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$ |
25 |
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$ |
5,561 |
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$ |
4,495 |
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$ |
9 |
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$ |
4,504 |
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Cash distribution to non-controlling interest |
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(5 |
) |
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(5 |
) |
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Net income |
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|
119 |
|
|
|
4 |
|
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|
123 |
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|
34 |
|
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|
40 |
|
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|
74 |
|
Other comprehensive (loss) income: |
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Foreign currency translation adjustments, net |
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(10 |
) |
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(10 |
) |
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3 |
|
|
|
1 |
|
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4 |
|
Unrealized gains (losses) on securities and
derivative instruments, net |
|
|
3 |
|
|
|
|
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|
|
3 |
|
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(8 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
112 |
|
|
|
4 |
|
|
|
116 |
|
|
|
32 |
|
|
|
38 |
|
|
|
70 |
|
Share-based compensation |
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|
5 |
|
|
|
|
|
|
|
5 |
|
|
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|
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|
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|
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|
|
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|
Balance as of end of period |
|
$ |
5,653 |
|
|
$ |
24 |
|
|
$ |
5,677 |
|
|
$ |
4,527 |
|
|
$ |
47 |
|
|
$ |
4,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Description of Business
Discovery Communications, Inc. (Discovery or the Company) is a leading global media and
entertainment company that provides original and purchased programming across multiple distribution
platforms in the United States (U.S.) and approximately 170 other countries, with over 100
television networks offering customized programming in 35 languages. Discovery also develops and
sells consumer and educational products and services as well as media sound services in the U.S.
and internationally. In addition, the Company owns and operates a diversified portfolio of website
properties and other digital services. The Company manages and reports its operations in three
segments: U.S. Networks, consisting principally of domestic cable and satellite television network
programming, web brands, and other digital services; International Networks, consisting principally
of international cable and satellite television network programming; and Commerce, Education, and
Other, consisting principally of e-commerce, catalog, sound production, and domestic licensing
businesses. Financial information for Discoverys reportable segments is presented in Note 19.
Discovery was formed in connection with Discovery Holding Company (DHC) and Advance/Newhouse
Programming Partnership (Advance/Newhouse) combining their respective ownership interests in
Discovery Communications Holding, LLC (DCH) and exchanging those interests with and into
Discovery, which was consummated on September 17, 2008 (the Newhouse Transaction). Prior to the
Newhouse Transaction, DCH was a stand-alone private company, which was owned approximately 662/3% by
DHC and 331/3% by Advance/Newhouse. The Newhouse Transaction was completed as follows:
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On September 17, 2008, DHC completed the spin-off to its shareholders of Ascent Media
Corporation (AMC), a subsidiary holding the cash and businesses of DHC, except for
certain businesses that provide sound, music, mixing, sound effects, and other related
services (Creative Sound Services or CSS) (the AMC spin-off) (such businesses remain
with the Company following the completion of the Newhouse Transaction). The AMC spin-off
was effected as a distribution by DHC to holders of its Series A and Series B common stock.
In connection with the AMC spin-off, each holder of DHC Series A common stock received 0.05
of a share of AMC Series A common stock and each holder of DHC Series B common stock
received 0.05 of a share of AMC Series B common stock. The AMC spin-off did not involve the
payment of any consideration by the holders of DHC common stock and was structured as a tax
free transaction under Sections 368(a) and 355 of the Internal Revenue Code of 1986, as
amended. There was no gain or loss related to the spin-off. Subsequent to the AMC spin-off,
the companies no longer have any ownership interests in each other and operate
independently. |
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|
On September 17, 2008, immediately following the AMC spin-off, DHC merged with a
transitory merger subsidiary of Discovery, with DHC continuing as the surviving entity and
as a wholly-owned subsidiary of Discovery. In connection with the merger, each share of DHC
Series A common stock was converted into the right to receive 0.50 of a share of Discovery
Series A common stock and 0.50 of a share of Discovery Series C common stock. Similarly,
each share of DHC Series B common stock was converted into the right to receive 0.50 of a
share of Discovery Series B common stock and 0.50 of a share of Discovery Series C common
stock. |
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|
On September 17, 2008, immediately following the exchange of shares between Discovery
and DHC, Advance/Newhouse contributed its ownership interests in DCH and Animal Planet to
Discovery in exchange for Discovery Series A and Series C convertible preferred stock. The
preferred stock is convertible at any time into Discovery common stock representing 331/3% of
the Discovery common stock issued in connection with the Newhouse Transaction, subject to
certain anti-dilution adjustments. |
As a result of the Newhouse Transaction, DHC and DCH became wholly-owned subsidiaries of
Discovery, with Discovery becoming the successor reporting entity to DHC.
Changes in Basis of Presentation
The 2008 financial information has been recast so that the basis of presentation is consistent
with that of the 2009 financial information. This recast reflects (i) the gross combined financial
information of both DHC and DCH as though the Newhouse Transaction was consummated on January 1,
2008, (ii) adjustments to revenues and expenses to exclude amounts for Ascent Media Corporation,
Ascent Media Systems & Technology Services, LLC, and Ascent Media CANS, LLC, which were disposed of
in September 2008, and (iii) the adoption of Financial Accounting Standards Board (FASB)
Statement No. 160, Non-controlling Interests in Consolidated
Financial Statements, an Amendment
of ARB No. 51 (FAS 160) (see Note 2).
Newhouse Transaction
In accordance with Accounting Research Bulletin No. 51, Consolidated Financial Statements (ARB
51), as amended, paragraph 11, these condensed consolidated financial statements and notes present
the Newhouse Transaction as though it was consummated on
January 1, 2008. Accordingly, Discoverys condensed consolidated financial statements and notes include
the gross combined financial results of both DHC and DCH since January 1, 2008, as permitted under
U.S. generally accepted accounting principles (GAAP).
7
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Prior to the Newhouse Transaction, DHC accounted for its ownership interest in DCH using the equity
method. Accordingly, DHC presented its portion of DCHs earnings in a separate account in its
Statements of Operations. Because the Newhouse Transaction is presented as of January 1, 2008, the
Condensed Consolidated Statement of Operations for the three months ended March 31, 2008
includes the gross combined revenues and expenses of both DHC and DCH and do not include the
portion of DCHs earnings previously recorded in DHCs Statements of Operations as equity investee
income during the period January 1, 2008 through March 31, 2008. Additionally, the Condensed
Consolidated Statement of Operations for the three months ended March 31, 2008 presents a portion
of DCHs earnings as being allocated to Advance/Newhouse for the period January 1, 2008 through
March 31, 2008 in a separate account titled Net income attributable to non-controlling interests.
Pursuant to FASB Technical Bulletin No. 85-5, Issues Relating to Accounting for Business
Combinations (FTB 85-5), Discovery accounted for the Newhouse Transaction as a non-substantive
merger. Accordingly, the assets and liabilities of DCH and DHC were accounted for at the investors
historical bases prior to the Newhouse Transaction.
The condensed consolidated financial statements for the three months ended March 31, 2008
reflect certain reclassifications of each companys financial information to conform to Discoverys
financial statement presentation, as follows:
|
|
|
The Condensed Consolidated Statement of Operations has been adjusted to eliminate the
portion of DCHs earnings recorded by DHC using the equity method during the period January
1, 2008 through March 31, 2008. |
|
|
|
|
The Condensed Consolidated Statement of Operations has been
adjusted to allocate $33 million of DCHs earnings to Advance/Newhouse for the period January 1, 2008 through March
31, 2008, which is recorded as a component of the account titled Net income attributable to non-controlling interests. |
|
|
|
|
Other comprehensive income and Total comprehensive income are reported in the Condensed
Consolidated Statement of Equity rather than in the Condensed Consolidated Statement of
Operations. |
|
|
|
|
DHCs results, excluding unallocated corporate costs and discontinued operations, have
been reported in the Commerce, Education, and Other segment. Unallocated corporate costs
are classified in the Corporate and intersegment eliminations category. |
|
|
|
|
All DHC share and per share data have been adjusted to reflect the exchange with and
into Discovery shares, unless otherwise indicated. |
Discontinued Operations
In connection with the Newhouse Transaction, DHC completed the spin-off to its shareholders of
AMC. Additionally, in September 2008, DHC sold its ownership interests in Ascent Media Systems &
Technology Services, LLC (AMSTS) and Ascent Media CANS, LLC (DBA AccentHealth). ASMTS and
AccentHealth were components of the AMC business. Revenues and expenses in the Condensed
Consolidated Statement of Operations for the three months ended March 31, 2008 have been adjusted
to exclude amounts for AMC, AMSTS, and AccentHealth. The combined net operating results for these
entities were break even for the three months ended March 31, 2008, and therefore, their results of
operations are not separately presented as discontinued operations in the Condensed Consolidated
Statement of Operations. Cash flows from AMC, AMSTS, and AccentHealth have not been segregated as
discontinued operations in the Condensed Consolidated Statement of Cash Flows for the three months
ended March 31, 2008. A description of the transactions is included in Note 4.
Basis of Presentation
Unaudited Interim Financial Statements
The condensed consolidated financial statements have been prepared in accordance with U.S.
GAAP applicable to interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by
GAAP for complete financial statements. The condensed consolidated financial statements are
unaudited; however, in the opinion of management, they reflect all adjustments, consisting of those
of a normal recurring nature, necessary to present fairly the
financial position, the 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.
The condensed consolidated financial statements should be read in conjunction with the
Companys audited consolidated financial statements and notes thereto, included in Discovery
Communications, Inc.s Annual Report on Form 10-K for the year ended December 31, 2008 (SEC File No. 001-34177) filed on February 26, 2009.
8
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Use of Estimates
The preparation of the consolidated 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 notes thereto. Management continually re-evaluates its
estimates, judgments, and assumptions and managements assessments could change. Actual results may
differ from those estimates, judgments, and assumptions and could have a material impact on the
consolidated financial statements.
Significant estimates, judgments, and assumptions inherent in the preparation of the
consolidated financial statements include consolidation of variable interest entities, accounting
for business acquisitions, dispositions, allowances for doubtful accounts, content rights, asset
impairments, redeemable interests in subsidiaries, estimating fair value, revenue recognition,
depreciation and amortization, share-based compensation, income taxes, and contingencies.
Consolidation and Accounting for Investments
The condensed consolidated financial statements include the accounts of Discovery, all
majority-owned subsidiaries in which a controlling interest is maintained, and variable interest
entities for which the Company is the primary beneficiary. Controlling interest is determined by
majority ownership interest and the ability to unilaterally direct or cause the direction of
management and policies of an entity after considering any third-party participatory rights. The
Company applies the guidelines set forth in FASB Interpretation No. 46R, Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51 (FIN 46R), in evaluating whether it has
interests in variable interest entities and in determining whether to consolidate any such
entities. All significant inter-company accounts and transactions between consolidated companies
have been eliminated in consolidation.
The Companys foreign subsidiaries assets and liabilities are translated at exchange rates in
effect at the balance sheet date, while results of operations are translated at average exchange
rates for the respective periods. The resulting asset and liability translation adjustments are
included as a separate component of Accumulated other comprehensive loss in the Condensed
Consolidated Balance Sheets. Intercompany accounts of a trading nature are revalued at
exchange rates in effect at each month end and are included as part of operating income in the
Condensed Consolidated Statements of Operations.
Investments in entities of 20% to 50%, without a controlling interest, and other investments
over which the Company has the ability to exercise significant influence but not control are
accounted for using the equity method. Investments in entities of less than 20% over which the
Company has no significant influence are accounted for at fair value or using the cost method.
Concentrations of Credit Risk
Concentrations of credit risk arise when a number of customers and counterparties engage in
similar activities or have similar economic characteristics that make them susceptible to similar
changes in industry conditions, which could affect their ability to meet their contractual
obligations. The increasing consolidation of the financial services industry will increase our
concentration risk to counterparties in this industry, and we will become more reliant on a smaller
number of institutional counterparties, which both increases our risk exposure to any individual
counterparty and decreases our negotiating leverage with these counterparties. Based on our
assessment of business conditions that could impact our financial results, we have determined that
none of the Companys customers or counterparties represent significant concentrations of credit
risk.
Derivatives Counterparties
The risk associated with a derivative transaction is that a
counterparty will default on payments due to us. If there is a default, we may have to acquire a
replacement derivative from a different counterparty at a higher cost or may be unable to find a
suitable replacement. Our derivative credit exposure relates principally to interest rate
derivative contracts. Typically, we seek to manage these exposures by contracting with experienced
counterparties that are investment grade-rated. These counterparties consist of large financial
institutions that have a significant presence in the derivatives market.
Lender Counterparties
The risk associated with a debt transaction is that a counterparty
will not be available to fund as obligated under the terms of our revolver facility. If funding
under committed lines of credit are unavailable, we may have to acquire a replacement credit
facility from a different counterparty at a higher cost or may be unable to find a suitable
replacement. Typically, we seek to manage these exposures by contracting with experienced large
financial institutions and monitoring the credit quality of our lenders.
The Company manages its exposure to derivative and lender counterparties by continually
monitoring its positions with, and the credit quality of, the financial institutions that are
counterparties to its financial instruments and does not anticipate nonperformance by the
counterparties.
9
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Customers
The Companys trade receivables do not represent a significant concentration of
credit risk at March 31, 2009 due to the wide variety of customers and markets in which the Company
operates and their dispersion across many geographic areas.
2. RECENTLY ISSUED ACCOUNTING AND REPORTING PRONOUNCEMENTS
Accounting and Reporting Pronouncements Adopted
Fair Value Measurements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (FAS 157), which establishes the authoritative definition of fair value, sets out a framework for measuring fair
value, and expands the required disclosures about fair value measurement. The provisions of FAS 157
related to financial assets and liabilities as well as nonfinancial assets and liabilities carried
at fair value on a recurring basis were adopted prospectively on January 1, 2008 and did not have a
material impact on the Companys consolidated financial statements. In February 2008, the FASB
issued FASB Staff Position (FSP) No. 157-2, Effective Date of FASB Statement No. 157 (FSP
157-2), which delayed the effective date of FAS 157 for non-recurring measurements of
non-financial assets and liabilities to fiscal years beginning after November 15, 2008 and interim
periods within those fiscal years. Effective January 1, 2009, the Company adopted the provisions of
FAS 157 related to non-financial assets and liabilities measured at fair value on a non-recurring
basis, which are being applied prospectively. The adoption of FAS 157 for non-recurring
measurements of non-financial assets and liabilities did not have a material impact on the
Companys consolidated financial statements. Additional information related to fair value
measurements is included in Note 5.
Business Combinations
In December 2007, the FASB issued Statement No. 141(R), Business Combinations
(FAS 141R), which requires, among other matters, that companies expense business
acquisition transaction costs; record an asset for in-process research and development, which is
expensed at the time of the acquisition; record at fair value amounts for contingencies, including
contingent consideration, as of the purchase date with subsequent adjustments recognized in
operations, which is accounted for as an adjustment of purchase price; recognize decreases in
valuation allowances on acquired deferred tax assets in operations, which are considered to be
subsequent changes in consideration and are recorded as decreases in goodwill; and measure at fair
value any non-controlling interest in the acquired entity. Effective
January 1, 2009, the Company
adopted the provisions of FAS 141R, which will be applied prospectively to new business
combinations consummated on or subsequent to the effective date. In April 2009, the FASB issued
FSP 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That
Arise from Contingencies (FSP 141R-1), which amends and clarifies the accounting, recording and
measurement of certain contingent assets acquired and liabilities assumed in a business
combination. The provisions of FSP 141R-1 were effective immediately and required to be applied
retrospectively to business combinations that occurred on or after
January 1, 2009. While FAS 141R
applies to new business acquisitions consummated on or subsequent to the effective date, the
amendments to FASB Statement No. 109, Accounting for Income Taxes (FAS 109), with respect to
deferred tax valuation allowances and liabilities for income tax uncertainties applies to changes
in deferred tax valuation allowances and liabilities for income tax uncertainties recognized in
prior business acquisitions. The adoption of FAS 141R and FSP 141R-1 did not impact the Companys
consolidated financial statements.
Non-controlling Interests
In December 2007, the FASB issued FAS 160, which establishes accounting and reporting
standards for the non-controlling interest in a subsidiary, commonly referred to as minority
interest. Among other matters, FAS 160 requires that non-controlling interests be reported within
the equity section of the balance sheet and that the amounts of consolidated net income or loss and
consolidated comprehensive income or loss attributable to the parent company and the
non-controlling interests are clearly presented separately in the consolidated financial
statements. Also, pursuant to FAS 160, where appropriate, losses will be allocated to
non-controlling interests even when that allocation may result in a deficit balance. Effective
January 1, 2009, the Company adopted the provisions of FAS 160, which are being applied
prospectively, except for the presentation and disclosure requirements, which are being applied
retrospectively to all periods presented. Upon adoption of FAS 160, non-controlling interests of
$25 million as of December 31, 2008 have been reclassified
from Other noncurrent liabilities to Equity attributable to
non-controlling interests in the equity section of the Condensed Consolidated Balance Sheets.
Additionally, $40
million previously recorded as Minority interests, net of tax during the three months ended
March 31, 2008 has been reclassified to Net income attributable to non-controlling interests and
excluded from the caption Net income in the Condensed Consolidated Statements of Operations.
Earnings per share for all prior periods is not impacted.
Disclosures about Derivative Investments and Hedging Activities
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and
Hedging Activities, an Amendment of FASB Statement No. 133 (FAS 161), which amends
and expands the disclosure requirements of FASB Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), to include
information about how and why an entity uses derivative instruments; how derivative instruments and
related hedged items are accounted for under FAS 133 and its related interpretations; and how
derivative instruments and related hedged items affect an entitys financial position, financial
performance, and cash flows. The Company adopted the provisions of FAS 161 effective January 1,
2009. The relevant disclosures required by FAS 161 are included in Note 9.
10
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Determination of the Useful Life of Intangible Assets
In April 2008, the FASB issued FSP No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3), which amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset pursuant to FASB Statement No. 142, Goodwill and Other Intangible Assets (FAS
142). Effective January 1, 2009, the Company adopted the provisions of FSP 142-3, which are being
applied prospectively to intangible assets acquired on or subsequent
to the effective date. The Companys policy is to expense costs
incurred
to contractually renew or extend the terms of its intangible assets. The
adoption of FSP 142-3 did not impact the Companys consolidated financial statements.
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities
In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) Issue No. 03-6-1,
Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating
Securities (FSP EITF 03-6-1). The provisions of FSP EITF 03-6-1 became effective for the
Company on January 1, 2009. This FSP provides that all outstanding unvested share-based payment
awards that contain rights to non-forfeitable dividends or dividend equivalents (whether paid or
unpaid) are considered participating securities. Because such awards are considered participating
securities, the issuing entity is required to apply the two-class method of computing basic and
diluted earnings per share retrospectively to all prior-period earnings per share computations. The
adoption of FSP EITF 03-6-1 did not impact the Companys computation of earnings per share
amounts for the periods presented.
