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Item 7. Management’s Discussion and Analysis

2023-02-24 compared with 2022-02-24 · 436 added, 311 removed, 258 unchanged (74% of the section changed)

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This section provides an analysis of our financial results for the fiscal year ended December 31, 2022 compared to the fiscal year ended December 31, 2021.

A discussion of our result of operations and liquidity for the fiscal year ended December 31, 2020 compared to the fiscal year ended December 31, 2019 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed on February 22, 2021, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at ir.corporate.discovery.com.

A discussion of our results of operations and liquidity for the fiscal year ended December 31, 2021 compared to the fiscal year ended December 31, 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed on February 24, 2022, which is available free of charge on the SEC’s website at www.sec.gov and our Investor Relations website at ir.wbd.com.

The information contained on our website is not part of this Annual Report on Form 10-K and is not incorporated by reference herein.

BUSINESS OVERVIEW

We are a global media company that provides content across multiple distribution platforms, including linear platforms such as pay-TV, FTA and broadcast television, our authenticated GO applications, digital distribution arrangements, content licensing arrangements and DTC subscription products.

For a discussion of our global portfolio of networks and joint ventures see our business overview set forth in Item 1, “Business” in this Annual Report on Form 10-K.

Our content spans genres including survival, natural history, exploration, sports, general entertainment, home, food, travel, heroes, adventure, crime and investigation, health and kids.

We have an extensive library of content and own most rights to our content and footage, which enables us to leverage our library to quickly launch brands and services into new markets and on new platforms.

Our content can be re-edited and updated in a cost-effective manner to provide topical versions of subject matter that can be utilized around the world on a variety of platforms.

We aim to invest in high-quality content for our networks and brands with the objective of building viewership, optimizing distribution revenue, capturing advertising revenue, and creating or repositioning branded channels and business to sustain long-term growth and occupy a desired content niche with strong consumer appeal.

Our strategy is to maximize the distribution, ratings and profit potential of each of our branded networks and discovery+.

In addition to growing distribution and advertising revenues for our branded networks, we have extended content distribution across new platforms, including brand-aligned websites, online streaming, mobile devices, VOD, and broadband channels, which provide promotional platforms for our television content and serve as additional outlets for advertising and distribution revenue.

Our goal is to reach consumers wherever and whenever they are consuming content, as well as reaching new audiences including broadband only, cord cutters and cord nevers, while continuing to serve our linear network subscribers.

Audience ratings, audience engagement and channel packaging are key drivers in generating advertising revenue and creating demand on the part of cable television operators, DTH satellite operators, telecommunication service providers, and other content distributors who deliver our content to their customers.

Although we utilize certain brands and content globally, we classify our operations in two reportable segments:

Networks, consisting principally of domestic television networks and digital content services, and International Networks, consisting primarily of international television networks and digital content services.

Our segment presentation aligns with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments.

On April 8, 2022, Discovery, a global media company that provides content across multiple distribution platforms, including linear, free-to-air, and broadcast television, authenticated GO applications, digital distribution arrangements, content licensing arrangements, and DTC subscription products, completed its Merger with the WM Business of AT&T and changed its name from “Discovery, Inc.” to “Warner Bros.

Discovery, Inc.” On April 11, 2022, our shares started trading on Nasdaq under the trading symbol WBD.

(See Note 3 and Note 4 to the accompanying consolidated financial statements.)

Discovery is a premier global media and entertainment company that combines the WarnerMedia Business’s premium entertainment, sports and news assets with Discovery’s leading non-fiction and international entertainment and sports businesses, thus offering audiences a differentiated portfolio of content, brands and franchises across television, film, streaming and gaming.

Some of our iconic brands and franchises include Warner Bros.

Pictures Group, Warner Bros.

Television Group, DC, HBO, HBO Max, Discovery Channel, discovery+, CNN, HGTV, Food Network, TNT, TBS, TLC, OWN, Warner Bros.

Games, Batman, Superman, Wonder Woman, Harry Potter, Looney Tunes, Hanna-Barbera, Game of Thrones, and The Lord of the Rings.

For a discussion of our global portfolio see our business overview set forth in Item 1, “Business” in this Annual Report on Form 10-K.

In connection with the Merger, we have announced and taken actions to implement projects to achieve cost synergies for the Company.

We finalized the framework supporting our ongoing restructuring and transformation initiatives during 2022, which include, among other things, strategic content programming assessments, organization restructuring, facility consolidation activities, and other contract termination costs.

We expect that we will incur approximately $4.1 - $5.3 billion in pre-tax restructuring charges.

Of the total expected pre-tax restructuring charges, we expect total cash expenditures to be $1.0 - $ 1.5 billion.

We incurred $3.8 billion of pre-tax restructuring charges during the year ended December 31, 2022.

While our restructuring efforts are ongoing, the restructuring program is expected to be substantially completed by the end of 2024.

In connection with the Merger, we reevaluated and changed our segment presentation and reportable segments during 2022.

As of December 31, 2022, we classified our operations in three reportable segments:

• Studios, consisting primarily of the production and release of feature films for initial exhibition in theaters, production and initial licensing of television programs to third parties and our networks/DTC services, distribution of our films and television programs to various third party and internal television and streaming services, distribution through the home entertainment market (physical and digital), related consumer products and themed experience licensing, and interactive gaming;

• Networks, consisting principally of our domestic and international television networks;

• DTC, consisting primarily of our premium pay-TV and streaming services.

Our segment presentation was aligned with our management structure and the financial information management uses to make decisions about operating matters, such as the allocation of resources and business performance assessments.

Prior periods have been recast to conform to the current period presentation.

During 2022, we exited our operations in Russia and removed all of our channels and services from the market.

We do not expect these actions to have a material effect on our consolidated financial statements.

For further discussion of financial information for our segments and the geographical areas in which we do business, our content development activities, and revenues, see our business overview set forth in Item 1, “Business” and Note 23 to the consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

Impact of COVID-19

On March 11, 2020, the World Health Organization declared the coronavirus disease 2019 (“COVID-19”) outbreak to be a global pandemic.

COVID-19 has continued to spread throughout the world, and the duration and severity of its effects and associated economic disruption remain uncertain.

We continue to closely monitor the impact of COVID-19 on all aspects of our business and geographies, including the impact on our customers, employees, suppliers, vendors, distribution and advertising partners, production facilities, and various other third parties.

Beginning in the second quarter of 2020, demand for our advertising products and services decreased due to economic disruptions from limitations on social and commercial activity.

These economic disruptions and the resulting effect on us eased

during the second half of 2020.

The pandemic did not have a significant impact on demand during fiscal year 2021.

Many of our third-party production partners that were shut down during most of the second quarter of 2020 due to COVID-19 restrictions came back online in the third quarter of 2020 and, as a result, we have incurred additional costs to comply with various governmental regulations and implement certain safety measures for our employees, talent, and partners.

Additionally, certain sporting events that we have rights to were cancelled or postponed, thereby eliminating or deferring the related revenues and expenses, including the Tokyo 2020 Olympic Games, which occurred in July and August 2021.

The postponement of the 2020 Olympic Games deferred both Olympic-related revenues and significant expenses from fiscal year 2020 to fiscal year 2021.

In response to the impact of the pandemic, we employed innovative production and programming strategies, including producing content filmed by our on-air talent and seeking viewer feedback on which content to air.

We pursued a number of cost savings initiatives, which began during the third quarter of 2020 through the implementation of travel, marketing, production and other operating cost reductions, including personnel reductions, restructurings and resource reallocations to align our expense structure to ongoing changes within the industry.

The full extent of COVID-19’s effects on our operations and results is not yet known and will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity and the extent of future surges of COVID-19, vaccine distribution and other actions to contain the virus or treat its impact, among others.

We will continue to monitor COVID-19 and its impact on our business results and financial condition.

The consolidated financial statements set forth in this Annual Report on Form 10-K reflect management’s latest estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures as of the date of the consolidated financial statements and reported amounts of revenue and expenses during the reporting periods presented.

Actual results may differ significantly from these estimates and assumptions.

We continue to closely monitor the ongoing impact of COVID-19 on all aspects of our business and geographies;

however, the nature and full extent of COVID-19’s effects on our operations and results are not yet known and will depend on future developments, which are highly uncertain and cannot be predicted.

Certain key sources of revenue for the Studios segment, including theatrical revenues, original television productions, studio operations, and themed entertainment, have been adversely impacted by governmentally imposed shutdowns and related labor interruptions and constraints on consumer activity, particularly in the context of public entertainment venues, such as cinemas and theme parks.

RESULTS OF OPERATIONS

Items Impacting Comparability

The impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results.

The discussion below compares our actual and pro forma combined results, as if the Merger occurred on January 1, 2021, for the year ended December 31, 2022 to the year ended December 31, 2021.

Management believes reviewing our combined operating results in addition to actual operating results is useful in identifying trends in, or reaching conclusions regarding, the overall operating performance of our businesses.

Our Studios, Networks, DTC, Corporate, and inter-segment eliminations information is based on the historical operating results of the respective segments and include, where applicable, adjustments for (i) additional costs of revenues from the fair value step-up of film and television library, (ii) additional amortization expense related to acquired intangible assets, (iii) additional depreciation expense from the fair value of property and equipment, (iv) transaction costs and other one-time non-recurring costs, (v) additional interest expense for borrowings related to the Merger and amortization associated with fair value adjustments of debt assumed, (vi) changes to align accounting policies, (vii) elimination of intercompany activity, and (viii) associated tax-related impacts of adjustments.

Adjustments do not include costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined businesses.

Pro forma amounts are not necessarily indicative of what our results would have been had we operated the combined businesses since January 1, 2021 and should not be taken as indicative of the Company’s future consolidated results of operations.

Actual amounts for the year ended December 31, 2022 include results of operations for Discovery for the entire period and WM for the period subsequent to the completion of the Merger on April 8, 2022.

Foreign Exchange Impacting Comparability

In addition to the Merger, the impact of exchange rates on our business is an important factor in understanding period-to-period comparisons of our results.

For example, our international revenues are favorably impacted as the U.S.

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dollar strengthens relative to other foreign currencies.