Accounting for Collaborative Arrangements
In December 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative
Arrangements (EITF 07-1). EITF 07-1 defines collaborative arrangements and establishes accounting
and reporting requirements for transactions between participants in the arrangement and third
parties. A collaborative arrangement is a contractual arrangement that involves a joint operating
activity, for example an agreement to co-produce and distribute programming with another media
company. Effective January 1, 2009, the Company adopted the provisions of EITF 07-1, which are
being applied retrospectively to all periods presented for all collaborative arrangements as
of the effective date. The relevant disclosures required by EITF 07-1 are included in Note 6.
Accounting and Reporting Pronouncements Not Yet Adopted
Interim Disclosures about Fair Value of Financial Instruments
In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP No. FAS 107-1 and APB 28-1). This FSP amends FASB Statement
No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair
value of financial instruments in interim financial statements as well as in annual financial
statements. This FSP also amends Accounting Principles Board Opinion
No. 28, Interim Financial
Reporting, to require these disclosures in all interim financial statements. The provisions of FSP
No. FAS 107-1 and APB 28-1 became effective for the Company on April 1, 2009, will be applied
prospectively beginning in the second quarter of 2009, and are not expected to have a material
impact on the Companys consolidated financial statements.
3. CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Discovery holds investments in multiple ventures, most of which were determined to be variable
interest entities. Pursuant to FIN 46R, it was determined that Discovery is the primary beneficiary
of the ventures determined to be variable interest entities and is required to
consolidate them accordingly. The following table provides a list of variable interest
entities consolidated by Discovery as of March 31, 2009 and December 31, 2008.
|
|
|
|
|
|
|
Percentage of |
|
|
Ownership |
Ventures with the British Broadcasting Corporation: |
|
|
|
|
JV Programs, LLC (JVP) |
|
|
50 |
% |
Joint Venture Network, LLC (JVN) |
|
|
50 |
% |
Animal Planet Europe |
|
|
50 |
% |
Animal Planet Latin America |
|
|
50 |
% |
People+Arts Latin America |
|
|
50 |
% |
Animal Planet Asia |
|
|
50 |
% |
Animal Planet Japan |
|
|
33 |
% |
|
Other ventures: |
|
|
|
|
Oprah Winfrey Network |
|
|
50 |
% |
11
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
During the three months ended March 31, 2009 and 2008, $4 million and $7 million,
respectively, of net income generated by the ventures was allocated to other venture partners,
which was recorded as a component of Net income attributable to non-controlling interests in the
Condensed Consolidated Statements of Operations.
Ventures with the British Broadcasting Corporation
The Company and the British Broadcasting Corporation (BBC) formed several cable and
satellite television network ventures, other than JVN, to produce and acquire factual-based
content. The JVN venture was formed to provide debt funding to the other ventures. In addition to
its own funding requirements, Discovery has assumed the BBCs funding requirements, giving the
Company preferential cash distribution for these joint ventures. No cumulative operating losses
generated by the ventures were allocated to the BBCs non-controlling interests. In accordance
with the venture arrangement, no losses can be allocated to the BBC in excess of distributable cash
to the BBC.
Pursuant to the venture agreements, the BBC has the right to require the Company to purchase
the BBCs interests in the People+Arts Latin America venture and the Animal Planet ventures if
certain conditions are not met. Additional information regarding the BBCs put right is disclosed
in Note 10.
Oprah Winfrey Network
On June 19, 2008, Discovery entered into a 50-50 joint venture with Oprah Winfrey and Harpo,
Inc. (Harpo) to rebrand Discovery Health Channel as OWN: The Oprah Winfrey Network (OWN
Network). It is expected that Discovery Health Channel will be rebranded as the OWN Network in early 2010.
Pursuant to the arrangement, Discovery will contribute its interest in the Discovery Health Channel
and certain DiscoveryHealth.com content and Harpo will contribute the Oprah.com website (which will
serve as the platform for the venture website) and certain Oprah.com content. Discovery and Harpo
are required to make these contributions on the launch date unless it is mutually agreed that
certain contributions will be made prior to the launch date for the benefit of the venture.
Pursuant to the venture agreement, Discovery is committed to fund up to $100 million of the
ventures operations through September 2011. To the extent funding the joint venture in excess of
$100 million is necessary, the Company may provide additional funds through a member loan or
require the venture to seek third party financing. During the three months ended March 31, 2009,
the Company funded $5 million of the OWN Networks operating costs.
Pursuant to the venture agreement, Harpo has the right to require the Company to purchase its
interest in the OWN Network venture if certain conditions are not met. Additional information
regarding Harpos put right is disclosed in Note 10.
4. DISCONTINUED OPERATIONS
In September 2008, as part of the Newhouse Transaction, DHC completed the spin-off to its
shareholders of AMC, a subsidiary holding the cash and businesses of DHC, except for certain
businesses that provide sound, music, mixing, sound effects and other related services. The AMC
spin-off did not involve the payment of any consideration by the holders of DHC common stock and
was structured as a tax free transaction under Sections 368(a) and 355 of the Internal Revenue Code
of 1986, as amended. There was no gain or loss related to the spin-off. Subsequent to the AMC
spin-off, the companies no longer have any ownership interests in each other and operate
independently.
In September 2008, DHC sold its ownership interests in AMSTS and AccentHealth for
approximately $7 million and $119 million, respectively, in cash. AMSTS and AccentHealth were
components of the AMC business. It was determined that AMSTS and AccentHealth were non-core
assets, and the sale of these companies was consistent with DHCs strategy to divest non-core
assets. The sale of these companies resulted in pre-tax gains of
approximately $3 million for AMSTS
and $64 million for AccentHealth, which were recorded at the time of the dispositions. The Company
has no continuing involvement in the operations of AMSTS or AccentHealth.
As there is no continuing involvement in the operations of AMC, AMSTS, or AccentHealth, in
accordance with FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (FAS 144), revenues and expenses in the Condensed Consolidated Statements of Operations
for the three months ended March 31, 2008 have been adjusted to
exclude amounts for these companies. During the three months ended March 31, 2008, these three companies generated
combined revenues of $174 million. The combined net operating results were break even for these
three companies during the three months ended March 31, 2008, and therefore, their results of
operations are not separately presented as discontinued operations in the Condensed Consolidated
Statements of Operations. No gains or losses on these dispositions were recorded in the periods
presented. Cash flows from AMC, AMSTS, and
AccentHealth have not been segregated as discontinued operations in the Condensed Consolidated
Statements of Cash Flows. No interest expense was allocated to discontinued operations for the
periods presented herein since there was no debt specifically attributable to discontinued
operations or that was required to be repaid following the dispositions.
12
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
5. FAIR VALUE MEASUREMENTS
In accordance with FAS 157, a fair value measurement is determined based on the assumptions
that a market participant would use in pricing an asset or liability. FAS 157 also established a
three-tiered hierarchy that draws a distinction between market participant assumptions based on:
(i) observable inputs such as quoted prices in active markets (Level 1), (ii) inputs other than
quoted prices in active markets that are observable either directly or indirectly (Level 2), and
(iii) unobservable inputs that require the Company to use present value and other valuation
techniques in the determination of fair value (Level 3). The following table presents information
about assets and liabilities required to be carried at fair value on a recurring basis as of March
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
as of March 31, 2009 Using: |
|
|
|
|
|
|
|
Quoted Market |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Total Fair Value as of |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
March 31, 2009 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
(amounts in millions) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
33 |
|
|
$ |
33 |
|
|
$ |
|
|
|
$ |
|
|
Available-for-sale securities |
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
Derivatives (Note 9) |
|
|
3 |
|
|
|
|
|
|
|
3 |
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives (Note 9) |
|
|
(99 |
) |
|
|
|
|
|
|
(99 |
) |
|
|
|
|
Deferred compensation plan |
|
|
(33 |
) |
|
|
|
|
|
|
(33 |
) |
|
|
|
|
HSW International, Inc. liability |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
Redeemable interests in subsidiaries (Note 10) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(134 |
) |
|
$ |
48 |
|
|
$ |
(133 |
) |
|
$ |
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents information about assets and liabilities required to be carried
at fair value on a recurring basis as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
|
|
|
|
|
as of December 31, 2008 Using: |
|
|
|
|
|
|
|
Quoted Market |
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Prices in Active |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
|
Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
Total Fair Value as of |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
|
|
December 31, 2008 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
(amounts in millions) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
$ |
36 |
|
|
$ |
36 |
|
|
$ |
|
|
|
$ |
|
|
Available-for-sale securities |
|
|
15 |
|
|
|
15 |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
(112 |
) |
|
|
|
|
|
|
(112 |
) |
|
|
|
|
Deferred compensation plan |
|
|
(36 |
) |
|
|
|
|
|
|
(36 |
) |
|
|
|
|
HSW International, Inc. liability |
|
|
(7 |
) |
|
|
|
|
|
|
(7 |
) |
|
|
|
|
Redeemable interests in subsidiaries (Note 10) |
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(153 |
) |
|
$ |
51 |
|
|
$ |
(155 |
) |
|
$ |
(49 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
For assets that are measured using quoted prices in active markets, the total fair value is
the published market price per unit in active markets multiplied by the number of units held
without consideration of transaction costs.
13
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The fair value of derivative instruments, which consists of interest rate and foreign currency
hedges, is determined using the published market price of similar instruments with similar
maturities and characteristics, interest rate yield curves, and measures of interest rate
volatility, adjusted for any terms specific to that liability and nonperformance risk.
The fair value of the deferred compensation plan liability is determined based on the fair
value of the related investments elected by employees.
The Company owns approximately 23 million shares (or 43%) of HSW International, Inc. (HSWI).
The investment is accounted for using the equity method. The Company has agreed to either: (i)
distribute approximately 18 million of the HSWI shares to the former shareholders of
HowStuffWorks.com, Inc. (HSW), or (ii) sell approximately 18 million of the HSWI shares and
distribute substantially all proceeds in excess of $0.37 per share to the former shareholders of
HSW. The Company has recorded a liability for this obligation at fair value using a Black-Scholes
option pricing model. Decreases in the fair value of this liability were $3 million during the
three months ended March 31, 2009, which was recorded as a component of Other non-operating income
(expense), net in the Condensed Consolidated Statements of Operations. There were no changes in
the fair value of this liability during the three months ended March 31, 2008.
The fair value of the redeemable interests in subsidiaries is determined based upon an
estimate of the proceeds from a hypothetical sale of the Channel Groups and a distribution of the
proceeds to the venture partners based on various rights and preferences. Additional information
regarding the redeemable interests in subsidiaries is disclosed in Note 10.
There were no changes in balances related to fair value measurements using
significant unobservable inputs during the three months ended March 31, 2009 and 2008.
6. CONTENT RIGHTS
The following table presents a summary of the components of content rights.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in millions) |
|
Produced content rights: |
|
|
|
|
|
|
|
|
Completed |
|
$ |
1,559 |
|
|
$ |
1,420 |
|
In-production |
|
|
236 |
|
|
|
270 |
|
Co-produced content rights: |
|
|
|
|
|
|
|
|
Completed |
|
|
503 |
|
|
|
462 |
|
In-production |
|
|
41 |
|
|
|
63 |
|
Licensed content rights: |
|
|
|
|
|
|
|
|
Acquired |
|
|
238 |
|
|
|
218 |
|
Prepaid |
|
|
12 |
|
|
|
17 |
|
|
|
|
|
|
|
|
Content rights, at cost |
|
|
2,589 |
|
|
|
2,450 |
|
Accumulated amortization |
|
|
(1,317 |
) |
|
|
(1,214 |
) |
|
|
|
|
|
|
|
Content rights, net |
|
|
1,272 |
|
|
|
1,236 |
|
Current portion |
|
|
(80 |
) |
|
|
(73 |
) |
|
|
|
|
|
|
|
Non current portion |
|
$ |
1,192 |
|
|
$ |
1,163 |
|
|
|
|
|
|
|
|
Amortization expense related to content rights was $167 million and $154 million during the
three months ended March 31, 2009 and 2008, respectively, which was recorded as a component of Cost
of revenues in the Condensed Consolidated Statements of Operations. Amortization expense in 2009
included impairment charges of $8 million for completed content and other charges of $1 million
related to the write-off of content that was in production at the Companys U.S. Networks and
International Networks segments. The impairment charges
and write-offs were the result of management evaluating the Companys programming portfolio
assets and concluding that certain programming was no longer aligned with the Companys strategy
and would no longer be aired.
The Company enters into collaborative co-produced content right arrangements
(co-productions) whereby it obtains certain editorial and distribution rights to content assets
in return for funding production costs. The Companys level of involvement in co-productions
ranges from review of the initial production plan to detailed editorial oversight through each
stage of the production process. As the Company shares in the variable risks and rewards of
content creation, these co-productions are within the scope of EITF
07-1.
14
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company capitalizes the net cost of co-productions and amortizes them in accordance with its
content amortization policy. The Company records cash receipts for distribution, advertising and
royalty revenue that result from the exploitation of co-produced
content rights as gross revenue in accordance with EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent. The Company generally does not allocate revenue to specific content rights, and there were
no royalty revenues or expenses associated with co-production partners during the three months ended March
31, 2009 and 2008. However, the Companys most significant
co-production partner is the BBC through the JVP, a consolidated joint venture disclosed in Note 3.
JVP recognized total third-party royalty revenue associated with co-production rights of $5 million and $20
million for the quarters ended March 31, 2009 and 2008, respectively.
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The
following table presents a summary of the Companys goodwill by
reportable segment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commerce, |
|
|
|
|
|
|
|
|
|
|
|
|
Education, |
|
|
|
|
U. S. |
|
International |
|
and |
|
|
|
|
Networks |
|
Networks |
|
Other |
|
Total |
|
|
(amounts in millions) |
Balance as of December 31,
2008 |
|
$ |
5,569 |
|
|
$ |
1,273 |
|
|
$ |
49 |
|
|
$ |
6,891 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
$ |
5,569 |
|
|
$ |
1,271 |
|
|
$ |
49 |
|
|
$ |
6,889 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
The following table presents a list of the gross carrying value of the Companys
intangible assets and related accumulated amortization by major category.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
March 31, 2009 |
|
|
December 31, 2008 |
|
|
|
Amortization Period |
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
(Years) |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
Gross |
|
|
Amortization |
|
|
Net |
|
|
|
|
|
|
(amounts in millions) |
|
Intangible assets subject to
amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
6 |
|
|
$ |
55 |
|
|
$ |
(25 |
) |
|
$ |
30 |
|
|
$ |
55 |
|
|
$ |
(23 |
) |
|
$ |
32 |
|
Customer lists |
|
|
23 |
|
|
|
558 |
|
|
|
(64 |
) |
|
|
494 |
|
|
|
611 |
|
|
|
(107 |
) |
|
|
504 |
|
Other |
|
|
5 |
|
|
|
36 |
|
|
|
(26 |
) |
|
|
10 |
|
|
|
36 |
|
|
|
(24 |
) |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
649 |
|
|
|
(115 |
) |
|
|
534 |
|
|
|
702 |
|
|
|
(154 |
) |
|
|
548 |
|
Intangible assets not subject to
amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
168 |
|
|
|
168 |
|
|
|
|
|
|
|
168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
817 |
|
|
$ |
(115 |
) |
|
$ |
702 |
|
|
$ |
870 |
|
|
$ |
(154 |
) |
|
$ |
716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense related to intangible assets was $14 million and
$22 million during the three months ended March 31, 2009 and 2008, respectively.
The following table presents the Companys estimate of its aggregate annual amortization
expense for intangible assets subject to amortization for the remainder of 2009 and each of the
succeeding four years based on the amount of intangible assets as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(amounts in millions) |
|
Amortization expense |
|
$ |
42 |
|
|
$ |
53 |
|
|
$ |
33 |
|
|
$ |
30 |
|
|
$ |
26 |
|
|
$ |
350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amount and timing of the estimated expenses in the above table may vary due to future
acquisitions, dispositions, or impairments.
15
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
8. DEBT
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in millions) |
|
$1.0 billion Term Loan A, due quarterly December 2008 to October 2010 |
|
$ |
875 |
|
|
$ |
938 |
|
$1.6 billion Revolving Loan, due October 2010 |
|
|
315 |
|
|
|
315 |
|
$1.5 billion Term Loan B, due quarterly September 2007 to May 2014 |
|
|
1,475 |
|
|
|
1,478 |
|
7.45% Senior Notes, semi-annual interest, due September 2009 |
|
|
55 |
|
|
|
55 |
|
8.37% Senior Notes, semi-annual interest, due March 2011 |
|
|
220 |
|
|
|
220 |
|
8.13% Senior Notes, semi-annual interest, due September 2012 |
|
|
235 |
|
|
|
235 |
|
Floating Rate Senior Notes, semi-annual interest, due December 2012
(3.3% at March 31, 2009 and December 31, 2008) |
|
|
90 |
|
|
|
90 |
|
6.01% Senior Notes, semi-annual interest, due December 2015 |
|
|
390 |
|
|
|
390 |
|
Obligations under capital leases |
|
|
64 |
|
|
|
67 |
|
Other notes payable |
|
|
4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Subtotal |
|
|
3,723 |
|
|
|
3,789 |
|
Current portion |
|
|
(586 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
Long-term debt |
|
$ |
3,137 |
|
|
$ |
3,331 |
|
|
|
|
|
|
|
|
Discoverys
$1.5 billion Term Loan B is secured by the assets of DCH, excluding assets held by
DCHs subsidiaries. The remaining Term Loan A, Revolving Loans and Senior Notes are unsecured.
The
following table presents a summary of scheduled and estimated debt
payments excluding capital lease obligations and other notes payable for the
remainder of 2009 and each of the succeeding four years based on the amount of debt outstanding as
of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April
1, 2009 December 31, 2009 |
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
Thereafter |
|
|
|
(amounts in millions) |
Long-term debt |
|
$ |
379 |
|
|
$ |
893 |
|
|
$ |
235 |
|
|
$ |
340 |
|
|
$ |
15 |
|
|
$ |
1,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company uses derivative instruments to modify its exposure to interest rate fluctuations
on its debt. The Term Loans, Revolving Facility, and Senior Notes contain covenants that require
the Company to meet certain financial ratios and place restrictions on the payment of dividends,
sale of assets, borrowing level, mergers, and purchases of capital stock, assets, and investments.
The Company was in compliance with all debt covenants as of March 31, 2009 and December 31, 2008.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative financial instruments to modify its exposure to market risks from
changes in interest rates and foreign exchange rates. The Company does not hold or enter into
financial instruments for speculative trading purposes.
The Companys interest expense is exposed to movements in short-term interest rates.
Derivative instruments, including both fixed to variable and variable to fixed interest rate swaps,
are used to modify this exposure. The majority of the Companys debt is variable rate and the
Company uses derivatives to effectively fix the amount of interest paid. The variable to fixed
interest rate instruments are based on the three-month LIBOR rate and have a total notional amount
of $2.3 billion and have a weighted average interest rate of 4.68% at March 31, 2009. The fixed to
variable interest rate agreements have a total notional amount of $50 million and have a weighted
average interest rate of 5.82% at March 31, 2009.
On January 29, 2009, the Company entered into two $100 million forward starting swaps with
fixed pay rates of 2.94% and 2.93%, receiving the three-month LIBOR rate, starting June 30, 2010
and maturing on March 31, 2014. On March 18, 2009, the Company entered into a $50 million forward
starting swap with a fixed pay rate of 2.75%, receiving the three-month LIBOR rate, starting June
30, 2010 and maturing on March 31, 2014. On March 4, 2009, the Company terminated an
unexercised interest rate swap put with a notional amount of $25 million.
Of the total notional amount of $3.1 billion in interest rate derivatives, a notional amount
of $2.3 billion of these derivative instruments are highly effective cash flow hedges. The change
in the fair value of derivatives designated as hedging instruments is reported as a
component of Accumulated other comprehensive loss on the Condensed
Consolidated Balance Sheets. Should any portion of these instruments become ineffective due to a
restructuring in the Companys debt, the monthly changes in fair
value would be reported as a component of Other non-operating income
(expense), net on the Condensed Consolidated Statements of
Operations. The Company does not expect material hedge ineffectiveness in the next twelve months.
The remaining $860 million in interest rate derivatives have not been designated for hedge
accounting under FAS 133. The change in the fair value of derivatives not designated as hedging
instruments is reported as component of Other non-operating income
(expense), net on the Condensed Consolidated Statements of
Operations.
16
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The foreign exchange instruments used to hedge foreign currency fluctuations for our non-U.S.
operations are spot, forward, and option contracts. Additionally, the Company enters into
non-designated forward contracts to hedge non-dollar denominated cash flows and foreign currency
balances. At March 31, 2009, the notional amount of foreign exchange derivative contracts was $24
million. These derivative instruments have not been designated for hedge accounting under FAS 133.
The following tables present the notional amount and fair value of the Companys derivatives
as of March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
|
Balance Sheet Location |
|
Notional |
|
|
Fair Value |
|
|
|
|
|
(amounts in millions) |
|
Derivatives
not designated as hedging instruments under FAS 133: |
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts short term (1) |
|
Prepaid
expenses and other current assets |
|
$ |
6 |
|
|
$ |
|
|
Interest rate contracts long term (2) |
|
Other noncurrent assets |
|
|
50 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
Total asset derivatives |
|
|
|
$ |
56 |
|
|
$ |
3 |
|
|
|
|
|
|
|
|
|
|
|
(1) Derivative instruments with contractual maturity within one year. |
|
(2) Derivative instruments with contractual maturity greater than one year. |
|
|
|
|
|
Liability Derivatives |
|
|
|
Balance Sheet Location |
|
Notional |
|
|
Fair Value |
|
|
|
|
|
(amounts in millions) |
|
Derivatives
designated as hedging instruments under FAS 133: |
|
|
|
|
|
|
|
|
|
|
Interest rate contracts short term (1) |
|
Other current liabilities |
|
$ |
560 |
|
|
$ |
16 |
|
Interest rate contracts long term (2) |
|
Other noncurrent liabilities |
|
|
1,710 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
Total derivatives designated as hedging instruments under FAS 133 |
|
|
|
|
2,270 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments under FAS 133: |
|
|
|
|
|
|
|
|
|
|
Interest rate contracts short term (1) |
|
Other current liabilities |
|
|
435 |
|
|
|
10 |
|
Foreign exchange contracts short term (1) |
|
Other current liabilities |
|
|
18 |
|
|
|
1 |
|
Interest rate contracts long term (2) |
|
Other noncurrent liabilities |
|
|
375 |
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
Total derivatives not designated as hedging instruments under
FAS 133 |
|
|
|
|
828 |
|
|
|
35 |
|
|
|
|
|
|
|
|
|
|
Total liability derivatives (3) |
|
|
|
$ |
3,098 |
|
|
$ |
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Derivative instruments with contractual maturity within one year. |
|
(2) |
|
Derivative instruments with contractual maturity greater than one year. |
|
(3) |
|
Includes net fair value of credit risk associated with Discovery of
$(4) million as of March 31, 2009. |
17
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The
following table presents the impact of derivative instruments on the Condensed Consolidated
Statement of Operations for the Companys derivatives in cash flow hedging
relationships for the three months ended March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location of Pretax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (or Loss) |
|
|
Amount of Pretax Gain |
|
|
|
|
Location of Pretax |
|
|
Amount of Pretax |
|
Recognized in Income |
|
|
or (Loss) Recognized in |
|
|
Amount of Pretax |
|
Gain (or Loss) |
|
|
Gain or (Loss) |
|
on Derivative |
|
|
Income on Derivative |
Derivatives in FAS |
|
Gain or (Loss) |
|
Reclassified from |
|
|
Recognized from |
|
(Ineffective Portion |
|
|
(Ineffective Portion and |
133 Cash Flow |
|
Recognized in OCI |
|
Accumulated OCI |
|
|
Accumulated OCI |
|
and Amount Excluded |
|
|
Amount Excluded |
Hedging |
|
on Derivative |
|
into Income |
|
|
into Income |
|
from Effectiveness |
|
|
from Effectiveness |
Relationships |
|
(Effective Portion) |
|
(Effective Portion) |
|
|
(Effective Portion) |
|
Testing) |
|
|
Testing) |
|
|
(amounts in millions) |
Interest rate contracts |
|
$ |
(7 |
) |
|
Interest expense |
|
$ |
(12 |
) |
|
Other non-operating income (expense), net |
|
$ |
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table presents the impact of derivative instruments on the
Condensed Consolidated
Statements of Operations for the Companys derivatives not designated as hedging instruments for
the three months ended March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
Location of Pretax |
|
|
|
|
|
Gain or (Loss) |
|
|
|
Derivatives Not |
|
Recognized in |
|
|
Amount of Pretax Gain or (Loss) |
Designated as Hedging |
|
Income on |
|
|
Recognized in Income on |
Instruments under FAS 133 |
|
Derivative |
|
|
Derivatives |
|
|
|
|
|
|
(amounts in millions) |
Interest rate contracts |
|
Other
non-operating income (expense), net |
|
|
$ |
5 |
Foreign exchange contracts |
|
Other
non-operating income (expense), net |
|
|
|
5 |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
$ |
10 |
|
|
|
|
|
|
|
|
|
Credit-Risk-Related Contingencies
Certain of the Companys derivative instruments contain provisions that require the Company to
comply with the credit agreements executed in connection with its outstanding Term Loan A and Term
Loan B. Under the terms of the early termination event provision specified in the derivative
contracts, if the Company is in default under the credit agreements or if the credit agreements are
terminated, the counterparties to the derivative instruments could exercise their option to early
termination and could request immediate settlement on all of their outstanding derivative contracts
with us. Certain derivative contracts give rise to an early termination event and are considered
to be in default upon the default of the credit agreements. Under the credit agreements, the
Company will be in default upon the occurrence of certain cross-default events, such as failure to
make payments when due in respect to any indebtedness exceeding certain threshold amounts.
Substantially all of our derivative instruments are in a liability position as of March 31,
2009. The aggregate fair value of all derivative instruments with credit-risk-related contingent
features that are in a liability position on March 31, 2009 was $99 million. If the
credit-risk-related contingent feature underlying these agreements were triggered on March 31,
2009, the Company may be required to settle the contracts at their fair value.
10. REDEEMABLE INTEREST IN SUBSIDIARIES
People+Arts Latin America and Animal Planet Channel Group
As disclosed in Note 3, Discovery and the BBC have formed several cable and satellite
television network joint ventures to develop and distribute programming content. Under certain
terms outlined in the contract, the BBC has the right every three years, commencing December 31,
2002, to put to the Company its interests in: (i) People+Arts Latin America, and/or (ii) certain
Animal Planet channels outside of the U.S. (the Channel Groups), in each case for a value
determined by a specified formula. In January 2009, the BBC requested that a determination be made
whether such conditions have occurred with respect to both Channel Groups as of December 31, 2008.
The contractual redemption value is based upon an estimate of the proceeds from a hypothetical sale
of the Channel Groups and a distribution of the proceeds to the venture partners based on various
rights and preferences. As the Company has funded all operations from inception of the ventures
through December 31, 2008, the Company believes that it has accumulated rights and preferences in
excess of the fair market value of the Channel Groups. However, due to the complexities of the
redemption formula, the Company has accrued the minority interest to an estimated negotiated value
of $49 million as of both March 31, 2009 and December 31, 2008. Changes in the assumptions used to
estimate the redemption value could materially impact current estimates. The Company recorded no
accretion to the redemption value during the three months ended March 31, 2009 and 2008.
18
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
OWN Network
As disclosed in Note 3, Discovery and Harpo have formed a venture to rebrand Discovery Health
Channel as OWN: The Oprah Winfrey Network. Pursuant to the venture agreement, Discovery provided a
put right to Harpo which is exercisable on four separate put exercise dates within 12.5 years of
the ventures formation date. The put arrangement provides Harpo with the right to require
Discovery to purchase its 50% ownership interest at fair market value up to a maximum put amount.
The maximum put amount ranges between $100 million on the first put exercise date up to $400
million on the fourth put exercise date. As of March 31, 2009, no amounts have been recorded for
this put right as the Company has not yet contributed its interest in Discovery Health Channel and
Harpo has not yet contributed the Oprah.com website to the OWN Network venture.
11. OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss included in the Condensed Consolidated
Balance Sheets reflects the aggregate of foreign currency translation adjustments and unrealized holding
gains and losses on available-for-sale securities and derivative
instruments.
The change in the components of Accumulated other comprehensive loss, net of taxes, is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Holding |
|
|
|
|
|
|
Foreign |
|
|
(Losses) Gains |
|
|
Accumulated |
|
|
|
Currency |
|
|
on Securities |
|
|
Other |
|
|
|
Translation |
|
|
and Derivative |
|
|
Comprehensive |
|
|
|
Adjustments |
|
|
Instruments |
|
|
Loss |
|
Balance as of December 31, 2008 |
|
$ |
(47 |
) |
|
$ |
(31 |
) |
|
$ |
(78 |
) |
Other comprehensive (loss) income |
|
|
(10 |
) |
|
|
3 |
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
Balance as of March 31, 2009 |
|
$ |
(57 |
) |
|
$ |
(28 |
) |
|
$ |
(85 |
) |
|
|
|
|
|
|
|
|
|
|
|
The components of Other comprehensive (loss) income are reflected in Discoverys Consolidated
Statements of Equity. The following table summarizes the tax effects related to each
component of Other comprehensive (loss) income. |
|
|
|
Before-tax |
|
|
Tax |
|
|
Net-of-tax |
|
|
|
Amount |
|
|
Benefit
(Expense) |
|
|
Amount |
|
|
|
(amounts in millions) |
|
Three months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
(17 |
) |
|
$ |
7 |
|
|
$ |
(10 |
) |
Unrealized
gains on securities and derivative instruments, net |
|
|
5 |
|
|
|
(2 |
) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(12 |
) |
|
$ |
5 |
|
|
$ |
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Three months
ended March 31, 2008 (recast): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
7 |
|
|
$ |
(3 |
) |
|
$ |
4 |
|
Unrealized
losses on securities and derivative instruments, net |
|
|
(14 |
) |
|
|
6 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
$ |
(7 |
) |
|
$ |
3 |
|
|
$ |
(4 |
) |
|
|
|
|
|
|
|
|
|
|
12. SHARE-BASED COMPENSATION
The Company has various plans it assumed from DHC and DCH in connection with the Newhouse
Transaction. Under these plans the Company is authorized to grant share-based awards to employees
and nonemployees. Prior to September 18, 2008, DCH maintained the Discovery Appreciation Plan (the
DAP Plan) and the HowStuffWorks.com Plan (the HSW Plan). The DAP Plan is a long-term incentive
plan under which eligible employees received cash settled unit awards. The HSW Plan is a long-term
incentive plan assumed with the acquisition of HSW for the benefit of the subsidiarys employees.
The DAP Plan and the HSW Plan continue to exist subsequent to the Newhouse Transaction.
Prior to September 18, 2008, DHC maintained the Discovery Holding Company 2005 Incentive Plan,
the Discovery Holding Company 2005 Non-Employee Director Incentive Plan (collectively the
Incentive Plans), and the Discovery Holding Company Transitional Stock Adjustment Plan (the
Transitional Plan). There are outstanding awards under the Transition Plan, but the Company has
no ability to issue new awards under this plan. The Company grants awards to its employees under
Incentive Plans, which may include stock options, restricted shares, restricted stock units, stock
appreciation rights (SARs), and cash awards that are
subject to the provisions of FASB Statement No. 123(R), Share-Based Payment (FAS 123R). Most
awards previously granted by DHC under these plans that were outstanding at the time of the Newhouse
Transaction were fully vested and were converted into securities of Discovery in connection with
the Newhouse Transaction. The Incentive Plans and the Transitional Plan continue to exist
subsequent to the Newhouse Transaction.
19
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
All share-based compensation information for the three months ended March 31, 2008 is
presented on an as-converted basis as if the Newhouse Transaction had occurred on January 1, 2008.
DAP Plan
The DAP Plan is a long-term incentive plan under which eligible employees receive cash settled
unit awards. The awards consist of a number of units which represent an equivalent number of shares
of common stock with a base price established by the Company. Although the DAP Plan was a DCH plan,
through September 17, 2008 the value of the unit awards was based on the price of DHCs Series A
common stock. As the unit awards were indexed to the stock of another entity, DCH accounted for the
unit awards as derivatives pursuant to FAS 133. Accordingly, DCH remeasured the fair value of
outstanding unit awards each reporting period until settlement. Compensation expense, including
the change in fair value, was attributed using the straight-line method during the vesting period.
Changes in the fair value of the unit awards that occurred subsequent to the vesting period were
recorded as adjustments to compensation costs in the period in which the change occurs.
In connection with the Newhouse Transaction disclosed in Note 1, effective September 18, 2008
the DAP Plan was amended such that outstanding unit awards and new unit awards granted under that
plan are based on Discoverys Series A common stock. Accordingly, beginning on September 18, 2008,
outstanding unit awards and new unit awards granted under the DAP Plan have been accounted for
pursuant to the provisions of FAS 123R. Because the unit awards are cash settled they are
considered liability instruments under FAS 123R. Therefore, the Company continues to remeasure the
fair value of outstanding unit awards each reporting period until settlement. Compensation
expense, including the change in fair value, is attributed using the straight-line method during
the vesting period. Changes in the fair value of the unit awards that occur subsequent to the
vesting period are recorded as adjustments to compensation costs in the period in which the change
occurs. The Company does not intend to grant additional cash-settled unit awards, except as may be
required by contract or to employees in countries where stock option awards are not permitted.
Unit awards vest in 25% increments each year over a four year period from the grant date.
Additionally, upon voluntary termination of employment, the Company distributes 100% of vested unit
benefits if employees agree to certain contractual provisions.
The fair value of each unit award granted under the DAP Plan is determined using the
Black-Scholes option-pricing model. The following table presents a summary of the weighted average
assumptions used to determine the fair value of each unit award as of March 31, 2009 and December
31, 2008.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
Risk-free interest rate |
|
|
0.74 |
% |
|
|
0.56 |
% |
Expected term (years) |
|
|
1.39 |
|
|
|
1.38 |
|
Expected volatility |
|
|
54.84 |
% |
|
|
37.89 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
A summary of the unit awards activity for the three months ended March 31, 2009 is presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
Unit |
|
Weighted Average |
|
Contractual Life |
|
Aggregate |
|
|
Awards |
|
Grant Price |
|
(years) |
|
Intrinsic Value |
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
(in millions) |
Outstanding as of December 31, 2008 |
|
|
20.0 |
|
|
$ |
18.95 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
1.5 |
|
|
|
14.34 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2.5 |
) |
|
|
16.93 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(0.3 |
) |
|
|
18.86 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of March 31, 2009 |
|
|
18.7 |
|
|
|
18.85 |
|
|
|
1.39 |
|
|
$ |
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made cash payments totaling $1 million and $12 million, respectively, during the
three months ended March 31, 2009 and 2008 to settle vested
unit awards issued under the DAP Plan.
20
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Incentive Plans
Stock Options
Stock options are granted with exercise prices equal to, or in excess of, the fair market
value at the date of grant. Generally, stock options vest either in 33 1/3%
increments each year over three years or in 25% increments each year over a four year period
beginning one year after the grant date and expire three to ten years from the date of grant.
Certain stock option awards provide for accelerated vesting upon an election to retire pursuant to
the Companys incentive plans or after reaching a specified age and years of service.
The fair value of each stock option granted under the Incentive Plans is determined using the
Black-Scholes option-pricing model. The following table presents a summary of the weighted average
assumptions used to determine the grant date fair value of stock options awarded during the three
months ended March 31, 2009.
|
|
|
|
|
|
|
Three Months |
|
|
Ended |
|
|
March 31, 2009 |
Risk-free interest rate |
|
|
1.52 |
% |
Expected term (years) |
|
|
3.24 |
|
Expected volatility |
|
|
47.96 |
% |
Dividend yield |
|
|
|
|
A summary of option activity for the three months ended March 31, 2009 is presented
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
Weighted Average |
|
Contractual Life |
|
Aggregate |
|
|
Options |
|
Exercise Price |
|
(years) |
|
Intrinsic Value |
|
|
(in millions) |
|
|
|
|
|
(in millions) |
Outstanding
as of December 31, 2008 |
|
|
10.9 |
|
|
$ |
14.47 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
7.8 |
|
|
|
15.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 31, 2009 |
|
|
18.7 |
|
|
|
14.83 |
|
|
|
5.64 |
|
|
$ |
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of March 31, 2009 |
|
|
3.2 |
|
|
|
13.87 |
|
|
|
3.01 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average fair value of stock options granted during the three months ended March
31, 2009 was $5.35. There were no material stock option exercises during the three
months ended March 31, 2009 and 2008.
Stock Appreciation Rights
SARs are granted with exercise prices equal to the fair market value at the date of grant.