We believe the presentation of results on a constant currency basis (ex-FX), in addition to results reported in accordance with GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results.

The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with GAAP.

We believe the presentation of results on a constant currency basis (“ex-FX”), in addition to results reported in accordance with U.S.

GAAP provides useful information about our operating performance because the presentation ex-FX excludes the effects of foreign currency volatility and highlights our core operating results.

The presentation of results on a constant currency basis should be considered in addition to, but not a substitute for, measures of financial performance reported in accordance with U.S.

The ex-FX change represents the percentage change on a period-over-period basis adjusted for foreign currency impacts.

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Year Ended December 31,

2021 2020 % Change % Change (ex-FX)

2022 2021 % Change

Actual Pro Forma

Adjustments Pro Forma Combined Actual (a)

Adjustments Pro Forma Combined Actual Pro Forma Combined

(Actual) Combined

Advertising $ 8,524 $ 1,412 $ 9,936 $ 6,194 $ 4,395 $ 10,589 38 % (6) % (4) %

Distribution 5,409 4,866 11 % 11 %

Other 567 222 NM NM

Total revenues 12,191 10,671 14 % 14 %

Costs of revenues, excluding depreciation and amortization 4,620 3,860 20 % 18 %

Selling, general and administrative 4,016 2,722 48 % 46 %

Depreciation and amortization 1,582 1,359 16 % 15 %

Impairment of goodwill and other intangible assets — 124 NM NM

Restructuring and other charges 32 91 (65) % (64) %

Gain on disposition (71) — NM NM

Total costs and expenses 10,179 8,156 25 % 23 %

Operating income 2,012 2,515 (20) % (18) %

Distribution 16,142 4,339 20,481 5,202 15,579 20,781 NM (1) % — %

Content 8,360 3,297 11,657 737 12,455 13,192 NM (12) % (9) %

Other 791 230 1,021 58 706 764 NM 34 % 36 %

Total revenues 33,817 9,278 43,095 12,191 33,135 45,326 NM (5) % (3) %

Costs of revenues, excluding depreciation and amortization 20,442 5,125 25,567 4,620 21,353 25,973 NM (2) % 1 %

Selling, general and administrative 9,678 1,745 11,423 4,016 8,987 13,003 NM (12) % (10) %

Depreciation and amortization 7,193 34 7,227 1,582 6,774 8,356 NM (14) % (13) %

Restructuring 3,757 (90) 3,667 32 90 122 NM NM NM

Impairment and loss (gain) on disposition and disposal groups 117 — 117 (71) 223 152 NM (23) % (23) %

Total costs and expenses 41,187 6,814 48,001 10,179 37,427 47,606 NM 1 % 3 %

Operating (loss) income (7,370) 2,464 (4,906) 2,012 (4,292) (2,280) NM NM NM

Interest expense, net (1,777) (515) (2,292) (633) (2,026) (2,659)

Loss on extinguishment of debt (10) (76) (87) %

Loss from equity investees, net (160) (20) (180) (18) 14 (4)

Other income, net 347 139 486 72 100 172

Income before income taxes 1,433 1,728 (17) %

Income tax expense (236) (373) (37) %

Net income 1,197 1,355 (12) %

(Loss) income before income taxes (8,960) 2,068 (6,892) 1,433 (6,204) (4,771)

Income tax benefit (expense) 1,663 (56) 1,607 (236) 1,448 1,212

Net (loss) income (7,297) 2,012 (5,285) 1,197 (4,756) (3,559)

Net income attributable to noncontrolling interests (68) — (68) (138) — (138)

Net income attributable to redeemable noncontrolling interests (53) (12) NM

Net income available to Discovery, Inc.

Net income attributable to redeemable noncontrolling interests (6) — (6) (53) — (53)

Net (loss) income available to Warner Bros.

Discovery, Inc.

$ (7,371) $ 2,012 $ (5,359) $ 1,006 $ (4,756) $ (3,750)

(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast.

NM - Not meaningful

Our advertising revenue is generated across multiple platforms and consists of consumer advertising, which is sold primarily on a national basis in the U.S.

Unless otherwise indicated, the discussion through operating (loss) income below is on a pro-forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenues, and selling, general and administrative expenses are substantially attributable to the Merger.

The percent changes of line items below operating (loss) income in the table above are not included as the activity is principally in U.S.

Advertising revenues are principally generated from the sale of commercial time on linear (television networks and authenticated TVE applications) and digital platforms (DTC subscription services and websites), and sold primarily on a national basis in the U.S.

and on a pan-regional or local-language feed basis outside the U.S.

Advertising contracts generally have a term of one year or less.

Advertising revenue is dependent upon a number of factors, including the stage of development of television markets, the popularity of FTA television, the number of subscribers to our channels, viewership demographics, the popularity of our content and our ability to sell commercial time over a group of channels.

Advertising revenue is dependent upon a number of factors, including the number of subscribers to our channels, viewership demographics, the popularity of our content, our ability to sell commercial time over a group of channels, the stage of development of television markets, and the popularity of FTA television.

Revenue from advertising is subject to seasonality, market-based variations, the mix in sales of commercial time between the upfront and scatter markets, and general economic conditions.

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In some cases, advertising sales are subject to ratings guarantees that require us to provide additional advertising time if the guaranteed audience levels are not achieved.

We also generate revenue from the sale of advertising through our digital products on a stand-alone basis and as part of advertising packages with our television networks.

Advertising revenue increased 11% in 2021.

Excluding the impact of foreign currency fluctuations, advertising revenue increased 10%.

The increase was primarily attributable to improved overall performance at International Networks as advertising markets recovered from the COVID-19 pandemic, as well as the broadcast of the Summer Olympics throughout Europe in the third quarter of 2021.

Distribution revenue consists principally of fees from affiliates for distributing our linear networks, supplemented by revenue earned from SVOD content licensing, DTC subscription services, and other emerging forms of digital distribution.

The largest component of distribution revenue is comprised of linear distribution services for rights to our networks from cable, DTH satellite and telecommunication service providers.

We also generate revenue from the sale of advertising through our digital platforms on a stand-alone basis and as part of advertising packages with our television networks.

Advertising revenue decreased 4% in 2022, primarily attributable to declines in domestic general entertainment and news networks, partially offset by subscriber growth on our DTC ad-supported tiers and higher sports advertising in the U.S.

due to the NCAA Men's Final Four and Championship games airing on our networks and the addition of the NHL starting in the fourth quarter of 2021.

Distribution revenues are generated from fees charged to network distributors, which include cable, DTH satellite, telecommunications and digital service providers, and DTC subscribers.

The largest component of distribution revenue is comprised of linear distribution rights to our networks from cable, DTH satellite and telecommunication service providers.

We have contracts with distributors representing most cable and satellite service providers around the world, including the largest operators in the U.S.

and major international distributors.

Distribution revenues are largely dependent on the rates negotiated in the agreements, the number of subscribers that receive our networks or content, the number of platforms covered in the distribution agreement, and the market demand for the content that we provide.

Distribution revenues are largely dependent on the rates negotiated in the agreements, the number of subscribers that receive our networks, the number of platforms covered in the distribution agreement, and the market demand for the content that we provide.

From time to time, renewals of multi-year carriage agreements include significant year one market adjustments to re-set subscriber rates, which then increase at rates lower than the initial increase in the following years.

In some cases, we have provided distributors launch incentives, in the form of cash payments or free periods, to carry our networks.

Distribution revenue also includes fees charged for bulk content arrangements and other subscription services for episodic content.

These digital distribution revenues are impacted by the quantity, as well as the quality, of the content we provide.

As reported and excluding the impact of foreign currency fluctuations, distribution revenue increased 11% in 2021 primarily attributable to the growth of discovery+ at both U.S.

Networks and International Networks.

Other revenue increased $345 million in 2021.

Excluding the impact of foreign currency fluctuations, other revenue increased $354 million in 2021.

Excluding the impact of foreign currency fluctuations, the increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.

Distribution revenue was flat in 2022, primarily attributable to a decline in linear subscribers in the U.S.

and lower contractual affiliate rates in some European markets, as well as a decline in wholesale revenues primarily due to the expiration of HBO Max on Amazon Channels in September 2021, offset by global retail subscriber gains on DTC platforms.

HBO Max re-launched on Amazon Channels in December 2022.

Content revenues are generated from the release of feature films for initial exhibition in theaters, the licensing of feature films and television programs to various television, SVOD and other digital markets, distribution of feature films and television programs in the physical and digital home entertainment market, sales of console games and mobile in-game content, sublicensing of sports rights, and licensing of intellectual property such as characters and brands.

Content revenue decreased 9% in 2022, primarily attributable to lower TV licensing and home entertainment revenue, partially offset by higher theatrical film rental revenue and higher third-party licensing of HBO content.

Other revenue primarily consists of studio production services and tours.

Other revenue increased 36% in 2022, primarily attributable to a full year of results for the Warner Bros.

Studio Tour London and Hollywood, as well as the Harry Potter flagship store in New York, which opened in June 2021, and services provided to the unconsolidated BT Sport joint venture.

Costs of Revenues

Our principal component of costs of revenues is content expense.

Content expense includes television series, television specials, films, sporting events and digital products.

The costs of producing a content asset and bringing that asset to market consist of film costs, participation costs, exploitation costs and manufacturing costs.

Costs of revenues increased 20% in 2021.

Excluding the impact of foreign currency fluctuations, costs of revenues increased 18%.

The increase was primarily attributable to the Olympics and to a lesser extent, European sporting events and leagues

returning to a more normalized schedule, and higher content investment related to discovery+ at U.S.

Networks and International Networks.

Content expense includes television/digital series, specials, films, and sporting events.

The costs of producing a content asset and bringing that asset to market consist of production costs, participation costs, and exploitation costs.

Costs of revenues increased 1% in 2022, primarily attributable to increased programming expenses on DTC platforms, higher theatrical product content expense, higher sports-related expense globally, and increased expense at CNN, partially offset by lower television product content expense and distribution fees.

Selling, General and Administrative

Selling, general and administrative expenses consist principally of employee costs, marketing costs, research costs, occupancy, and back office support fees.

Selling, general and administrative expenses increased 48% in 2021.

Excluding the impact of foreign currency fluctuations, selling, general and administrative increased 46%.

The increase was primarily attributable to higher marketing related expenses to drive the growth of discovery+ at U.S.

Networks and International Networks.

Selling, general and administrative expenses decreased 10% in 2022, primarily attributable to lower marketing expenses.

Depreciation and Amortization

Depreciation and amortization expense includes depreciation of fixed assets and amortization of finite-lived intangible assets.

Depreciation and amortization increased 16% in 2021.

Excluding the impact of foreign currency fluctuations, depreciation and amortization increased 15%.

The increase was primarily attributable to a change in amortization method from the straight-line method to the sum of the years digits method effective October 1, 2021 for acquired customer relationships, and to a lesser extent, assets placed in service related to the launch of discovery+.

Impairment of Goodwill and Other Intangible Assets

There was no impairment of goodwill and other intangible assets in 2021 compared to $124 million in 2020.

(See Note 7 to the accompanying consolidated financial statements.)

Restructuring and Other Charges

Restructuring and other charges were $32 million and $91 million in 2021 and 2020, respectively.

Restructuring and other charges primarily include employee relocation and termination costs.

Depreciation and amortization decreased 13% in 2022, primarily attributable to a change in amortization method from the straight-line method to the sum of the months’ digits method for some of the WM assets acquired.

Restructuring

In connection with the Merger, the Company has announced and taken actions to implement projects to achieve cost synergies for the Company.

Restructuring was $3,694 million and $121 million in 2022 and 2021, respectively.

Restructuring in 2022 primarily related to strategic content programming assessments, organization restructuring, facility consolidation activities, and other contract termination costs.

(See Note 6 to the accompanying consolidated financial statements.)

Gain on Disposition

Gain on disposition was $71 million for 2021, and was primarily attributable to the sale of our Great American Country network.

Impairment and Loss (Gain) on Dispositions and Disposals Groups

Impairment and loss (gain) on disposition and disposal groups was a $117 million and $152 million loss in 2022 and 2021, respectively.

The loss in 2022 was primarily attributable to the write-down to the estimated fair value, less costs to sell, of the Ranch Lot and Knoxville office building and land in connection with the classification as assets held for sale.

(See Note 18 to the accompanying consolidated financial statements.) The gain in 2021 was primarily attributable to the sale of our Great American Country network, partially offset by the WM sale of Hello Sunshine.

(See Note 4 to the accompanying consolidated financial statements.)

Interest Expense, net

Interest expense decreased 2% in 2021.

Actual interest expense, net increased $1,144 million in 2022, primarily attributable to debt assumed as a result of the Merger.

(See Note 11 and Note 13 to the accompanying consolidated financial statements.)

Loss on Extinguishment of Debt

Losses on extinguishment of debt were $10 million and $76 million in 2021 and 2020, respectively.

In 2020, we repurchased $1.5 billion aggregate principal amount of DCL's and Scripps Networks' senior notes.

The repurchase resulted in a loss on extinguishment of debt of $76 million.

(See Note 8 to the accompanying consolidated financial statements.)

Loss from Equity Investees, net

We reported losses from our equity method investees of $18 million and $105 million in 2021 and 2020, respectively.

Actual losses from our equity method investees were $160 million and $18 million in 2022 and 2021, respectively.

The changes are attributable to the Company's share of earnings and losses from its equity investees.

(See Note 10 to the accompanying consolidated financial statements.)

Other Income, net

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Year Ended December 31,

Foreign currency gains (losses), net $ 93 $ (115)

(Losses) gains on derivative instruments, net (33) 29

Interest income 18 10

Foreign currency (losses) gains, net $ (150) $ 93

Gains (losses) on derivative instruments, net 475 (33)

Gain on sale of investment with readily determinable fair value — 15

Change in the value of equity investments without readily determinable fair value (13) —

Change in the value of investments with readily determinable fair value (105) (6)

Expenses from debt modification — (11)

Other income, net 8 —

Change in fair value of equity investments without readily determinable fair value (142) (13)

Gain on sale of equity method investments 195 4

Loss on extinguishment of debt — (10)

Other income, net 74 22

Total other income, net

The following table reconciles our effective income tax rate to the U.S.

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Effect of foreign operations 246 (3) % 25 2 %

Preferred stock conversion premium charge 166 (2) % — — %

UK Finance Act legislative change — — % (155) (11) %

Noncontrolling interest adjustment (17) — % (40) (3) %

Change in uncertain tax positions 12 1 % 17 1 %

Impairment of goodwill — — % 25 2 %

Deferred tax adjustment — — % (22) (1) %

Other, net 41 — % (3) — %

Income tax expense $ 236 16 % $ 373 22 %

Income tax expense was $236 million and $373 million, and the Company's effective tax rate was 16% and 22% for 2021 and 2020, respectively.

The decrease in income tax expense for the year ended December 31, 2021 was primarily attributable to a decrease in pre-tax book income and an increase in the deferred tax benefit from the UK Finance Act 2021 that was enacted in June 2021.

Those decreases were partially offset by an increase in the state and local income tax expense recorded in 2021.

Income tax (benefit) expense $ (1,663) 19 % $ 236 16 %

Income tax (benefit) expense was $(1,663) million and $236 million, and the Company’s effective tax rate was 19% and 16% for 2022 and 2021, respectively.

The decrease in the tax expense for the year ended December 31, 2022, was primarily attributable to a decrease in pre-tax book income, partially offset by an unfavorable tax adjustment related to the 2022 preferred stock conversion transaction expense that was not deductible for tax purposes (see Note 3), as well as the effect of foreign operations, including taxation and allocation of income and losses across multiple foreign jurisdictions.

The decrease for the year ended December 31, 2022 was further offset by a deferred tax benefit of $155 million recorded in 2021 resulting from the UK Finance Act 2021 enacted in June 2021.

Segment Results of Operations – 2022 vs.

We evaluate the operating performance of our operating segments based on financial measures such as revenues and Adjusted OIBDA.

Adjusted OIBDA is defined as operating income excluding:

(i) employee share-based compensation, (ii) depreciation and amortization, (iii) restructuring and other charges, (iv) certain impairment charges, (v) gains and losses on business and asset dispositions, (vi) certain inter-segment eliminations related to production studios, (vii) third-party transaction and integration costs, and (viii) other items impacting comparability.

We use this measure to assess the operating results and performance of our segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment.

We believe Adjusted OIBDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses.

We exclude share-based compensation, restructuring and other charges, certain impairment charges, gains and losses on business and asset dispositions, and acquisition and integration costs from the calculation of Adjusted OIBDA due to their impact on comparability between periods.

We also exclude the depreciation of fixed assets and amortization of intangible assets, as these amounts do not represent cash payments in the current reporting period.

Certain corporate expenses and inter-segment eliminations related to production studios are excluded from segment results to enable executive management to evaluate segment performance based upon the decisions of segment executives.

Adjusted OIBDA should be considered in addition to, but not a substitute for, operating income, net income and other measures of financial performance reported in accordance with U.S.

generally accepted accounting principles (“GAAP”).

The table below presents our Adjusted OIBDA by segment, with a reconciliation of consolidated net income available to Discovery, Inc.

to Adjusted OIBDA (in millions).

Year Ended December 31,

2021 2020 % Change

Net income available to Discovery, Inc.

$ 1,006 $ 1,219 (17) %

Net income attributable to redeemable noncontrolling interests 53 12 NM

Net income attributable to noncontrolling interests 138 124 11 %

Income tax expense 236 373 (37) %

Income before income taxes 1,433 1,728 (17) %

Other (income) expense, net (82) (42) 95 %

Loss from equity investees, net 18 105 (83) %

Loss on extinguishment of debt 10 76 (87) %

Interest expense, net 633 648 (2) %

Operating income 2,012 2,515 (20) %

Depreciation and amortization 1,582 1,359 16 %

Impairment of goodwill and other intangible assets — 124 NM

The Company evaluates the operating performance of its operating segments based on financial measures such as revenues and Adjusted EBITDA.

Adjusted EBITDA is defined as operating income excluding:

• employee share-based compensation;

Restructuring and other charges 32 91 (65) %

Transaction and integration costs 95 6 NM

(Gain) loss on disposition (71) 2 NM

Adjusted OIBDA $ 3,817 $ 4,196 (9) %

Adjusted OIBDA

Networks 3,940 3,975 (1) %

International Networks 494 723 (32) %

Corporate, inter-segment eliminations, and other (617) (502) 23 %

Adjusted OIBDA $ 3,817 $ 4,196 (9) %

The table below presents the calculation of Adjusted OIBDA (in millions).

• depreciation and amortization;

• restructuring and facility consolidation;

• certain impairment charges;

• gains and losses on business and asset dispositions;

• certain inter-segment eliminations;

• third-party transaction and integration costs;

• amortization of purchase accounting fair value step-up for content;

• amortization of capitalized interest for content;

• other items impacting comparability.

The Company uses this measure to assess the operating results and performance of its segments, perform analytical comparisons, identify strategies to improve performance, and allocate resources to each segment.

The Company believes Adjusted EBITDA is relevant to investors because it allows them to analyze the operating performance of each segment using the same metric management uses.

The Company excludes employee share-based compensation, restructuring, certain impairment charges, gains and losses on business and asset dispositions, and transaction and integration costs from the calculation of Adjusted EBITDA due to their impact on comparability between periods.

The Company also excludes the depreciation of fixed assets and amortization of intangible assets, amortization of purchase accounting fair value step-up for content, and amortization of capitalized interest for content, as these amounts do not represent cash payments in the current reporting period.

Adjusted EBITDA should be considered in addition to, but not a substitute for, operating income, net income, and other measures of financial performance reported in accordance with U.S.

The table below presents our Adjusted EBITDA by segment (in millions).