SARs entitle the recipient to receive a payment in cash equal to the excess value of the stock over
the base price specified in the grant. Most SAR grants consist of two separate vesting tranches with the
first tranche that vested 100% on March 15, 2009 and the second tranche vesting 100% on March 15,
2010. The first tranche expires one year after vesting. All SARs in the second tranche are
automatically exercised on March 15, 2010. Upon vesting, grantees may exercise the SARs included in
the first tranche at any time prior to March 15, 2010.
Cash-settled SARs are liability instruments in accordance with FAS 123R. Accordingly, the
Company remeasures the fair value of outstanding SARs each reporting period until settlement.
Compensation expense, including the change in fair value, is attributed using the straight-line
method during the vesting period. Changes in the fair value of liability instruments that occur
subsequent to the vesting period are recorded as adjustments to compensation costs in the period in
which the change occurs.
The
fair value of each SAR granted under the Incentive Plans is
determined using the Black-Scholes option-pricing model. The
following table presents a summary of the weighted-average assumptions used to
determine the fair value of
each SAR as of March 31, 2009 and December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
March 31,
2009 |
|
December 31, 2008 |
Risk-free interest rate |
|
|
0.57 |
% |
|
|
0.37 |
% |
Expected term (years) |
|
|
0.97 |
|
|
|
1.20 |
|
Expected volatility |
|
|
65.29 |
% |
|
|
39.89 |
% |
Dividend yield |
|
|
|
|
|
|
|
|
21
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
A
summary of SAR activity for the three months ended March 31,
2009 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
Weighted Average |
|
Contractual Life |
|
Aggregate |
|
|
SARs |
|
Grant Price |
|
(years) |
|
Intrinsic Value |
|
|
(in millions) |
|
|
|
|
|
|
|
|
|
(in millions) |
Outstanding
as of December 31, 2008 |
|
|
5.5 |
|
|
$ |
14.40 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
0.7 |
|
|
|
14.79 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(0.1 |
) |
|
|
14.22 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(0.2 |
) |
|
|
14.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
as of March 31, 2009 |
|
|
5.9 |
|
|
|
14.44 |
|
|
|
0.97 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
as of March 31, 2009 |
|
|
2.6 |
|
|
|
14.44 |
|
|
|
0.96 |
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Based Compensation Expense
The following table presents a summary of shared-based compensation expense (benefit) and the
related tax (benefit) expense, by award type, recognized by the Company during the three months ended March
31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
|
Stock options |
|
$ |
5 |
|
|
$ |
|
|
Stock appreciation rights |
|
|
13 |
|
|
|
|
|
HSW Plan |
|
|
(1 |
) |
|
|
5 |
|
DAP award units |
|
|
20 |
|
|
|
(41 |
) |
|
|
|
|
|
|
|
Total impact on operating income |
|
$ |
37 |
|
|
$ |
(36 |
) |
|
|
|
|
|
|
|
Tax (benefit) expense recognized |
|
$ |
(14 |
) |
|
$ |
22 |
|
Compensation expense associated with all share based awards is recorded as a component of
Selling, general and administrative expenses in the Condensed Consolidated Statements of
Operations. The Company classifies as a current liability the
intrinsic value of DAP unit awards and stock appreciation rights that are vested or will become vested
within one year. The intrinsic value of DAP unit awards that were classified as a current liability
at March 31, 2009 and December 31, 2008 was $17 million and $4 million, respectively. The intrinsic
value of stock appreciation rights that were classified as a current
liability at March 31, 2009 and December 31, 2008
was $9 million and $1 million, respectively.
13. EXIT AND RESTRUCTURING COSTS
The Company incurred $3 million of exit and restructuring costs during the three months ended
March 31, 2009. The costs were primarily incurred by Corporate and the International Networks
segment for employee relocation and termination costs. The purpose of restructuring was to better
align Discoverys organizational structure with the Companys strategic priorities and to respond
to continuing changes within the media industry.
22
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table presents a summary of changes in the Companys liability with respect to
exit and restructuring costs during the three months ended March 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee |
|
|
|
|
|
|
Contract |
|
|
Relocations/ |
|
|
|
|
|
|
Termination Costs |
|
|
Terminations |
|
|
Total |
|
|
|
(amounts in millions) |
|
Liability as of December 31, 2008 |
|
$ |
6 |
|
|
$ |
18 |
|
|
$ |
24 |
|
Net accruals |
|
|
|
|
|
|
3 |
|
|
|
3 |
|
Cash paid |
|
|
(1 |
) |
|
|
(10 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
Remaining liability as of March 31, 2009 |
|
$ |
5 |
|
|
$ |
11 |
|
|
$ |
16 |
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, exit and restructuring related accruals expected to be paid within one year totaling $11 million were
classified as a component of Accounts payable and accrued liabilities
in the Condensed Consolidated Balance Sheets. The Company does
not expect to incur significant additional costs with
respect to these particular activities.
14. INCOME TAXES
The Companys income tax expense was $70 million and $110 million during the three months
ended March 31, 2009 and 2008, respectively. The Companys effective tax rate was 36% and 60% for
the three months ended March 31, 2009 and 2008, respectively. The Companys effective tax rate for
the three months ended March 31, 2009 differed from the federal income tax rate of 35% primarily
due to state taxes, offset by the impact of non-controlling interests in consolidated partnerships.
The Companys effective tax rate for the three months ended March 31, 2008 differed from the
federal income tax rate of 35% primarily due to DHCs recognition of $23 million of deferred tax
expense related to its investment in DCH prior to the Newhouse Transaction (net of tax benefit from
intangible asset amortization related to the spin-off of Travel Channel in 2007). In accordance with ARB
51, DHC and DCH are combined in the Companys financial statements as if the Newhouse Transaction
had occurred on January 1, 2008. DHCs book basis in DCH is increased by its share of DCHs net
income for the quarter. However, DHCs tax basis remains the same.
During the three months ended March 31, 2009, the Company
reclassified $29 million of deferred tax liabilities to U.S.
federal and state taxes payable in order to recapture certain
accelerated tax deductions that the Company determined would not
qualify as accelerated deductions.
There have been no significant changes to the Companys reserves for uncertain tax positions
since December 31, 2008.
15. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the weighted average number
of shares outstanding during the period. The weighted average number of shares outstanding for the
three months ended March 31, 2009 includes Discoverys Series A, B, and C common shares, as well as
Discoverys Series A and C convertible preferred shares. Preferred shares are included in the
weighted average number of shares outstanding when calculating both basic and diluted income per
share for the three months ended March 31, 2009 as the common and preferred shares participate
equally in any dividends paid. The weighted average number of shares outstanding for the three
months ended March 31, 2008 represent only the outstanding shares of Discoverys Series A, B, and C
common stock, as though the Newhouse Transaction was consummated on January 1, 2008. Preferred
shares are excluded from the weighted average number of shares outstanding when calculating both
basic and diluted income per share for the three months ended March 31, 2008 as the preferred
shares are a new security issued September 18, 2008 in connection with the Newhouse Transaction and
were not exchanged with the common shares of the Companys predecessor, DHC.
Diluted net income per share adjusts basic net income per share for the dilutive effects of
stock options, restricted stock units, and stock settled stock appreciation rights, only in the periods
in which such effect is dilutive. For the three months ended March 31, 2009, options to purchase
nine million common shares were excluded from the calculation of diluted net income per share because
their inclusion would have been anti-dilutive. Additionally, the net income per share calculation
for the three months ended March 31, 2009 excludes any contingently issuable preferred shares
placed in escrow for which specific conditions have not yet been met. Due to the relative
insignificance of other dilutive securities in 2009 and 2008, their inclusion does not impact net
income per share.
16. ADDITIONAL FINANCIAL INFORMATION
Cash Flows
The following tables present a summary of certain cash payments made and received.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
|
Cash payments made for interest expense |
|
$ |
60 |
|
|
$ |
73 |
|
Cash payments made for income taxes |
|
|
17 |
|
|
|
27 |
|
Cash payments received for income tax refunds |
|
|
|
|
|
|
17 |
|
23
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Other non-operating income (expense), net
The following table presents a summary of the components of Other non-operating income
(expense), net.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
|
Equity in earnings of unconsolidated affiliates |
|
$ |
1 |
|
|
$ |
|
|
Unrealized gains (losses) on derivative instruments, net |
|
|
11 |
|
|
|
(16 |
) |
Realized losses on derivative instruments, net |
|
|
(6 |
) |
|
|
|
|
Other, net |
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other
non-operating income (expense), net |
|
$ |
8 |
|
|
$ |
(16 |
) |
|
|
|
|
|
|
|
17. RELATED PARTY TRANSACTIONS
The Company identifies related parties as investors in its consolidated subsidiaries, the
Companys joint venture partners and equity investments, and the Companys executive management and
directors and their respective affiliates. Transactions with related parties typically result from
distribution of networks, mainly with the Discovery Japan, Inc. and Discovery Channel Canada joint
ventures, production of content primarily with BBC affiliates, and services involving satellite
uplink, systems integration, origination and post-production.
The
following table presents a summary of balances related to transactions with related parties during the
three months ended March 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
Revenues (a) |
|
$ |
4 |
|
|
$ |
7 |
|
Operating costs and expenses (b) |
|
|
4 |
|
|
|
15 |
|
|
|
|
(a) |
|
Revenues for the three months ended March 31, 2008 exclude $9 million
for related party transactions that were recorded by AMC, which was
spun-off effective January 1, 2008. |
|
(b) |
|
Operating costs and expenses for the three months ended March 31, 2008
include disbursements of $9 million to an entity that is no longer a
related party following the Newhouse Transaction. |
The following table presents a summary of outstanding balances from
transactions with related parties as of March 31, 2009 and December
31, 2008.
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2009 |
|
2008 |
|
|
(amounts in millions) |
Accounts receivable |
|
$ |
4 |
|
|
$ |
12 |
|
18. COMMITMENTS AND CONTINGENCIES
As more fully described in the Companys 2008 Annual Report on Form 10-K, the Company and its
subsidiaries lease offices, satellite transponders, and certain equipment under capital and
operating lease arrangements. The Company has several investments in joint ventures. From
time-to-time the Company agrees to fund the operations of the ventures on an as needed basis. The
Company has long-term noncancelable lease commitments for office space and equipment, studio
facilities, transponders, vehicles and operating equipment. Content commitments of the Company not
recorded on the balance sheet include obligations relating to programming development, programming
production and programming acquisitions and talent contracts. Other commitments include obligations
to purchase goods and services, employment contracts, sponsorship agreements and transmission
services. A majority of such fees are payable over several years, as part of the normal course of
business.
In December 2007, Discovery acquired HSW and a 49.5% interest in HSWI. Pursuant to the terms
of the agreement, Discovery has the option to: (i) distribute the HSWI stock to the former HSW
shareholders, or (ii) sell the HSWI stock and distribute substantially all proceeds in excess of $0.37 per share to the former HSW shareholders. Discovery recognized a liability of $4 million at March 31, 2009
for its estimated obligation with respect to the HSWI shares to the former HSW shareholders.
24
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
In addition to the amounts disclosed above, the Company has committed to fund up to $100
million of the OWN Network ventures operations through September 2011 as discussed in Note 3.
In connection with the Newhouse
Transaction, DHCs outstanding stock options were converted into stock options or stock settled
stock appreciation rights of Discovery, in accordance with the terms of the agreements governing
the Newhouse Transaction. Additionally, Advance/Newhouse received shares of Discoverys Series A
and Series C convertible preferred stock. In the event that the stock options that were converted
in connection with the Newhouse Transaction are exercised, Advance/Newhouse is entitled to
receive additional shares of the same series of convertible preferred stock. The Company has
placed approximately 1.6 million shares of preferred stock into an escrow account for this
anti-dilution provision. In the event that shares are released from escrow to Advance/Newhouse,
the distribution would be accounted for as a dividend measured at the fair value of the
underlying shares as of the Newhouse Transaction date.
In the normal course of business, the Company has pending claims and legal proceedings. It is
the opinion of the Companys management, based on information available at this time, that none of
the other current claims and proceedings will have a material effect on the Companys consolidated
financial statements.
19. REPORTABLE SEGMENTS INFORMATION
The Company has three reportable segments: U.S. Networks, consisting principally of domestic
cable and satellite television network programming, web brands, and other digital services;
International Networks, consisting principally of international cable and satellite television
network programming; and Commerce, Education, and Other, consisting principally of e-commerce,
catalog, sound production, and domestic licensing businesses.
Prior to the Newhouse Transaction (see Note 1) and related AMC spin-off (see Note 4), DHC had three reportable
segments: Creative Services Group, which provided various technical and creative services necessary
to complete principal photography into final products such as films, trailers, shows, and other
media; Network Services Group, which provided the facilities and services necessary to assemble and
distribute programming content for cable and broadcast network; and DCH, as a significant equity
method investee. In connection with the Newhouse Transaction, DHC spun-off its interest in AMC,
which included the Creative Services Group segment, except for CSS, and the Network Services Group
segment. The discontinued operations of the Creative Services Group and Network Services Group
segments have been excluded from the reportable segment information presented below.
The CSS business, which remains with Discovery subsequent to the Newhouse Transaction and AMC
spin-off, is included in the Commerce, Education, and Other segment. In accordance with ARB 51, the
financial results of both DHC and DCH have been combined in Discoverys financial statements as if
the Newhouse Transaction occurred January 1, 2008. Accordingly, the Commerce, Education, and Other
segment information for March 31, 2008 includes amounts for CSS since January 1, 2008.
The accounting policies of the reportable segments are the same as those described in the
summary of significant accounting policies, except that certain inter-segment transactions that are
eliminated at the consolidated level are not eliminated at the segment level as they are treated
similar to third-party sales transactions in determining segment performance. Inter-segment
transactions primarily include the purchase of advertising and content between segments.
Inter-segment transactions are not material to the periods presented.
The Company evaluates the operating performance of its segments based on financial measures
such as revenues and adjusted operating income before depreciation and amortization (Adjusted
OIBDA). Adjusted OIBDA is defined as revenues less cost of revenues and selling, general and
administrative expense excluding (i) mark-to-market share-based compensation expense, (ii)
amortization of deferred launch incentives, (iii) restructuring and impairment charges, and (iv)
gains (losses) on asset dispositions. Management uses Adjusted OIBDA to assess the operational
strength and performance of its segments. Management uses this measure to view operating results,
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 operating performance of each segment using the same metric management uses and
also provides investors a measure to analyze operating performance of each segment against
historical data. The Company excludes mark-to-market compensation expense and restructuring and
impairment charges from the calculation of Adjusted OIBDA due to their volatility or non-recurring
nature. The Company also excludes the amortization of deferred launch incentive payments because
these payments are infrequent and the amortization does not represent cash payments in the current
reporting period. Because Adjusted OIBDA is a non-GAAP measure, it should be considered in addition
to, but not a substitute for, operating income, net income, cash flow provided by operating
activities and other measures of financial performance reported in accordance with U.S. GAAP.
The Companys reportable segments are determined based on: (i) financial information reviewed
by the chief operating decision maker (CODM), the Chief Executive Officer, (ii) internal
management and related reporting structure, and (iii) the basis upon which the CODM makes resource
allocation decisions.
25
DISCOVERY COMMUNICATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following tables present summarized financial information for each of the Companys
reportable segments.
Revenues by Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
|
U.S. Networks |
|
$ |
509 |
|
|
$ |
484 |
|
International Networks |
|
|
255 |
|
|
|
266 |
|
Commerce, Education, and Other |
|
|
49 |
|
|
|
40 |
|
Corporate and inter-segment eliminations |
|
|
4 |
|
|
|
19 |
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
817 |
|
|
$ |
809 |
|
|
|
|
|
|
|
|
There were no material inter-segment transactions during the three months ended March 31, 2009
and 2008.
Adjusted OIBDA by Segment
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
|
U.S. Networks |
|
$ |
275 |
|
|
$ |
258 |
|
International Networks |
|
|
96 |
|
|
|
80 |
|
Commerce, Education, and Other |
|
|
6 |
|
|
|
|
|
Corporate and inter-segment eliminations |
|
|
(48 |
) |
|
|
(37 |
) |
|
|
|
|
|
|
|
Total adjusted OIBDA |
|
$ |
329 |
|
|
$ |
301 |
|
|
|
|
|
|
|
|
Reconciliation of Total Adjusted OIBDA to Total Operating Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
(recast) |
|
|
(amounts in millions) |
|
Total adjusted OIBDA |
|
$ |
329 |
|
|
$ |
301 |
|
(Expense) income arising from long-term incentive plan awards (mark- to-market) |
|
|
(32 |
) |
|
|
36 |
|
Depreciation and amortization |
|
|
(38 |
) |
|
|
(47 |
) |
Amortization of deferred launch incentives |
|
|
(14 |
) |
|
|
(21 |
) |
Exit and restructuring charges |
|
|
(3 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
242 |
|
|
$ |
269 |
|
|
|
|
|
|
|
|
Total Assets by Segment
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
(amounts in millions) |
|
U.S. Networks |
|
$ |
1,832 |
|
|
$ |
1,840 |
|
International Networks |
|
|
1,013 |
|
|
|
1,043 |
|
Commerce, Education, and Other |
|
|
106 |
|
|
|
115 |
|
Corporate |
|
|
7,524 |
|
|
|
7,486 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,475 |
|
|
$ |
10,484 |
|
|
|
|
|
|
|
|
Total assets allocated to Corporate in the above table includes the Companys goodwill
balance as the financial reports reviewed by the Companys CODM does not include an allocation of
goodwill to each reportable segment. Goodwill by reportable segment is
disclosed in Note 7.
20. SUBSEQUENT EVENTS
In April 2009, Discovery announced a proposed 50-50 joint venture with Hasbro to rebrand
Discovery Kids as a new multi-platform childrens venture leveraging a strong base of intellectual
property to compete more meaningfully in the kids market. Hasbro will acquire its ownership for
approximately $300 million. It is expected that Discovery Kids will be rebranded in the second
half of 2010. The joint venture is expected to close in the summer of 2009 and is subject to
customary closing conditions, including necessary regulatory approvals. There
can be no assurance that such approvals will be obtained.