Year Ended December 31,

2022 2021 % Change

Studios $ 1,772 $ 14 NM

Networks 8,725 5,533 58 %

International Networks 4,539 3,713 22 %

Corporate, inter-segment eliminations, and other (10) 9 NM

Total revenue 12,191 10,671 14 %

Costs of revenues, excluding depreciation and amortization 4,620 3,860 20 %

Selling, general and administrative (a)

3,754 2,615 44 %

Adjusted OIBDA $ 3,817 $ 4,196 (9) %

(a) Selling, general and administrative expenses exclude employee share-based compensation and third-party transaction and integration costs.

The table below presents, for our U.S.

Networks segment, revenues by type, certain operating expenses, and Adjusted OIBDA (in millions).

DTC (1,596) (1,345) (19) %

Corporate (1,200) (385) NM

Inter-segment eliminations 17 — NM

Studios Segment

The following table presents, for our Studios segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating (loss) income (in millions).

Year Ended December 31,

2022 2021 % Change

Advertising $ 4,188 $ 4,012 4 %

Distribution 3,297 2,852 16 %

Actual Pro Forma

Adjustments Pro Forma

Combined Actual (a)

Adjustments Pro Forma

Combined Actual Pro Forma Combined

(Actual) Pro Forma

Advertising $ 15 $ 9 $ 24 $ — $ 123 $ 123 NM (80) % (80) %

Distribution 12 6 18 — 14 14 NM 29 % 29 %

Content 9,156 3,898 13,054 20 14,336 14,356 NM (9) % (7) %

Other 548 154 702 — 516 516 NM 36 % 36 %

Total revenues 7,662 6,949 10 %

Costs of revenues, excluding depreciation and amortization 1,841 1,843 — %

Selling, general and administrative 1,881 1,131 66 %

Adjusted OIBDA 3,940 3,975 (1) %

Employee share-based compensation 1 —

Gain on disposition (77) —

Total revenues 9,731 4,067 13,798 20 14,989 15,009 NM (8) % (6) %

Costs of revenues, excluding depreciation and amortization 6,310 2,392 8,702 3 9,589 9,592 NM (9) % (7) %

Selling, general and administrative 1,649 698 2,347 3 2,769 2,772 NM (15) % (13) %

Adjusted EBITDA 1,772 977 2,749 14 2,631 2,645 NM 4 % 8 %

Depreciation and amortization 501 39 540 — 691 691

Restructuring and other charges 4 41

Transactions and integration costs 1 —

Employee share-based compensation 1 26 27 — 85 85

Restructuring 1,050 (38) 1,012 — 38 38

Transaction and integration costs 9 — 9 — — —

Inter-segment eliminations 5 — 5 — — —

Operating income $ 2,926 $ 3,031

Advertising revenue increased 4% in 2021 and was primarily attributable to higher pricing, the continued monetization of content offerings on our next generation initiatives, and higher inventory, partially offset by lower overall ratings and secular declines in the pay-TV ecosystem.

Distribution revenue increased 16% in 2021 and was primarily attributable to growth of discovery+ and an increase in contractual affiliate rates, partially offset by a decline in linear subscribers, and certain prior year nonrecurring items.

Excluding these nonrecurring items, distribution revenue increased 17% in 2021.

Total portfolio subscribers at December 31, 2021 were 8% lower than at December 31, 2020, while subscribers to our fully distributed networks were 4% lower than the prior year.

Excluding the impact of the sale of our Great American Country linear network, total subscribers to our linear networks at December 31, 2021 were 5% lower than at December 31, 2020.

Other revenue increased $92 million in 2021 and was primarily attributable to a nonrecurring item.

Impairment and loss on disposition and disposal groups 30 — 30 — — —

Amortization of fair value step-up for content 1,370 (785) 585 — 1,588 1,588

Operating (loss) income $ (1,194) $ 1,735 $ 541 $ 14 $ 229 $ 243

(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast.

The discussion below is on a pro forma combined basis, ex-FX, since the actual increases year over year for revenues, cost of revenue, selling, general and administrative expenses and Adjusted EBITDA are substantially attributable to the Merger.

Content revenue decreased 7% in 2022, primarily attributable to lower TV licensing and home entertainment revenue, partially offset by higher theatrical film rental revenue.

TV licensing revenue decreased mainly due to large television licensing deals in the prior year and the timing of initial telecast revenue, as the prior year benefited from the ramp up of TV production following COVID-related delays in 2020.

Home entertainment revenue was lower due to strong COVID-induced demand in the prior year and fewer new releases of theatrical products.

Theatrical film rental revenue was favorably impacted by improved performance of our theatrical slate and improved audience attendance at movie theaters.

Other revenue increased 36% in 2022, primarily attributable to a full year of results for the Warner Bros.

Studio Tour London and Hollywood, as well as the Harry Potter flagship store in New York, which opened in June 2021.

Costs of Revenues

Costs of revenues were flat in 2021, primarily attributable to our content investment in discovery+, a nonrecurring, non-cash item in 2020, and third-party app store fees, offset by more efficient content spend on our linear networks.

Content expense was $1.6 billion in 2021 and 2020.

Costs of revenues decreased 7% in 2022, primarily attributable to lower television product content expense and distribution fees related to the aforementioned television licensing deals, partially offset by higher theatrical product content expense.

Selling, General and Administrative

Selling, general and administrative expenses increased 66% in 2021 and was primarily attributable to higher marketing-related expenses to drive the growth of discovery+.

Adjusted OIBDA

Adjusted OIBDA decreased 1% in 2021.

International Networks

The following table presents, for our International Networks segment, revenues by type, certain operating expenses, and Adjusted OIBDA (in millions).

Selling, general and administrative expenses decreased 13% in 2022, primarily attributable to lower marketing expense due to fewer theatrical releases in 2022.

Adjusted EBITDA

Adjusted EBITDA increased 8% in 2022.

Networks Segment

The table below presents, for our Networks segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating income (in millions).

Year Ended December 31,

2021 2020 Change % Change % (ex-FX)

2022 2021 % Change

Actual Pro Forma

Adjustments Pro Forma

Combined Actual (a)

Adjustments Pro Forma

Combined Actual Pro Forma Combined

(Actual) Pro Forma

Advertising $ 8,224 $ 1,380 $ 9,604 $ 6,063 $ 4,330 $ 10,393 36 % (8) % (5) %

Distribution 2,112 2,014 5 % 4 %

Other 400 128 NM NM

Distribution 9,759 2,183 11,942 4,486 7,843 12,329 NM (3) % (1) %

Content 1,120 220 1,340 706 568 1,274 59 % 5 % 7 %

Other 245 55 300 56 178 234 NM 28 % 35 %

Total revenues 19,348 3,838 23,186 11,311 12,919 24,230 71 % (4) % (2) %

Costs of revenues, excluding depreciation and amortization 2,784 2,004 39 % 35 %

Costs of revenues, excluding depreciation and amortization 8,006 2,148 10,154 3,926 6,098 10,024 NM 1 % 4 %

Selling, general and administrative 2,617 364 2,981 1,852 1,367 3,219 41 % (7) % (5) %

Adjusted OIBDA 494 723 (32) % (27)%

Adjusted EBITDA 8,725 1,326 10,051 5,533 5,454 10,987 58 % (9) % (7) %

Depreciation and amortization 4,687 4 4,691 1,212 4,151 5,363

Impairment of goodwill and other intangible assets — 124

Restructuring and other charges 26 29

Employee share-based compensation — 9 9 — 41 41

Restructuring 1,003 (5) 998 30 5 35

Transaction and integration costs 2 — 2 4 — 4

Amortization of fair value step-up for content 73 425 498 — 476 476

Inter-segment eliminations 17 — 17 — — —

Loss on disposition 6 —

Impairment and loss (gain) on disposition and disposal groups 24 — 24 (72) (1) (73)

Operating income $ 2,919 $ 893 $ 3,812 $ 4,359 $ 782 $ 5,141

Advertising revenue increased 29% in 2021.

Excluding the impact of foreign currency fluctuations, advertising revenue increased 25%.

The increases were attributable to improved overall performance as advertising markets recovered from the COVID-19 pandemic, as well as the broadcast of the Summer Olympics throughout Europe in the third quarter of 2021.

Distribution revenue increased 5% in 2021.

Excluding the impact of foreign currency fluctuations, distribution revenue increased 4%.

The increases were primarily attributable to higher next generation revenues due to growth of discovery+, partially offset by lower contractual affiliate rates in some European markets.

Other revenue increased $272 million in 2021.

Excluding the impact of foreign currency fluctuations, other revenue increased $281 million.

The increases were primarily attributable to sublicensing of Olympics sports rights to broadcast networks throughout Europe.

(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast.

Advertising revenue decreased 5% in 2022, primarily attributable to declines in domestic general entertainment and news networks, partially offset by higher sports advertising in the U.S.

due to the NCAA Men's Final Four and Championship games airing on our networks and the addition of the NHL starting in the fourth quarter of 2021.

Distribution revenue decreased 1% in 2022, primarily attributable to a decline in linear subscribers in the U.S.

and lower contractual affiliate rates in some European markets, partially offset by an increase in contractual affiliate rates in the U.S.

and certain Latin American markets and premium sports packages in Latin America.

Content revenue increased by 7% in 2022, primarily attributable to higher inter-segment licensing of content to DTC, partially offset by overall net lower sub-licensing revenue for the Winter Olympics in 2022 compared to the Summer Olympics in 2021.

Other revenue increased 35% in 2022, primarily attributable to services provided to the unconsolidated BT Sport joint venture.

Costs of Revenues

Costs of revenues increased 39% in 2021.

Excluding the impact of foreign currency fluctuations, costs of revenues increased 35%.

The increases were primarily attributable to the Olympics and to a lesser extent, European sporting events and leagues returning to a more normalized schedule, and higher content investment related to discovery+.

Content expense, excluding the impact of foreign currency fluctuations, was $2.0 billion for 2021 and $1.4 billion 2020.

Costs of revenues increased 4% in 2022, primarily attributable to higher sports-related expense globally, increased expense at CNN, and costs associated with providing services to the unconsolidated BT Sport joint venture, partially offset by lower content expense due to the previously announced restructuring program and lower international sports rights driven by the Winter Olympics in 2022 (as compared to the Summer Olympics in 2021).

Selling, General and Administrative

Selling, general and administrative expenses increased 28% in 2021.

Excluding the impact of foreign currency fluctuations, selling, general, and administrative expenses increased 24%.

The increases were primarily attributable to higher marketing-related expenses to drive the growth of discovery+ and the Olympics, as well as personnel costs to support our next generation platforms.

Adjusted OIBDA

Adjusted OIBDA decreased 32% in 2021.

Excluding the impact of foreign currency fluctuations, adjusted OIBDA decreased 27%.

Corporate, Inter-segment Eliminations, and Other

The following table presents our unallocated corporate amounts including certain operating expenses, Adjusted OIBDA and a reconciliation of Adjusted OIBDA to operating loss (in millions).

Selling, general and administrative expenses decreased 5% in 2022, primarily attributable to lower personnel and marketing expenses.

Adjusted EBITDA

Adjusted EBITDA decreased 7% in 2022.

The following table presents, for our DTC segment, revenues by type, certain operating expenses, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions).

Year Ended December 31,

2022 2021 % Change

Revenues $ (10) $ 9 NM

Actual Pro Forma

Adjustments Pro Forma

Combined Actual (a)

Adjustments Pro Forma

Combined Actual Pro Forma Combined

(Actual) Pro Forma

Advertising $ 371 $ 36 $ 407 $ 131 $ 49 $ 180 NM NM NM

Distribution 6,371 2,150 8,521 716 7,722 8,438 NM 1 % 3 %

Content 522 230 752 11 622 633 NM 19 % 19 %

Other 10 3 13 2 12 14 NM (7) % — %

Total revenues 7,274 2,419 9,693 860 8,405 9,265 NM 5 % 6 %

Costs of revenues, excluding depreciation and amortization 6,211 1,977 8,188 691 6,166 6,857 NM 19 % 21 %

Selling, general and administrative 2,659 909 3,568 1,514 2,759 4,273 76 % (16) % (16) %

Adjusted OIBDA (617) (502) (23) %

Adjusted EBITDA (1,596) (467) (2,063) (1,345) (520) (1,865) (19) % (11) % (11) %

Depreciation and amortization 1,733 31 1,764 275 1,757 2,032

Employee share-based compensation (1) — (1) — 16 16

Restructuring 1,551 (3) 1,548 2 3 5

Transaction and integration costs 2 — 2 1 — 1

Amortization of fair value step-up for content 390 (52) 338 — 293 293

Inter-segment eliminations 9 — 9 — — —

Impairment and loss on disposition and disposal groups 13 — 13 1 — 1

Operating loss $ (5,293) $ (443) $ (5,736) $ (1,624) $ (2,589) $ (4,213)

(a) Prior year actual results have been recast to conform to the current period presentation as a result of the Merger and segment recast.

As of December 31, 2022, we had 96.1 million DTC subscribers.

Advertising revenue increased $229 million in 2022, primarily attributable to subscriber growth on our DTC ad-supported tiers.

Distribution revenue increased 3% in 2022, primarily attributable to global retail subscriber gains, partially offset by a decline in wholesale revenues primarily due to the expiration of HBO Max on Amazon Channels in September 2021.

HBO Max re-launched on Amazon Channels in December 2022.

Content revenue increased 19% in 2022, primarily attributable to higher third-party licensing of HBO content.

2 We define a “DTC Subscription” as:

(i) a retail subscription to discovery+, HBO or HBO Max for which we have recognized subscription revenue, whether directly or through a third party, from a direct-to-consumer platform;

(ii) a wholesale subscription to discovery+, HBO, or HBO Max for which we have recognized subscription revenue from a fixed-fee arrangement with a third party and where the individual user has activated their subscription;

(iii) a wholesale subscription to discovery+, HBO or HBO Max for which we have recognized subscription revenue on a per subscriber basis;

and (iv) users on free trials who convert to a subscription for which we have recognized subscription revenue within the first seven days of the calendar month immediately following the month in which their free trial expires.

We may refer to the aggregate number of DTC Subscriptions as “subscribers.”

The reported number of “subscribers” included herein and the definition of “DTC Subscription” as used herein excludes:

(i) individuals who subscribe to DTC products, other than discovery+, HBO and HBO Max, that may be offered by us or by certain joint venture partners or affiliated parties from time to time;

(ii) a limited number of international discovery+ subscribers that are part of non-strategic partnerships or short-term arrangements as may be identified by the Company from time to time;

(iii) domestic and international Cinemax subscribers, and international basic HBO subscribers;

and (iv) users on free trials except for those users on free trial that convert to a DTC Subscription within the first seven days of the next month as noted above.

Costs of Revenues

Cost of revenues increased 21% in 2022, primarily attributable to increased programming expenses, which were moderated by the previously announced restructuring program.

Selling, General, and Administrative Expenses

Selling, general and administrative expenses decreased 16% in 2022, primarily attributable to more efficient marketing-related spend.

Adjusted EBITDA

Adjusted EBITDA decreased 11% in 2022.

The following table presents our Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions):

Year Ended December 31,

2022 2021 % Change

Actual Pro Forma

Adjustments Pro Forma

Combined Actual Pro Forma

Adjustments Pro Forma

Combined Actual Pro Forma Combined

(Actual) Pro Forma

Adjusted EBITDA $ (1,200) $ (353) $ (1,553) $ (385) $ (966) $ (1,351) NM (15) % (17) %

Employee share-based compensation 410 (11) 399 167 177 344

Depreciation and amortization 272 (40) 232 95 175 270

Restructuring 195 (44) 151 — 44 44

Transaction and integration costs 1,182 (564) 618 90 1,138 1,228

Restructuring and other charges 2 21

Loss on asset disposition — 2

Impairment and loss on disposition and disposal groups 50 — 50 — 224 224

Inter-segment eliminations (31) — (31) — — —

Operating loss $ (3,278) $ 306 $ (2,972) $ (737) $ (2,724) $ (3,461)

Corporate operations primarily consist of executive management, administrative support services, substantially all of our share-based compensation and third-party transaction and integration costs.

Corporate operations primarily consist of executive management and administrative support services, which are recorded in selling, general and administrative expense, as well as substantially all of our share-based compensation and third-party transaction and integration costs.

Adjusted EBITDA decreased 17% for 2022, primarily attributable to increased securitization costs from higher interest rates, partially offset by lower personnel costs.

As reported transaction and integration costs for 2022 included the impact of the issuance of additional shares of WBD common stock to Advance/Newhouse Programming Partnership of $789 million upon the closing of the Merger.

(See Note 3 to the accompanying consolidated financial statements.)

Inter-segment Eliminations

The following table presents our inter-segment eliminations by revenue and expense, Adjusted EBITDA and a reconciliation of Adjusted EBITDA to operating loss (in millions):

Year Ended December 31,

2022 2021 % Change

Actual Pro Forma

Adjustments Pro Forma

Combined Actual Pro Forma

Adjustments Pro Forma

Combined Actual Pro Forma Combined

(Actual) Pro Forma

Inter-segment revenue eliminations $ (2,566) $ (1,065) $ (3,631) $ — $ (3,219) $ (3,219) NM (13) % (13) %

Inter-segment expense eliminations (2,583) (1,038) (3,621) — (3,229) (3,229) NM (12) % (12) %

Adjusted EBITDA 17 (27) (10) — 10 10 NM NM NM

Restructuring (42) — (42) — — —

Amortization of fair value step-up for content 583 — 583 — — —

Operating (loss) income $ (524) $ (27) $ (551) $ — $ 10 $ 10

Inter-segment revenue and expense eliminations primarily represent inter-segment content transactions and marketing and promotion activity between reportable segments.

In our current segment structure, in certain instances, production and distribution activities are in different segments.

Inter-segment content transactions are presented “gross” (i.e.

the segment producing and/or licensing the content reports revenue and profit from inter-segment transactions in a manner similar to the reporting of third-party transactions, and the required eliminations are reported on the separate “Eliminations” line when presenting our summary of segment results).

Generally, timing of revenue recognition is similar to the reporting of third-party transactions.

The segment distributing the content, e.g.

via our DTC or linear services, capitalizes the cost of inter-segment content transactions, including “mark-ups” and amortizes the costs over the shorter of the license term, if applicable, or the expected period of use.

The content amortization expense related to the inter-segment profit is also eliminated on the separate “Eliminations” line when presenting our summary of segment results.

LIQUIDITY AND CAPITAL RESOURCES

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Access to sufficient capital from the public market is not assured.

We also have a $2.5 billion revolving credit facility and commercial paper program described below.

We have a $6.0 billion revolving credit facility and commercial paper program described below.

We also participate in a revolving receivables program and an accounts receivable factoring program described below.

Revolving Credit Facility and Commercial Paper

In June 2021, we entered into a multicurrency revolving credit agreement (the "Credit Agreement"), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended.

We have the capacity to initially borrow up to $2.5 billion under the Credit Agreement.

Upon the closing of the proposed Combination with WarnerMedia and subject to certain conditions, the available commitments will increase by $3.5 billion, to an aggregate amount not to exceed $6 billion.

The Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit.

We may also request additional commitments up to $1 billion from the lenders upon satisfaction of certain conditions.

Obligations under the Credit Agreement are unsecured and are fully and unconditionally guaranteed by Discovery, Inc.

and Scripps Networks Interactive, Inc., and will also be guaranteed by the holding company of the WarnerMedia business upon the closing of the proposed Combination.

The Credit Agreement will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent.

The Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants.

As of December 31, 2021, DCL was in compliance with all covenants and there were no events of default under the Credit Facility.

Additionally, our commercial paper program is supported by the Credit Facility.

Under the commercial paper program, we may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings.

In June 2021, Discovery Communication, LLC (“DCL”) entered into a multicurrency revolving credit agreement (the “Revolving Credit Agreement”), replacing the existing $2.5 billion credit agreement, dated February 4, 2016, as amended, among DCL, the Company, certain lenders from time to time party thereto, and Bank of America, N.A., as administrative agent.

DCL has the capacity to borrow up to $6.0 billion under the Revolving Credit Agreement (the “Credit Facility”).

The Revolving Credit Agreement includes a $150 million sublimit for the issuance of standby letters of credit.