26
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Cautionary Note Concerning Forward-Looking Statements
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995, including statements
regarding our business, marketing and operating strategies, integration of acquired businesses, new
service offerings, financial prospects, and anticipated sources and uses of capital. 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 achieved or accomplished. The
following include some but not all of the factors that could cause actual results or events to
differ materially from those anticipated:
|
|
|
continued deterioration in the macroeconomic environment; |
|
|
|
|
the inability of advertisers or affiliates to remit payment to us in a timely
manner or at all; |
|
|
|
|
general economic and business conditions and industry trends including the timing
of, and spending on, feature film, television and television commercial production; |
|
|
|
|
spending on domestic and foreign television advertising and spending on domestic
and 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; |
|
|
|
|
continued consolidation of the broadband distribution and movie studio industries; |
|
|
|
|
uncertainties inherent in the development of new business lines and business
strategies; |
|
|
|
|
integration of acquired operations; |
|
|
|
|
uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new television
and telecommunications technologies; |
|
|
|
|
changes in the distribution and viewing of television programming, including the
expanded deployment of personal video recorders, video on demand and IP television
and their impact on television advertising revenue; |
|
|
|
|
rapid technological changes; |
|
|
|
|
future financial performance, including availability, terms and deployment of
capital; |
|
|
|
|
fluctuations in foreign currency exchange rates and political unrest in
international markets; |
|
|
|
|
the ability of suppliers and vendors to deliver products, equipment, software and
services; |
|
|
|
|
the outcome of any pending or threatened litigation; |
|
|
|
|
availability of qualified personnel; |
|
|
|
|
the possibility of an industry-wide strike or other job action affecting a major
entertainment industry union, or the duration of any existing strike or job action; |
|
|
|
|
changes in, or failure or inability to comply with, government regulations,
including, without limitation, regulations of the Federal Communications Commission,
and adverse outcomes from regulatory proceedings; |
|
|
|
|
changes in the nature of key strategic relationships with partners and joint
venturers; |
|
|
|
|
competitor responses to our products and services, and the products and services
of the entities in which we have interests; |
|
|
|
|
threatened terrorist attacks and ongoing military action in the Middle East and
other parts of the world; |
|
|
|
|
reduced access to capital markets or significant increases in costs to borrow; and |
|
|
|
|
a failure to secure affiliate agreements or renewal of such agreements on less
favorable terms. |
27
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
For additional risk factors, please see our Annual Report on Form 10-K for the year ended
December 31, 2008 filed with the Securities and Exchange Commission on February 26, 2009 (SEC File
No. 001-34177). 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.
Overview
We are a leading global media and entertainment company that provides original and purchased
programming across multiple distribution platforms in the United States and approximately 170 other
countries, including television networks offering customized programming in 35 languages. Our
strategy is to optimize the distribution, ratings and profit potential of each of our branded
channels. We own and operate a diversified portfolio of website properties and other digital
services and develop and sell consumer and educational products and media sound services in the
United States and internationally. We operate through three divisions: (1) U.S. Networks, (2)
International Networks, and (3) Commerce, Education, and Other.
Our media content is designed to target key audience demographics and the popularity of our
programming creates a reason for advertisers to purchase commercial time on our channels. Audience
ratings are a key driver in generating advertising revenue and creating demand on the part of cable
television operators, direct-to-home or DTH satellite operators and other content distributors to
deliver our programming to their customers. The current economic conditions, and any continuation
of these adverse conditions, may adversely affect the economic prospects of advertisers and could
alter their current spending priorities.
In addition to growing distribution and advertising revenue for our branded channels, we are
focused on growing revenue across new distribution platforms, including brand-aligned web
properties, mobile devices, video-on-demand and broadband channels, which serve as additional
outlets for advertising and affiliate sales, and provide promotional platforms for our programming.
We also operate internet sites, such as HowStuffWorks.com, providing supplemental news, information
and entertainment content that are aligned with our television programming.
U.S. Networks
U.S. Networks is our largest division, which owns and operates 11 cable and satellite
channels, including Discovery Channel, TLC and Animal Planet, as well as a portfolio of website
properties and other digital services. U.S. Networks also provides distribution and advertising
sales services for Travel Channel and distribution services for BBC America and BBC World News.
U.S. Networks derives revenue primarily from distribution fees and advertising sales, which
comprised 49% and 48%, respectively, of revenue for this division for the three months ended March
31, 2009 and 46% and 49%, respectively, for the three months ended March 31, 2008. During the three
months ended March 31, 2009 and 2008, Discovery Channel, TLC and Animal Planet collectively
generated 76% and 78% of U.S. Networks total revenue, respectively. U.S. Networks earns
distribution fees under multi-year affiliation agreements with cable operators, DTH operators and
other distributors of television programming. Distribution fees are based on the number of
subscribers receiving programming. Upon the launch of a new channel, we may initially pay
distributors to carry such channel (such payments are referred to as launch incentives), or may
provide the channel to the distributor for free for a predetermined length of time. Launch
incentives are amortized on a straight-line basis as a reduction of revenue over the term of the
affiliation agreement. U.S. Networks sells commercial time on our networks and websites. The number
of subscribers to our channels, the popularity of our programming and our ability to sell
commercial time over a group of channels are key drivers of advertising revenue.
Several of our domestic networks, including Discovery Channel, TLC and Animal Planet, are
currently distributed to substantially all of the cable television and direct broadcast satellite
homes in the U.S. Accordingly, the rate of growth in U.S. distribution revenue in future periods is
expected to be less than historical rates. Our other U.S. Networks are distributed primarily on the
digital tier of cable systems and equivalent tiers on DTH platforms and have been successful in
maximizing their distribution within this more limited universe. There is, however, no guarantee
that these digital networks will ever be able to gain the distribution levels or advertising rates
of our major networks. Our contractual arrangements with U.S. distributors are renewed or
renegotiated from time to time in the ordinary course of business.
U.S. Networks largest single cost is the cost of programming, including production costs for
original programming. U.S. Networks amortizes the cost of original or purchased programming based
on the expected realization of revenue resulting in an accelerated amortization for Discovery
Channel, TLC and Animal Planet and straight-line amortization over three to five years for the
remaining networks.
International Networks
International Networks manages a portfolio of channels, led by the Discovery Channel and
Animal Planet brands that are distributed in virtually every pay-television market in the world
through an infrastructure that includes major operational centers in London, Singapore, New Delhi
and Miami. International Networks regional operations cover most major markets and are organized
into four locally-managed regional operations covering the U.K.; Europe (excluding the U.K.),
Middle East and Africa (EMEA); Asia-Pacific; and Latin America. International Networks currently
operates over 100 unique distribution feeds in 35 languages with channel feeds customized according
to language needs and advertising sales opportunities. Most of the divisions channels are wholly
owned by us with the exception of (1) the international Animal Planet channels, which are generally
joint ventures in which the British Broadcasting Corporation (BBC) owns 50%, (2) People + Arts,
which operates in Latin America and Iberia as a 50-50 joint venture with the BBC and (3) several
channels in Japan, Canada and Poland, which operate as joint ventures with strategically important
local partners.
28
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Similar to U.S. Networks, the primary sources of revenue for International Networks are
distribution fees and advertising sales, and the primary cost is programming. International
Networks executes a localization strategy by offering high quality shared programming with U.S.
Networks, customized content, and localized schedules via our distribution feeds. During the three
months ended March 31, 2009 and 2008, distribution revenue represented approximately 69% and 67% of
the divisions operating revenue, respectively, and continues to deliver growth in markets with the
highest potential for pay television expansion.
Advertising sales are increasingly important to the divisions financial success.
International television markets vary in their stages of development. Some, notably the U.K., are
among the more advanced digital multi-channel television markets in the world, while others remain
in the analog environment with varying degrees of investment from operators in expanding channel
capacity or converting to digital. In developing pay TV markets, we expect to see advertising
revenue growth from subscriber growth, our localization strategy, and the shift of advertising
spending from broadcast to pay TV. In relatively mature markets, such as the U.K., the growth
dynamic is changing. Increased penetration and distribution are unlikely to drive rapid growth in
those markets. Instead, growth in advertising sales will come from increasing viewership and advertising pricing on our
existing pay-TV networks and launching new services, either in pay-TV or free television
environments.
Our international businesses are subject to a number of risks including fluctuations in
currency exchange rates, regulatory issues, and economic and political instability. Changes in any
of these areas could adversely affect the performance of the International Networks.
International Networks priorities include maintaining a leadership position in nonfiction and
certain fictional entertainment in international markets and continuing to grow and improve the
performance of the international operations. These priorities will be achieved through increased
distribution, expanding local advertising sales capabilities, creating licensing and digital growth
opportunities, and improving operating efficiencies by strengthening programming and promotional
collaboration between U.S. and International Network groups.
Commerce, Education, and Other
In February 2009 we announced our plan to transition our commerce business to a royalty
model, thereby providing for growth in profitability and reducing the financial risk of holding
significant product inventories. As such, we will outsource the commerce direct-to-consumer
operations including our commerce website, related marketing, product development and fulfillment
to a third party in exchange for royalties. We expect to complete the transition in the second
quarter of 2009. Our new structure for our commerce business will enable us to continue offering
high quality Discovery Blu-Ray and standard definition DVD programming as well as many merchandise
categories leveraging both licensed and make and sell products. Although we expect this new
structure to facilitate growth in operating income, we expect an initial reduction in top-line
revenue contribution, as well as a reduction in direct operating expenses in 2009. Commerce will
continue to grow our established brand and home video licensing businesses to further expand our
national presence in key retailers. Our commerce operations continue to add value to our television
assets by reinforcing consumer loyalty and creating opportunities for our advertising and
distribution partners.
Our education business is focused on our direct-to-school streaming distribution subscription
services as well as our benchmark student assessment services, publishing and distributing hardcopy
content through a network of distribution channels including online, catalog and dealers. Our
education business also participates in a growing sponsorship and global brand and content
licensing business.
With the completion of the Newhouse Transaction in the prior year, the operating results of
the Creative Sound Services (CSS) businesses, which provide sound, music, mixing sound effects
and other related services under brand names such as Sound One, POP Sound, Soundelux and Todd A-O,
are reported in the Commerce, Education, and Other segment for the three months ended March 31,
2009 and 2008.
29
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The Newhouse Transaction
On September 17, 2008, we were formed as a result of DHC and Advance/Newhouse Programming
Partnership (Advance/Newhouse) combining their respective interests in Discovery and exchanging
those interests with the Company (the Newhouse Transaction). The Newhouse Transaction provided,
among other things, for the combination of DHCs 66 2 / 3 % interest with Advance/Newhouses 33 1 /
3 % interest in DCH. The Newhouse Transaction was completed as follows:
|
|
|
On September 17, 2008, DHC completed the spin-off to its shareholders
of Ascent Media Corporation (AMC), a subsidiary holding cash and all
of the businesses of its wholly-owned subsidiaries except for CSS
(which businesses remained with us following the completion of the
Newhouse Transaction) (the AMC spin-off); |
|
|
|
|
On September 17, 2008, immediately following the AMC spin-off, DHC
merged with a transitory merger subsidiary of the Company, and DHCs
existing shareholders received common stock of the Company; and |
|
|
|
|
On September 17, 2008, immediately following the DHC exchange of
shares for ours, Advance/Newhouse contributed its interests in us and
Animal Planet to us in exchange for shares of our Series A and Series
C convertible preferred stock that are convertible at any time into
our common stock, which at the transaction date represented one-third
of the outstanding shares of our common stock. |
As a
result of the Newhouse Transaction, we became the successor reporting entity to DHC under
the Securities Exchange Act of 1934, as amended (the Exchange Act). Because Advance/Newhouse was a one-third
owner of Discovery prior to the completion of the Newhouse Transaction and is a one-third owner of
us immediately following completion of the Newhouse Transaction, there was no effective change in
ownership. Our convertible preferred stock does not have any special dividend rights and only a de
minimis liquidation preference. Additionally, Advance/Newhouse retains significant participatory
special class voting rights with respect to certain matters that could be submitted to stockholder
vote. Pursuant to Financial Accounting Standards Board (FASB) Technical Bulletin No. 85-5,
Issues Relating to Accounting for Business Combinations (FTB 85-5), for accounting purposes the Newhouse Transaction
was treated as a non-substantive merger, and therefore, the Newhouse Transaction was recorded at
the investors historical basis (see Note 1).
The following table summarizes the defined terms concerning the various Discovery entities
included in this analysis:
|
|
|
Entity |
|
Reference |
|
|
|
Discovery Communications, Inc. (post Newhouse Transaction)
|
|
Discovery, we, or us |
Discovery Communications Holding, LLC
|
|
DCH |
Discovery Holding Company
|
|
DHC |
Ascent Media Corporation
|
|
AMC |
Advance/Newhouse Programming Partnership
|
|
Advance/Newhouse |
Creative Sound Services
|
|
CSS |
Results of Operations Three Months Ended March 31, 2009 and 2008
For financial reporting purposes, we are the successor reporting entity to DHC. Because there
was no effective change in ownership, in accordance with Accounting
Research Bulletin No. 51, Consolidated Financial Statements (ARB 51), as amended, paragraph 11, both DHC and DCH were consolidated in our financial statements as if the transaction
had occurred on January 1, 2008. For purposes of analyzing DCHs business in this managements
discussion and analysis, we have presented our consolidated operating results for March 31, 2008
consistent with our financial statement presentation since the Newhouse Transaction is treated as
effectively occurring in the first quarter of 2008.
The 2008 financial information has been recast so that the basis of presentation is consistent
with that of the 2009 financial information. This recast reflects (i) the gross combined financial
information of both DHC and DCH as though the Newhouse Transaction was consummated on January 1,
2008, (ii) adjustments to revenues and expenses to exclude amounts for Ascent Media Corporation,
Ascent Media Systems & Technology Services, LLC, and Ascent Media CANS, LLC, which were disposed of
in September 2008, and (iii) the adoption of FASB Statement
No. 160, Non-controlling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51 (FAS 160) (see Note 2).
The following discussion of our results of operations is presented in two parts to assist the
reader in better understanding our operations. The first section is an overall discussion of our
consolidated operating results. The second section includes a more detailed discussion of revenue
and expense activity of our three reportable segments: U.S. Networks, International Networks, and
Commerce, Education, and Other.
30
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The following table represents the comparison of our Condensed Consolidated Statement of
Operations for the three months ended March 31, 2009 and 2008, respectively, for purposes of
discussion and analysis of our operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions, except |
|
|
|
|
|
|
|
per share amounts) |
|
|
|
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
$ |
425 |
|
|
$ |
402 |
|
|
|
6 |
% |
Advertising |
|
|
301 |
|
|
|
304 |
|
|
|
(1 |
)% |
Other |
|
|
91 |
|
|
|
103 |
|
|
|
(12 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
817 |
|
|
|
809 |
|
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues, excluding depreciation and amortization listed below |
|
|
253 |
|
|
|
242 |
|
|
|
5 |
% |
Selling, general and administrative |
|
|
281 |
|
|
|
251 |
|
|
|
12 |
% |
Depreciation and amortization |
|
|
38 |
|
|
|
47 |
|
|
|
(19 |
)% |
Exit and restructuring charges |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
575 |
|
|
|
540 |
|
|
|
6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
242 |
|
|
|
269 |
|
|
|
(10 |
)% |
Interest expense |
|
|
(57 |
) |
|
|
(69 |
) |
|
|
(17 |
)% |
Other non-operating income (expense), net |
|
|
8 |
|
|
|
(16 |
) |
|
|
150 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
193 |
|
|
|
184 |
|
|
|
5 |
% |
Provision for income taxes |
|
|
(70 |
) |
|
|
(110 |
) |
|
|
(36 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
123 |
|
|
|
74 |
|
|
|
66 |
% |
|
|
|
|
|
|
|
|
|
|
|
Less: Net income attributable to non-controlling interests |
|
|
(4 |
) |
|
|
(40 |
) |
|
|
(90 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Discovery Communications, Inc. |
|
$ |
119 |
|
|
$ |
34 |
|
|
|
250 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share attributable to Discovery Communications, Inc. stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.28 |
|
|
$ |
0.12 |
|
|
|
133 |
% |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.28 |
|
|
$ |
0.12 |
|
|
|
133 |
% |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
422 |
|
|
|
282 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
422 |
|
|
|
282 |
|
|
|
50 |
% |
|
|
|
|
|
|
|
|
|
|
|
31
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Revenues. Our consolidated revenues increased $8 million for the three months ended
March 31, 2009 when compared with the same period in 2008. Distribution revenues increased $23
million for the three months ended March 31, 2009 when compared with the same period in the prior
year. The increase in distribution revenues are primarily due to annual price increases required by contract for U.S.
Networks combined with International Networks subscriber growth, offset by a $17 million
unfavorable impact from foreign exchange. Advertising revenues decreased $3 million for the three
months ended March 31, 2009 from the comparable period in the prior year, and is primarily
attributed to a $12 million unfavorable impact from foreign exchange offset by higher viewership
for both U.S. Networks and International Networks. Other revenues decreased $12 million for the
three months ended March 31, 2009 when compared with 2008, primarily due to a decrease in sales of
the Planet Earth DVD through a joint venture, offset by an increase in revenues from the
direct-to-consumer business in our Commerce, Education, and Other business segment.
Cost
of revenues. Cost of revenues, which includes content amortization and other
production-related expenses in addition to distribution and merchandising costs, increased $11
million for the three months ended March 31, 2009 when compared to 2008. The increase in cost of
revenues was primarily due to a $19 million increase in content amortization in the U.S. Networks
segment coupled with a $6 million increase in content amortization for International Networks.
These increases were partially offset by a $15 million favorable impact from foreign exchange.
Selling, general and administrative. Selling, general and administrative expenses,
which include certain personnel, marketing and other general and administrative expenses, increased
$30 million for the three months ended March 31, 2009 from the comparable period in 2008, primarily
due to a $68 million increase in expenses arising from long-term incentive plans, partially offset
by a $34 million decrease in personnel and marketing costs and a decrease in professional fees.
Expenses arising from long-term incentive plans are largely related to our unit-based, long-term
incentive plan, the Discovery Appreciation Plan (DAP or LTIP), which is indexed to the value of
our Series A common stock. The change in unit value of LTIP awards is recorded as expense arising
from long-term incentive plans over the period outstanding. Because our Series A common stock price
increased 13% during the three months ended March 31, 2009, we recorded $32 million of expense
arising from long-term incentive plans during the period compared to a $36 million benefit arising
from long-term incentive plans for the three months ended March 31, 2008. In the first quarter of
2009 and fourth quarter of 2008, eligible new hires and promoted employees received stock options
that vest in four equal installments, and those employees with LTIP units that vested between
September 18, 2008 and March 14, 2009 received cash-settled stock appreciation awards that expire
in March 2010. In March 2009, we made annual grants to eligible employees which consisted of
options to purchase shares of Series A common stock which vest in three annual installments
beginning on the first anniversary of the grant date and expire 3.25 years after the grant date.
We do not intend to make additional cash-settled stock appreciation awards, except as may be
required by contract or to employees in countries where stock option awards are not permitted.
Depreciation and amortization. Depreciation and amortization expense decreased $9
million for the three months ended March 31, 2009 compared to the prior year period. The decrease
is due to a decline in amortization expense resulting from lower
intangible asset balances in the first quarter of 2009 compared to
the same quarter in 2008.
Interest expense. Interest expense decreased $12 million for the three months ended
March 31, 2009 when compared with the same period in 2008 primarily due to a $324 million decrease
in average debt outstanding coupled with an overall decrease in our average interest rates.
Other non-operating income (expense), net. Other non-operating income (expense), net
includes our unrealized gains and losses from derivative transactions as well as other
non-operating expenses net of non-operating income. Other non-operating income (expense), net
increased $24 million for the three months ended March 31, 2009 compared to the same period in 2008
primarily due to a change in unrealized gains and losses from derivative transactions. As a result
of derivative mark-to-market adjustments, we recognized net unrealized gains of $11 million during
the three months ended March 31, 2009 and net unrealized losses of $16 million during the three
months ended March 31, 2008. Refer to Note 9 to the condensed consolidated financial statements for
a more detailed discussion of our derivative transactions.
Provision for income taxes. Provision for income taxes was $70 million for the three
months ended March 31, 2009 and $110 million for the three months ended March 31, 2008. Our
effective tax rate was 36% and 60% for the three months ended
March 31, 2009 and 2008, respectively. Our effective tax rate for the three months ended March 31,
2009 differed from our federal income tax rate of 35% primarily due to state taxes, offset by the
impact of non-controlling interests in consolidated partnerships. Our effective tax rate for the
three months ended March 31, 2008 differed from our federal income tax rate of 35% primarily due to
DHCs recognition of $23 million of deferred tax expense related to its investment in DCH prior to
the Newhouse Transaction (net of tax benefit from intangible amortization related to the spin-off
of Travel Channel in 2007). DHCs book basis in DCH is increased by its share of DCHs net income
for the quarter. However, DHCs tax basis remains the same.
32
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Net income attributable to non-controlling interests. Net income attributable to
non-controlling interests represents the portion of earnings which are allocable to the
non-controlling partners of $4 million and $40 million for the three months ended March 31, 2009
and 2008, respectively. The decrease in net income attributable to non-controlling interests for
the three months ended March 31, 2009 is primarily a result of profits allocated to non-controlling
partners prior to the Newhouse Transaction.
Operating Division Results
As noted above, our operations are divided into three reportable segments: U.S. Networks,
International Networks and Commerce, Education, and Other. Corporate expenses primarily consist of
corporate functions, executive management and administrative support services. Corporate expenses
are excluded from segment results to enable executive management to evaluate business segment
performance based upon decisions made directly by business segment executives. Operating results
exclude mark-to-market share-based compensation expense, restructuring and impairment charges,
and gains (losses) on asset dispositions, consistent with
our segment reporting. Refer to Note 19 to the condensed consolidated financial statements for
discussion on our segments.
We evaluate the operating performance of our segments based on financial measures such as
revenues and adjusted operating income before depreciation and amortization (Adjusted OIBDA).
Adjusted OIBDA is defined as revenues less cost of revenues and selling, general and administrative
expense excluding (i) mark-to-market share-based compensation expense, (ii) amortization of
deferred launch incentives, (iii) restructuring and impairment charges, and (iv) gains (losses) on
asset dispositions. Management uses Adjusted OIBDA to assess the operational strength and
performance of our segments. Management uses this measure to view operating results, 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
operating performance of each segment using the same metric management uses and also provides
investors a measure to analyze operating performance of each segment against historical data. We
exclude mark-to-market compensation expense and restructuring and impairment charges from the
calculation of Adjusted OIBDA due to their volatility or non-recurring nature. We also exclude the
amortization of deferred launch incentive payments because these payments are infrequent and the
amortization does not represent cash payments in the current reporting period. Because Adjusted
OIBDA is a non-GAAP measure, it should be considered in addition to, but not a substitute for,
operating income, net income, cash flow provided by operating activities and other measures of
financial performance reported in accordance with U.S. GAAP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions) |
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Networks |
|
$ |
509 |
|
|
$ |
484 |
|
|
|
5 |
% |
International Networks |
|
|
255 |
|
|
|
266 |
|
|
|
(4 |
)% |
Commerce, Education, and Other |
|
|
49 |
|
|
|
40 |
|
|
|
23 |
% |
Corporate and intersegment eliminations |
|
|
4 |
|
|
|
19 |
|
|
|
(79 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
817 |
|
|
|
809 |
|
|
|
1 |
% |
Cost of revenues (1) |
|
|
(253 |
) |
|
|
(242 |
) |
|
|
5 |
% |
Selling, general and administrative (1) |
|
|
(249 |
) |
|
|
(287 |
) |
|
|
(13 |
)% |
Add: Amortization of deferred launch incentives (2) |
|
|
14 |
|
|
|
21 |
|
|
|
(33 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
$ |
329 |
|
|
$ |
301 |
|
|
|
9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Cost of revenues and selling, general and administrative expenses exclude
depreciation and amortization, income (expense) arising
from long-term incentive plan awards (mark-to-market), and exit and restructuring charges. |
|
(2) |
|
Amortization of deferred launch incentives are included in distribution revenues
for U.S. GAAP reporting, but are excluded from Adjusted OIBDA. |
33
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions) |
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Adjusted OIBDA: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Networks |
|
$ |
275 |
|
|
$ |
258 |
|
|
|
7 |
% |
International Networks |
|
|
96 |
|
|
|
80 |
|
|
|
20 |
% |
Commerce, Education, and Other |
|
|
6 |
|
|
|
|
|
|
NM |
|
Corporate and intersegment eliminations |
|
|
(48 |
) |
|
|
(37 |
) |
|
|
(30 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total adjusted OIBDA |
|
|
329 |
|
|
|
301 |
|
|
|
9 |
% |
Income (expense) arising from long-term incentive plan awards (mark-to-market) |
|
|
(32 |
) |
|
|
36 |
|
|
|
(189 |
)% |
Depreciation and amortization |
|
|
(38 |
) |
|
|
(47 |
) |
|
|
(19 |
)% |
Exit and restructuring charges |
|
|
(3 |
) |
|
|
|
|
|
NM |
|
Amortization of deferred launch incentives |
|
|
(14 |
) |
|
|
(21 |
) |
|
|
(33 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total operating income |
|
$ |
242 |
|
|
$ |
269 |
|
|
|
(10 |
)% |
|
|
|
|
|
|
|
|
|
|
|
U.S. Networks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions) |
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
$ |
248 |
|
|
$ |
224 |
|
|
|
11 |
% |
Advertising |
|
|
244 |
|
|
|
239 |
|
|
|
2 |
% |
Other |
|
|
17 |
|
|
|
21 |
|
|
|
(19 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
509 |
|
|
|
484 |
|
|
|
5 |
% |
Cost of revenues |
|
|
(131 |
) |
|
|
(116 |
) |
|
|
13 |
% |
Selling, general and administrative |
|
|
(109 |
) |
|
|
(120 |
) |
|
|
(9 |
)% |
Add: Amortization of deferred launch incentives |
|
|
6 |
|
|
|
10 |
|
|
|
(40 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
|
275 |
|
|
|
258 |
|
|
|
7 |
% |
Income (expense) arising from long-term incentive plan awards (mark-to-market) |
|
|
1 |
|
|
|
(5 |
) |
|
|
120 |
% |
Depreciation and amortization |
|
|
(8 |
) |
|
|
(14 |
) |
|
|
(43 |
)% |
Amortization of deferred launch incentives |
|
|
(6 |
) |
|
|
(10 |
) |
|
|
(40 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
262 |
|
|
$ |
229 |
|
|
|
14 |
% |
|
|
|
|
|
|
|
|
|
|
|
34
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Revenues. Total revenues increased $25 million for the three months ended March 31,
2009, when compared with 2008, primarily due to an increase in distribution revenues of $24 million
over the period, driven by annual contractual rate increases and increases in average paying
subscription units, principally from networks carried on the digital tier. Contra revenue items
included in distribution revenues, such as launch amortization and marketing consideration,
decreased $5 million for the three months ended March 31, 2009 when compared with 2008. Advertising
and other revenues increased $1 million for the three months ended March 31, 2009, when compared
with the prior year, primarily due to higher pricing and increased ratings offset by lower cash
sellouts and a reduction in other revenues generated by our Digital Media businesses, when compared
with the corresponding prior year periods.
Cost of revenues. For the three months ended March 31, 2009, cost of revenues
increased $15 million when compared with 2008, primarily due to an increase in content amortization
expense of $19 million. The increase in content amortization expense was primarily driven by
increased carryover amortization from higher content investment of $12 million and content
impairment charges of $7 million.
Selling, general and administrative expenses. Total selling, general and
administrative expenses decreased $11 million for the three months ended March 31, 2009, when
compared with 2008. The expenses for the three months ended
March 31, 2009 include $6 million in
selling, general and administrative expenses related to OWN which
were not incurred in the first quarter of 2008.
Excluding the impact of OWN, selling, general and administrative expenses decreased $17 million
which was primarily a result of lower personnel and marketing costs as well as lower overhead costs
for Digital Media.
Adjusted OIBDA. Adjusted OIBDA increased $17 million for the three months ended March
31, 2009 when compared with 2008. The increase reflects a $25 million increase in revenues offset
by a $4 million increase in operating costs and a $4 million decrease in amortization of deferred
launch incentives, which are added back to Adjusted OIBDA.
International Networks
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions) |
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution |
|
$ |
177 |
|
|
$ |
178 |
|
|
|
(1 |
)% |
Advertising |
|
|
57 |
|
|
|
65 |
|
|
|
(12 |
)% |
Other |
|
|
21 |
|
|
|
23 |
|
|
|
(9 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
255 |
|
|
|
266 |
|
|
|
(4 |
)% |
Cost of revenues |
|
|
(92 |
) |
|
|
(95 |
) |
|
|
(3 |
)% |
Selling, general and administrative |
|
|
(75 |
) |
|
|
(102 |
) |
|
|
(26 |
)% |
Add: Amortization of deferred launch incentives |
|
|
8 |
|
|
|
11 |
|
|
|
(27 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA
|
|
|
96 |
|
|
|
80 |
|
|
|
20 |
% |
Depreciation and amortization |
|
|
(10 |
) |
|
|
(9 |
) |
|
|
11 |
% |
Exit and restructuring charges |
|
|
(1 |
) |
|
|
|
|
|
NM |
|
Amortization of deferred launch incentives |
|
|
(8 |
) |
|
|
(11 |
) |
|
|
(27 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
77 |
|
|
$ |
60 |
|
|
|
28 |
% |
|
|
|
|
|
|
|
|
|
|
|
Revenues. Total revenues decreased $11 million for the three months ended March 31,
2009, when compared with 2008, driven by an unfavorable impact from foreign exchange of $32
million, of which $17 million related to distribution revenues. Excluding the unfavorable impact
of foreign exchange, distribution revenues increased $16 million due to subscriber growth in EMEA
and Latin America primarily as a result of a 17% increase in average paying subscription units in
those regions for the three months ended March 31, 2009 when compared with 2008.
35
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Advertising revenues decreased $8 million for the three months ended March 31, 2009, when compared
with 2008, primarily as a result of a $12 million unfavorable impact of foreign exchange. Excluding
the unfavorable impact of foreign exchange, advertising revenues increased $4 million in EMEA and
Latin America primarily due to higher viewership combined with an increased subscriber base.
Cost of revenues. Cost of revenues decreased $3 million for the three months ended
March 31, 2009, when compared with 2008, driven by favorable foreign exchange of $15 million,
partially offset by a $6 million increase in content amortization expense due to continued
investment in original productions and language customization to support additional local feeds for
growth in local ad sales and a $3 million increase in distribution costs.
Selling general and administrative expenses. Selling, general and administrative
expenses decreased $27 million for the three months ended March 31, 2009, when compared with 2008.
This decrease was primarily driven by a $12 million favorable impact of foreign exchange and a $12 million
decrease in marketing and personnel costs.
Adjusted OIBDA. Adjusted OIBDA increased $16 million for the three months ended March
31, 2009 when compared with 2008. The increase reflects a $30 million decrease in operating costs
offset by an $11 million decrease in revenues and a $3 million decrease in amortization of deferred
launch incentives, which are added back to Adjusted OIBDA.
Commerce,
Education, and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions) |
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
$ |
49 |
|
|
$ |
40 |
|
|
|
23 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
49 |
|
|
|
40 |
|
|
|
23 |
% |
Cost of revenues |
|
|
(28 |
) |
|
|
(25 |
) |
|
|
12 |
% |
Selling, general and administrative |
|
|
(15 |
) |
|
|
(15 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
|
6 |
|
|
|
|
|
|
NM |
|
Depreciation and amortization |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(50 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
5 |
|
|
$ |
(2 |
) |
|
|
350 |
% |
|
|
|
|
|
|
|
|
|
|
|
Revenues.
Commerce, Education, and Other total revenues increased $9 million for the
three months ended March 31, 2009 when compared with the prior period due to an increase in
Commerce revenues of $4 million from the sale of inventory to a third party as part of the
transition of our Commerce business to a royalty model. In addition, revenues for the Education
business increased by $4 million as the core streaming business continued to grow. CSS revenues
increased $2 million. As we transition our Commerce
business to a royalty model, we expect an initial reduction in revenue contribution,
as well as a reduction in direct operating expenses.
Cost of revenues. Cost of revenues increased $3 million for the three months ended
March 31, 2009, due to higher costs of sold inventory for Commerce and higher production costs for
CSS.
Selling, general and administrative expenses. Selling, general and administrative
expenses were unchanged for the three months ended March 31, 2009.
Adjusted OIBDA. Adjusted OIBDA increased $6 million for the three months ended March
31, 2009 when compared with 2008. The increase reflects a $9 million increase in revenues offset by
a $3 million increase in operating costs.
36
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Corporate and Intersegment Eliminations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
March 31, |
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
% Change |
|
|
|
(amounts in millions) |
|
|
|
|
|
|
|
|
(recast) |
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
$ |
4 |
|
|
$ |
19 |
|
|
|
(79 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
4 |
|
|
|
19 |
|
|
|
(79 |
)% |
Cost of revenues |
|
|
(2 |
) |
|
|
(6 |
) |
|
|
(67 |
)% |
Selling, general and administrative |
|
|
(50 |
) |
|
|
(50 |
) |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
|
(48 |
) |
|
|
(37 |
) |
|
|
(30 |
)% |
Income (expense) arising from long-term incentive plan awards (mark-to-market) |
|
|
(33 |
) |
|
|
41 |
|
|
|
(180 |
)% |
Depreciation and amortization |
|
|
(19 |
) |
|
|
(22 |
) |
|
|
(14 |
)% |
Exit and restructuring charges |
|
|
(2 |
) |
|
|
|
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
(102 |
) |
|
$ |
(18 |
) |
|
|
(467 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Corporate is mainly comprised of ancillary revenues and expenses from a joint venture,
corporate functions, executive management and administrative support services. Consistent with our
segment reporting, corporate expenses are excluded from segment results to enable executive
management to evaluate business segment performance based upon decisions made directly by business
segment executives.
Corporate revenues decreased $15 million for the three months ended March 31, 2009, when
compared with 2008, primarily due to decreased ancillary revenues from a joint venture, whose
primary sales were of the Planet Earth DVD during the three months ended March 31, 2008. Corporate
cost of revenues decreased $4 million, for the three months ended March 31, 2009, driven by a
reduction of cost of revenues by the joint venture.
Liquidity and Capital Resources
Sources of Cash
Our principal sources of liquidity are cash in-hand, cash flows from operations and borrowings
under our credit facilities. We anticipate that our cash flows from operations, existing cash, cash
equivalents and borrowing capacity under our revolving credit facility are sufficient to meet our
anticipated cash requirements for at least the next 12 months.
Total Liquidity at March 31, 2009. As of March 31, 2009, we had approximately $1.4 billion of
total liquidity, comprised of $142 million in cash and cash equivalents and the ability to borrow
approximately $1.2 billion under our revolving credit facilities.
Cash Provided by Operations. For the three months ended March 31, 2009, our cash provided by
operating activities was $140 million compared to $67 million for the same period in 2008, driven
by an increase of $49 million in net income and an improvement in working capital, net of cash.
Debt Facilities. Our committed debt facilities include two term loans, a revolving loan
facility and various senior notes payable. The second term loan was entered into on May 14, 2007
for $1.5 billion in connection with the exchange of DCH common stock with Cox Communications
Holding, Inc. (the Cox Transaction). Total commitments of these facilities were $4.9 billion at
March 31, 2009. Debt outstanding on these facilities aggregated $3.7 billion at March 31, 2009,
providing excess debt availability of $1.2 billion.
We currently have fixed the interest rate on the majority of our outstanding debt. The
anticipated interest payments, together with the scheduled principal payments, due over the next
year are within the available capacity on our committed facilities. Although we have adequate
liquidity to fund our operations and to meet our debt service obligations over the next 12 months,
we may seek to arrange new financing in the current year in advance of the maturity of our debt
facility in 2010.
DCHs $1.5 billion term loan is secured by its assets, excluding assets held by its
subsidiaries. The remaining term loan, revolving loan and senior notes are unsecured. The debt
facilities contain covenants that require the respective borrowers to meet certain financial ratios
and place restrictions on the payment of dividends, sale of assets, additional borrowings, mergers,
and purchases of capital stock, assets and investments. We were in compliance with all debt
covenants as of March 31, 2009.
37
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Uses of Cash
During the three months ended March 31, 2009, our primary uses of cash were cash payments for
content of $179 million, mandatory principal payments under our bank facilities and senior notes
totaling $66 million and capital expenditures of $20 million. During the three months ended March
31, 2008, our primary uses of cash were mandatory principal payments under our bank facilities and
senior notes totaling $184 million, cash payments for content of $151 million, and capital
expenditures of $22 million.
In 2009, we expect our uses of cash to be approximately $445 million for debt repayments, $260
million for interest expense, and $60 million for capital expenditures. We will also be required to
make payments under our LTIP as well as for stock appreciation rights issued under our Incentive
Plans. Amounts expensed and payable under the LTIP and for stock
appreciation rights issued under our Incentive Plans are dependent on future annual calculations of
unit values which are primarily affected by changes in our stock price, changes in units
outstanding, and changes to the plan.
Joint Venture Arrangement. On June 19, 2008, we entered in to a 50-50 joint venture with
Oprah Winfrey and Harpo, Inc. (Harpo) to rebrand Discovery Health Channel as OWN: Oprah Winfrey
Network (OWN Network). It is expected that Discovery Health will be rebranded as OWN in early
2010. Pursuant to the agreement, we have committed to make capital contributions of up to $100
million through September 30, 2011, of which $11 million has been funded as of March 31, 2009. We
anticipate that a significant portion of the $100 million funding obligation will occur in 2009.