DCL may also request additional commitments up to $1.0 billion from the lenders upon the satisfaction of certain conditions.

Obligations under the Revolving Credit Agreement are unsecured and are fully and unconditionally guaranteed by the Company, Scripps Networks, and WarnerMedia Holdings, Inc.

The Credit Facility will be available on a revolving basis until June 2026, with an option for up to two additional 364-day renewal periods subject to the lenders' consent.

The Revolving Credit Agreement contains customary representations and warranties as well as affirmative and negative covenants.

As of December 31, 2022, DCL was in compliance with all covenants and there were no events of default under the Revolving Credit Agreement.

Additionally, the Company’s commercial paper program is supported by the Credit Facility.

Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings.

Borrowing capacity under the Credit Facility is reduced by any outstanding borrowings under the commercial paper program.

As of December 31, 2022 and 2021, the Company had no outstanding borrowings under the Credit Facility or the commercial paper program.

• Investments

We received proceeds of $599 million during 2021 from the sales and maturities of investments.

Our primary uses of cash include the creation and acquisition of new content, business acquisitions, repurchases of our capital stock, income taxes, personnel costs, costs to develop and market discovery+, principal and interest payments on our outstanding senior notes, and funding for various equity method and other investments.

• Revolving Receivables Program

The Company has a revolving agreement to transfer up to $5.7 billion of certain receivables through its bankruptcy-remote subsidiary, Warner Bros.

Discovery Receivables Funding, LLC, to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred.

The Company services the sold receivables for the financial institution for a fee and pays fees to the financial institution in connection with this revolving agreement.

As customers pay their balances, the Company’s available capacity under this revolving agreement increases and typically the Company transfers additional receivables into the program.

In some cases, the Company may have collections that have not yet been remitted to the bank, resulting in a liability.

The outstanding portfolio of receivables derecognized from our consolidated balance sheets was $5,366 million as of December 31, 2022.

• Accounts Receivable Factoring

The Company has a factoring agreement to sell certain of its non-U.S.

trade accounts receivable on a non-recourse basis to a third-party financial institution.

Total trade accounts receivable sold under the Company’s factoring arrangements was $477 million as of December 31, 2022.

• Derivatives

We received investing proceeds of $752 million during the year ended December 31, 2022 from the unwind and settlement of derivative instruments.

(See Note 13 to the accompanying consolidated financial statements.)

• Investments and Business Combinations

In addition to other investments, we completed the sale of our minority interests in Discovery Education and Golden Maple Limited (known as Tencent Video VIP) and received cash of $306 million during the year ended December 31, 2022.

Additionally, we acquired $3.6 billion of cash in connection with the Merger and the post-closing working capital settlement process.

Our primary uses of cash include the creation and acquisition of new content, business acquisitions, income taxes, personnel costs, costs to develop and market HBO Max and discovery+, principal and interest payments on our outstanding senior notes, funding for various equity method and other investments, and repurchases of our capital stock.

• Content Acquisition

We plan to continue to invest significantly in the creation and acquisition of new content.

Our investment in content has increased as we acquire and develop new content for discovery+.

Additional information regarding contractual commitments to acquire content is set forth in "Material Cash Requirements from Known Contractual and Other Obligations" in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

In July 2021, we issued notices for the redemption in full of all $168 million aggregate principal amount outstanding of our 3.300% Senior Notes due May 2022 and $62 million aggregate principal amount outstanding of our 3.500% Senior Notes due June 2022 (collectively, the "2022 Notes").

The 2022 Notes were redeemed in July 2021 for an aggregate redemption price of $235 million, plus accrued interest.

In February 2021, we issued a notice for the redemption in full of all $335 million aggregate principal amount outstanding of our 4.375% Senior Notes due June 2021 (the “2021 Notes”).

The 2021 Notes were redeemed in March 2021 for an aggregate redemption price of $339 million, plus accrued interest.

In addition, we have $339 million of senior notes coming due in March 2022.

We plan to continue to invest significantly in the creation and acquisition of new content, as well as certain sports rights.

Subsequent to the Merger, our contractual commitments to acquire content have increased significantly.

Additional information regarding contractual commitments to acquire content is set forth in “Material Cash Requirements from Known Contractual and Other Obligations” in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations.”

During the year ended December 31, 2022, we repaid $6.0 billion of aggregate principal amount outstanding of our term loans prior to the due dates of October 2023 and April 2025.

During the year ended December 31, 2022, we repaid in full at maturity $327 million of aggregate principal amount outstanding of our 2.375% Euro Denominated Senior Notes due March 2022 and issued notices for the redemption in full of all $192 million of aggregate principal amount outstanding of our 3.250% senior notes due in 2023 and all $796 million of aggregate principal amount outstanding of our 2.950% senior notes due 2023 (collectively the “2023 Notes”).

The 2023 Notes were redeemed in December 2022 for an aggregate redemption price of $988 million, plus accrued interest.

During 2022, we also assumed $41.5 billion of senior notes (at par value) and term loans in connection with the Merger.

In addition, we have $363 million of senior notes coming due in 2023.

• Capital Expenditures and Investments in Next Generation Initiatives

We effected capital expenditures of $373 million in 2021, including amounts capitalized to support our next generation platforms, such as discovery+.

In addition, we expect to continue to incur significant costs to develop and market discovery+ in the future.

We effected capital expenditures of $987 million in 2022, including amounts capitalized to support our next generation platforms, such as HBO Max and discovery+.

In addition, we expect to continue to incur significant costs to develop and market our combined streaming service in the future.

• Investments and Business Combinations

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(See Note 10 to the accompanying consolidated financial statements.) We provide funding to our investees from time to time.

We contributed $184 million and $181 million in 2021 and 2020, for investments in and advances to our investees.

We also purchased $103 million and $250 million of time deposit investments during 2021 and 2020.

In May 2021, we entered into an agreement with AT&T Inc.

to combine with WarnerMedia’s ("WarnerMedia") entertainment, sports and news assets to create a standalone, global entertainment company.

The transaction is expected to close in the second quarter of 2022, subject to approval by the Company's shareholders and customary closing conditions, including receipt of regulatory approvals.

For the year ended December 31, 2021, we incurred transaction and integration costs of $95 million, primarily related to the WarnerMedia acquisition, and we expect to continue to incur significant transaction and integration costs in 2022 and beyond.

We contributed $168 million and $184 million in 2022 and 2021, respectively, for investments in and advances to our investees.

We have and expect to continue to incur significant, one-time transaction and integration costs during the first year following the Merger.

(See Note 4 to the accompanying consolidated financial statements.)

• Redeemable Noncontrolling Interest and Noncontrolling Interest

Due to business combinations, we also have redeemable equity balances of $363 million, which may require the use of cash in the event holders of noncontrolling interests put their interests to us.

Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $251 million and $254 million in 2021 and 2020, respectively.

Due to business combinations, we also had redeemable equity balances of $318 million at December 31, 2022 which may require the use of cash in the event holders of noncontrolling interests put their interests to us.

In 2022, GoldenTree exercised its put right and we are required to purchase GoldenTree’s noncontrolling interest.

(See Note 19 to the accompanying consolidated financial statements.) Distributions to noncontrolling interests and redeemable noncontrolling interests totaled $300 million and $251 million in 2022 and 2021, respectively.

• Common Stock Repurchases

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Under the new stock repurchase authorization, management is authorized to purchase shares from time to time through open market purchases at prevailing prices or privately negotiated purchases subject to market conditions and other factors.

(See Note 12 to the accompanying consolidated financial statements.) There was no common stock repurchase activity during 2021.

During 2020, we repurchased $969 million of our Series C common stock.

(See Note 3 to the accompanying consolidated financial statements.) There were no common stock repurchases during 2022 or 2021.

• Income Taxes and Interest

We expect to continue to make payments for income taxes and interest on our outstanding senior notes.

During 2021 and 2020, we made cash payments of $643 million and $641 million for income taxes and $664 million and $673 million for interest on our outstanding debt.

Following the closing of the proposed Combination with WarnerMedia, we expect cash required for interest payments to significantly increase.

During 2022 and 2021, we made cash payments of $1,027 million and $643 million for income taxes and $1,539 million and $664 million for interest on our outstanding debt, respectively.

Cash required for interest payments has increased significantly as a result of the Merger.

The following table presents changes in cash and cash equivalents (in millions).

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Cash provided by operating activities 4,304 2,798

Cash used in investing activities (56) (703)

Cash provided by (used in) investing activities 3,524 (56)

Cash used in financing activities (7,742) (853)

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Operating Activities

Cash provided by operating activities was $2.8 billion and $2.7 billion in 2021 and 2020, respectively.

The increase in cash provided by operating activities was primarily attributable to an increase in net income excluding non-cash items, partially offset by a negative fluctuation in working capital activity.

Cash provided by operating activities was $4,304 million and $2,798 million in 2022 and 2021, respectively.

The increase in cash provided by operating activities was primarily attributable to an increase in net income, excluding non-cash items, and working capital initiatives, partially offset by other negative fluctuations in working capital activity.

Investing Activities

Cash used in investing activities was $56 million and $703 million in 2021 and 2020, respectively.

The decrease in cash used in investing activities was primarily attributable to proceeds received from the sales and maturities of investments and a reduction in purchases of investments, partially offset by an increase in payments for derivatives during 2021.

Cash provided by (used in) investing activities was $3,524 million and $(56) million in 2022 and 2021, respectively.

The increase in cash provided by investing activities was primarily attributable to proceeds received from cash acquired during the Merger and the post-closing working capital settlement process and cash received from the unwind and settlement of derivative instruments, partially offset by increased purchases of property and equipment and a reduction in cash received from the sales and maturities of investments during the year ended December 31, 2022.

Financing Activities

Cash used in financing activities was $853 million and $1.5 billion in 2021 and 2020, respectively.

The decrease in cash used in financing activities was primarily attributable to the suspension of stock repurchases throughout 2021.

Cash used in financing activities was $7,742 million and $853 million in 2022 and 2021, respectively.

The increase in cash used in financing activities was primarily attributable to principal repayments made on our term loans during the year ended December 31, 2022.