Factors Affecting Sources of Liquidity
If we were to experience a significant decline in operating performance, or have to meet an
unanticipated need for additional liquidity beyond our available commitments, there is no certainty
that we would be able to access the needed liquidity. While we have established relationships with
U.S. and international banks and investors which continue to participate in our various credit
agreements, the current tightening in the credit markets may cause some lenders to have to reduce
or withdraw their commitments if we were to seek to negotiate a refinancing or an increase in our
total commitments. Covenants in existing debt agreements may constrain our capacity for additional
debt or there may be significant increases in costs to refinance existing debt to access additional
liquidity. As a public company, we may have access to other sources of capital such as the public
bond and equity markets. However, access to sufficient liquidity in these markets is not assured
given our substantial debt outstanding and the continued volatility in the equity markets and
further tightening in the credit markets.
Our access to capital markets can be affected by factors outside of our control. In addition,
our cost to borrow is impacted by market conditions and our financial performance as measured by
certain credit metrics defined in our credit agreements, including interest coverage and leverage
ratios.
We expect to have sufficient cash flow from operations in 2009, combined with $142 million of
cash on hand, to meet current year interest payments, expected capital expenditures of $60 million,
and mandatory principal repayments of $445 million. In addition, we have $1.2 billion of available
capacity on our existing revolving credit facility if our cash flow from operations is less than
anticipated.
We are compliant with all debt covenants and have sufficient excess capacity to draw on
existing debt commitments or incur additional debt should we seek refinancing during 2009 in
advance of our debt facility maturing in October 2010. We have no indication that any of our
lenders would be unable to perform under the requirements of our credit agreements should we seek
additional funding. Although our leverage and interest coverage covenants limit the total amount
of debt we might incur relative to our operating cash flow, we expect we would continue to maintain
compliance with our debt covenants with a 50% reduction in our current operating performance.
Capital expenditures of $102 million in 2008 included the investment in building improvements,
broadcast equipment, computer hardware/software, and office furniture/equipment, including $35
million related to AMC, which was spun off in September 2008. Therefore, capital expenditures of
continuing operations in 2008 were $67 million. Our anticipated cash expenditures of $60 million
in 2009 are not materially lower than our 2008 capital expenditures; however, a portion could be
deferred should the need arise.
38
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We anticipate $563 million of our Term Loan A debt will mature in 2010 as will any remaining
revolving debt. We expect to meet a significant portion of the maturing debt obligations through
cash flows from operations. We are also considering various options for refinancing debt in both
the public and private credit markets. Although the current credit
markets have contracted from previous levels, our need for financing has diminished from prior years. If we are unable to access
additional credit or if we do not have the ability to refinance the maturing debt, we could bridge
a portion of our remaining 2010 cash needs by taking advantage of flexibility in our cost structure
and reducing certain expenditures.
Contractual Obligations
We have agreements covering leases of satellite transponders, facilities and equipment. These
agreements expire at various dates through 2028. We are obligated to license programming under
agreements with content suppliers that expire over various dates. We also have other contractual
commitments arising in the ordinary course of business.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements (as defined in Item 303(a)(4) of Regulation
S-K) that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with U.S. GAAP requires management
to make estimates, judgments and assumptions that affect the amounts reported in the condensed
consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate
estimates, which are based on historical experience and on various other assumptions believed
reasonable under the circumstances. The results of these evaluations form the basis for making
judgments about the carrying values of assets and liabilities and the reported amount of expenses
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions. Critical accounting policies impact the presentation of our financial
condition and results of operations and require significant judgment and estimates. An appreciation
of our critical accounting policies facilitates an understanding of our financial results. Amounts
disclosed relate to Discovery for March 31, 2009 and 2008. Unless otherwise noted, we applied
critical accounting policies and estimates methods consistently in all material respects and for
all periods presented. For further information regarding these critical accounting policies and
estimates, please see the Notes to our condensed consolidated financial statements.
Revenues
We derive revenues from (i) distribution revenues from cable systems, satellite operators and
other distributors, (ii) advertising aired on our networks and websites, and (iii) other, which is
largely e-commerce and educational sales.
Distribution. Distributors generally pay a per-subscriber fee for the right to distribute our
programming under the terms of long-term distribution contracts (distribution revenues).
Distribution revenues is reported net of incentive costs or other consideration, if any, offered to
system operators in exchange for long-term distribution contracts. We recognize distribution
revenues over the term of the contracts based on contracted monthly license fee provisions and
reported subscriber levels. Network incentives have historically included upfront cash incentives
referred to as launch incentive in connection with the launch of a network by the distributor
within certain time frames. Any such amounts are capitalized as assets upon launch of our
programming by the distributor and are amortized on a straight-line basis as a reduction of revenue
over the terms of the contracts. In instances where the distribution agreement is extended prior to
the expiration of the original term, we evaluate the economics of the extended term and, if it is
determined that the deferred launch asset continues to benefit us over the extended term, then we
will adjust the launch amortization period accordingly. Other incentives are recognized as a
reduction of revenue as incurred.
The amount of distribution revenues due to us is reported by distributors based on actual
subscriber levels. Such information is generally not received until after the close of the
reporting period. Therefore, reported distribution revenues are based upon our estimates of the
number of subscribers receiving our programming for the month, plus an adjustment for the prior
month estimate. Our subscriber estimates are based on the most recent remittance or confirmation of
subscribers received from the distributor.
39
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Advertising. We record advertising revenues net of agency commissions and audience deficiency
liabilities in the period advertising spots are broadcast. A substantial portion of the advertising
sold in the United States includes guaranteed levels of
audience that either the program or the advertisement will reach. Deferred revenue is recorded
and adjusted as the guaranteed audience levels are achieved. Audience guarantees are initially
developed by our internal research group and actual audience and
delivery information is provided
by third party ratings services. In certain instances, the third party ratings information is not
received until after the close of the reporting period. In these cases, reported advertising
revenues and related deferred revenue are based on our
estimates for any under-delivery of contracted advertising ratings based on the most current
data available from the third party ratings service. Differences between the estimated
under-delivery and the actual under-delivery have historically been insignificant. Online
advertising revenues are recognized as impressions are delivered.
Certain of our advertising arrangements include deliverables in addition to commercial time,
such as the advertisers product integration into the programming, customized vignettes, and
billboards. These contracts that include other deliverables are evaluated as multiple element
revenue arrangements under Emerging Issues Task Force
(EITF) Issue No. 00-21, Revenue Arrangements with
Multiple Deliverables.
Other. Other revenues primarily consist of revenues from our Commerce, Education, and CSS
businesses. Commerce revenues are recognized upon product shipment, net of estimated returns, which
are not material to our condensed consolidated financial statements. Educational service sales are
generally recognized ratably over the term of the agreement. CSS services revenues are recognized
when services are performed. Revenues from post-production and certain distribution related
services are recognized when services are provided. Prepayments received for services to be
performed at a later date are deferred.
Derivative Financial Instruments
FASB
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, (FAS 133), requires every derivative instrument to be recorded on the
balance sheet at fair value as either an asset or a liability. The statement also requires that
changes in the fair value of derivatives be recognized currently in earnings unless specific hedge
accounting criteria are met. We use financial instruments designated as cash flow hedges. The
effective changes in fair value of derivatives designated as cash flow hedges are recorded in
accumulated other comprehensive income (loss). Amounts are reclassified from accumulated other
comprehensive income (loss) as interest expense is recorded for debt. We use the cumulative dollar
offset method to assess effectiveness. To be highly effective, the ratio calculated by dividing the
cumulative change in the value of the actual swap by the cumulative change in the hypothetical swap
must be between 80% and 125%. The ineffective portion of a derivatives change in fair value is
immediately recognized in earnings. We use derivative instruments principally to manage the risk
associated
with the movements of foreign currency exchange rates and changes in interest rates that will
affect the cash flows of our debt transactions. Refer to Note 9 for additional information
regarding derivative instruments held by us and risk management strategies.
Content Rights
Costs incurred in the direct production, co-production or licensing of content rights are
capitalized and stated at the lower of unamortized cost, fair value, or net realizable value. In
accordance with Statement of Position (SOP) No. 00-2, Accounting by Producers or Distributors of
Films, we amortize our content assets based upon the ratio of current revenue to total estimated
revenue (ultimate revenue). To determine this ratio, we analyze historical and projected usage
for similar programming and apply such usage factors to projected revenues by network adjusted for
any future significant programming strategy changes.
The result of this policy is an accelerated amortization pattern for the fully distributed
U.S. Networks segment (Discovery Channel, TLC, Animal Planet) and Discovery Channel in the
International Networks segment over a period of no more than four years. The accelerated
amortization pattern results in the amortization of approximately 40% to 50% of the program cost
during the first year. Topical or current events programming is amortized over shorter periods
based on the nature of the programming and may be expensed upon its initial airing. All other
networks in the U.S. Networks segment and International Networks segment utilize up to
five year useful life. For these networks, with programming investment levels lower than the
established networks and higher reuse of programming, straight-line amortization is considered a
reasonable estimate of the use of content consistent with the pace of earning ultimate revenue.
Ultimate revenue assessments include advertising and affiliate revenue streams. Ancillary
revenue is considered immaterial to the assessment. Changes in managements assumptions, such as
changes in expected use, could significantly alter our estimates for amortization. Amortization is
approximately $167 million for the three months ended March 31, 2009 and the unamortized
programming balance at March 31, 2009 is $1.3 billion.
40
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
If we expect to alter the planned use of programming because of a change in network strategy,
we write it down to its net realizable value based on adjusted ultimate revenues when we identify
the need to alter the planned use. On a periodic basis, management evaluates the net realizable
value of content in conjunction with our strategic review of the business. Changes in managements
assumptions, such as changes in expected use, could significantly alter our estimates for
write-offs. Consolidated content impairment, including accelerated amortization of certain programs
is approximately $9 million for the three months ended March 31, 2009.
Expenses Arising from Long-Term Incentive Plans
Expenses arising from liability awards based on long-term incentive plans are primarily
related to our unit-based LTIP for our employees who meet certain eligibility criteria. Units were
awarded to eligible employees and vest at a rate of 25% per year. Prior to the Newhouse
Transaction, we accounted for the LTIP in accordance with FAS 133
and EITF Issue No. 02-08, Accounting for Options Granted to Employees in
Unrestricted, Publicly Traded Shares of an Unrelated Entity, as the value of units in the LTIP was
indexed to the value of DHC Series A common stock. Upon redemption of the LTIP awards, participants
received a cash payment based on the difference between the market price of DHC Series A common
stock on the vesting date and the market price on the date of grant. Following the Newhouse
Transaction, units remained outstanding and were adjusted to track changes in the value of our
publicly traded stock. We account for these cash settled stock appreciation awards in accordance
with FASB Statement No. 123(R), Share-Based Payment (FAS 123R).
The value of units in the LTIP is calculated using the Black-Scholes model each reporting
period, and the change in unit value of LTIP awards outstanding is recorded as compensation expense
over the period outstanding. We elected to attribute expense for the units in accordance with FAS
123R. We use volatility of DHC common stock or our common stock, if available, in our Black-Scholes
models. However, if the term of the units is in excess of the period common stock has been
outstanding, we use a combination of historical and implied volatility. Different assumptions could
result in different market valuations. However the most significant factor in determining the unit
value is the price of our common stock.
Goodwill and Indefinite-lived Intangible Assets
Goodwill is the excess fair value of an acquired entity over the amounts assigned to assets
acquired and liabilities assumed in a purchase business combination. Goodwill is assigned to
reporting units at the date the goodwill is initially recorded. Once goodwill has been assigned to
a reporting unit, it no longer retains its association with a particular acquisition and all the
activities within a reporting unit are available to support the value
of goodwill. FASB Statement No. 142, Goodwill and Other Intangible
Assets (FAS 142), requires the testing of goodwill for impairment
annually or more often if circumstances or events indicate a change in the impairment status.
On September 17, 2008, we were formed as a result of DHC and Advance/Newhouse Programming
Partnership combining their respective interests in DCH and exchanging those interests with the
Company. The Newhouse Transaction provided, among other things, for the combination of DHCs 66
2/3% interest with Advance/Newhouses 33 1/3% interest
in DCH.
For financial reporting purposes, we are the successor reporting entity to DHC. Because there
is no effective change in ownership, in accordance with ARB 51, paragraph 11, both DHC and DCH have
been consolidated in our financial statements as if the transaction had occurred January 1, 2008.
Our critical accounting policies were adopted from DCH following the Newhouse Transaction. For
purposes of analyzing DCIs critical accounting policies, we present associated 2008 financial
information consistent
with our financial statement presentation and present associated 2007 financial information
consistent with the financial statement presentation of DCH.
The majority of our goodwill balance is the result of the Newhouse and Cox transactions in
2008 and 2007, respectively. As a result of the Newhouse Transaction, we allocated $1.8 billion
of goodwill previously allocated to DHCs equity investment in DCH and $251 million of goodwill for
the basis differential between the carrying value of DHCs and Advance/Newhouses investments in
DCH to our reporting units. The formation of DCH as part of the Cox Transaction required
pushdown accounting of each shareholders basis in DCH. The result was the pushdown of $4.6
billion of additional goodwill previously recorded on the investors books to DCH reporting units.
41
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We performed our annual goodwill impairment testing in accordance with FAS 142 on November 30,
2008, which did not result in any impairment charges. Under the
guidelines established by FASB Statement No.
131, Disclosures about Segments of an Enterprise and Related Information (FAS 131), we have
aggregated our operating segments into three reportable segments,
U.S. Networks, International Networks, and Commerce, Education and Other. However, the goodwill impairment analysis, under the
requirements of FAS 142, is performed at the reporting unit level. A reporting unit is the same
as, or one level below, an operating segment as defined in FAS 131. Generally our reporting units
represent our largest individual networks within the U.S. Networks reportable segment, territories
within our International Networks reportable segment, and the individual components of our
Commerce, Education and Other reportable segment.
The balances as of December 31, 2008 in the table below are included in Note 7 to the
condensed consolidated financial statements and the balances for December 31, 2007 are included for
comparative purposes. Total goodwill for 2007 agrees to the consolidated goodwill balance included
in the Rule 3-09 financial statements of the significant
subsidiary included in Discovery Holding Companys 2007 Annual
Report on Form 10-K. A summary of the goodwill
balance as of December 31, by reportable segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(amounts in millions) |
|
U.S. Networks |
|
$ |
5,569 |
|
|
$ |
4,062 |
|
International Networks |
|
|
1,273 |
|
|
|
769 |
|
Commerce, Education and Other |
|
|
49 |
|
|
|
39 |
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
6,891 |
|
|
$ |
4,870 |
|
|
|
|
|
|
|
|
Goodwill impairment is determined using a two-step process. The first step of the process is
to compare the fair value of a reporting unit with its carrying amount, including goodwill. We
utilized a discounted cash flow (DCF) model and market approach, weighted equally, to estimate
the fair value of our reporting units. The discounted cash flow model utilizes projected financial
results for each reporting unit. The projected financial results are created from critical
assumptions and estimates which are based on managements business plans and historical trends.
The market approach relies on data from publicly traded guideline companies. Determining fair
value requires the exercise of significant judgments, including judgments about appropriate
discount rates, perpetual growth rates, the amount and timing of expected future cash flows, and
relevant comparable company earnings multiples. We also considered the control premium (which can
be defined as the difference between fair value and market price) and other qualitative factors
including capitalization and ownership structure. Management believes the assumptions used for the
impairment test are consistent with those utilized by a market participant in performing similar
valuations of our reporting units.
A summary of the critical assumptions utilized for our annual impairment test in 2008 and 2007
are outlined below by reportable segment. We believe the segment information coupled with our
sensitivity analysis considering reporting units whose fair value would not exceed carrying value
following a hypothetical reduction in fair value of 10% and 20% provide relevant information to
understand our goodwill impairment testing and evaluate our goodwill balances.
During 2008, there were no significant changes in our reporting units. However, as a result
of the Newhouse Transaction we allocated $2.0 billion of goodwill to our reporting units. We did
not significantly change the methodology used in 2007 to determine the fair value of our reporting
units for the annual goodwill impairment test performed on November 30, 2008. Due to a decline in
the
global economic environment, we made changes to certain of the assumptions utilized in the
discounted cash flow model for 2008 compared with the prior year.
The following is a summary analysis of the significant assumptions used in our DCF model by
reportable segment, as well as a sensitivity analysis on the impact of specific changes in
assumptions to our overall conclusion concerning impairment to our goodwill balances.
Discount rate: The discount rate represents the expected return on capital. The U.S.
Networks reporting units generally used a discount rate of 12% for 2008, which represents an
increase from a rate of 11% utilized in 2007. The International Networks reporting units
discount rates were a weighted average of 16% and 14% for the years 2008 and 2007, respectively.
For our remaining reporting units, discount rates were a weighted average of 15% for the years 2008
and 2007. We used the average interest rate of a 20 year government security over a one year
period to determine the risk free rate in our weighted average cost of capital calculation. The
difference between our discount rate and the risk free rate was 8% and 7% in 2008 and 2007,
respectively.
Growth
assumptions: Projected annual growth is primarily driven by
assumed advertising sales
and cable subscriber trends offset by expected expenses. Other considerations include historical
performance and anticipated economic conditions for the current period and long term.
42
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
We use a five year period of assumed cash flows to assess short-term company net free cash
flow for our DCF calculation. The projected revenue growth for U.S. Networks reporting units was
5% for the 2008 DCF calculation, compared with 8% in 2007. U.S. Networks experienced actual
revenue growth of 10% in 2008 and 2007, when adjusted for the spin-off of the Travel Channel. The
projected expense growth for U.S. Networks reporting units was 5% in 2008, compared with 3% in
2007. The projected revenue growth for International Networks reporting units was 7% for the 2008
DCF calculation, compared with 11% in 2007. International Networks experienced actual revenue
growth of 12% and 13% in 2008 and 2007, respectively. The projected expense growth for
International Networks reporting units was 6% in 2008, compared with 7% in 2007. The projected
revenue growth for other reporting units was 4% for the 2008 DCF calculation, compared with 8% in
2007. Other reporting units experienced an actual revenue decline of 19% and an increase of 39% in
2008 and 2007, respectively. The historical revenue decline in 2008 is not relevant due to one time
items and the closure of retail stores in the third quarter of 2007. The projected expense decline
for other reporting units was 1% in 2008, compared with increases of 4% in 2007.
We used a terminal value growth rate of 4% and 5% for U.S. Networks reporting units in our
2008 and 2007 DCF calculations, respectively. We used a terminal value growth rate of 5% and 6%
for International Networks reporting units in our 2008 and 2007 DCF calculations, respectively.