Capital Resources

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Capacity Outstanding

Credit Outstanding

Indebtedness Unused

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Revolving credit facility and commercial paper program 6,000 — 6,000

Term loans 4,000 4,000 —

Senior notes (a)

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Our borrowing costs and access to capital markets can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in part, on our performance as measured by credit metrics such as interest coverage and leverage ratios.

As of December 31, 2021, we held $236 million of our $3.9 billion of cash and cash equivalents in our foreign subsidiaries.

As of December 31, 2022, we held $3.1 billion of our $3.7 billion of cash and cash equivalents in our foreign subsidiaries.

The 2017 Tax Act features a participation exemption regime with current taxation of certain foreign income and imposes a mandatory repatriation toll tax on unremitted foreign earnings.

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Our current plans do not demonstrate a need to repatriate them to the U.S.

However, if these funds are needed in the U.S., we would be required to accrue and pay non-U.S.

However, if these funds were to be needed in the U.S., we would be required to accrue and pay non-U.S.

taxes to repatriate them.

The determination of the amount of unrecognized deferred income tax liability with respect to these undistributed foreign earnings is not practicable.

Summarized Guarantor Financial Information

Basis of Presentation

As of December 31, 2021, all of the Company’s outstanding registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company and guaranteed by the Company and Scripps Networks, except for $23 million of senior notes outstanding as of December 31, 2021 that have been issued by Scripps Networks and are not guaranteed.

(See Note 8 to the accompanying consolidated financial statements.) DCL primarily includes the Discovery Channel and TLC networks in the U.S.

DCL is a wholly owned, indirect subsidiary of the Company.

Scripps Networks is also 100% owned by the Company.

The tables below present the summarized financial information as combined for Discovery, Inc.

(the “Parent”), Scripps Networks and DCL (collectively, the “Obligors”).

All guarantees of DCL's senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes.

Note Guarantees issued by Scripps Networks or any subsidiary of the Parent that in the future issues a Note Guarantee (each, a “Subsidiary Guarantor”) may be released and discharged (i) concurrently with any direct or indirect sale or disposition of such Subsidiary Guarantor or any interest therein, (ii) at any time that such Subsidiary Guarantor is released from all of its obligations under its guarantee of payment by DCL, (iii) upon the merger or consolidation of any Subsidiary Guarantor with and into DCL or the Parent or another Subsidiary Guarantor, or upon the liquidation of such Subsidiary Guarantor and (iv) other customary events constituting a discharge of the Obligors’ obligations.

Summarized Financial Information

The Company has included the accompanying summarized combined financial information of the Obligors after the elimination of intercompany transactions and balances among the Obligors and the elimination of equity in earnings from and investments in any subsidiary of the Parent that is a non-guarantor (in millions).

December 31, 2021

Current assets $ 4,452

Non-guarantor intercompany trade receivables, net 85

Noncurrent assets 5,969

Current liabilities 1,018

Noncurrent liabilities 15,778

Year Ended December 31, 2021

Revenues $ 2,091

Operating income 1,028

Net income 294

Net income available to Discovery, Inc.

Additional information regarding the changes in our outstanding indebtedness and the significant terms and provisions of our revolving credit facility and outstanding indebtedness is discussed in Note 8 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

MATERIAL CASH REQUIREMENTS FROM KNOWN CONTRACTUAL AND OTHER OBLIGATIONS

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Additionally, DCL's revolving credit facility allows DCL and certain designated foreign subsidiaries of DCL to borrow up to $6.0 billion, including a $150 million sublimit for the issuance of standby letters of credit.

Upon the closing of the Combination with WarnerMedia and subject to certain conditions, the available commitments will increase by $3.5 billion, to an aggregate amount not to exceed $6 billion.

DCL may also request additional commitments up to $1.0 billion from the lenders upon the satisfaction of certain conditions.

Additionally, the Company's commercial paper program is supported by the Credit Facility.

Under the commercial paper program, the Company may issue up to $1.5 billion, including up to $500 million of euro-denominated borrowings.

Borrowing capacity under the Credit Facility is effectively reduced by any outstanding borrowings under the commercial paper program.

As of December 31, 2022, we had no outstanding borrowings under the Credit Facility or the commercial paper program.

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Purchase Obligations

Content purchase obligations include commitments and liabilities associated with third-party producers and sports associations for content that airs on our television networks.

Production contracts generally require:

Content purchase obligations include commitments and liabilities associated with third-party producers and sports associations for content that airs on our television networks and DTC services.

Production and licensing contracts generally require:

purchase of a specified number of episodes;

payments over the term of the license;

payments during production or over the term of a license;

and include both programs that have been delivered and are available for airing and programs that have not yet been produced or sporting events that have not yet taken place.

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Interest payments on our outstanding finance lease obligations are based on the stated or implied rate in our finance lease agreements.

(See Note 12 to the accompanying consolidated financial statements.)

Operating Lease Obligations

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Payments for operating leases represent the amounts due under the agreements assuming the agreements are not canceled prior to their expiration.

(See Note 12 to the accompanying consolidated financial statements.)

Pension and Other Employee Obligations

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We also have a non-qualified Supplemental Executive Retirement Plan (“SERP”).

In connection with the Merger, the Company assumed four U.S.

nonqualified pension plans that are noncontributory and unfunded and several non-U.S.

pension plans (See Note 17 to the accompanying consolidated financial statements.)

Contractual commitments include payments to meet minimum funding requirements of our Pension Plan in 2023 and estimated benefit payments for our SERP that exceed plan assets.

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Our unrecognized tax benefits totaled $1,929 million as of December 31, 2022.

Six Flags Guarantee

In connection with WM’s former investment in the Six Flags (as defined below) theme parks located in Georgia and Texas (collectively, the “Parks”), in 1997, certain subsidiaries of the Company agreed to guarantee (the “Six Flags Guarantee”) certain obligations of the partnerships that hold the Parks (the “Partnerships”) for the benefit of the limited partners in such Partnerships, including, annual payments made to the Parks or to the limited partners and additional obligations at the end of the respective terms for the Partnerships in 2027 and 2028 (the “Guaranteed Obligations”).

The aggregate gross undiscounted estimated future cash flow requirements covered by the Six Flags Guarantee over the remaining term (through 2028) are $544 million.

To date, no payments have been made by us pursuant to the Six Flags Guarantee.

Six Flags Entertainment Corporation (formerly known as Six Flags, Inc.

and Premier Parks Inc.) (“Six Flags”), which has the controlling interest in the Parks, has agreed, pursuant to a subordinated indemnity agreement (the “Subordinated Indemnity Agreement”), to guarantee the performance of the Guaranteed Obligations when due and to indemnify the Company, among others, if the Six Flags Guarantee is called upon.

If Six Flags defaults on its indemnification obligations, we have the right to acquire control of the managing partner of the Parks.

Six Flags’ obligations to us are further secured by its interest in all limited partnership units held by Six Flags.

Based on our evaluation of the current facts and circumstances surrounding the Guaranteed Obligations and the Subordinated Indemnity Agreement, we are unable to predict the loss, if any, that may be incurred under the Guaranteed Obligations, and no liability for the arrangements has been recognized as of December 31, 2022.

Because of the specific circumstances surrounding the arrangements and the fact that no active or observable market exists for this type of financial guarantee, we are unable to determine a current fair value for the Guaranteed Obligations and related Subordinated Indemnity Agreement.

Other Contingent Commitments

Other contingent commitments primarily include contingent payments for post-production term advance obligations on certain co-financing arrangements, as well as operating lease commitment guarantees, letters of credit, bank guarantees, and surety bonds, which generally support performance and payments for a wide range of global contingent and firm obligations, including insurance, litigation appeals, real estate leases, and other operational needs.

The Company's other contingent commitments at December 31, 2022 were $283 million, with $279 million estimated to be due in 2026.

For other contingent commitments where payment obligations are outside our control, the timing of amounts represents the earliest period in which the payment could be requested.

For the remaining other contingent commitments, the timing of the amounts presented represents when the maximum contingent commitment will expire but does not mean that we expect to incur an obligation to make any payments within that time period.

In addition, these amounts do not reflect the effects of any indemnification rights we might possess.

We have granted put rights to certain consolidated subsidiaries, but we are unable to reasonably predict the ultimate amount or timing of any payment.

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If for some reason the Partnership is not continued, it will be required to limit its activities to winding up, settling debts, liquidating assets and distributing proceeds to the partners in proportion to their partnership interests.

Summarized Guarantor Financial Information

Basis of Presentation

As of December 31, 2022 and December 31, 2021, all of the Company’s outstanding $13.8 billion registered senior notes have been issued by DCL, a wholly owned subsidiary of the Company, and guaranteed by the Company, Scripps Networks, and WarnerMedia Holdings, Inc.

As of December 31, 2022, the Company also has outstanding $30.0 billion of senior notes issued by WarnerMedia Holdings, Inc.

and guaranteed by the Company, Scripps and DCL;

$1.5 billion of senior notes issued by the legacy WarnerMedia Business (not guaranteed);

and approximately $23 million of un-exchanged senior notes issued by Scripps Networks (not guaranteed).

(See Note 11 to the accompanying consolidated financial statements.) DCL primarily includes the Discovery Channel and TLC networks in the U.S.

DCL is a wholly owned subsidiary of the Company.

Scripps Networks is also wholly owned by the Company.

The tables below present the summarized financial information as combined for Warner Bros.

Discovery, Inc.

(the “Parent”), Scripps Networks, DCL, and WarnerMedia Holdings, Inc.

(collectively, the “Obligors”).

All guarantees of DCL and WarnerMedia Holdings, Inc.'s senior notes (the “Note Guarantees”) are full and unconditional, joint and several and unsecured, and cover all payment obligations arising under the senior notes.

Note Guarantees issued by Scripps Networks, DCL or WarnerMedia Holdings, Inc., or any subsidiary of the Parent that in the future issues a Note Guarantee (each, a “Subsidiary Guarantor”) may be released and discharged (i) concurrently with any direct or indirect sale or disposition of such Subsidiary Guarantor or any interest therein, (ii) at any time that such Subsidiary Guarantor is released from all of its obligations under its guarantee of payment, (iii) upon the merger or consolidation of any Subsidiary Guarantor with and into DCL, WarnerMedia Holdings, Inc.

or the Parent or another Subsidiary Guarantor, as applicable, or upon the liquidation of such Subsidiary Guarantor and (iv) other customary events constituting a discharge of the Obligors’ obligations.