We used a terminal value growth rate of 7% and 5% for other reporting units in our 2008 and 2007
DCF calculations, respectively. The terminal values used in our DCF model are calculated using
the dividend discount model. As a result, the terminal values used for our reporting units are a
function of their respective discount rates and terminal value growth rates.
Market
approach assumptions: We used both earnings before interest,
taxes, depreciation and amortization (EBITDA) and price per subscriber multiples
to estimate fair value using a market approach. The U.S. Networks reporting units EBITDA
multiples ranged from 12 to 6 and from 14 to 4 for 2008 and 2007, respectively. The International
Networks reporting units EBITDA multiples ranged from 15 to 6 and from 18 to 12 for 2008 and
2007, respectively.
The U.S. Networks reporting units made up 75% and 79% of the fair value of our Company in
2008 and 2007, respectively. At the date of impairment testing, the carrying value of our U.S.
Networks reporting units made up 77% of the carrying value of net assets allocated for purposes of
goodwill impairment testing in 2008 and 2007. The International Networks reporting units made up
23% and 20% of the fair value of our Company in 2008 and 2007, respectively. The carrying
value of the International Networks reporting units made up 22% and 23% of the carrying value of
net assets allocated for purposes of goodwill impairment testing in 2008 and 2007, respectively.
The fair value of our other reporting units made up 2% and 1% of the fair value of our Company in
2008 and 2007, respectively. The carrying value of our other reporting units made up 1% of
the carrying value of net assets allocated for purposes of goodwill impairment testing in 2008 and
2007, respectively.
Sensitivity Analysis: In order to analyze the sensitivity our assumptions have on our
overall impairment assessment, we determined the impact that a hypothetical 10% and 20% reduction
in fair value would have on our conclusions.
|
|
|
There were no reporting units for which a 10% decline in fair value would result in
the reporting units carrying value to be in excess of its fair value. |
|
|
|
|
The fair values of the UK and the Other U.S. Networks reporting units do not exceed
their carrying values by 20%. A hypothetical 20% reduction in fair value of these
reporting units results in carrying values in excess of fair value by 9% and 4%,
respectively. The goodwill balance attributable to these two reporting units is $1.6
billion in 2008. A 100 basis point change in the discount rate used for these two
reporting units results in a weighted average 8% decline or 11% rise in fair value. A
50 basis point change in long-term growth rates used for these two reporting units
results in a weighted average 4% decline or rise in fair value. |
If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting
unit is not impaired and the second step of the impairment test is not necessary. If the carrying
amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test
is required to be performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of the reporting units goodwill with
the carrying amount of that goodwill and non-amortizing trademarks. The implied fair value of
goodwill is determined in the same manner as the amount of goodwill recognized in a business
combination. In other words, the estimated fair value of the reporting unit is allocated to all of
the assets and liabilities of that unit (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination and the fair value of the reporting unit
was the purchase price paid. If the carrying amount of the reporting units goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to the
excess.
43
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
The impairment test for other intangible assets not subject to amortization involves a
comparison of the estimated fair value of the intangible asset with its carrying value. If the
carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in
an amount equal to that excess. The estimates of fair value of intangible assets not subject to
amortization are determined using a DCF valuation analysis.
We will perform our annual impairment testing of goodwill as of November 30, 2009, unless
there is a triggering event, which would require the performance of impairment testing before our
annual impairment testing date. We monitor our anticipated operating performance to ensure that no
event has occurred requiring goodwill impairment testing. As part of our annual impairment testing
or any interim impairment test deemed necessary, we will evaluate whether our assumptions and
methodologies require changes as a result of the current global economic environment.
Long-lived Assets
Long-lived assets (e.g., amortizing trademarks, customer lists, other intangibles and
property, plant and equipment) do not require that an annual impairment test be performed; instead,
long-lived assets are tested for impairment upon the occurrence of a triggering event. Triggering
events include the likely (i.e., more likely than not) disposal of a portion of such assets or the
occurrence of an adverse change in the market involving the business employing the related assets.
Once a triggering event has occurred, the impairment test employed is based on whether the intent
is to hold the asset for continued use or to hold the asset for sale. If the intent is to hold the
asset for continued use, the impairment test first requires a comparison of undiscounted future
cash flows against the carrying value of the asset. If the carrying value of the asset exceeds the
undiscounted cash flows, the asset would be deemed to be impaired. Impairment would then be
measured as the difference between the fair value of the asset and its carrying value. Fair value
is
generally determined by discounting the future cash flows associated with that asset. If the
intent is to hold the asset for sale and certain other criteria are met (e.g., the asset can be
disposed of currently, appropriate levels of authority have approved the sale, and there is an
active program to locate a buyer), the impairment test involves comparing the assets carrying
value to its fair value. To the extent the carrying value is greater than the assets fair value,
an impairment loss is recognized for the difference.
Significant judgments in this area involve determining whether a triggering event has
occurred, determining the future cash flows for the assets involved and determining the proper
discount rate to be applied in determining fair value.
The determination of recoverability of goodwill and other intangibles and long-lived assets
requires significant judgment and estimates regarding future cash flows, fair values, and the
appropriate grouping of assets. Such estimates are subject to change and could result in impairment
losses being recognized in the future. If different reporting units, asset groupings, or different
valuation methodologies had been used, the impairment test results could have differed.
Redeemable Interests in Subsidiaries
For those instruments with an estimated redemption value, redeemable interests in subsidiaries
are accreted or amortized to an estimated redemption value ratably over the period to the
redemption date. Accretion and amortization are recorded as a
component of Net income attributable
to non-controlling interests on the Condensed Consolidated
Statements of Operations.
Income Taxes
Income taxes are recorded using the asset and liability method of accounting for income taxes.
Deferred income taxes reflect the net tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used for income
tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than
not such assets will be unrealized.
44
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Recent Accounting Pronouncements
In
September 2006, the FASB issued Statement No. 157, Fair Value
Measurements (FAS 157), which establishes the authoritative definition of fair value, sets out a framework for measuring fair
value, and expands the required disclosures about fair value measurement. The provisions of FAS 157
related to financial assets and liabilities as well as nonfinancial assets and liabilities carried
at fair value on a recurring basis were adopted prospectively on January 1, 2008 and did not have a
material impact on our condensed consolidated financial statements. In February 2008, the FASB
issued FASB Staff Position (FSP) No. 157-2, Effective
Date of FASB Statement No. 157 (FSP 157-2), which
delayed the effective date of FAS 157 for non-recurring measurements of non-financial assets and
liabilities to fiscal years beginning after November 15, 2008 and interim periods within those
fiscal years. Effective January 1, 2009, we adopted the provisions of FAS 157 related to
non-financial assets and liabilities measured at fair value on a non-recurring basis, which are
being applied prospectively. The adoption of FAS 157 for non-recurring measurements of
non-financial assets and liabilities did not have a material impact on our condensed consolidated
financial statements. Additional information related to fair value
measurements is included in
Note 5.
In
December 2007, the FASB issued Statement No. 141(R), Business
Combinations (FAS 141R), which requires, among
other matters, that companies expense business acquisition
transaction costs; record an asset for
in-process research and development, which is expensed at the time of the acquisition;
record at fair value amounts for contingencies, including contingent consideration, as of the
purchase date with subsequent adjustments recognized in operations, which is accounted
for as an adjustment of purchase price; recognize decreases in valuation allowances on acquired
deferred tax assets in operations, which are considered to be subsequent changes in
consideration and are recorded as decreases in goodwill; and measure at fair value any
non-controlling interest in the acquired entity. Effective
January 1, 2009, we adopted the
provisions of FAS 141R, which will be applied prospectively to new business combinations
consummated on or subsequent to the effective date. In
April 2009, the FASB issued FSP 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination
That Arise from Contingencies (FSP 141R-1), which amends and clarifies the accounting, recording and measurement of certain
contingent assets acquired and liabilities assumed in a business combination. The provisions of
FSP 141R-1 were effective immediately and required to be applied retrospectively to business
combinations that occurred on or after January 1, 2009. While FAS 141R applies to new business
acquisitions consummated on or subsequent to the effective date, the
amendments to Statement No. 109, Accounting for Income
Taxes (FAS 109), with respect to deferred tax
valuation allowances and liabilities for income tax uncertainties applies to changes in
deferred tax valuation allowances and liabilities for income tax uncertainties recognized in prior
business acquisitions. The adoption of FAS 141R and FSP 141R-1 did not impact our condensed
consolidated financial statements.
In
December 2007, the FASB issued FAS 160, which establishes accounting
and reporting standards for the non-controlling interest in a subsidiary, commonly referred to as
minority interest. Among other matters, FAS 160 requires that non-controlling interests be reported
within the equity section of the balance sheet and that the amounts of consolidated net income or
loss and consolidated comprehensive income or loss attributable to the parent company and the
non-controlling interests are clearly presented separately in the condensed consolidated financial
statements. Also, pursuant to FAS 160, where appropriate, losses will be allocated to
non-controlling interests even when that allocation may result in a deficit balance. Effective
January 1, 2009, we adopted the provisions of FAS 160, which are being applied prospectively,
except for the presentation and disclosure requirements, which are being applied retrospectively to
all periods presented. Upon adoption of FAS 160, non-controlling interests of $25 million as of
December 31, 2008 have been reclassified from Other
noncurrent liabilities to Equity attributable to non-controlling
interests in the equity section of the Condensed Consolidated Balance Sheets. Additionally, $40
million previously recorded as Minority interests, net of tax during the three months ended March
31, 2008 has been reclassified and excluded from Net income in the Condensed Consolidated
Statements of Operations. Earnings per share for all prior periods is not impacted.
In
March 2008, the FASB issued Statement No. 161, Disclosures about
Derivative Instruments and Heding Activities, an Amendment of
FASB Statement No. 133 (FAS 161), which amends
and expands the disclosure requirements of FAS 133, to include information about how and why an entity
uses derivative instruments; how derivative instruments and related hedged items are accounted for
under FAS 133 and its related interpretations; and how derivative instruments and related hedged
items affect an entitys financial position, financial performance, and cash flows. We adopted the
provisions of FAS 161 effective January 1, 2009. The relevant disclosures required by FAS 161 are
included in Note 9.
In
April 2008, the FASB issued FSP No. 142-3, Determination of the
Useful Life of Intangible Assets (FSP 142-3), which amends the factors that should be considered in developing renewal or
extension assumptions used to determine the useful life of a recognized intangible asset pursuant
to FAS 142. Effective January 1, 2009, we adopted the provisions of FSP 142-3, which are being
applied prospectively to intangible assets acquired on or subsequent
to the effective date. Our policy is to expense costs incurred to renew or
extend the terms of its intangible assets. The
adoption of FSP 142-3 did not impact our condensed consolidated financial statements.
45
DISCOVERY COMMUNICATIONS, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
In
June 2008, the FASB issued FSP EITF Issue No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment
Transactions Are Participating Securities (FSP EITF 03-6-1).
The provisions of FSP EITF 03-6-1 became effective for us on January 1, 2009. This FSP
provides that all outstanding unvested share-based payment awards that contain rights to
non-forfeitable dividends or dividend equivalents (whether paid or unpaid) are considered
participating securities. Because such awards are considered participating securities, the issuing
entity is required to apply the two-class method of computing basic and diluted earnings per share
retrospectively to all prior-period earnings per share computations. The adoption of FSP EITF 03-6-1 did not impact our computation of earnings per share amounts for the periods presented.
In
December 2007, the EITF issued EITF Issue No. 07-1, Accounting for Collaborative Arrangements (EITF 07-1), which defines collaborative arrangements and establishes accounting
and reporting requirements for transactions between participants in the arrangement and third
parties. A collaborative arrangement is a contractual arrangement that involves a joint operating
activity, for example an agreement to co-produce and distribute programming with another media
company. Effective January 1, 2009, we adopted
the provisions of EITF 07-1, which are being applied retrospectively to all periods
presented for all collaborative arrangements as of the effective date. The relevant disclosures
required by EITF 07-1 are included in Note 6.
46
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk.
Our earnings and cash flows are exposed to market risk and can be affected by, among other
things, economic conditions, interest rate changes, foreign currency fluctuations, and changes in
the market values of investments. We have established policies, procedures and internal processes
governing our management of market risks and the use of financial instruments to manage our
exposure to such risks. We use derivative financial instruments to modify our exposure to market
risks from changes in interest rates and foreign exchange rates. We do not hold or enter into
financial instruments for speculative trading purposes.
Interest Rates
The nature and amount of our long-term debt are expected to vary as a result of future
requirements, market conditions and other factors. Our interest expense is exposed to movements in
short-term interest rates. Of our $3.7 billion of debt, $2.8 billion was floating rate debt at
March 31, 2009. Derivative instruments, including fixed to variable and variable to fixed interest
rate instruments, are used to modify this exposure. The variable to fixed interest rate instruments
had a notional amount of $2.3 billion and had a weighted average interest rate of 4.68% at both
March 31, 2009 and December 31, 2008. The fixed to variable interest rate agreements had a notional
amount of $50 million and $50 million and had a weighted average interest rate of 5.82% and 6.66%
at March 31, 2009 and December 31, 2008, respectively. As of March 31, 2009, we have a notional
amount of $810 million of forward starting variable to fixed interest rate swaps, of which a
notional amount of $560 million will become effective in December 2009 and a notional amount of
$250 million will become effective in June 2010. On March 4, 2009, we terminated an unexercised
interest rate swap put with a notional amount of $25 million. The fair value of our interest rate
derivative contracts, adjusted for our credit risk, aggregate $95 million and $106 million at March
31, 2009 and December 31, 2008, respectively.
Of the total notional amount of $3.1 billion in interest rate derivatives, $2.3 billion of
these derivative instruments are highly effective cash flow hedges. The fair value of these hedges
in a loss position at March 31, 2009 and December 31, 2008 was $64 million and $70 million,
respectively, with changes in the mark-to-market value recorded as a component of Other
comprehensive income (loss), net of taxes. We do not expect material hedge ineffectiveness in the
next twelve months. As of March 31, 2009, a parallel shift in the interest rate yield curve equal
to one percentage point would change the fair value of our interest rate derivative portfolio by
approximately $48 million. In addition, a change of one percentage point in interest rates on
variable rate debt would impact interest expense by approximately $5 million on a yearly basis.
We continually monitor our positions with, and the credit quality of, the financial
institutions that are counterparties to our derivative instruments and do not anticipate
nonperformance by the counterparties. In addition, we limit the amount of investment credit
exposure with any one institution.
Refer to Note 9 to the accompanying condensed consolidated financial statements for additional
information regarding our interest rate derivative instruments.
Foreign Currency Exchange Rates
We continually monitor our economic exposure to changes in foreign exchange rates and may
enter into foreign exchange agreements where and when appropriate. Substantially all of our foreign
transactions are denominated in foreign currencies, including the liabilities of our foreign
subsidiaries. The majority of our foreign currency exposure is to the British pound and the Euro.
Although our foreign transactions are not generally subject to significant foreign exchange
transaction gains or losses, the financial statements of our foreign subsidiaries are translated
into U.S. dollars as part of our consolidated financial reporting. As a result, fluctuations in
exchange rates affect our financial position and results of operations.
47
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of
earnings and cash flow. Accordingly, we may enter into foreign currency derivative instruments that
change in value as foreign exchange rates change. The foreign exchange instruments used are spot,
forward, and option contracts. Additionally, we enter into non-designated forward contracts to
hedge non-dollar denominated cash flows and foreign currency balances. At March 31, 2009 and
December 31, 2008, the notional amount of foreign exchange derivative contracts was $24 million and
$75 million, respectively. These derivative instruments did not receive hedge accounting treatment.
The fair value of these derivative instruments aggregate $1 million and $5 million at March 31,
2009 and December 31, 2008, respectively. As of March 31, 2009, an estimated 10% adverse movement
in exchange rates against the U.S. dollar would decrease the fair value of our portfolio by
approximately $3 million
Refer to Note 9 to the accompanying condensed consolidated financial statements for additional
information regarding our foreign currency derivative instruments.
Market Values of Investments
We
are exposed to market risk as it relates to changes in the market
value of our
investments. We invest directly and indirectly through mutual funds in equity instruments
of public and private companies. These securities are subject to significant fluctuations in fair
market value due to the volatility of the stock market and the industries in which the companies
operate. At March 31, 2009, these investments had a fair value of $48 million which is recorded as
a component of Other current assets and Other noncurrent assets on the Condensed Consolidated
Balance Sheets. As of March 31, 2009, a 10% decline in the fair value of these investments would
reduce the fair value of these investments to $43 million.
ITEM 4. Controls and Procedures.
Disclosure Controls and Procedures
The Companys management, with the participation of our Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report. The term disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the 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 SECs
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 companys
management, including its principal executive and principal financial officers, 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 the end of the period covered by this quarterly report,
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
There have been no changes to the Companys internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act of 1934) during the quarter
ended March 31, 2009, that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting.
As of December 31, 2009, the Company is required to comply with the management certification and
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. In the interim,
the Company is required to perform the documentation, evaluation and testing required to make these
assessments.
48
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings.
We experience routine litigation in the normal course of our business. We believe that none of
the pending litigation will have a material adverse effect on our consolidated financial condition,
future results of operations, or liquidity.
ITEM 1A. Risk Factors.
There have been no material changes to our risk factors from those disclosed in the Part I, Item
1A, Risk Factors section of our 2008 Annual Report on Form 10-K (SEC File No. 001-34177) filed on
February 26, 2009.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3. Defaults Upon Senior Securities.
None.
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits.
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Exhibit No. |
|
Description |
10.1
|
|
Amended and Restated Employment Agreement dated as of March 6,
2008 by and between Discovery Communications, LLC and Adria
Alpert-Romm |
|
|
|
10.2
|
|
Amended and Restated Employment Agreement dated as of March 7,
2008 by and between Discovery Communications, LLC and Joseph A.
LaSala, Jr. |
|
|
|
10.3
|
|
Form of Stock Option Agreement (incorporated by reference to
Exhibit 99.1 to the Form 8-K filed on March 9, 2009 (SEC File No.
001-34177) |
|
|
|
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 |
|
|
|
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 |
|
|
|
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 |
|
|
|
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 |
49
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.
|
|
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DISCOVERY COMMUNICATIONS, INC.
(Registrant)
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|
Date: May 4, 2009 |
By: |
/s/ David M. Zaslav
|
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|
|
David M. Zaslav |
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|
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President and Chief Executive Officer |
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|
|
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Date: May 4, 2009 |
By: |
/s/ Bradley E. Singer
|
|
|
|
Bradley E. Singer |
|
|
|
Senior Executive Vice President and
Chief Financial Officer |
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50