Summarized Financial Information

The summarized balance sheet information as of December 31, 2022 does not include information with respect to WarnerMedia Holdings, Inc., as WarnerMedia Holdings, Inc.

was a wholly-owned subsidiary of AT&T with de minimis assets and no operating activities for the year ended December 31, 2022.

The summarized income statement information for the year ended December 31, 2022 includes information with respect to WarnerMedia Holdings, Inc.

beginning subsequent to the close of the Merger.

December 31, 2022

Current assets $ 1,949

Non-guarantor intercompany trade receivables, net 112

Noncurrent assets 5,785

Current liabilities 1,095

Noncurrent liabilities 48,839

Year Ended December 31, 2022

Revenues $ 2,066

Operating loss (574)

Net loss (1,672)

Net loss available to Discovery, Inc.

Additional information regarding the changes in our outstanding indebtedness and the significant terms and provisions of our revolving credit facility and outstanding indebtedness is discussed in Note 11 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

RELATED PARTY TRANSACTIONS

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Information regarding our adoption of new accounting and reporting standards is discussed in Note 2 to the accompanying consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

CRITICAL ACCOUNTING ESTIMATES

Our consolidated financial statements are prepared in accordance with U.S.

GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities.

On an ongoing basis, we evaluate our estimates and assumptions, including those related to uncertain tax positions, goodwill and intangible assets, content rights, consolidation and revenue recognition.

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The development and selection of these critical accounting estimates have been determined by management and the related disclosures have been reviewed with the Audit Committee of the board of directors of the Company.

We believe the following accounting policies are critical to our business operations and the understanding of our results of operations and involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

We believe the following accounting estimates are critical to our business operations and the understanding of our results of operations and involve the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Uncertain Tax Positions

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Components are aggregated into a single reporting unit if they share similar economic characteristics.

Our reporting units are as follows:

Networks, Europe, Latin America, and Asia-Pacific.

Our reporting units are Studios, Networks, and DTC.

We evaluate our goodwill for impairment annually as of October 1 or earlier upon the occurrence of substantive unfavorable changes in economic conditions, industry trends, costs, cash flows, or ongoing declines in market capitalization.

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For the DCF method, we use projections specific to the reporting unit, as well as those based on general economic conditions, which require the use of significant estimates and assumptions.

Determining fair value specific to each reporting unit requires the Company to exercise judgment when selecting the appropriate discount rates, control premiums, terminal growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows, including revenue growth rates and profit margins.

Determining fair value specific to each reporting unit requires us to exercise judgment when selecting the appropriate discount rates, control premiums, terminal growth rates, relevant comparable company earnings multiples and the amount and timing of expected future cash flows, including revenue growth rates and profit margins.

The cash flows employed in the DCF analysis for each reporting unit are based on the reporting unit's budget, long range plan, and recent operating performance.

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2022 Impairment Analysis

During the fourth quarter of 2021, the Company performed a qualitative goodwill impairment assessment for all reporting units and it determined that it was more likely than not that the fair value of those reporting units exceeded their carrying values, therefore, no quantitative goodwill impairment analysis was performed

As of October 1, 2022, we performed a quantitative goodwill impairment assessment for all reporting units consistent with our accounting policy.

The estimated fair value of each reporting unit exceeded its carrying value by at least 20% and, therefore, no impairment was recorded.

Due to declining levels of global GDP growth and execution risk associated with anticipated growth in the Company’s DTC reporting unit, which is the DTC segment, the Company will continue to monitor its reporting units for changes that could impact recoverability.

Content Rights

Content rights principally consist of television series, specials, films and sporting events.

Costs of produced and coproduced content consist of development costs, acquired production costs, direct production costs, certain production overhead costs and participation costs and are capitalized if we have previously generated revenues from similar content in established markets and the content will be used and revenues will be generated for a period of at least one year.

Linear content amortization expense for each period is recognized based on the revenue forecast model, which approximates the proportion that estimated distribution and advertising revenues for the current period represent in relation to the estimated remaining total lifetime revenues.

Digital content amortization for each period is recognized based on estimated viewing patterns as there are no direct revenues to associate to the individual content assets and therefore, number of views is most representative of the use of the title.

Judgment is required to determine the useful lives and amortization patterns of our content assets.

Critical assumptions used in determining content amortization include:

(i) the grouping of content with similar characteristics, (ii) the application of a quantitative revenue forecast model or viewership model based on the adequacy of historical data, (iii) determining the appropriate historical periods to utilize and the relative weighting of those historical periods in the forecast model, (iv) assessing the accuracy of our forecasts and (v) incorporating secondary streams.

We capitalize the costs to produce or acquire feature films and television programs, and we amortize costs and test for impairment based on whether the content is predominately monetized individually, or as a group.

For films and television programs predominantly monetized individually, the amount of capitalized film and television production costs amortized and the amount of participations and residuals to be recognized as expense in a particular period are determined using the individual film forecast method.

Under this method, the amortization of capitalized costs and the accrual of participations and residuals are based on the proportion of the film’s or television program’s revenues recognized for such period to the film’s or television program’s estimated remaining ultimate revenues (i.e., the total revenue to be received throughout a film’s or television program’s remaining life cycle).

For theatrical films, which are monetized on an individual basis, the process of estimating ultimate revenues requires us to make a series of judgments related to future revenue-generating activities associated with a particular film.

Prior to the theatrical release of a film, our estimates are based on factors such as the historical performance of similar films, the star power of the lead actors, the rating and genre of the film, pre-release market research (including test market screenings), international distribution plans and the expected number of theaters in which the film will be released.

Subsequent to release, ultimate revenues are updated to reflect initial performance, which is often predictive of future performance.

For television programs that are monetized on an individual basis, ultimate revenues are estimated based on factors including the performance of similar programs in each applicable market, firm commitments in hand from customers that license the program in the future, and the popularity of the program in its initial markets.

For a film or television program that is predominantly monetized on its own but also monetized with other films and/or programs (such as our DTC or linear services), we make a reasonable estimate of the value attributable to the film or program’s exploitation while monetized with other films/programs, based on relative market rates, and expense such costs as the film or television program is exhibited.

Ultimates for content monetized on an individual basis are reviewed and updated (as applicable) on a quarterly basis;

any adjustments are applied prospectively as of the beginning of the fiscal year of the change.

For programs monetized as a group, including licensed programming, amortization expense for network programs is generally based on projected usage, generally resulting in an accelerated or straight-line amortization pattern.

Adjustments to projected usage are applied prospectively in the period of the change.

Streaming and premium pay-TV content amortization is based on estimated viewing patterns, as there are generally limited to no direct revenues to associate to the individual content assets for premium pay-TV.

As such, number of views is most representative of the use of the title.

Judgment is required to determine the useful lives and amortization patterns of our content assets that are predominately monetized as a group.

Critical assumptions include:

(i) the grouping of content with similar characteristics, (ii) the application of a quantitative revenue forecast model or historical viewership model based on the adequacy of historical data, (iii) determining the appropriate historical periods to utilize and the relative weighting of those historical periods in the forecast model, and (iv) incorporating secondary revenue streams.

We then consider the appropriate application of the quantitative assessment given forecasted content use, expected content investment and market trends.

Content use and future revenues may differ from estimates based on changes in expectations related to market acceptance, network affiliate fee rates, advertising demand, the number of cable and satellite television subscribers receiving our networks, the number of subscribers to our digital services, and program usage.

Accordingly, we continually review our estimates and planned usage and revise our assumptions if necessary.

Accordingly, we review our estimates and planned usage at least quarterly and revise our assumptions if necessary.

Consolidation

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Revenue Recognition

As described in Note 2, we generate advertising revenues primarily from advertising sold on our television networks, authenticated TVE applications, DTC subscription services and websites and distribution revenues from fees charged to distributors of our network content, which include cable, direct-to-home satellite, telecommunications and digital service providers and bundled long-term content arrangements, as well as through DTC subscription services.

As described in Note 2, revenue is recognized upon transfer of control of promised services or goods to customers in an amount that reflects the consideration that we expect to receive in exchange for those services or goods.

Significant estimates and judgements are applied in determining the timing of revenue recognition for certain types of transactions, such as bundled arrangements for advertising sales and content licensing arrangements.

A substantial portion of the advertising contracts in the U.S.

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These advertising campaigns are considered to represent a single, distinct performance obligation.

For such contracts, judgment is required in measuring progress across the Company’s single performance obligation.

Various factors such as pricing specific to the channel, daypart and targeted demographic, as well as estimated audience guarantees, are considered in determining how to appropriately measure progress across the campaigns.

Revenues are ultimately recognized based on the audience level delivered multiplied by the average price per impression.

For such contracts, judgment is required in measuring progress across our single performance obligation.

Various factors such as pricing specific to the channel, daypart and targeted demographic, as well as audience guarantees, are considered in determining how to appropriately measure progress across the campaigns.

Revenues are ultimately recognized based on the guaranteed audience level delivered multiplied by the average price per impression.

Our content licensing arrangements often include fixed license fees from the licensing of feature films and television programs in the off-network cable, premium pay, syndication, streaming, and international television and streaming markets.

For arrangements that include multiple titles and/or staggered availabilities across geographical regions, the availability of each title and/or each region is considered a separate performance obligation, and the fixed fee is allocated to each title/region based on comparable market rates and recognized as revenue when the title is available for use by the licensee.

Our games sometimes include digital offerings such as in-game purchases or other online features.

In these cases, we determine the timing of satisfaction of our performance obligations based on the nature of the deliverable (e.g., whether the type of in-game purchase can be consumed by the player right away (“consumable good”, or used by the player over time “durable good”)), and if recognized over time, we estimate the duration of consumer game play based on available game play, historical, or market data.

See Item 1A, “Risk Factors” for details on significant risks that could impact our ability to successfully grow our cash flows.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis